ANNUAL REPORT AND ACCOUNTS 2018
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EUROPE’S LEADING
FLOORCOVERINGS
DISTRIBUTOR
Headlam Group plc is Europe’s leading
distributor of floorcoverings, providing
the distribution channel between
suppliers and trade customers
LEADING THROUGH...
SCALE
Leveraging an extensive
distribution network and dense
geographic coverage to service a
broad and diverse customer base
Discover more on page 02
PARTNERS
Working in partnership with
suppliers and customers to
support their growth and
development
Discover more on page 04
SERVICE
EXPERTISE
Headlam Group plc Annual report and accounts 2018
Providing the broadest product
offering supported by next day
delivery and additional marketing
and other support
Discover more on page 06
Offering years of operating
expertise supplemented by
additional market segment
knowledge via acquisition
Discover more on page 08
Overview
Strategic Report
Governance
Financial Statements
GOVERNANCE
FINANCIAL STATEMENTS
50 Board of Directors
51 Senior Management Team
52 Chairman’s Introduction to Governance
53 Corporate Governance
57 Nomination Committee Report
59 Audit Committee Report
64 Directors' Remuneration Report
73 Other Statutory Disclosures
78 Statement of Directors’ Responsibilities
79
Independent Auditors Report
84 Consolidated Income Statement
85 Consolidated Statement of Comprehensive
Income
86 Statements of Financial Position
87 Statement of Changes in Equity – Group
88 Statement of Changes in Equity – Company
89 Cash Flow Statements
90 Notes to the Financial Statements
134 Financial Record
OVERVIEW
01 2018 Highlights
02 Headlam in Numbers
STRATEGIC REPORT
10 At a Glance
12 Chairman’s Welcome & Investment Case
14 Chief Executive’s Review
18 Efficiency Initiatives
20 Our Marketplace
22 Our Business Model
24 Our Strategy
26 Financial Review
32 Key Performance Indicators
34 Risk Management and Principal Risks &
Uncertainties
36 Viability Statement
38
39 Stakeholder Engagement
40 Corporate Responsibility
Introduction to Corporate Responsibility
2018 HIGHLIGHTS
Revenue* £million
£708.4m
+2.3% (2017: £692.5m)
2018
2017
2016
2015
2014
639.3
620.8
708.4
692.5
677.7
Underlying** Operating Profit £million
£44.3m
+1.1% (2017: £43.8m)
2018
2017
2016
2015
2014
2018 Statutory Operating Profit £41.3m (2017: £41.4m)
44.3
43.8
36.8
41.1
31.5
Underlying** Profit before Tax £million
Basic Earnings Per Share pence
£43.4m
+0.6% (2017: £43.1m)
2018
2017
2016
2015
2014
30.3
35.6
43.4
43.1
40.1
40.0p
+2.3% (2017: 39.1p)
2018
2017
2016
2015
2014
28.6
40.0
39.1
36.8
33.8
Total Ordinary Dividends (declared and
proposed in respect of 2018) pence
25.0p
+0.8% (2017: 24.80p)
2018
2017
2016
2015
2014
17.50
25.0
24.80
22.55
20.70
Net Cash Position £million
£36.7m
+4.0% (2017: £35.3m)
2018
2017
2016
2015
2014
36.7
35.3
24.6
43.9
52.6
Operational Highlights
Ten efficiency initiatives focused
on improving operational
practices and financial
performance, some earlier-stage
ones beginning to contribute in
2018, with increasing benefits
expected throughout 2019
Five smaller strategic acquisitions
completed in 2018, further
enhancing and broadening
the Company’s industry and
geographical position
Planning approval received for the
new regional distribution centre in
Ipswich, with the land acquired
post the year-end
Board supplemented with a wealth
of experience throughout the year,
with several operational
appointments bringing significant
additional expertise into
the business
Statutory Profit before Tax £million
£40.4m
-0.7% (2017: £40.7m)
2018
2017
2016
2015
2014
30.3
40.4
40.7
38.2
35.6
* All prior year revenue numbers restated to
present comparatives on a consistent basis due
to the reclassification in 2018 of some items
between revenue, cost of sales and operating
expenses to better reflect their nature.
** Underlying is before non-underlying items which
includes intangibles amortisation relating to
businesses acquired, acquisition fees, contingent
consideration movements, non-recurring pension
costs in relation to guaranteed minimum pension
(‘GMP’) equalisation and non-recurring costs
relating to senior personnel changes.
Headlam Group plc Annual report and accounts 2018
01
HEADLAM IN NUMBERS
LEADING
THROUGH...
SCALE
Leveraging an extensive
distribution network and dense
geographic coverage to service a
broad and diverse customer base
+67 MILLION
CUBIC
FEET OF
WAREHOUSE
CAPACITY
02
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
67
BUSINESSES AND
4 COUNTRIES OF
OPERATION
£102.0 million
PROPERTY, PLANT
AND EQUIPMENT
ASSETS
£50.0 million
CASH FROM
OPERATIONS
£133.7 million
AVERAGE INVENTORY
POSITION
All data stated for the financial year ended 31 December 2018 or as at 31 December 2018
Headlam Group plc Annual report and accounts 2018
03
HEADLAM IN NUMBERS
LEADING
THROUGH...
PARTNERS
Working in partnership with
suppliers and customers to
support their growth and
development
199 SUPPLIERS
WORLDWIDE
71,384
CUSTOMER
ACCOUNTS
04
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
199 SUPPLIERS
WORLDWIDE
71,384
CUSTOMER
ACCOUNTS
22
SUPPLIER
COUNTRIES
35.0%
OF PRODUCT
PURCHASES FROM
UK SUPPLIERS*
+30,000
PRODUCT UNITS
OFFERED TO UK
CUSTOMERS
* Based on actual purchase prices from suppliers
** Distribution businesses
All data stated for the financial year ended 31 December 2018 or as at 31 December 2018
£133
AVERAGE
ORDER SIZE**
Headlam Group plc Annual report and accounts 2018
05
HEADLAM IN NUMBERS
LEADING
THROUGH...
SERVICE
Providing the broadest product
offering supported by next day
delivery and additional marketing
and other support
+5.3 MILLION
ORDERS
PROCESSED
IN 2018
06
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
+840
SALES REPS
AND DELIVERY
DRIVERS
600,607
UK SALES REPS
VISITS
64
TRADE COUNTERS
AND SHOWROOMS
23
DISTRIBUTION
HUBS AND
CENTRES
All data stated for the financial year ended 31 December 2018 or as at 31 December 2018
Headlam Group plc Annual report and accounts 2018
07
HEADLAM IN NUMBERS
LEADING
THROUGH...
EXPERTISE
Offering years of operating expertise
supplemented by additional market
segment knowledge via acquisition
26 YEARS OF
OPERATION
08
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
2,612
EMPLOYEES
10
PRIMARY PRODUCT
CATEGORIES
31%
UK EMPLOYEES
+10 YEARS WITH
HEADLAM
332
MANAGERS
All data stated for the financial year ended 31 December 2018 or as at 31 December 2018
Headlam Group plc Annual report and accounts 2018
09
AT A GLANCE
WHAT
WE DO
SUPPLIERS
SALES
CUSTOMER SERVICE
Operating for 26 years and employing over
2,600 people, Headlam is Europe’s leading
distributor of floorcoverings.
Headlam provides the distribution channel between suppliers
and trade customers of floorcoverings. Working in partnership
with suppliers from 22 countries manufacturing a diverse
range of floorcovering products and ancillary accessories,
Headlam provides an unparalleled route to market for
their products across the UK and certain Continental
European territories.
The utilisation of an outsourced distribution channel enables
manufacturers to focus on their core activities, incur reduced
costs associated with distribution, and benefit from localised
sales, marketing and distribution expertise that provides a
more effective and greater route to market for their products.
To maximize customer and market penetration, Headlam
comprises 67 individual businesses in the UK and Continental
Europe (France, the Netherlands and Switzerland), each
operating under their own unique trade brand and utilising
individual sales teams.
10
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
PROCESSING
DELIVERY
CUSTOMERS
Headlam’s extensive customer base, operating within both the
residential and commercial sectors and comprising principally
independent retailers and flooring contractors, receives the
broadest product offering supported by next day delivery as
well as additional marketing and other support.
Following years of considerable investment, Headlam’s
distribution network currently comprises four national
distribution hubs, 19 regional distribution centres and a
supporting network of smaller warehouse premises, trade
counters, showrooms and specification centres.
Headlam’s offering is enabled through its unrivalled
operating expertise, long-established supplier and customer
relationships, and comprehensive distribution network.
In 2018, Headlam worked with 199 suppliers and fulfilled over
5.3 million customer orders.
Headlam Group plc Annual report and accounts 2018
11
CHAIRMAN’S WELCOME & INVESTMENT CASE
CHAIRMAN’S
WELCOME
I am pleased to present my first Annual Report and Accounts having
succeeded Dick Peters as Chairman upon his retirement after last
year’s AGM.
Headlam is a market-leading business developed around an
established business model and underpinned by strong
operational cash generation and balance sheet strength. I am
continually impressed by the commitment of our people, who I
especially want to thank for their considerable efforts during
2018, in what was a demanding year due in the most part to the
UK market weakness that prevailed throughout. Despite this
backdrop, it is pleasing to report financial results marginally
ahead of 2017 and an improved dividend for 2018 totalling 25.0
pence (subject to shareholders’ approval at the AGM).
During the year we completed the planned succession and
development of our Board by adding individuals with a wealth of
new experience and expertise pertinent to the delivery of our
strategic aims and future ambitions. As previously detailed,
Amanda Aldridge was appointed a Non-Executive Director in
February 2018 and assumed the role of Chair of the Audit
Committee in June 2018 following my stepping down from the
position after three years. Additionally, in conjunction with
Andrew Eastgate’s forthcoming retirement in May 2019 after
INVESTMENT
CASE
Significant scale and longevity
of operations underpinned
by capital efficiency and
progressive dividend policy
nine years’ service, Keith Edelman and Alison Littley were
appointed Non-Executive Directors and assume the positions
of Senior Independent Director and Chair of the Remuneration
Committee respectively. I am delighted to welcome them to
Headlam and their experience spanning the areas of supply
chain management, consumer and customer-led service
innovation, and commercial development mean their
contributions will be invaluable. I also lastly wish to thank
Andrew for his considerable service to the Company.
As announced earlier this year, 2019 is likely to present us with
further general market weakness in the UK and an increased
element of economic and political uncertainty. As previously
announced, this is one of the factors contributing to our
expectation that 2019 profits will be lower than 2018. This
situation serves to reinforce our concerted commitment to
pursuing multiple efficiency initiatives aimed at improving
operational and financial performance, developing the business,
and providing a more robust platform for future growth.
MARKET LEADER
• 26 years of operations and expertise
• Significant scale and dense coverage, with multiple
businesses and touch-points
• Broadening overall industry position, with room
for growth
RELATIONSHIPS
• Long-established supplier and customer
relationships
• Partnerships with 199 suppliers in 22 countries
• Broad and diverse customer base,
with 71,384 active accounts and over 5.3 million
orders processed in 2018
12
Headlam Group plc Annual report and accounts 2018
All numbers given are for the financial year ended 31 December 2018
Overview
Strategic Report
Governance
Financial Statements
During 2019, I expect to see increasing momentum towards
and contribution from these initiatives, aided by the enhanced
Board and an expanded senior team following recent
appointments bringing additional skills and expertise into
the business.
Against this backdrop of confidence in our ability to deliver an
improved future performance, the Board has reiterated its
commitment to a progressive dividend policy, with the 2019
dividend currently intended to be maintained in-line with that
of 2018.
I look forward to being able to update you on our progress
during the year and within next year’s Report.
Philip Lawrence
Non-Executive Chairman
6 March 2019
DISTRIBUTION NETWORK
FINANCIAL STRENGTH
• Significant warehousing network and inventory
positions, supporting the customer service
proposition
• Substantial time and resources required to
replicate, creating a significant barrier to entry
• Largely freehold portfolio underpinning value,
with property, plant and equipment assets totalling
£102.0 million
• Strong balance sheet and operational cash
generation
• Net cash of £36.7 million as at 31 December 2018,
and included acquisition spend of £9.1 million
during the year
• Strong cash generation, with cash generated from
operations 121% of operating profit
EFFICIENCY INITIATIVES
DIVIDEND
• Gross margin improved 130 basis points to 32.3%
• Continued commitment to a progressive
over two years*, with focus on gradual
improvement
• Multiple efficiency initiatives underway aimed at
improving operating margin
• Initiatives at early roll-out phase and trialling to
positively impact coming years
dividend policy
• Total ordinary dividend of 25.0 pence in 2018
• Intention to maintain 2019 dividend in-line with 2018
reflecting confidence despite lower profit guidance
* Gross margin for 2016 financial year restated to present comparatives on a
consistent basis due to the reclassification in 2018 of some items between
revenue, cost of sales and operating expenses to better reflect their nature.
Headlam Group plc Annual report and accounts 2018
13
CHIEF EXECUTIVE’S REVIEW
CHIEF EXECUTIVE’S
REVIEW
“Despite the generally softer trading
backdrop that was evident throughout
2018, it was pleasing that total revenue*
increased by 2.3% in the year to £708.4
million (2017: £692.5 million)”
Steve Wilson
Chief Executive
2018 Financial Performance
Despite the generally softer trading backdrop that was evident
throughout 2018, it was pleasing that total revenue* increased
by 2.3% in the year to £708.4 million (2017: £692.5 million).
The Continental European businesses in aggregate
outperformed this result, growing 5.3% and representing
14.7% of total revenue (2017: 14.3%), while the UK improved by
1.8% and accounted for 85.3% of total revenue (2017: 85.7%).
Due to year-on-year inflationary cost increases and the
expanded specification business area having a higher overhead
percentage when compared with revenue, total underlying***
distribution expenses and administration costs increased to
26.1% as a percentage of revenue (2017: 25.2%). This 90 basis
points increase offset the gross margin improvement leading
to the year’s underlying operating margin declining by 10 basis
points from 6.3% to 6.2%.
Disappointingly, like-for-like** revenue declined in both the UK
and Continental Europe, 4.2% and 1.8% respectively. This was
a reflection of the generally softer markets, more keenly felt in
the UK, with a noticeable weakness in the UK residential sector
where the Company’s distribution business is more heavily
weighted. This particular weakness resulted in the percentage
of total revenue attributable to the residential sector declining
to 64.6% in the year (2017: 67.9%).
The UK like-for-like performance did, however, show an
improvement in the second half of the year compared with the
first (H1 2018: -5.5%; H2 2018: -3.5%). The commercial sector
reversed a small decline in the first half to end the year up 0.6%,
and the full-year residential sector decline of 6.2% represented
an uplift on the first half (H1 2018: -7.6%; H2 2018: -5.1%).
Pleasingly, the month of September was comparatively strong,
recording a good like-for-like uplift on the previous year in
both the residential and commercial sectors, with September
noteworthy for being when the majority of the educational
refurbishment activity completes.
In contrast to the UK, the second half performance in
Continental Europe was weaker than the first, moving from a
modest positive like-for-like position to a decline (H1 2018:
+1.7%; H2 2018: -4.5%), and the residential sector was positive
for the year (FY 2018: +2.8%) while the commercial sector
declined (FY 2018: -6.9%).
Gross margin* increased by 80 basis points during the year,
from 31.5% in 2017 to 32.3%, an historic high. The
improvement in the year was due in the most part to an
increased contribution from the higher-margin specification
business area, as well as the benefits from early settlement
discount on trade creditors and ongoing pricing discipline
implemented across the Company since late 2016.
Underlying profit before tax increased by £0.3 million during
the year to £43.4 million compared with £43.1 million for the
previous year, and statutory profit before tax of £40.4 million
was marginally down on the prior year (2017: £40.7 million).
The net cash position increased year-on-year, being £36.7
million as at 31 December 2018 (2017: £35.3 million), and
included acquisition spend during the year of £9.1 million on
five smaller businesses to further enhance and broaden the
Company’s industry and geographical position.
Efficiency Initiatives
Ten efficiency initiatives currently being pursued are focused on
improving operational practices and financial performance, and
are collectively aimed at improving the Company’s operating
margin. Whilst most of these initiatives are at an early-stage in
their implementation, we have previously highlighted the
initiative focused on the streamlining of processes and pricing
discipline implemented since late 2016. This initiative has
contributed to gross margin improving by 130 basis points since
2016 and reaching an historic high in 2018. Other initiatives
which began to contribute to the financial performance in 2018
included the work completed in connection with a revised group
procurement approach to Goods Not for Resale (‘GNFR’) and
changes to our vehicle leasing contracts.
Additionally, we are making progress with our trials in relation to
inventory management and more effective utilisation of the
delivery fleet. Thus far, the inventory management trial at
Coleshill, our largest distribution hub, has resulted in improved
customer service through a meaningful reduction in the
number of stock-outs, whilst creating surplus warehouse
capacity of approximately 10%. This increased capacity has
helped support the Company’s investment in additional
inventory across its fastest-moving products in 2019 to
partially mitigate potential disruption and maintain levels of
customer service in the event of a hard Brexit.
14
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
STRATEGIC FOCUS:
EFFICIENCY INITIATIVES TO IMPROVE
PERFORMANCE
Ten efficiency initiatives currently being pursued are focused on improving operational
practices and financial performance, and are collectively aimed at improving the
Company’s operating margin. Whilst most of these initiatives are at an early-stage
in their implementation, we have previously highlighted the initiative focused on
the streamlining of processes and pricing discipline implemented since late 2016.
This initiative has contributed to gross margin improving by 130 basis points since
2016 and reaching an historic high in 2018.
10
MAIN
INITIATIVES
MOSTLY
EARLY-STAGE
See more on page 18
The review around the more effective utilisation of our delivery
fleet incorporates two separate initiatives both currently being
trialled, these being dynamic route planning and the aggregation
and consolidation of geographic specific deliveries. The latter
deliveries initiative, whereby deliveries destined for the same
customers or geographic location by different Headlam
businesses are consolidated at, and delivered from, the nearest
warehouse location, is currently being trialled in South Wales.
The proposed benefits of improved customer service levels,
reduction in the cost to serve and reduced carbon footprint are
beginning to materialise. There is potential to extend this trial
across a number of the Company’s other locations.
As each of the ten initiatives continues to be progressed, we
will see increasing benefits throughout 2019 and a more
meaningful impact on financial and operational performance in
2020 and beyond. It is our aim to expedite activity as much as
possible while ensuring there is no disruption to the business
and customer service levels, which ultimately influences the
pace of implementation.
Continental Europe
In Continental Europe, following investment in people and an
acquisition during 2018, the emphasis has been on revenue
improvement and restoring their collective profitability, with
additional focus on higher margin products and certain market
segments. In the Netherlands, against a positive market backdrop,
there has been investment in new product ranges, particularly
luxury vinyl tile (‘LVT’), and progress towards extracting operating
synergies following the acquisition of Dersimo BV in March 2018,
which enlarged the Company’s Dutch footprint.
In Switzerland, following continued investment in the
specification-focused sales team and showrooms, there have
been positive developments in terms of product mix and
associated higher margin revenue.
A strategic review has been completed at the French business
following the appointment of a new Managing Director in 2018 to
address the previous decline in performance. Areas now being
focused on, in association with an improved sales team, include
specification and higher-margin own-branded products, and
leveraging of the business’s position as the only national
distributor. Progress to date in 2019 has been encouraging.
Acquisitions
We completed five smaller strategic acquisitions in 2018,
spending a total of £9.1 million during the year. Ashmount
Flooring Supplies Limited, Rackhams Limited and Garrod
Bros Ltd expanded our footprint in Greater London, an area
where we have historically been underrepresented. Dersimo
BV increased our presence and geographical coverage in the
Netherlands, and CECO (Flooring) Limited based in Carryduff,
south of Belfast, extended our position in the specification
area which provides an opportunity to broaden our overall
position in the industry. We are delighted to welcome the
businesses and their employees to Headlam, and to be able to
provide support for their future growth and development
through our financial and centralised resources.
Whilst we are a leading business in aggregate, there are a
number of market segments and product categories where we
hold underweight positions, and this provides scope for growth
whether organically or through further strategic acquisitions.
While our present overarching focus is the improvement of
performance of the existing business portfolio and network,
we continue to monitor a deliberately reduced pipeline of
acquisitions, and remain responsive to further opportunity.
Investments and Capital Expenditure
In-line with our focus on improvement, during 2019 investment
and capital expenditure will primarily be focused on the
development of our new regional distribution centre in Ipswich
which will enable greater network optimisation and provide
improved support to our surrounding businesses and
customers in the South East of England. In October 2018 we
received planning approval for the centre and as of last month
acquired the land at a cost of £4.0 million. Ground-work
preparation will start in the second quarter of this year to
enable the project to move to the construction phase by the
second half of 2019. The current timetable indicates that the
centre, which is estimated to cost a total of approximately £26
million, should be operational in mid-2020.
In addition to ongoing maintenance capital expenditure of
typically £3-4 million per annum in connection with the running
of our operations in a largely freehold property portfolio, there
has been recent investment in people and expertise. Some of
this investment is specifically to support the timely delivery of
our efficiency initiatives.
Headlam Group plc Annual report and accounts 2018
15
We have had a positive start to the year, with both the UK and
Continental Europe up on a like-for-like revenue basis for the
year-to-date. I would like to thank all our people for their hard
work and dedication in 2018, and delivery of an improved
financial performance in a somewhat challenging year. I believe
that with the improvements we are putting in place and the
evolution of our business firmly underway, 2019 will be a year of
progress towards our objectives.
Steve Wilson
Chief Executive
6 March 2019
CHIEF EXECUTIVE’S REVIEW CONTINUED
People
As detailed in the Chairman’s Welcome, the Board has been
supplemented with a wealth of experience and expertise.
Additionally, we have made several operational appointments, the
most senior being the UK Operations Director who will join the
Company and Senior Management Team shortly. I believe we now
have all the appropriate people in place to fulfil our ambitions.
Dividends
We are committed to providing improving returns to
shareholders and a progressive dividend policy****. The Board
seeks to protect dividend payments against short-term
fluctuations in profit resulting from temporary adverse trading
conditions. This commitment is enabled by the strength of our
balance sheet, and additionally reflects our confidence in the
ability to improve profitability and maintain a strong balance
sheet and operational cash generation going forward.
The Board has proposed a final ordinary dividend of 17.45
pence (2017: 17.25 pence), payable on 1 July 2019 to
shareholders on the register as at 7 June 2019. This brings
the total ordinary dividend declared and proposed in respect of
2018 to 25.0 pence, a slight increase on the 24.8 pence in 2017.
Current Trading and Outlook
As advised in January 2019, we have taken a prudent view of
2019 and expect revenue to be in-line with 2018 due to the
anticipated further general weakness in the UK market, and as a
consequence it is anticipated that underlying profit before tax
will be lower than 2018 due to a number of factors. These include
the anticipated movement in revenue mix and associated
margin, the year-on-year inflationary pressure on distribution
costs and administrative expenses, and the efficiency initiatives
being predominately at an early stage and not yet sufficiently
material in their contribution to offset the current weak market
backdrop and increases in overheads.
It is gratifying that despite being an established and leading
business with considerable financial strength, there remain
multiple initiatives and measures under our control which should
enable improvement in performance going forward. This
position provides the confidence to support our current
intention to maintain the 2019 dividend in-line with that of 2018.
*
All prior year revenue, like-for-like revenue and gross margin numbers are restated to present comparatives on a consistent basis with 2018.
This follows the reclassification in 2018 of some items between revenue, cost of sales and operating expenses to better reflect their nature.
** Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2018
and 2017 periods and is adjusted for any variances in working days.
*** Underlying is before non-underlying items which includes intangibles amortisation relating to businesses acquired, acquisition fees,
contingent consideration movements, non-recurring pension costs in relation to guaranteed minimum pension (‘GMP’) equalisation and
non-recurring costs relating to senior personnel changes.
**** A progressive dividend policy is one where the dividend is expected to rise at least in-line with increases in earnings per share, and if earnings
per share falls, the dividend will not be reduced.
16
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Headlam Group plc Annual report and accounts 2018
17
EFFICIENCY INITIATIVES
IMPROVING
PERFORMANCE
A number of efficiency initiatives aimed at lowering the breakeven
point and improving operating margin are at the early roll-out phase
or trialling. They will yield increasing benefits as 2019 progresses and
have a more meaningful impact in 2020 and beyond. An overview of the
ten main initiatives are given in the table below.
Initiative
Description
1. Inventory
Management
2. Dynamic Route
Planning
3. Delivery Fleet
Utilisation
4. Vehicle Leasing
5. Goods Not For
Resale (GNFR)
Status
2018: Trialled
2019: Roll-out phase
2018: Trialled
2019: Larger scale
trials
2018: Initial trialling
2019: Potential trial
roll-out to additional
geographical
locations
A stock reordering and management
algorithm to i) improve stock-turn
and increase warehouse capacity;
ii) reduce stock-outs and improve
customer service; iii) focus working
capital investment on fastest-
moving products; and iv) enable
improved supplier production
scheduling.
A dynamic route planning software
system to improve usage and
efficiency of the commercial fleet.
Giving rise to better vehicle load-fill,
and associated cost savings through
reduced fleet number and fuel
consumption.
Consolidation of geographic specific
deliveries, whereby deliveries from
different Headlam businesses to the
same customer are consolidated
into a delivery from the nearest
warehouse location. Leading to
enhanced customer service and
improved operating efficiencies
through reducing the cost to serve
(via fleet and fuel consumption)
whilst also reducing carbon footprint.
Extend the life of the vehicle leasing
contracts across both the
commercial vehicle and company car
fleet. Delivers reduced lease costs
and other associated cost savings,
including costs connected to
renewal and replacement.
2018: Commercial
vehicle fleet
migrated to new
contract
2019: Company car
fleet initiated
Review and leverage group
purchasing (group procurement) to
deliver cost savings and service
improvements in relation to GNFR.
Introduction of aligned group
practices also aimed at reducing
costs. Categories to include: Print;
Consumables; Promotional Items;
Continuous Stationery; Mobile
Telecommunications; and
Packaging.
2018: Tenders and
contracts entered
into
2019: Further
tenders and actions
initiated
18
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Initiative
Description
6. Administrative
Expenses
7. Cloud Migration
Examine all components within
Administrative Expenses with the
objective of arresting the growing
percentage of revenue it accounts
for year-on-year, and ultimately
improve operating margin.
Status
2018: Analysis
2019: Review and
planning, initial
implementation
2020
Migration of all business servers to
the Cloud to increase security and
resilience, speed up processes with
associated efficiencies, and allow a
more flexible response to support
future growth and expansion.
2018: Successful
migration of first site
2019: Full migration
completed
8. Distribution
Network
Configuration
Proposed new regional distribution
centre in Ipswich, UK, to support
businesses in the wider area, provide
growth capacity, and enable greater
network optimisation.
2018: Planning
permission granted
and construction
consultants
engaged
9. Streamlining
of Processes
10. Data Management
and Analytics
Elimination of inconsistent pricing
practices across the group, coupled
with a move towards a more
disciplined pricing policy and focus
on higher margin and exclusive
products. Objective of improving
and maintaining gross margin above
historic levels.
Introduce a business data
management and analytics software
solution to provide improved visibility
of key performance metrics
across the group. Enabling better
identification of inefficiencies, and
improved operational decision
making and cost control.
2019: Land
acquisition and
construction
commence
2018: Gross margin
improvement of 80
basis points*
2019: Maintain
improvement
2018: Software
identified
2019:
Implementation
* Gross margin for 2017 financial year restated to present comparatives on a consistent basis
due to the reclassification in 2018 of some items between revenue, cost of sales and operating
expenses to better reflect their nature.
Headlam Group plc Annual report and accounts 2018
19
OUR MARKETPLACE
EVERY ROOM
HAS A FLOOR
Almost all need a covering
Introduction
It might seem like an obvious statement, but every room has
a floor and almost all require some form of covering.
The marketplace for floorcoverings can be divided into
residential and commercial sector usage, with the total UK
floorcoverings market valued at £2.05 billion in 2018*.
Supporting this value is a residential sector comprising 27.2
million households with an estimated 146.9 million rooms** and
a commercial sector spanning, amongst others, buildings within
the health, education, leisure, retail, office and hospitality
industries.
Market Dynamics
The residential and commercial sectors have largely differing
demand drivers and product requirements in terms of
functionality, design characteristics and size of area to be covered.
Demand in the residential sector is mainly driven by refreshment
or refurbishment of a single room or several rooms at a time
and, as such, typically tends to be a non-essential,
discretionary purchase. This is much less true of the
commercial sector, which operates on a far greater scale and
where a replacement requirement is a key driver. Health and
safety and the provision of a safe, clean and comfortable
working environment are key drivers of replacement demand
particularly within the areas of office, health and education.
Demand from the hospitality, retail and leisure industries is also
influenced to a greater degree by innovation and design trends,
with an aspiration to update furnishings to keep them current.
Due to the differing dynamics behind the demand for product,
the residential sector tends to be more susceptible, at least in
the short-term, to a weaker economic environment than the
commercial sector which tends to operate on less discretionary
spend parameters, larger budgets and longer planning timelines.
One of Headlam’s strategic aims (detailed on page 24) is to
broaden its position within the overall industry; expanding its
revenue streams, customer base and presence in certain market
segments and sectors. During 2018, Headlam increased its
presence in the specification segment of the marketplace,
which is predominately focused around longer-term project
work with a greater weighting towards the commercial sector
than Headlam’s core distribution businesses (see ‘Market
Segment Focus’ box on page 21).
Manufacturers & Product
Manufacturers of floorcoverings are focused on constant technical
innovation and the development of improved materials and
floorcovering solutions. Significant investment has been made in
technology and manufacturing processes leading to a broadening
range of products with improved functionality available in the
marketplace. This in turn helps create ongoing customer demand
and support the growth of the market. Due to the technical
advancements made by the manufacturers, certain product
categories have outperformed in recent years including luxury
vinyl tile (‘LVT') and the associated floor preparation materials.
20
Headlam Group plc Annual report and accounts 2018
£2.05 billion
UK MARKET
VALUE*
146.9 million
UK RESIDENTIAL
ROOMS**
£133
HEADLAM’S AVERAGE
ORDER SIZE***
* Source: AMA Research, December 2018 (estimate),
and expressed by reference to manufacturer’s selling price
** Source: ONS
*** The Company’s distribution businesses, for the financial
year ended 31 December 2018
Image from Domus
Overview
Strategic Report
Governance
Financial Statements
MARKET SEGMENT FOCUS:
SPECIFICATION
The specification consultant’s key
relationships are with professionals who act
as the ‘specifier’ on projects requiring floor
and wallcovering products. ‘Specifiers’ are
principally architects, designers, developers
and end-users who determine the materials
and products to be used in a particular
project having defined the preferred product
characteristics and design. This information
is then passed to the ‘buyer’, typically a
contractor, who makes the final purchasing
decision and places the order with the
specification consultant who then supplies
the products.
The specification consultant’s sales teams
utilise their relationships with specifiers to
identify, target and track projects through
the concept and planning stage, and
ultimately get their products specified and
ordered following a tender process.
Successful specification is reliant on the
relationships with both specifiers and
buyers, quality of service levels, technical
expertise, and ability to provide a compelling
and typically exclusive product range which
caters to the specifier’s emphasis on design
as well as functionality. Due to the design-
led nature of the business, specifiers often
look to specification consultants for
inspiration and advice as well as guidance on
trends.
Projects span the commercial and residential
sectors, ranging from residential homes to
office, and other commercial categories
including healthcare, education, retail,
leisure, hospitality and transportation. The
sales and order process can cover a few
months to well over a year dependent on the
size and complexity of the project, and
specification consultants typically have
extensive pipelines of project opportunities
and long-term order books.
CECO
During 2018, Headlam acquired CECO
(Flooring) Ltd, a leading specification
consultant based in Carryduff, south of
Belfast, to expand its presence in the
specification marketplace. Established in
1978, CECO has partnerships and exclusive
distribution rights with a number of leading
manufacturers of tiles, carpet tiles and
architectural stone products enabling it to
offer an unrivalled portfolio of floor finishes
and wall solutions to retail and commercial
customers. Covering all sectors of the
market, CECO has been involved in many
prestigious projects including high-profile
office fit-out work for global names such as
Google and Facebook. Recent and upcoming
projects include the new mental health facility
at Belfast City Hospital, HM Prison
Maghaberry and HMRC’s new headquarters
in Belfast.
Image from CECO
The utilisation of an outsourced distribution channel enables
manufacturers to focus on their core activities, incur reduced
costs associated with distribution, and benefit from localised
sales, marketing and distribution expertise that provides a
more effective and broader route to market for their products.
As stated within Our Strategy on page 24, Headlam continually
engages with manufacturers around the world to partner in
bringing a broad range of innovative and sometimes exclusive
products to market, and enhance the product range it can
offer its customer base.
Customers & Processing
Within the trade segment of the marketplace, the customer
base includes independent retailers, flooring contractors,
specialist multiples, non-specialist multiples, architects,
interior designers and housebuilders.
Supporting sales and marketing activities and order
characteristics vary markedly between the customer groups.
Independent retailers, for example, have frequent interaction
with sales representatives at their premises and place regular,
smaller orders reflecting the end-consumer’s refurbishment of
a single room or several rooms at a time.
The interaction with flooring contractors is also mainly
conducted by sale representatives, but due to the focus on the
commercial sector there is greater consideration of the
technical requirements of products and therefore more
support provided in terms of technical advice and product
options, and orders are much larger and less frequent.
Customers’ orders will on the whole require some form of
preparation or processing prior to delivery. This includes rolls of
carpet or vinyl and boxes of palletised goods such as
engineered wood and ceramic being cut to length or broken-
down to meet the customer’s specific order size. Specialised
equipment required to process orders includes cutting tables,
sortation units and specially adapted handling equipment, with a
large degree of material handling expertise required.
Headlam has developed its footprint and operations to cater
to the differing needs of its customer base. The trade counter
network is designed to support the local flooring contractor
who typically doesn’t have premises with warehousing capacity
and prefers to collect orders, while next day delivery
particularly benefits the independent retailer who tends to
have a limited ability to hold stock due to small premises and
prefers delivery just-in-time for end-consumer installation.
Headlam Group plc Annual report and accounts 2018
21
OUR BUSINESS MODEL
CREATING VALUE FOR
OUR STAKEHOLDERS
INPUTS AND SOURCES OF
COMPETITIVE ADVANTAGE
26 years of industry expertise and knowledge
Market-leading position
Extensive distribution network
Partnerships with a global supplier base
Unparalleled product offering
Longstanding customer relationships
Broad customer base
Commitment to customer service
Considerable investment over many years
Financial strength and centralised support
Expanding route to market
WHAT WE DO
Europe’s leading distributor of floorcoverings, providing
the distribution channel between suppliers and trade
customers. Provides suppliers with an unparalleled route
to market for their products, and customers with the
broadest product offering supported by comprehensive
customer service and next day delivery.
Years of operation
+26
HOW WE OPERATE
Suppliers & Products
Work closely with a global manufacturing supply base to
offer over 30,000 product units to customers covering all
principal product categories. Build on supplier relationships
to continue expanding product offering to customers.
Suppliers
+110
Businesses & Extensive Network
Comprise 67 businesses in the UK and Continental Europe,
each operating under their own unique trade brand and
utilising individual sales teams to maximise customer and
market penetration. Each business supported by centralised
and financial resources and extensive distribution network.
Sales reps
+360
REINVESTMENT
UNDERPINNED BY
Clear
strategy
Robust
governance
Read more on page 24
Read more on page 52
22
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Revenue
Commercial
35.4%
Continental Europe
14.7%
64.6%
Residential
85.3%
UK
BENEFITS FOR STAKEHOLDERS
Employees
Stability and security, and sense of ownership
Long-standing relationships with other stakeholders
Benefits including employee share-save schemes
and performance based rewards
Feedback actively encouraged, with a commitment
to fostering an open and positive working
environment
Customers & Sectors
Customers span both the residential and commercial
sectors, and comprise principally independent retailers and
flooring contractors. Focused on supporting customers
and their growth through sales and marketing support,
credit and next day delivery.
Active customer accounts in 2018
+71,000
Expanded Industry Position
Extend position within the industry, and customer base,
through focus in other market segments, including
specification, working principally with interior designers,
architects and building developers on projects.
Specification projects in 2018
+2,750
Suppliers
Unparalleled route to market for products
Able to supply large volumes
Extensive market and customer insight, and
feedback on sales potential and positioning
of product
Marketing support
Customers
Broadest product offering, including exclusive lines
Next day delivery satisfying end-consumer demand,
and minimising need to hold stock
Market awareness of new product lines and trends
Point-of-sale materials, new product training and
provision of credit
Informed risk
management
Empowering
culture
Read more on page 34
Read more on page 40
Shareholders
Commitment to the highest level of corporate
governance
Focused on long-term sustainable growth
Strong cash generation and balance sheet
Progressive dividend policy
Headlam Group plc Annual report and accounts 2018
23
OUR STRATEGY
SUSTAINABLE
LONG-TERM VALUE
Our strategy is based upon building a successful
company delivering sustainable long-term value
Strategic Area
Strategic Objective
DEVELOP AND BROADEN
NETWORK UTILISATION
PERFORMANCE AND
MODERNISATION
CULTURE AND PEOPLE
SUPPLIERS
CUSTOMERS
24
Headlam Group plc Annual report and accounts 2018
Continue developing the market-leading
distribution business
Broaden position within the overall industry to
expand revenue streams and customer base
Grow in identified product categories and market
segments
Improve performance through better utilisation of
the network and collaboration amongst the group
Review existing configuration to remove
inefficiencies, improve capacity and customer
service
Leverage the network and be the intermediary of
choice for suppliers and customers
Pursue multiple efficiency initiatives to improve
operational and financial performance
Update existing operational processes and business
practices
Build the business reflecting market and industry
evolution
Invest in people through training, support and
creating a positive working environment
Focus on culture and opportunity to attract and
retain the best talent
Extend a collaborative culture and common purpose
to deliver success
Maintain and build upon the basis of a true
partnership
Provide a cost efficient and most effective route to
market for products
Engage further with suppliers to develop product
categories and overall offering
Maintain commitment to achieving the highest
level of customer service and support
Continue building customer base through service
quality, product diversity and market segment
expansion
Respond to evolving customer demands and
industry trends
Overview
Strategic Report
Governance
Financial Statements
[•] p
25.0 pence
TOTAL DIVIDEND
IN RESPECT OF 2018
TOTAL ORDINARY
DIVIDEND FOR 2018
1.7
[•]
TOTAL SHAREHOLDER
FREE CASH FLOW
COVER RATIO
RETURN LAST THREE
FINANCIAL YEARS*
*Inclusive of 2018
Headlam Group plc Annual report and accounts 2018
25
FINANCIAL REVIEW
FINANCIAL REVIEW
“The total dividend payable in respect of
2018 equates to an earnings per share cover
ratio of 1.6, cash outflow of £21.0 million, and
reflects a free cash flow cover ratio of 1.7“
Chris Payne
Chief Financial Officer
2017 Income Statement Restatement
As disclosed in the 2018 Interim Report, the Income Statement
for 2017 has been restated due to the reclassification, in 2018,
of some items between revenue, cost of sales and operating
expenses to better reflect their nature. The 2017 restated
results are presented in a consistent manner with 2018 and all
references to year-on-year movements are on a restated basis.
UK
The Company’s UK revenue performance was marginally up on
2017 at £604.2 million (2017: £593.5 million), reflecting a weak
market backdrop throughout the year compared with 2017,
particularly in the residential sector, offset by contributions
from acquisitions. Year-on-year revenue from acquired
businesses during the year amounted to £33.1 million while
like-for-like revenue declined by £24.7 million.
Revenue
During the year, total revenue improved by 2.3% from
£692.5 million to £708.4 million, an increase of £15.9 million.
Like-for-like* revenue declined in both the UK and Continental
Europe, by 4.2% and 1.8% respectively.
The residential sector represented 66.3% of UK revenue in
2018 (2017: 70.4%), a reduction of 4.1% and 6.2% on an
absolute and like-for-like basis respectively.
Revenue for the year ended 31 December 2017 (restated)
UK
Continental Europe
593,476
99,064
85.7
14.3
£000
%
£000
%
Incremental items during the 12-month period to 31 December 2018
UK:
Like-for-like*
One additional working day
Acquisitions
Continental Europe:
Like-for-like*
Changes in working days
Acquisitions
Translation effect
Total movement
Revenue for the year ended 31 December 2018
UK
Continental Europe
692,540
100.0
10,674
1.8
5,209
15,883
5.3
2.3
708,423
100.0
(4.2)
0.4
5.6
(1.8)
0.1
6.7
0.2
85.3
14.7
(24,651)
2,275
33,050
(1,791)
112
6,648
240
604,150
104,273
* Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2018 and
2017 periods and is adjusted for any variances in working days.
26
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
As a consequence, there was a slight shift in the business mix
towards the commercial sector, now representing 33.7% of UK
revenue in 2018 (2017: 29.6%), although the year-on-year
movement was almost flat on a like-for-like basis, up 0.6%.
Continental Europe
The Continental European businesses delivered a 5.3%
increase in revenue to £104.3 million, with this growth, driven
by an acquisition in the Netherlands during the year, being
slightly offset by the 1.8% decline in like-for-like revenue.
Continental Europe accounted for 14.7% of total revenue
in 2018, up from 14.3% in 2017. In contrast to the UK, the
weighting between the residential and commercial sector
revenue showed a slight movement towards residential
compared with 2017, accounting for 54.7% of revenue
(2017: 52.6%).
Gross Margin
Gross margin increased by 80 basis points in the year from
31.5% to 32.3% predominately as a result of the positive
impact of higher margin acquisitions (55 basis points), with the
balance largely due to the benefit arising from anticipated early
settlement discount on trade creditors and the ongoing focus
on pricing discipline since late 2016.
Expenses
Combined distribution costs and administrative expenses
increased by 6.2% up £11.0 million to £187.7 million. On an
underlying basis, and after adjusting for the impact of the
acquisitions during the year, total costs actually decreased by
£3.3 million which was largely driven by a reduction in
performance-related bonus payments offsetting the 2% cost
of living award given to all UK employees bar the Executive
Directors and Senior Management Team.
Underlying distribution costs and administrative expenses
expressed as a proportion of total revenue increased from
25.2% in 2017 to 26.1% in 2018. This was predominately as a
consequence of the expansion into the specification business
area which typically has a higher fixed cost base compared with
the Company’s distribution businesses.
The relative proportions of distribution costs and
administrative expenses as a percentage of total expenses for
2018 remained largely consistent at 72.7% and 27.3%
respectively (2017: 72.9% and 27.1%).
After adjusting for the effect of the acquisitions during the
year, the annual movement in other expenses was relatively
modest, with the next largest item being the £3.2 million
decrease in people costs reflecting the reduction in
performance-related bonus payments offset by the
aforementioned 2% cost of living award.
Items totalling £2.9 million (net) have been treated as non-
underlying in 2018 (2017: £2.4 million). These non-underlying
items related to amortisation of acquired intangible assets
(£1.8 million), acquisition related fees for the five acquisitions
made in 2018 (£0.5 million), non-recurring people costs
(£0.8 million), pension equalisation costs associated with past
service liabilities (£1.2 million) and a credit from the release of
contingent consideration accrued for the Domus acquisition in
2017 (£1.4 million). These are discussed in detail in note 3 to
the Financial Statements.
Expenses for 2017
Significant movements in 2018:
People cost
Vehicle expenses
Carriage and packaging costs
Sampling investment
Legal and professional fees
Effect of acquisitions
Other
Underlying sub total
Non-underlying
Total before currency translation
Currency translation
Expenses for 2018
Total expenses
Distribution
Administration
£000
176,720
(3,170)
244
(205)
(387)
(543)
13,765
669
10,373
543
10,916
107
187,743
%
£000
127,145
%
71.9
£000
49,575
(29.0)
2.2
(1.9)
(3.5)
(5.0)
126.1
6.1
95.0
5.0
100.0
(339)
238
(205)
(387)
–
7,795
2
7,104
–
7,104
67
(4.8)
3.4
(2.8)
(5.5)
–
109.7
0.0
100.0
–
100.0
(2,831)
6
–
–
(543)
5,970
667
3,269
543
3,812
40
%
28.1
(74.3)
0.1
–
–
(14.3)
156.6
17.6
85.7
14.3
100.0
134,316
71.5
53,427
28.5
Headlam Group plc Annual report and accounts 2018
27
FINANCIAL REVIEW CONTINUED
Operating Profit
Underlying operating profit was marginally up on 2017 at
£44.3 million (2017: £43.8 million), however, the underlying
operating margin was slightly reduced at 6.2% (2017: 6.3%).
The underlying operating margin was almost maintained despite
the £7.6 million loss of gross profit from a reduction in like-for
like-revenue. This was due to the positive contribution from
acquisitions of £2.8 million, improvement in pricing, a reduction
in cost of sales for the anticipated early settlement discount
received from the year-end trade creditors, reduction in
performance-related bonus payments, and ongoing operating
cost mitigations.
One of the key areas of strategic focus is improving the
Company’s operating efficiency. The Company has a rolling
programme of margin improvement initiatives, most of which
are at an early-stage of implementation with some earlier ones
having been commenced in 2017 or 2018. Some of these
started to deliver initial benefits in 2018, with more meaningful
contributions to come. These primarily were achieved by
operating a group procurement function in relation to a number
of goods not for resale and an extension of commercial vehicle
and car leasing contracts. Commenced in 2018, these changes
will deliver an accumulated cost saving of over £1.0 million per
annum once fully deployed following the full fleet replacement
cycle over the next few years and as supply contracts come up
for renewal.
Operating profit 2017
Gross margin improvement in 2018:
Volume reduction
Pricing benefit
Anticipated trade creditor settlement discount
Effect of acquisitions
Expense changes
Distribution
Administration
Effect of acquisitions
Total increase
Operating profit 2018
Underlying
£000
Non-underlying
£000
Total
£000
43,783
(2,399)
41,384
(7,570)
954
1,049
16,537
10,970
624
2,661
(13,765)
(10,480)
44,273
–
–
–
–
–
–
(543)
–
(543)
(2,942)
(7,570)
954
1,049
16,537
10,970
624
2,118
(13,765)
(11,023)
41,331
Tax
The underlying effective tax rate for 2018 was 17.9% (2017:
18.5%) which is lower than the headline rate of corporation tax in
the UK of 19.0%. This difference is largely due to an adjustment
in prevailing overseas tax rates and a release in creditors for
uncertain tax positions following the ongoing review of tax risks
in the Company. The full effective rate of tax in 2018 was lower at
17.2% (2017: 19.1%) due to non-underlying tax credits.
The Company is committed to being fully compliant with the
relevant tax laws and compliance obligations regarding the filing
of tax returns, payment and collection of tax. The Company
maintains an open relationship with HM Revenue & Customs and
currently operates with a level of tax compliance risk that is rated
as ‘low’.
Ordinary Dividends and Earnings Per Share
When declaring the interim and recommending the final dividend, the
Board considers the Company’s cash resource, adequacy of
distributable reserves and future expectations of performance.
The total dividend payable in respect of 2018 equates to an
earnings per share cover ratio of 1.6 (2017: 1.6), cash outflow of
£21.0 million, and reflects a free cash flow (cash from operating
activities less capital equipment spend) cover ratio of 1.7 (2017: 1.9).
Dividend announcements, approvals and payments are
typically expected to be as follows:
Dividend
Ordinary interim
Ordinary final
Status and date announced
Declared
August
Approval
The Board
August
Approximate
payment date
January in the
year following
announcement
Recommended
March
AGM by shareholders
May
July
28
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Acquisitions, Related Goodwill and Other
Intangible Assets
The Board has a methodology for calculating the value of
acquired intangible assets and the period over which intangible
assets are amortised for each acquired business.
In arriving at values for goodwill and the associated intangible
assets, the Board has taken a judgment on the discounted fair
value of any contingent consideration which is payable after
completion of the acquisition. Similarly, the Company has taken
judgments over attributing values for the intangible assets of
order book, brand value, any non-compete arrangements with
sellers and customer relationships together with a useful
economic life over which to amortise the assets. After evaluating
the above, this leaves the Company with residual goodwill value
which reflects the overall value to the Company as a result of
having a more diverse product range and broader route to market.
The carrying value of contingent consideration and goodwill
for acquired businesses is then reviewed at the end of each
financial year.
As an illustration, the impact of each of the five acquired
businesses in 2018 are shown in the table below, together with
the current value and amortisation charge in the Income
Statement (although it is worth noting that the Garrod Bros
intangible asset was fully written down in 2018). Further
information is contained in note 24 to the Financial Statements.
Businesses acquired
in 2018
Dersimo
CECO
Ashmount
Rackhams*
Garrod Bros*
Total
Consideration
£ million
Residual
goodwill
£ million
Intangible
assets
£ million
Amortisation
costs in 2018
£000
3.7
5.6
2.4
0.7
0.6
13.0
1.3
2.2
0.5
0.4
-
4.4
1.2
1.4
0.4
0.4
0.2
3.6
82
113
50
23
219
487
* Both Rackhams and Garrod Bros are currently subject to a merger inquiry by the Competition and Markets Authority (‘CMA’).
Retirement Benefits
The Company operates two defined benefit pension schemes in
the UK and in Switzerland, the assets and liabilities of which are
dominated by the UK scheme which is closed to new members.
The net liability attaching to employee benefits is as follows:
Current liabilities
Non-current liabilities
Total
2018
£000
–
5,888
5,888
2017
£000
2,235
10,481
12,716
The year-on-year decrease in the net liability amounts to £6.8
million, which reflects the elimination of the short-term deficit
contributions which ceased to be paid by the Company during
2018 following the most recent triennial valuation. This was
mainly caused by the changes in financial assumptions, where
annual salary increases are assumed to rise in-line with RPI
rather than at a 1.5% uplift to RPI as previously the case and an
increase in the discount rate to 2.7% (0.3% increase), offset by
negative changes in the returns on asset performance.
Following recent pension case law, the UK scheme liabilities
have increased to reflect gender equalisation of benefits for
past service. This has resulted in a one-off £1.2 million cost in
the Income Statement for 2018, categorized within the
non-underlying items.
Capital Allocation, Investment Decisions and
Return on Capital
The Board is committed to ensuring the efficient allocation of
capital, with a clear strategy for sustainable growth, with controls
in place to govern capital expenditure and working capital.
The Board routinely reviews organic growth opportunities
and associated investment, value enhancing acquisitions,
and shareholder returns to ensure the Company deploys an
optimal capital structure. Such investment opportunities are
subject to both internal rate of return and cash flow payback
criteria, regularly reviewed by the Company to ensure
consistency of assessment.
Return on Capital Employed (measured as earnings before
interest and taxes (‘EBIT’) as % of capital employed) in 2018
was 23.2% (2017: 26.2%).
Capital Expenditure
The Company incurred a replacement level of capital
expenditure on its land and buildings of £0.4 million during the
year (2017: £0.2 million), and capital expenditure on plant and
machinery of £3.5 million (2017: £2.8 million).
Activity in relation to the new Ipswich regional distribution
centre is now meaningfully underway. Total capital expenditure
is estimated to be in the region of £26.0 million, with £0.5 million
spend incurred in 2018, approximately £16.0 million expected
in 2019 (including land acquisition cost of £4.0 million), and the
balance in 2020.
New Accounting Standard not yet applied –
IFRS16 Leases
This new standard is effective for financial periods beginning
after 1 January 2019 and eliminates the classification between
operating and finance leases over 12 months in length. Full
information, including an evaluation of the impact on the
Company’s financial statements, is detailed in note 1 to the
Financial Statements. While adoption of the new standard will
have a material impact on the presentation of the Group
Statement of Financial Position, the Group expects that the
impact on the Income Statement for 2019 will be a reduction in
the net profit before tax by approximately £0.5 million.
Headlam Group plc Annual report and accounts 2018
29
FINANCIAL REVIEW CONTINUED
Cash Flows
Net Cash Flow from Operating Activities
During the year, net cash flow from operating activities was £40.0 million (2017: £43.2 million) with the key drivers behind this
positive cash flow generation shown below.
Cash flows from operating activities
Profit before tax for the year
Depreciation, amortisation and impairment
Profit on sale of property, plant and equipment
Net finance cost
EBITDA
Share-based payments
Working capital changes
Cash generated from the operations
Interest paid
Tax paid
Additional pension contributions
Net cash from operating activities
2018
£000
2017
£000
40,447
7,038
(50)
884
48,319
1,478
209
50,006
(1,426)
(7,789)
(747)
40,044
40,719
5,845
(45)
665
47,184
1,218
6,108
54,510
(761)
(8,388)
(2,164)
43,197
Cash generated from operations remained strong in the year despite the weaker trading backdrop, being 121% of operating profit
(2017: 132%).
Cash Flows from Investing and Financing Activities
The table below summarises the cash flow movements arising from investing and financing activities during the year. The overall
net cash outflow from the two activities was £38.5 million, with the main factors being the payment of dividends, acquisition
consideration (net of cash acquired), investment in capital equipment, and an increase in shares acquired reflecting payments to
acquire own shares for treasury to satisfy future obligations under the Company’s employee share schemes. In 2018, there was a
£4.8 million reduction in dividends paid owing to an additional special dividend being paid in relation to 2017.
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Interest received
Acquisition of subsidiaries, net of cash and debt acquired and repaid
Acquisition of property, plant and equipment
Net cash from investing activities
Cash flows from financing activities
Shares acquired (net of treasury shares issued)
Net movement on borrowings
Dividends paid
Net cash from financing activities
2017
£000
2016
£000
403
601
(9,576)
(4,384)
(12,956)
(4,764)
211
(20,969)
(25,522)
190
576
(31,805)
(3,058)
(34,097)
(377)
(230)
(25,729)
(26,336)
30
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Net Funds
Net funds at the year-end increased slightly to £36.7 million from £35.3 million in 2017 as a result of the net cash outflows arising
from operating, investing and financing activities outlined above.
In both 2017 and 2018, the Company drew-down on its banking facilities during the year in-line with the normal swings in working
capital. Average net debt in 2018 was £16.9 million (2017: £9.2 million net funds).
Cash at bank and in hand
Bank overdraft
Debt due within one year
Debt due after one year
At
1 January
2018
£’000
42,030
–
(233)
(6,519)
35,278
Cash flows
including
acquisitions
£’000
1,784
(218)
–
(211)
1,355
Translation
differences
£’000
191
(3)
(3)
(75)
110
At
31 December
2018
£’000
44,005
(221)
(236)
(6,805)
36,743
Funding and Going Concern
The Company increased its committed UK banking facilities in 2017 to £72.5 million (Sterling denominated) and €8.6 million
(Euro denominated) all with end dates of December 2021. The Company also has short-term uncommitted facilities which
amount to £25.0 million, and are renewable on an annual basis. In addition, the Company has existing facilities of £7.6 million
in Continental Europe.
The Company maintains sufficient banking facilities to fund its operations and investments, and as at 31 December 2018,
93.6% of the total facilities were undrawn as shown below.
Less than one year
Over one year and less than five years
Drawn
£’000
457
6,805
7,262
Undrawn
£’000
32,116
73,401
Total facility
£’000
32,573
80,206
105,517
112,779
Having reviewed the Company’s resources and a range of likely outcomes, the Board believes there are reasonable grounds for stating
that the Company has adequate resources to continue in operational existence for a period no shorter than 12 months from the date of
this Financial Review and it is appropriate to adopt the going concern basis in preparing the Company’s Financial Statements.
Chris Payne
Chief Financial Officer
6 March 2019
Headlam Group plc Annual report and accounts 2018
31
KEY PERFORMANCE INDICATORS
The Board believes the Key Performance Indicators (‘KPIs’) below provide a comprehensive and relevant
list of measurements with which to assess the Company’s financial, operational and social performance
towards the achievement of its strategy.
Measurement
Why it’s important
Performance
(3 years)
Initiatives and actions
for improvement
Allows a consistent
measure of year on year
performance
2018
3.8
2017 1.1
2016
4.1
Organic growth focus for
regional businesses and
universal product
coverage
Financial
Like-for-like
revenue*
growth
Year on year revenue
growth
as a % adjusted to
normalise currency,
businesses making a
full year’s contribution
and consistent
working days
Gross profit
margin
Measured as a % of
revenue
Shows the effectiveness
of gross profit
generation from revenue
Underlying**
operating
profit margin
Measured as a % of
revenue
Basic earnings
per share
(‘EPS’)
Profit after tax divided
by average weighted
number of shares
Return on
capital
employed
(‘ROCE’)
Underlying**
operating cash
from
operations
Measured as EBIT as a
% of capital employed
Measured as a % of
EBITDA
Measured as a % of
Revenue
Underlying**
selling,
general and
administrative
(‘SG&A’) costs
Shows the effectiveness
of sustainable operating
profit generation from
revenue
Demonstrates the level
of profit per share
attributable to the
shareholders
Demonstrates the
relative level of profit
generated by the capital
employed
Cash conversion
measures the success of
the Company in
converting operating
profit (measured as
EBITDA) to cash, which
underpins the quality of
the Company’s earnings
and reflects the
effectiveness of working
capital management
Shows how effective the
Company is at
converting gross profit
into operating profit
32
Headlam Group plc Annual report and accounts 2018
***
2018
2017
2016
***
2018
2017
2016
***
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
***
32.3
31.5
31.0
6.2
6.3
6.1
40.0
39.1
36.8
23.2
26.2
26.9
97.5
109.8
94.2
Pricing discipline and
product expansion
Margin improvement
initiatives
In-line with profit
performance
May be offset in the short
term by infrastructure
investment, for example
on Ipswich distribution
centre development
Should be held above
90% to ensure profit
growth is cash
generative. It is
anticipated that
improvements in
inventory turn (see KPI
below) will also lead to
improvements in cash
conversion %
26.1
25.2
24.7
Maintain cost control to
ensure increases remain
below revenue growth
Overview
Strategic Report
Governance
Financial Statements
Measurement
Why it’s important
Performance
(3 years)
Initiatives and actions
for improvement
Non-Financial
Inventory turn
Annual ratio
measured by
comparing cost of
goods sold during the
financial period with
the average annual
inventory level (using
averaged data points
at 1 January, 30 June
and 31 December)
A higher inventory turn is
an indicator of efficient
revenue generation,
reduced risk of inventory
obsolescence and more
effective utilisation of
distribution centre
capacity
2018
2017
2016
3.6x
3.8x
3.9x
Moving from a manual
reordering system to a
computerised reordering
algorithm in order to
optimise the level of
inventory held, match
revenue demand with
inventory availability,
ensure excess inventory
positions are minimised
and supplier ordering is
structured, inventory
requirements
communicated to fit in
with supplier production
schedules and deliveries
scheduled to ensure
adequate availability
Further develop
employee engagement;
Introduce people
strategies based on
insight gathered from the
employee engagement
survey; and identify
future skills gaps and
implement learning
strategies
2018
2017
2016
76.0
74.0
74.0
2018
2017
2016
18
17
25
Increase frequency of
in-house H&S compliance
assessments to identify
and limit failures in
compliance
2018
68.8%
(new KPI for 2018)
Group procurement
initiative in place for every
UK location to be using
regranulated polythene
packaging manufactured
from 100% recycled
polythene by end of 2019
(machinery permitting)
Employee
retention
Reportable
incidents
(‘RIDDOR
Reports’)
Recycled
packaging
Retention measures
the ability to retain
employees in the
current year
compared to previous
years. Measured as a
percentage of
employees retained in
the Company
between 1 January
and 31 December
Reporting of Injuries,
Diseases and
Dangerous
Occurrences
Regulations 2013.
These regulations
require employers,
the self-employed
and those in control
of premises to report
specified workplace
incidents
Use of recycled
polythene for
protective plastic
packaging needs
across the Company’s
UK locations.
Measured as % of the
Company’s total UK
volume per annum
Retention demonstrates
the Company’s ability to
retain employees. The
Company’s medium-
term objective is to
further develop a cultural
ethos which attracts and
retains the best talent in
order to ensure valuable
workforce knowledge is
retained to support
delivery of the strategic
objectives and reduce
the substantial costs
involved in hiring and
training employees
By measuring reportable
injuries, can benchmark
and identify any
deficiencies in the
Company’s processes,
allowing continuous
improvement in H&S
standards in the pursuit
of excellence
Protective plastic
packaging is one of the
main areas of waste
arising from the
Company’s operations.
By utilising recycled
polythene, the Company
mitigates its impact on
the environment
*
**
Like-for-like revenue is calculated based on constant currency from activities and businesses that made a full contribution in both the 2018
and 2017 periods and is adjusted for any variances in working days.
Underlying is before non-underlying items which includes intangibles amortisation relating to businesses acquired, acquisition fees and
contingent consideration movements, non-recurring pension costs in relation to guaranteed minimum pension (‘GMP') equalisation and
non-recurring costs relating to senior personnel changes.
*** Prior year numbers restated to present comparatives on a consistent basis due to the reclassification in 2018 of some items between
revenue, cost of sales and operating expenses to better reflect their nature.
Headlam Group plc Annual report and accounts 2018
33
RISK MANAGEMENT AND PRINCIPAL RISKS & UNCERTAINTIES
Risk Governance
The Board is responsible for the adequacy and effectiveness
of the Company’s internal control system and risk
management framework.
The Group Executive team has been delegated ownership and
responsibility from the Board for day to day risk management
and control. The Company’s Chief Financial Officer chairs a
risk committee, established in 2018, whose purpose it is to
discharge this delegated authority with a more granular review
of business risks from a cross function of business leaders
which are then reported back to the Board on a quarterly basis.
This allocation of responsibilities is best described by the
Group’s risk governance framework summarised on page 35.
Risk Assessment
During the year the Board carried out a robust assessment
of the financial risks facing the Company, including those
that would threaten its business model, future performance,
solvency or liquidity.
Summarised below are the key risks, not in order of significance,
which the Board considers could have a material impact on the
Company’s reputation, operations or financial performance.
These include, but are not limited to, risks that are directly
managed by the Board and therefore may be informed by more
detailed risk management processes in place via the Risk
Committee or the Audit Committee.
Area of risk
Description
Potential Impact
Mitigating Actions
Market demand
A significant proportion of the
Company’s revenue arises from
trade with independent retailers
and flooring contractors. The
activity levels within this customer
base are determined by consumer
demand created through residential
property refurbishment or moves,
new residential housing
developments and a wide range of
commercial refurbishment and
building projects.
Periods of economic recession that
create reduced consumer
confidence or contraction in the
construction industry and changes
in trends and preferences all have
the potential to affect market
activity and demand for products
supplied by the Company.
Competitor risk
IT resilience and
cyber security
The Company operates across four
geographical markets, each of
which has a number of similar
trading characteristics. Within each
market, the Company competes
directly with a variety of regional
and national distributors and
manufacturers selling directly to its
customer base and indirectly with
multiple retail chains.
The IT system is a vital component
of the Company’s operating
strategy, underpinning the delivery
of operational objectives and
providing the framework for the
maintenance of financial control.
The emergence of a competitor or
market disruptor with a strong
business model could undermine
the Company’s growth objectives.
Given its importance, any
prolonged system failure has the
potential to adversely affect
business performance.
The theft, destruction or loss of
sensitive and or confidential
information could adversely
affect business performance
and reputation.
Market activity is monitored daily in
each individual business and
collectively at Company level. This
visibility allows prompt response to
factors adversely affecting trading.
Furthermore, since the Company’s
principal activities are supply and
distribution, the Company has the
ability to react quickly to market
changes. In addition, the development
of a range of regional, national and
specialist businesses provides the
Company with broad market
penetration and the capability to
manage the downside risk arising from
a market contraction.
The Company seeks to sustain its
competitive position by maintaining
close relationships with its supplier and
customer base. Substantial and
continued investment in management
and facilities, an extensive product
offering, a knowledgeable selling
resource, product availability, IT,
efficient material handling and logistics
enables the Company to continue to
improve its market leading position.
Each business has its own dedicated IT
infrastructure and failure in one will not
interrupt another. Furthermore, the
Company operates well defined backup
procedures and has contingency plans
in place to enable swift recovery from a
failure of this nature.
Third party IT provision enables
network software to be kept up to date.
People
The Company’s ability to deliver
ongoing success is dependent upon
its ability to attract, retain and
develop its people.
An inadequate pool of suitably
qualified and motivated people can
disrupt business development,
customer delivery and undermine
the Company’s ability to deliver on
its strategy.
The Company is committed to
driving employee engagement
through direct communication,
listening groups and employee
champion forums.
Recruitment, training and development
are aimed at ensuring the Company has
suitably skilled and qualified people to
meet the current and future operational
needs of its businesses.
34
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Risk Management Framework
Risk
Committee
Business Risk
Registers
Senior Manager /
Risk Owners
Business subject
matter experts
Business Risks
Assurance
The Board
Audit
Committee
Health
and Safety
External Audit
Health and Safety
audits and
compliance inspections
Other Activities
e.g.
whistleblowing,
fraud, bribery, tax
evasion, corporate
criminal offences
and MAR
compliance
Area of risk
Description
Potential Impact
Mitigating Actions
Health and
safety
The Company’s operations and
business model carry inherent
health and safety risks to our
people, customers and the
wider public.
If the Company were to breach
health and safety law and/or
regulations it could have a material
adverse effect on reputation,
overall business performance and
the welfare of our people.
Brexit
The Company operates an
international supply chain, with
purchases made across EU borders.
A hard Brexit is likely to result in
cost increases and extended
supply chain timelines.
Any tariffs or other increases in
costs will affect the whole market
and result in higher prices.
Delays in supply chain
deliveries may affect our ability
to service customers in a timely
manner, particularly during a
period of adjustment to
post-Brexit conditions.
The Company employs a health and
safety function reporting directly to
the Board.
Active and regular engagement
by the senior and local
management in prioritising
health and safety procedures.
There are embedded common
processes and controls in place
across the UK businesses which are
supported by regular independent
reviews and checks.
The Company maintains strong
relationships with its suppliers
enabling an open dialogue to
secure supply.
The Company’s business model
creates a significant level of UK
stock holding which buffers
supply disruption.
The Company has invested in
additional stock holding for fast
moving products to protect
customer service.
Legislation and
regulation
The Company’s operations are
regulated by a variety of laws and
regulations, the principal ones
relating to the environment,
employment, commerce,
corporate, financial reporting
and taxation.
Failure to comply could cause
reputational harm and lead to
serious civil or criminal proceedings,
causing disruption to the
Company’s operations and leading
to financial loss.
The Company manages its
obligations through a framework of
policies and procedures and, where
appropriate, engages the services
of competent third-party advisers.
Headlam Group plc Annual report and accounts 2018
35
VIABILITY STATEMENT
Background
Provision C2.2 of the 2014 revision of the UK Corporate
Governance Code requires the Board to assess the prospects
of the Company over a period in excess of the twelve months
required by the ‘Going Concern’ provision. This section sets
out, in overview, that assessment.
Scenario B – Economic Environment
Scenario B is modelled on the basis that there is a similar
economic crisis to that observed in 2008, where revenues
decreased sharply in 2009 with modest growth thereafter
through to 2014.
After analysing various options, a period of three years,
to 31 December 2021, was chosen for the purpose of the
viability assessment, as this represents the period focussed
on by the Board during strategic planning. This period also
allows for modelling of capital investments planned during
the timeframe. Due to the current macroeconomic
uncertainty in the UK and Continental Europe, the Board
believed an assessment over a longer time period would
incorporate a high degree of inherent uncertainty.
Sensitivity Analysis
Reporting on the Company’s viability requires the Board to
consider those principal risks that could impair the solvency
and liquidity of the Company. In order to determine those risks,
the Board considered the Company-wide principal risks as given
in the Risk Management and Principal Risks & Uncertainties
section on pages 34 and 35.
In light of the Company’s competitive position in its geographical
markets, it unlikely that any of the individual risks, other than
market demand, would compromise the Company’s viability.
In respect of market demand, the key risk relates to periods of
economic recession that create reduced consumer confidence
or contraction in the construction industry, both of which could
result in a significant reduction in demand for the Company’s
products. As a result, two alternative plausible downside
scenarios have been modelled which have a potential to
threaten the viability of the Company.
Scenario A – Sustained Recessionary Environment
Scenario A is modelled on the basis that there is a sustained
recessionary environment in both the UK and Continental
Europe such that revenues decline in 2020 and 2021 whilst
there are ongoing inflationary fixed cost pressures.
In this scenario, even in the absence of any significant mitigating
actions, the Company continues to operate within its current
banking facilities and the covenant restrictions set out therein.
In this scenario, the Company continues to operate within its
current banking facilities and the covenant restrictions set out
therein, although, the covenant headroom is significantly
reduced and this position requires swift and pro-active
management of the cost base.
Based on the consolidated financial impact of the scenarios
analysed and associated mitigating actions that are either in
place or could be implemented, the Board has been able to
conclude that the Company will be able to operate within its
existing bank covenants and maintain sufficient bank facilities
to meet its funding needs over the three-year assessment
period. In coming to this conclusion, it has been assumed
that the Company’s existing UK bank facilities, running to
7 December 2021, continue in existence.
Confirmation of Longer-Term Viability
Based on the results from these two scenarios, and having
considered the available mitigating actions, the Board can
have a reasonable expectation that the Company will be able
to continue in operation and meet its liabilities as they fall due
over the three-year period of this assessment. This longer-
term assessment process supports the Board’s statements
on both viability and Going Concern.
The Strategic Report was approved by the Board
on 6 March 2019:
Steve Wilson
Chief Executive
Chris Payne
Chief Financial Officer
36
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Headlam Group plc Annual report and accounts 2018
37
INTRODUCTION TO CORPORATE RESPONSIBILITY
OUR
COMMITMENT
The relationships with our stakeholders
are of the uppermost importance
We remain committed to managing our Company in a socially
responsible way, continually reviewing our performance in all
areas of Corporate Responsibility. We utilize the feedback and
recommendations from the agencies, consultancies and
voting bodies who undertake reviews of environmental, social
and governance (‘ESG’) issues to enhance our practices going
forward. During 2018, we were delighted to remain a
constituent of the FTSE4Good Index, an Index launched to
identify companies that demonstrate strong ESG practices as
measured against globally recognised standards.
A key constituent of our Corporate Responsibility is the
relationships with our stakeholders, encompassing our people;
suppliers; customers; investors; and the communities in which
we operate. These relationships, many of which span the
26 years we have been operating, are of the uppermost
importance. They are pivotal to our performance and delivery
of our Strategy (as detailed on page 24) and we are committed
to continuing the investment in these relationships to promote
and ensure their longevity. We endeavour to have a positive
impact on all our stakeholders, working in partnership with
them, with the strategic aim of creating value for the benefit
of all stakeholders whilst supporting the end-consumer by
providing an exceptional package of goods and services.
Our ambition is to embed Corporate Responsibility within
the Company’s culture and uphold the highest standards.
Pages 39 to 49 of this Strategic Report detail our considerable
efforts in this regard during 2018, particularly in relation to
employee engagement, and our further endeavours for 2019.
Philip Lawrence
Non-Executive Chairman
Steve Wilson
Chief Executive
6 March 2019
38
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
STAKEHOLDER ENGAGEMENT
STAKEHOLDER
ENGAGEMENT
The Company aims to have a positive impact on all its stakeholders through its interaction with
them, working in partnership to create value and a positive contribution which benefits all.
The Company places particular importance on directly engaging and communicating with its
stakeholders in the areas of operational and financial performance, strategy, corporate values,
and policies and procedures including health and safety.
The main methods of engagement with each of the Company’s stakeholders are given below:
Stakeholder
Engagement
EMPLOYEES
SUPPLIERS AND
OTHER PROVIDERS
CUSTOMERS
AND LOCAL
COMMUNITIES
Conducted at both the Company and individual business level, and including all
departments and levels of seniority, engagement is undertaken via meetings
(formal and informal), presentations, training, emails, bulletins, and the
corporate website and intranet. Specific activities include:
Employee surveys, and follow-up workshops and planning meetings to take
appropriate actions
Senior manager events at head office, including to discuss performance
and strategy
Visits to all operating locations by the Chief Executive, Chief Financial Officer and
Commercial Director, and associated meetings with the local management teams
Conducted primarily by the delegated buyers within the Company, and supported
by regular interaction with the Company’s executive team, activities include:
Meetings on a regular basis at manufacturing facilities and/or showrooms,
including to discuss product development and production scheduling
Trade shows, and collaborative events/presentations to enhance the sales
potential of products
Questionnaires and reviews of practices, including with the aim of ensuring a
supply-chain free from slavery and human trafficking
Conducted primarily by sales representatives’ visits, delivery drivers and
telephonically with the customer service team, the Company provides the
widest interaction possible for the customer to ensure the service proposition is
upheld. Additional activities include:
Open-house or trade days at the Company’s business locations to educate
about products and/or promotions
One-to-one meetings with managers / directors to garner feedback and ensure
the level of service received
Customer surveys to be conducted to gauge levels of satisfaction and analyse
buying habits
SHAREHOLDERS
AND WIDER
INVESTMENT
COMMUNITY
Conducted primarily via meetings following the publication of the Company’s
interim and final results, and at the time of the AGM. The Company seeks to
provide regular corporate updates, and increased direct interaction through:
Briefings for analysts and other members of the investment community to
coincide with the Company’s bi-annual results
Meetings hosted at the Company’s main operating locations to enable first-hand
review of operations and meet additional members of the team
Group events, including those aimed at increasing the understanding of a
specific area of the business or marketplace
Headlam Group plc Annual report and accounts 2018
39
CORPORATE RESPONSIBILITY
OUR
PEOPLE
At the heart of the Company’s approach to people management is the
provision of a safe and environmentally sound workplace where everyone
can fulfil their potential. Having further invested in the HR team, 2018 saw
progress with the continuing development of people practices to build on
the Company’s history and which will help shape its future.
Employee Engagement
The Company undertook its second employee survey
during 2018 with the aim of enabling employees to express
their views on a confidential basis and identify areas for
improvement. The survey was enlarged to include both UK
and Dutch employees, and a much improved response rate
of 73% (2017: 53%) presented a broader and more in-depth
insight into the views of an increased number of employees
across all departments. Pleasingly, while capturing an
enlarged representation of opinion, the overall
engagement score of 75% stayed broadly in-line with the
previous year’s score of 77% and provides a positive
foundation to continue developing a positive workplace.
The next survey will take place during 2020, with the
Company’s Swiss employees participating and the
2018 Employee Initiatives
Second Employee Survey
Enhanced Maternity Policy
Enhanced Occupational Health Service
Inclusion and Respect at Work Policy
Company’s French business continuing to operate a survey
specific to them.
Throughout 2018, senior managers of the Company’s
businesses continued to work with the champions from
their different departments to discuss ideas and concerns
specific to their businesses as well as the Company as a
whole, and undertake actions as a result.
To increase employee involvement further and ensure that
employees have a greater opportunity to communicate
their views, the Company is launching an Employee Forum
in 2019 which will be comprised of elected employees from
across the Company’s businesses in the UK and
Continental Europe. The Forum, to be held quarterly, will be
chaired by the Company’s Chief Executive and act as a
communication platform, enabling employees to voice
their ideas, opinions and concerns and allow them to
participate more actively in the future direction of the
Company.
During 2018, three events were held for the senior
managers of the Company’s businesses to discuss the
financial and operational performance of the collective
group as well as engage with them on the delivery of the
Company’s vision, strategy and initiatives to deliver
improved performance. These events will continue
throughout 2019.
40
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Positive Workplace Culture
In order to continue creating a positive working
environment and culture, a number of policies and working
practices were reviewed and additionally launched during
2018, including:
Maternity Policy – An enhanced maternity policy was
introduced aimed at providing greater support for
families and encouraging women to continue their
career after motherhood. During 2018 10 women
benefitted from the enhanced policy;
Drugs and Alcohol – To further support the policies and
processes in place to ensure a safe workplace for all, ‘For
cause’ drugs and alcohol testing was introduced; and
Inclusion and Respect at Work – The launch of this
policy, accompanied by training for all managers, reflects
the Company’s commitment to providing equality of
opportunity for all in an environment which is free from
discrimination, victimisation and harassment, and in
which everyone is treated with dignity and respect.
Employee Support
Following its introduction in November 2017, the Employee
Assistance Programme (‘EAP’) ran for its first full year in
2018. The EAP, delivered via an independent company
called LifeWorks, is a confidential telephone, internet,
app-based service available to all employees and their
immediate families providing advice, information and
support on issues spanning work, health, life, family and
money. During 2018, 26 people benefitted from individual
support provided.
During 2018 an enhanced Occupational Health service was
introduced via an independent company called MediGold
Health to further support employee wellbeing. The service
assists the HR team in supporting employees with complex
medical conditions via early intervention and their
appropriate return to work.
Headlam Group plc Annual report and accounts 2018
41
75%
EMPLOYEE
ENGAGEMENT
SCORE
76%
EMPLOYEE
RETENTION
All data stated is for the financial
year ended 31 December 2018
or as at 31 December 2018
CORPORATE RESPONSIBILITY
OUR
PEOPLE CONTINUED
Recruitment and Tenure
The Company actively recruited in all departments
throughout 2018 and the total number of employees
grew year-on-year to 2,612 as at 31 December 2018 (2017:
2,427). The focus on supporting and encouraging internal
moves resulted in 30 vacancies being filled by internal
candidates. The Company’s commitment to retaining
talent and experience is additionally reflected in the tenure
of its employees, with 31% of UK employees having been
with the Company over 10 years as at 31 December 2018
and 132 people since operations began in 1992.
As detailed within the Key Performance Indicators section
on page 33, employee retention improved during 2018 to
76.0% (2017: 74.0%).
Training and Development
The Company actively encourages all its employees to
participate in the training opportunities available to them.
In 2018, and in addition to the training outlined within
the Health & Safety and Environment sections of the
Strategic Report:
35 newly appointed managers attended a ‘Step into
Management’ course designed to equip first-time
managers with the skills needed to lead people; and
51 sales representatives attended the Sales Induction
Programme which is designed to induct them in all
aspects of the role.
As detailed below, the Company has begun in 2019 to
utilise its apprenticeship levy to fund apprenticeship
training schemes.
Cost of Living Pay Award
The cost of living award is designed to benefit employees
through helping offset the effect of inflation and the rising
cost of living. For 2018, the Company elected to award
a cost of living increase of 2% to base salary for all UK
employees with the exception of the Board and Senior
Management Team who elected not to receive it. For 2019
the Company has awarded an increase of 2% to all UK
employees. For the Company’s employees in Continental
Europe, local market practice was followed in 2018 and
for 2019.
Employee Benefits
The Company encourages and supports the financial
security of its employees and offers a number of benefits
including opportunities for participation in the Company’s
Pension Plan and the Government auto-enrolment
National Employee Savings Trust, and also providing death
in service benefits through the Headlam Group Life
Assurance scheme.
Additionally, the Company operates a HM Revenue &
Customs approved Save-As-You-Earn share option
scheme (‘SAYE’), a monthly savings scheme facilitating the
purchase of shares in Headlam at a discount by eligible
employees. The SAYE not only provides employees with a
tax-efficient savings plan but additionally promotes a
sense of ownership of the Company. During 2018, 608
eligible employees participated in the Company’s SAYE
schemes, equivalent to 33% of the UK workforce.
Diversity and Equal Opportunities
The Company recognises and values highly the benefits of
diversity in the workplace, and maintains a policy of
employing the best candidates available in every position,
regardless of gender, ethnic group or background, and is
committed to fair and equal treatment. Where existing
employees become disabled, it is the Company’s policy,
wherever practicable, to provide continuing employment
under normal terms and conditions and to provide training,
career development and promotion wherever appropriate.
The Company gives full and fair consideration to
applications for employment from disabled persons.
As at 31 December 2018, the Company had 2,612
employees of which 20% were female, a marked
improvement on 2017 (2017: 18% female).
The table below shows the Company’s gender diversity:
Employees
Male
Female
Number of
employees as at
31 December 2018
Executive
Directors
Senior
Management Managers
Other
Total
2
0
2
1
2
3
286
46
1,793 2,082
530
482
332
2,275
2,612
42
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
As of the date of the report, the Board (including the
Non-Executive Directors) and Senior Management Team,
who attend all Board Meetings, comprised 5 females and 6
males, equivalent to a 45% female representation. This will
increase to 50% upon Andrew Eastgate’s retirement from
the Board on 31 May 2019.
Anti-Bribery and Corruption
It is the Company’s policy to conduct all business in an
honest and ethical manner. The Company takes a zero-
tolerance approach to bribery and corruption and is
committed to acting professionally, fairly and with integrity
in all business dealings and relationships.
The Company is working to improve the male: female ratio
across the whole Company which stood at 4:1 as at 31
December 2018. Actions and initiatives being launched
include:
Enhance Maternity Policy (as detailed above)
Paternity and Shared Paternity Leave policies
(to be launched in 2019)
Flexible Working Policy and practices
(to be launched in 2019)
Reward frameworks and policies
(to be launched in 2020)
Gender Pay Gap Report
In-line with the UK Government’s regulations which
introduced gender pay gap reporting, the Company has
published its most recent report dated 5 April 2018 on the
GOV.UK website and its own website. The report fully
complies with the legislation and an abridged summary is
given below which includes the Company’s two legal
entities required to report (‘HFD’ and ‘MCD’) and
additionally the ultimate holding company (‘PLC’) not
required to report.
The Company’s overall median pay gap was lower
than the UK national average at 10.1%
The proportion of men and women eligible to
receive bonuses:
HFD - men 97%, women 98%
MCD - men 98%, women 98%
PLC - men 100%, women 100%
Modern Slavery and Human Rights
The Company is committed to improving its practices to
combat slavery and human trafficking, and the Company’s
Slavery and Human Trafficking Statement detailing its
policies, processes and actions is available on its website
www.headlam.com.
The policy, which is detailed on the Company’s website
www.headlam.com, applies to all employees, directors,
officers, agency workers, seconded workers, volunteers,
interns, agents, contractors, external consultants,
third-party representatives and business partners. Any
individual who breaches the policy will face action, which in
the case of employees could result in dismissal for gross
misconduct.
2019 Activity
New activity for 2019, in addition to the Employee Forum
and policies detailed above, includes a development
programme for senior managers and the launch and
roll-out of apprenticeship schemes. The apprenticeship
schemes have been launched to capitalise on the levy
payable under the Government’s Apprenticeship Levy
programme to fund new apprenticeships and increase
investment in human capital. Since the beginning of the
year the Company has piloted two cohorts in the area of
sales, and will roll-out the schemes across other job
functions as the year progresses.
To help provide ongoing support to the wider workforce,
the Company will continue to offer guaranteed interviews
to employees from local companies who face redundancy
as a result of closures or job cuts and who have
appropriate experience.
Right to Work and Brexit
The Company is ensuring that it is fully compliant with the
legal requirement to carry out checks with existing and
prospective employees to ensure that they have the legal
right to work in the UK. The Company has 134 identified EU
and EEA nationals working in the UK and has commenced a
communication plan which will provide ongoing support and
guidance for employees applying for pre-settled or settled
status to remain in the UK after it leaves the EU (‘Brexit’).
Headlam Group plc Annual report and accounts 2018
43
CORPORATE RESPONSIBILITY
HEALTH
& SAFETY
The health and safety of employees and individuals likely to be
affected by the Company’s operations is treated with the utmost
importance. It is the Company’s policy to ensure that operations
are carried out at all times in compliance with the relevant health
and safety guidance in the jurisdictions in which it operates.
Introduction
The Company is committed to promoting a positive Health
& Safety (‘H&S’) culture and high standard of H&S
management throughout the Company. Each of the
Company’s businesses occupying distribution facilities has
a H&S Committee comprising representatives from the
various business departments. These meet on a regular
basis and formally report to the National Health & Safety
Manager quarterly.
H&S is a standing agenda item at the Company’s Board
meetings, with an associated report submitted, and regular
presentations are made to the Board and the Senior
Management Team. The report covers accident statistics,
progress on initiatives, transport audits, assessment visits,
updates on policies and procedures, and any changes in
legislation that could affect the Company and its
businesses.
A Risk Committee (as detailed on page 34) serves as a
governance body to provide oversight, review and
challenge of the risk management processes, and to
confirm that appropriate and proportionate risk
management procedures are in place. Investigations are
carried out in respect of any accidents or matters
warranting further detail.
The Company’s H&S capacity has been much enhanced
since 2017 following the introduction of a new in-house
H&S team, and a comprehensive review of the Company’s
policies and procedures was undertaken by them and the
Risk Committee during 2018.
2018 Key Activities
During 2018, a new in-house Health & Safety Management
System was launched and rolled-out across the Company
to ensure a standardised approach to risk assessments,
safe systems of work, accident and near-miss reporting.
The System allows data to be immediately logged,
analysed and any trends identified, with appropriate
remedial action then taken. In addition to being a
centralised portal containing all general policies,
procedures and pictorial aids, the System contains specific
information tailored to each operating location and has an
employee feedback facility.
Various in-house and external training programmes were
undertaken during the year. All business managers
responsible for H&S completed the Institution of
Occupational Safety and Health (‘IOSH’) ‘Managing Safely’
training course, and in-house training courses tailored to
the specific requirements of the Company focused on Fire
Risk Management, First Aid and Accident Investigation.
The Company continued the installation of fall arrest
systems across its commercial fleet, with a further 62
systems installed in the rear of vehicles and trailers to
prevent falls by drivers unloading. In-line with its fleet
renewal schedule, a further 70 installations are anticipated
for 2019. Additionally, ‘creep speed’ mode was fully
implemented across the forklift fleet adding enhanced
control when handling loads at high elevations.
Over 150 H&S compliance assessments were undertaken
at the Company’s 69 UK locations by the in-house H&S
team in 2018, far exceeding historic numbers, with this
level of local assessment anticipated to increase going
forward.
There were 18 reportable incidents in 2018, down from
25 in 2017, none of which resulted in a serious injury.
All reportable accidents are investigated and, in the
infrequent instances where improvement is required,
remedial actions to prevent reoccurrence are
implemented in a timely manner. There were no
prosecutions for breaches of health and safety or
enforcement actions in the year.
44
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
2019 Key Priorities
A key priority for 2019 is the commencement of work
towards achieving ISO 45001 accreditation across the
Company’s main UK operating sites. The ISO 45001
Occupational Health and Safety Management Systems is a
new international standard introduced in 2018 with the aim
of reducing occupational injuries, and provides a single
benchmark for the management of occupational health
and safety. Accreditation would provide validation that the
Company is operating at the highest standard with regard
to H&S, and a series of independent audits will commence
in 2019 and progress through 2020 and 2021.
And Lastly
The Company would like to congratulate Leigh
Holdsworth, National Health & Safety Manager, who was
admitted as a Chartered Member to the Institution of
Occupational Safety in December 2018. Chartered
Members are recognised within the H&S profession as
meeting the highest standards of skills and knowledge.
Headlam Group plc Annual report and accounts 2018
45
150
COMPLIANCE
ASSESSMENTS
28%
REDUCTION IN
REPORTABLE
INCIDENTS
All data stated is for the financial
year ended 31 December 2018
or as at 31 December 2018
CORPORATE RESPONSIBILITY
ENVIRONMENT
The Company is committed to mitigating its
impact on the environment.
Introduction
The Company is committed to implementing the correct
policies and procedures relating to the sustainability of the
environment, and mitigating its impact on the environment.
The Company endeavours to lead by example and
provides the managers of its businesses with guidance
on waste reduction, recycling and consumption of
utilities. In general, and as part of its commitment to the
environment, the Company continues to actively migrate
away from paper-based systems to handheld paperless
delivery and invoicing techniques.
Three of the efficiency initiatives being pursued by the
Company, detailed on page 18 of the Strategic Report,
will lead to improvements in the Company’s environmental
impact and are referred to below. In addition, a KPI in relation to
recycled packaging has been introduced this year to better
measure the Company’s progress in this important area
(page 33).
Recycling & Waste
The waste arising from the Company’s operations is
predominantly protective plastic packaging, cardboard
poles and wooden pallets. The cardboard poles from the
centre of rolls and cut lengths of carpet and vinyl delivered to
customers are subsequently collected from their premises
by the Company’s drivers, with the Company providing a
financial incentive to its drivers to do so. They are re-used
until no longer fit for purpose and then recycled. All pallets
are reused for goods going out and when not needed are
dispatched to specialist reprocessing agents when it is
economic to do so.
For several years the Company’s main UK distribution
hubs, and some other locations with appropriate
machinery, have been utilising recycled polythene for their
protective plastic packaging needs. Packaging has been
identified as one of the key areas targeted for review as
part of the Company’s group procurement efficiency
initiative aimed at delivering cost-savings and other
benefits. As a result of this initiative, by the end of 2019,
machinery permitting, every Company UK location will be
using regranulated polythene packaging manufactured
from 100% recycled polythene.
The Company is a core funder member of Carpet Recycling
UK, a not-for-profit membership association working
to increase the recycling of carpet waste across the UK.
Core funder members are deemed industry leaders in
developing voluntary responsibility for carpet recycling
throughout their lifecycle. Per Carpet Recycling UK,
175,252 tonnes of carpet was diverted from landfill in the
UK in 2018 (being reused, recycled or recovered for energy
generation). This represented a diversion rate of 44%,
and a 2% increase on 2017. The Company does not send
any floorcovering products or plastic packaging to landfill.
The Company is a member of Valpak, the leading provider of
environmental compliance, data and resource management
services. Valpak provides compliance services to its
members by analysing the packaging waste data submitted
by each member on an annual basis and comparing it with
comparative data in order to confirm to the Environment
Agency that its members are continuing to meet UK
recycling and recovery standards.
Fleet Operator Recognition Scheme (‘FORS’)
FORS is a voluntary accreditation scheme that promotes best
practice for commercial vehicle operators, including in relation
to reducing environmental impact and improving operational
efficiency. The Company is committed to achieving and
maintaining FORS accreditations. 10 of the Company’s
businesses’ locations now hold FORS Bronze accreditation,
up from six last year, with an additional business holding
FORS Silver. Further accreditations will be applied for in 2019.
Fleet
European emission standards define the acceptable limits
for exhaust emissions of new vehicles sold in the European
Union and European Economic Area member states with
the aim of improving air quality. Currently 87% of the
Company’s commercial fleet is compliant with the latest
Euro 6 emission standards, up from 74% last year. This will
rise to almost 100% following the delivering of new
vehicles in 2019.
The Company currently holds 12 operator licences,
11 of which have roadworthiness scores within the highest
band (Green) under the Operator Compliance Risk Score
(‘OCRS’) system developed by the Driver and Vehicle
Standards Agency (‘DVSA’). The Company is working
towards the remaining licence achieving a Green score.
The Company is committed to improving the efficiency
of its deliveries and limiting its vehicle emissions where
possible. Further progress in this area will be achieved in
2019 and beyond via two efficiency initiatives that are
currently being pursued by the Company, namely dynamic
route planning and more effective delivery fleet utilisation.
If successfully deployed, both initiatives will result in a
reduced fleet size and fuel consumption.
46
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Wood Sourcing
As an importer of wood products from outside the EU,
the Company has procedures in place to comply with the
requirements of the European Union Timber Regulation
2013. It applies a due diligence process to mitigate the risk of
illegally sourced timber within the supply chain process and
as a result, is able to compile a document trail confirming
that the wood products are sourced from authorised and
renewable supplies.
Utilities
Water, Electricity and Gas
The Company monitors greenhouse gases on a consistent
basis with the aim of improving its use of energy, water,
recyclable and non-recyclable resources, ensuring
long-term environmental and business sustainability.
While the Company recognises its business has a direct and
indirect effect on the environment, it believes that owing
to its proactive approach, its activities generally have a low
impact on the environment. There were no environmental
legal or compliance issues arising during 2018.
Water
Water consumption arises predominantly in respect of
employee welfare and commercial vehicle washing, and was
42,246 cubic metres in 2018. The Company is committed to
commercial vehicles being kept clean and a pleasant
environment in which its drivers operate, and operates jet
wash machines and specialist truck washes throughout its
network. Each truck wash utilises 100% recycled water and
environmentally-friendly washing detergents.
The Company continually seeks to reduce water
consumption and charges through analysing invoices
received, the installation of water meters, and by reducing
consumption through repair, renewal or installation of
equipment to improve efficiency.
Headlam Group plc Annual report and accounts 2018
47
87%
COMMERCIAL
FLEET EURO 6
COMPLIANT
100%
RECYCLED
POLYTHENE
PACKAGING
IN 2019
All data stated is for the financial
year ended 31 December 2018
or as at 31 December 2018
The total 27,844 tonnes CO2 for the financial year ended 31
December 2018 was in-line with that of the prior year
despite the expansion in the number of businesses within
the Company.
Energy Savings Opportunity Scheme (‘ESOS’)
ESOS is a mandatory energy assessment scheme for large
organisations in the UK. External audits are required to be
carried out every four years following the previous audit,
and the Company’s next audit is therefore not anticipated
before December 2019.
CORPORATE RESPONSIBILITY
ENVIRONMENT
CONTINUED
Electricity
Electricity consumption is predominantly in relation to:
forklift truck battery charging; operation of specialist
cutting tables; associated mechanical handling and
compressed air equipment; and warehouse and office
lighting and equipment. Modern and energy-efficient
construction techniques and products are incorporated
when investing in new facilities or undertaking refurbishment
or repair works. Energy-efficient LED lighting units have now
been installed across the vast majority of the network, and
photovoltaic panels installed on the roof of the Company’s
Coleshill distribution hub generate an estimated 46,000
kWh of electricity. Similar panels are currently in scope for
the Company’s proposed new distribution centre in the
Ipswich area, where all the most energy-efficient and
cost-saving appliances will be considered.
Gas
Gas is consumed predominantly in respect of office
heating and a very limited number of localised radiant
heating above work stations on cutting tables located
within distribution hubs and centres. Future savings in the
consumption of electricity and gas have been identified
through the installation of sophisticated heating control
systems either in new facilities or during refurbishment
works. It is intended that such a system will be installed
at the new Ipswich distribution centre.
Electricity and gas supplies in the UK are purchased on a
Company contract basis. The actual cost of electricity and
gas in 2018 was comparable to prior years, and represented
0.14% of UK revenue (2017: 0.13%).
Carbon Reporting
The Company is required to report on all the measured
emissions sources under The Companies Act 2006
(Strategic Report and Directors’ Report) Regulations
2013. Data has been collected in accordance with the
Carbon Reduction Commitment Energy Efficiency
Scheme. Conversion factors for electricity, gas and
fuel are those published by the Carbon Trust.
2018
CO2/
tonnes
Electricity
Gas
Commercial vehicle fuel
Car fuel
Total
Tonnes per £1 million revenue
2,080
866
19,400
5,498
27,844
39
2017
CO2/
tonnes
2,736
783
19,475
4,853
27,847
40
2016
CO2/
tonnes
3,457
1,052
19,597
4,780
29,540
45
48
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
SOCIAL ACTIVITIES, COMMUNITY
& CHARITABLE DONATIONS
The Company is committed to having a positive impact on the
communities in which its businesses operate and looks to support its
local communities through employment, involvement in local events and
fundraising activities, charitable donations, sponsorships of local teams
and donations of floorcovering products for specific projects.
The Company and its individual businesses donate
floorcovering products to many deserving causes during
the year. During 2018, these included:
Coleshill-based businesses donating to Sebastian’s
Action Trust, for their new purpose-built respite facility
which provides support to families of seriously
ill children
Headlam Newcastle donating to BAY Foodbank, for
their office space in support of their work providing
emergency food provision to those experiencing
financial crisis
Mercado Leeds donating to DIY SOS, to provide
assistance in a home rebuild project in support of a
disadvantaged family
Other activities in support of both local communities and
furthering education included the sponsorship of a junior
football club local to the Company’s head office, the
presentation to summer school students as part of an
educational trip, and providing work experience at several
of the Company’s locations.
Headlam is proud to have been able to be supportive
of all the incredibly worthwhile causes and activities
detailed above.
The Company encourages its businesses to support local
charitable organisations, providing assistance to do so,
and also has a policy in place to match individual’s charity
fundraisings under its Employee Donation Scheme and
allow employees paid time off work to undertaken
charitable duties.
Charitable donations made during the year in support of
charitable causes in local communities, nationally, and
those of interest to employees amounted to £24,172
(2017: £33,483). In addition, employees participated in a
variety of fundraising activities and supported charities
local to their businesses.
While the Company does not support a specific charity
or community it has been a member of the Pennies from
Heaven payroll giving scheme since 2011 and matches
the charitable donation made by its employees under
the scheme. In 2018, the Company made an overall
contribution of £5,482.07 to Pennies from Heaven on
behalf of itself and its employees (2017: £10,098.68).
During 2018, the Company held its second employee
survey, again donating £5 on behalf of each employee who
completed it. Due to the much-improved response rate in
2018, a greater total of £8,190 was raised for the chosen
charities of Cancer Research UK, Make-A-Wish UK and
Age UK. (2017: £5,430).
In 2018, the Company became a corporate member of
The Furniture Makers’ Company, the City of London livery
company and charity for the furnishing industry. The
Furniture Makers’ Company aims to promote, encourage
and foster the craft and industry of furnishing and furniture
and its ancillary activities, advance education in the
industry, and relieve financial hardship of present and past
employees of the industry, their families, relatives and
dependents. In 2018, Headlam made a donation to their
charitable fund, and one of its businesses, Florco,
participated in their charitable football tournament.
Headlam Group plc Annual report and accounts 2018
49
BOARD OF DIRECTORS
Philip Lawrence
Non-Executive Chairman
Philip was appointed a Non-Executive Director in
June 2015 and became Non-Executive Chairman
on 1 June 2018. Philip is currently Chairman of
private equity backed Airband Community Internet
Limited and a member of the advisory board for
the Offshore Petroleum Regulator for
Environment and Decommissioning, part of the
Department for Business, Energy and Industrial
Strategy (‘BEIS’). Philip is the former Chief
Executive of the Coal Authority, an arm’s-length
body of BEIS. He stepped down as Chief Executive
of the Coal Authority in May 2018 after 11 years,
and prior to this, he held significant roles with
Marconi plc and Deloitte LLP. He is an Associate of
the Institute of Chartered Accountants in England
and Wales.
Steve Wilson
Chief Executive
Steve was appointed Chief Executive in September
2016, having previously been the Group Finance
Director, a position he had held since joining
Headlam in 1991. Steve is a Non-Executive
Director of Conviviality Plc, a UK wholesaler and
distributor of alcohol and impulse products, and,
until his retirement from their board in September
2010, was the Non-Executive Chairman of Synergy
Health plc, which delivers outsourced services to
healthcare providers. He is a Fellow of the Institute
of Chartered Accountants in England and Wales.
Steve is the Executive Director with lead oversight of
People and Health & Safety matters as part of the
Company’s commitment to Corporate
Responsibility.
Chris Payne
Chief Financial Officer
Chris was appointed Chief Financial Officer in
September 2017. Chris joined from Biffa plc, the UK
integrated waste management company, where
he was Group Commercial Finance Director with
responsibilities including overseeing all the
operational finance teams and divisional Finance
Directors. Chris joined Biffa plc in 2013 and was
previously at Mitie Group plc from 2008 to 2013
where he held two divisional Finance Director
positions. He is a qualified Chartered Accountant
having trained with KPMG and is a Fellow of the
Institute of Chartered Accountants in England
and Wales.
Chris is the Executive Director with lead oversight of
Environment and Social & Community matters as
part of the Company’s commitment to Corporate
Responsibility.
■ ▲
■
Amanda Aldridge
Independent Non-Executive Director
Amanda was appointed a Non-Executive Director
in February 2018 and appointed Chair of the Audit
Committee on 1 June 2018. Amanda is currently a
Non-Executive Director of Impact Health REIT plc.
Amanda was a partner in KPMG LLP from 1996 until
2017, when she retired from the partnership,
having joined the firm in 1984 and qualified as a
chartered accountant in 1987. She has significant
experience as an external auditor, working
predominately with quoted clients in the retail and
distribution sectors. Amanda has also advised
quoted companies on corporate transactions and
the assessment and remediation of internal
controls, and held a number of strategic and line
management roles during her 32 years with KPMG
LLP. She is a Fellow of the Institute of Chartered
Accountants in England and Wales.
Andrew Eastgate
Independent Non-Executive Director
Andrew was appointed a Non-Executive Director
in May 2010. He is the Chairman of the
Remuneration and Nomination Committees and
was previously the Senior Independent Director
until Keith Edelman’s appointment in January
2019. Andrew is a solicitor and was formerly a
Partner in Pinsents, including being head of
Pinsents’ corporate practice in Birmingham.
Andrew has broad experience of advising quoted
companies, particularly in connection with
transactions and compliance issues, and is
Non-Executive Chairman of Epwin Group Plc, the
AIM listed manufacturer of low maintenance
building products, and a Non-Executive Director of
Castings PLC, an iron casting and machining group
based in the UK. He is also an experienced
commercial mediator.
l ■ ▲
l ■ ▲
Key to Committees:
l Audit
■ Nomination
▲ Remuneration
Chairman of Committee
50
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
SENIOR MANAGEMENT TEAM
Keith Edelman
Senior Independent Director
Keith was appointed a Non-Executive Director in
October 2018 and was appointed Senior
Independent Director on 1 January 2019. Keith is
currently Chairman of Revolution Bars Group Plc
and Pennpetro Energy Plc and a Non-Executive
Director of the London Legacy Development
Corporation and Altitude Group plc. In his
executive career he was a director of consumer,
retail and leisure companies including Ladbroke
Group Plc, Carlton Communications Plc and
Storehouse Plc. His last executive appointment,
which ended in 2009, was Managing Director of
Arsenal Holdings Plc where he was responsible for
the move from Highbury to Emirates Stadium.
Since 2009, Keith has held a number of non-
executive roles including Superdry Plc, Safestore
Plc, Goals Soccer Centres plc, JE Beale Plc and
Thorntons Plc.
l ■ ▲
Catherine Miles
Director of Communications
Catherine was appointed Director of
Communications in January 2017. Catherine was
previously Corporate Broking Director at the
stockbroker Arden Partners, where she was an
adviser to Headlam. Catherine worked in
Corporate Broking for six years advising, and
raising money for, a broad spectrum of public
companies predominately in the small and mid-cap
space. Prior to this she was Corporate
Communications Director and Company
Secretary at an AIM listed company, and initially
worked in the Financial PR industry.
Darryl Price
Commercial Director
Darryl was appointed Commercial Director in
September 2016 assuming operational
responsibility for the majority of Headlam’s
UK businesses. Darryl joined the Company in
February 1994 as Sales Office Manager at
Thatcham before progressing to Operations
Director. From 2003 to 2015, he was the
Commercial Director responsible for the
businesses in Coleshill. In November 2015 he
was appointed to the Senior Management
Team assuming operational responsibility for
an increased number of the UK businesses.
Darryl has 25 years’ experience in the
floorcoverings industry.
Alison Littley
Independent Non-Executive Director
Alison was appointed a Non-Executive Director in
January 2019 and will be appointed Chair of the
Remuneration and Nomination Committees on
1 June 2019. Alison has substantial experience in
multinational manufacturing and supply chain
operations, and a strong international leadership
background of building effective management
teams and third-party relationships gained
through a variety of senior management positions
in Diageo plc and Mars Inc and an Agency to HM
Treasury where she was Chief Executive Officer.
She is currently a Non-Executive Director at James
Hardie Industries Plc, an industrial building
materials company headquartered in Ireland and
listed on the Australian Securities Exchange, Eakin
Healthcare Limited, Weightmans LLP, and
Geoffrey Osborne Group.
l ■ ▲
Sue LaVerne
People Director
Sue was appointed People Director in October
2017. Sue joined from E.ON where she worked
between 2009 and 2017 carrying out various
commercial and international HR leadership roles,
latterly as HR Director of the global customer
solutions division. Sue started her career in retail
with commercial and HR appointments including at
Marks and Spencer and Arcadia Group. Sue has
broad experience in all areas of HR and has
contributed to external bodies, including as Chair
of the Department for Work and Pensions
employers steering group focused on giving more
disabled people access to work.
Karen Atterbury
Company Secretary
Karen was appointed Company Secretary in
January 2019. Karen was previously Deputy
Company Secretary of Barratt Developments PLC.
Prior to this, she held various company secretarial
roles including Company Secretary of Dixons
Carphone PLC and Deputy Company Secretary of
Dixons Retail. She is an Associate of the Institute of
Chartered Secretaries and Administrators.
Headlam Group plc Annual report and accounts 2018
51
CHAIRMAN’S INTRODUCTION TO THE CORPORATE GOVERNANCE REPORT
At the heart of the New Code is an emphasis on stakeholder
relations and a company’s culture. A key component for us will
be the establishment of an Employee Forum this year, as
outlined in detail on page 40 of the Strategic Report.
In last year’s annual report, we stated that we intended to run
an externally facilitated Board evaluation in 2018. Due to the
considerable evolution of the Board, as detailed above, it was
thought more beneficial to delay this external evaluation until
2019 when all the new Directors had joined the Board and could
fully participate in the exercise. Instead we conducted an
internal evaluation towards the end of 2018. Details of this
evaluation are set out on page 55, and an external evaluation
will be carried out in 2019 to adhere to best practice, despite
there being no requirement for the Company to do so at
this time.
Together with the reports from each of the Nomination,
Remuneration and Audit Committees, this section of the
Annual Report provides an overview of our key governance
activities and practices during the last year.
Philip Lawrence
Non-Executive Chairman
6 March 2019
I am pleased to present this, my first governance report since
becoming Headlam’s Chairman on 1 June 2018. I extend my
and the Board’s gratitude to my predecessor Dick Peters for his
leadership these past years, and I look forward to maintaining
the highest levels of corporate governance as the Company
moves forward.
My priorities in 2018 have been to provide succession for
Non-Executive Directors, improve the diversity of skills and
experience on the Board, and ensure we continuously improve
on all areas of corporate governance including risk
management and addressing the requirements of the new
UK Corporate Governance Code 2018 (the ‘New Code’).
The succession planning and evolution of the Board continued
during the year with two new Independent Non-Executive
Director appointments, and another just post the year-end on
1 January 2019. These appointments in part reflect Andrew
Eastgate’s forthcoming retirement from the Board on 31 May
2019 after nine years as a Non-Executive Director, and his roles
as Chairman of the Remuneration Committee, Chairman of
the Nomination Committee, and the Company’s Senior
Independent Director subsequently being divided between
two of the recently appointed Non-Executive Directors.
Amanda Aldridge joined the Board on 1 February 2018 as a
Non-Executive Director and became Chair of the Audit
Committee on 1 June 2018. Amanda has significant
experience as an external auditor from her 32 years with
KPMG LLP, working predominately with quoted companies in
the retail and distribution sectors.
Keith Edelman joined the Board on 1 October 2018 as a
Non-Executive Director and was appointed Senior
Independent Director on 1 January 2019. Keith brings
extensive commercial experience coupled with a background
in consumer facing businesses.
Alison Littley joined the Board on 1 January 2019 as a Non-
Executive Director and will become Chair of both the
Remuneration and Nomination Committees on 1 June 2019.
Alison has substantial experience in multinational
manufacturing and supply chain operations and a strong
international leadership background of building effective
management teams and third-party relationships.
I believe we have developed an effective Board which
comprises the key strengths, experience and vision to uphold
the highest levels of corporate governance and evaluate and
continue to develop the Company’s strategy (as detailed on
page 24). Our Board considers that good governance
underpins the delivery of our strategic priorities and future
success of the business for the benefit of all stakeholders. The
New Code took effect from 1 January 2019, and applies to
accounting periods beginning on or after 1 January 2019. The
application of the principles articulated in the New Code goes
to the heart of good governance, and the Board has carefully
considered and analysed the Company’s position in relation to
these principles and accompanying guidance which will apply to
the Company’s 2019 financial year. Being mindful of the New
Code as well as the Company’s continual endeavour to improve
and evolve, the Company has initiated a number of actions and
changes which will lead to full compliance with the New Code.
Compliance with the New Code will be reflected in the next
corporate governance report to be included in the annual
report and accounts for the year ending 31 December 2019.
52
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
CORPORATE GOVERNANCE REPORT
Our governance framework helps the Company in the delivery
of its strategic priorities and ensures that its obligations to its
stakeholders are understood and met. The Board consists of
the Chairman, two Executive Directors and four Non-
Executive Directors, with this reducing to three following the
AGM in May 2019. The Executive Directors in conjunction with
the members of the Senior Management Team, who also
attend Board meetings, are responsible for the
implementation of the decisions of the Board. The Non-
Executive Directors are responsible for evaluating and
challenging the proposals of the wider executive team, and
their mix of skills and experience bring a broader perspective to
the Board’s dialogue and decision-making process.
Compliance statement
This corporate governance statement, together with the
Nomination Committee report on pages 57 to 58, the Audit
Committee report on pages 59 to 63 and the Directors
Remuneration Report on pages 64 to 72 provides a description
of how the main principles of the 2016 edition of the
UK Corporate Governance Code (the ‘Code’) have been
applied within the Company during 2018. The Code, as well as
the New Code to be applied to accounting periods beginning
1 January 2019 onwards, is published by the Financial
Reporting Council and is available on its website at
www.frc.org.uk.
It is the Board’s view that, throughout the financial year ended
31 December 2018, the Company complied with the relevant
provisions set out in the Code.
This statement complies with Rule 7 of the Disclosure Rules
and Transparency Rules of the Financial Conduct Authority,
with the information required to be disclosed by sub-section
2.6 of Rule 7 being shown on pages 73 to 77.
The Board’s Activities in 2018
Overview
The following sections outline the key activities of the Board
during 2018. During the year, the Board took a number of steps
to refresh and develop its role and remit, and the approach that
it takes to governance in general. Specific activities of the
Board included the following (with new initiatives marked with
an asterisk):
Board and senior management structure:
Review of succession plans and identifying required skills for
all Directors and Senior Management Team;
Discussions on the relevant skills required on the Board,
including those that would help mitigate the risks specific to
the Company, and the successful appointment of Amanda
Aldridge, Keith Edelman and Alison Littley;
Overseeing the induction process for new Directors; and
Agreeing the appointment of a new Company Secretary.
Strategy and management:
Review and approval of the Company’s strategy and
development plans;
Greater interaction with senior managers of the Company’s
businesses on strategy and development plans, with
particular emphasis on the People Strategy 2019-2021
prepared during the year*;
Consideration of proposed cost control, margin and
efficiency initiatives; and
Review of the Company’s acquisition strategy.
Internal controls and risk management
Establishment of a new executive Risk Committee, and
review of the Company’s internal control and risk
management systems*;
Support for an enhanced Health & Safety capability and
focus*;
Review of reports on the Company’s core IT, cyber security
and technology risks and management’s response plan*;
Review of steps taken to ensure compliance with the
General Data Protection Regulation (GDPR)*;
Assessment of capital investment in property and
acquisitions;
Review and approval of an updated Whistleblowing policy;
Advised on the updating of the Company’s Anti-Corruption
and Bribery policy, procedures on gifts & hospitality, and
Fraud and Anti-money Laundering policy for Board approval
in January 2019; and
Receiving and considering reports on compliance with
financial, regulatory, corporate responsibility and
environmental commitments.
Governance and stakeholder engagement
Ongoing interaction with shareholders and the wider
investment community, with the Chairman attending a
number of shareholder meetings;
Participation in and review of the results of an internally
facilitated Board and Committee evaluation exercise;
A review of compliance against the New Code to determine
the actions required to comply with its principles for the
year ending 31 December 2019, including revisions to the
Schedule of Matters reserved to the Board, Statement of
the Responsibilities of the Chairman, Chief Executive and
Senior Independent Director and terms of reference of the
Board Committees*;
Approval of a proposal to provide a forum for employees to
engage with the Chief Executive and other Directors as
appropriate, the key driver being the desire to improve
communications with employees and create a positive
working culture across the Company*;
Consideration of the results of the 2018 Employee
Engagement Survey*;
Commissioning a supplier survey for implementation in the
first half of 2019*:
Approval of a Customer Insight exercise in the first half of
2019*; and
Approval of the Modern Slavery Act Statement;
Operations and material transactions
Review of a presentation on BREXIT by KPMG, and an action
plan in preparation for operational issues that might arise on
the UK leaving the European Union*;
Review of the planning and subsequent trailing of stock
re-ordering and dynamic route planning initiatives*;
Approval of the acquisitions of Dersimo, CECO, Ashmount,
Rackhams and Garrod Bros (see page 129 for full details of
the transactions);
Continuous assessment of potential acquisitions, cognisant
of market and general economic background, with the
objective of delivering strategic benefits to the Company
and building upon certain product lines and/or market
segments;
Reviews of management structures in the Company’s
Continental Europe businesses; and
Approval of the proposed acquisition of land for the
development of a new distribution centre in Ipswich, UK*.
Headlam Group plc Annual report and accounts 2018
53
CORPORATE GOVERNANCE REPORT CONTINUED
Financial and performance reporting
Approval of the Company’s annual and half-year results, and trading updates;
Reviews of the Company’s ongoing capital management strategy;
Approval of share purchases;
Reviews and approvals of the Company’s investment programme;
Review and approval of the Company’s dividend policy, and approval of the interim and proposed final dividend;
Approval of the UK Tax Strategy;
Reviews of the Company’s performance against KPIs;
Reviews of the Company’s operating and project performance; and
Review of the Company’s draft budget relating to 2019.
Leadership
The Board is the Company’s principal decision-making body. The schedule of matters reserved for the Board, as approved by the
Board on 21 September 2018, is available on the Governance section of the Company’s website, www.headlam.com. It includes
matters relating to strategy, capital expenditure, acquisitions and risk management. The Board also reviewed the roles and
responsibilities of the Chairman, Chief Executive and the Senior Independent Director during the year. An overview of the main
duties, roles and responsibilities of the Board are available on the Company’s website. The Statement of the Responsibilities of
the Chairman, Chief Executive and Senior Independent Director were reviewed during the year and the latest version is also
available on the Company’s website.
The Board has long-established Audit, Nomination and Remuneration Committees to oversee and debate important issues of
policy and assist in attending to its responsibilities. Terms of reference for each have been updated during 2018 to ensure that
they comply with the provisions of the New Code, and are available on the Governance section of the Company’s website.
Nomination Committee
Information on the activities of the Nomination Committee is given in the Nomination Committee Report on pages 57 to 58
which should be read in conjunction with this report.
Audit Committee
Information on the activities of the Audit Committee is given in the Audit Committee Report on pages 59 to 63 which should be
read in conjunction with this report.
Remuneration Committee
The Directors Remuneration Report is set out on pages 64 to 72. The report also includes the Annual Report on Remuneration
which is subject to an advisory vote at the 2019 AGM.
Effectiveness
Composition
As at 31 December 2018, the Board comprised:
Non-Executive Chairman
Executive Directors
Independent Non-Executive Directors4
Philip Lawrence
Steve Wilson, Chief Executive
Andrew Eastgate1, Senior Independent Director
Chris Payne, Chief Financial Officer
Amanda Aldridge2, Non-Executive Director
Keith Edelman3, Non-Executive Director
1 Stepped down as Senior Independent Director on 1 January 2019
2 Appointed 1 February 2018
3 Appointed 1 October 2018, and as Senior Independent Director on 1 January 2019
4 Alison Littley was appointed after the year-end on 1 January 2019
Directors’ attendance during the year at Board meetings is set out on page 55. Attendance at meetings of the Audit, Nomination
and Remuneration Committees is given in the relevant Committee report.
The Board considers that it may be beneficial for the Executive Directors to hold an external directorship to broaden their
experience and normally this would be limited to one company.
The Board considers the balance achieved between Executive and Non-Executive Directors as appropriate and effective for the
control and direction of the business going forward.
The Directors bring strong judgement to the Board’s deliberations, and the size and balance of skills and experience of the Board
is considered appropriate for the requirements of the business and the size of the Company. The Board has considered the
independence of the Non-Executive Directors and consider that all four (excluding the Chairman, and including Alison Littley who
was appointed a Non-Executive Director on 1 January 2019) are independent of management and free from any business or
other relationship that could materially interfere with the exercise of independent and objective judgement. In making this
54
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
determination the Board has considered whether each
Director is independent in character and judgement and
whether there are relationships or circumstances which are
likely to, or could, affect the Director’s judgement.
The Senior Independent Director is available to shareholders if
they have concerns which are not resolved through the normal
channels of the Chairman, Chief Executive or Chief Financial
Officer, or for which such contact is inappropriate.
The Non-Executive Chairman and Non-Executive Directors do
not participate in any bonus, share option or pension scheme
of the Company. They are initially appointed for a three-year
term and, subject to review and re-election by shareholders,
can serve up to a maximum of three such terms. However,
in-line with governance best practice, all Board members
(with the exception of Andrew Eastgate who will step down
from the Board on 31 May 2019) will stand for election or
re-election, as appropriate, by shareholders at the 2019 AGM
and subsequent AGMs.
Commitment
The Board met 12 times during the year, to discuss the latest
operating and financial information, key strategic items and
other topics requiring discussion or decision. The Board
meeting agenda is structured to ensure that sufficient time is
given to each item under consideration. During the year there
is ample opportunity for the Chairman to meet with the
Non-Executive Directors without the Executive Directors
being present, should this be deemed appropriate. In addition,
Non-Executive Directors have substantial contact between
meetings and also endeavour to regularly visit operating
locations to review operations first-hand and meet with the
wider employee base.
A record of Directors’ attendance at Board meetings held
during the year is set out below. Committee meeting
attendance is given in the relevant Committee reports.
Meetings
attended
Eligible to
attend
Philip Lawrence
Dick Peters (stepped down 31/5/18)
Steve Wilson
Chris Payne
Tony Judge (stepped down 14/9/18)1
Andrew Eastgate
Amanda Aldridge (appointed 1/2/18)
Keith Edelman (appointed 1/10/18)
12
5
12
12
7
12
11
3
12
5
12
12
8
12
11
3
1 Tony Judge was unable to attend one Board meeting due to
personal reasons
Training and Development
When joining, each new Director receives a tailored induction
programme relevant to their experience, expertise and
committees. Particular emphasis is placed on the new Director
visiting several operating locations and businesses and
meeting the associated senior managers.
A comprehensive information pack is provided which includes
(but is not limited to):
Background information about the Company;
Briefings on Directors’ duties and responsibilities;
Information on Board meeting procedures;
Board minutes;
Internal and external policies;
Matters reserved for the Board;
Financial budgets;
Shareholder and other stakeholder feedback;
Sell-side analyst research notes;
Relevant industry reports; and
Committee terms of reference.
The new Director is also provided with an explanation of the
Company’s financing structure and relevant statutory and
regulatory guidance notes, including the Code and New Code.
An induction programme will include briefings on general
strategy and other matters, site visits, and one-to-one
meetings with all relevant colleagues, including other Directors
and the Senior Management Team, as well as with advisers
including the Company’s stockbrokers and Auditor.
Training and development in the year took various forms,
including visits to Company businesses and attendance at
courses run by professional bodies on various commercial and
regulatory matters. Directors receive regular updates
appropriate to the business throughout the year aimed at
developing and refreshing their knowledge and capabilities. All
Directors are considered to be suitably qualified, trained and
experienced so as to be able to participate fully in the work of
the Board. To assist with the independent conduct of their
function and, if required in connection with their duties, a
process is in place for the Non-Executive Directors to obtain
professional advice at the Company’s expense.
The Non-Executive Directors are encouraged to further their
knowledge of the Company by spending time with the
Executive Directors, the Senior Management Team and senior
managers of the Company’s businesses on site visits. Non-
Executive Directors are also encouraged to engage with all
people across the Company to further enhance their
understanding of the business.
Evaluation
The Code recommends that an evaluation of the effectiveness
of the Board and its Committees is conducted annually and
that this process is externally facilitated at least every three
years. Under the Code and New Code, companies outside the
FTSE 350 Index are not required to consider the use of
externally facilitated Board evaluations. The Company was not
a constituent of the FTSE 350 Index during 2018, nor as of the
date of this Report.
As detailed above, in last year’s annual report it was stated that
the Company intended to run an externally facilitated Board
evaluation in 2018. However, due to the considerable evolution
of the Board it was thought more beneficial to delay this until
2019 when all new Directors referred to in this Report would be
able to fully participate. An internal evaluation was instead
conducted by the Company Secretary in conjunction with the
Chairman towards the end of 2018. A comprehensive
questionnaire was issued to each member of the Board and the
responses were analysed by the Company Secretary and the
Chairman, with the results reported to the Board. The
evaluation concluded that the Board and its committees
continued to operate effectively. Areas considered for
improvement, and actions arising from this evaluation, were
as follows:
Headlam Group plc Annual report and accounts 2018
55
CORPORATE GOVERNANCE REPORT CONTINUED
Board Decisions
Succession Planning
Board Meetings
2018 Outcomes
To continue to ensure
that Board decisions
are reviewed following
their implementation.
Further enhance the
succession planning for
the Board and senior
management roles.
Actions for 2019
Broaden the use of
post-implementation
reviews.
Enhance succession
plans for Executive
Directors and other
senior managers.
Maintain and develop disciplines
surrounding Board processes
and ensure that an appropriate
balance exists between the
Board’s discussions on short-
term and long-term issues.
Make further progress
in developing Board and
Committee agendas and packs
to assist the Board in its analysis
of items presented for discussion.
Risk Management
Further evolve the
approach to risk
management.
Review approach to
risk appetite.
Re-election of Directors
The Company’s current Articles of Association provide that each Director shall retire from office and shall be eligible for
reappointment at the third annual general meeting after the general meeting at which he or she was appointed or last
reappointed. The Board has agreed that, with effect from and including at the 2019 AGM, all Directors will be subject to annual
re-election, in compliance with the New Code. The Notice of AGM sets out the specific reasons why the Board considers the
contribution of each Director to be important to the Company’s long-term sustainable success and recommends their
appointment or re-appointment.
The Board is of the opinion, supported by the Nomination Committee, that each Director continues to make an effective and
valuable contribution and demonstrates commitment to their role.
Directors’ conflicts of interest
Procedures are maintained by the Board whereby potential conflicts of interests are reviewed regularly. These procedures have
been designed so that the Board may be reasonably assured that any potential situation where a Director may have a direct or
indirect interest which may conflict, or may possibly conflict, with the interests of the Company are identified and, where
appropriate, dealt with in accordance with the Companies Act 2006 and the Company’s Articles of Association. The Board has
not had to deal with any conflicts of interest during the year.
Directors holding significant commitments outside of the Company are required to disclose them prior to appointment and on an
ongoing basis where there are any changes. Actual and potential conflicts of interest are regularly reviewed. Under the
Company’s Articles of Association, the Board has authority to authorise potential conflicts of interest and to impose any limits or
conditions it sees fit. All of the Directors are required to allocate sufficient time to the Company to discharge their responsibilities
effectively. This is reviewed annually by the Chairman.
Relations with shareholders
The Board places considerable importance on communication with shareholders. The Board considers that ongoing
engagement with shareholders and the wider investment community, including analysts and investors not currently shareholders
in the Company, is essential to shareholders’ understanding of the Company and their ability to appraise the performance and
management of the Company and consider the Company as an investment proposition.
The Company offers its larger shareholders, either directly or via its stockbrokers, face-to-face meetings on a bi-annual basis at a
minimum, to present and discuss performance and other matters, and obtain feedback. These meetings are typically hosted by
the two Executive Directors and the Company’s Director of Communications. The Company also retains a Financial PR and IR
adviser to further facilitate interaction and support its communication with the investment community.
Meetings are also periodically offered to and held with shareholders at various Company locations to help illustrate the Company’s
operations and aid understanding. Non-Executive Directors, including the Chairman, attend certain meetings, events and briefings
during the year in addition to the AGM, where shareholders are present, and the Non-Executive Directors are committed to
facilitating a direct channel of communication with the Company’s larger shareholders to hear any views and concerns.
The Company actively seeks shareholder feedback. Feedback is collated by both the Company and its advisers, discussed at
Board and Senior Management Team level, and considered in relation to all aspects of the Company whilst also helping to inform
its future communications.
All shareholders have the opportunity to communicate directly with the Board at the AGM. Shareholders are invited to ask
questions during the meeting, followed by an opportunity to meet with the Directors after the formal business of the meeting.
The Senior Management Team also attend the AGM and meet with shareholders before and after the meeting, and can provide
operational tours to interested parties. All of the Directors attend the AGM, and the Chairman of the Board and the Chairs of each
Committee are available to answer shareholder questions during the formal business of the meeting. The voting on all resolutions
at the AGM is conducted on a show of hands unless a poll is requested and in accordance with the Code, a separate resolution on
each substantially separate issue will be proposed. The Company releases the results of voting, including proxy votes on each
resolution, on its website on the next business day after the AGM and announces them through a regulatory news service. Details
of the 2019 AGM are set out in the Notice of Annual General Meeting circular sent to shareholders as a separate document to this
Report, and which is also available on the website.
56
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
NOMINATION COMMITTEE REPORT
Dear Shareholder
On behalf of the Board, I am pleased to present the Nomination
Committee report for the year ended 31 December 2018.
The Nomination Committee has responsibility for reviewing
the structure, size and composition of the Board and
recommending to the Board any changes required for
succession planning and for identifying and nominating for the
approval of the Board candidates to fill vacancies as and when
they arise. The Committee is also responsible for reviewing the
results of any Board performance evaluation process and
making recommendations to the Board concerning the Board’s
Committees and the re-election of Directors at the AGM.
I am pleased to present the Nomination Committee Report for
2018 which has seen the following new Board appointments:
Amanda Aldridge as Non-Executive Director (appointed
1 February 2018 as reported in last year’s Report);
Keith Edelman as Non-Executive Director (appointed
1 October 2018); and
Alison Littley as Non-Executive Director (appointed
1 January 2019).
We reported on Amanda Aldridge’s appointment in the 2017
Annual Report and Accounts. Keith Edelman and Alison
Littley’s appointments followed a rigorous and independent
selection process conducted in accordance with the Code.
Further information on this is included in the report below.
Following my retirement from the Board on 31 May 2019, Alison
Littley will become Chair of the Nomination Committee on
1 June 2019 having been a member of the Committee since
her appointment. She is well placed to continue the
Committee’s work.
Andrew Eastgate
Chair of the Nomination Committee
6 March 2019
Board changes
Dick Peters, the Company’s Non-Executive Chairman, stepped
down from the Board on 31 May 2018. Philip Lawrence, a
Non-Executive Director since June 2015 was appointed
Non-Executive Chairman on 1 June 2018 following his
re-election to the Board at the AGM on 24 May 2018. Philip
continued as a member of all Committees, until stepping down
as a member of the Audit Committee on 19 October 2018 of
which he had previously been Chairman. Amanda Aldridge,
whose appointment to the Board on 1 February 2018 was
reported in the 2017 Annual Report, assumed the Chair of the
Audit Committee on 1 June 2018.
Tony Judge, the Company’s Chief Operating Officer, stepped
down from the Board in September 2018 ahead of leaving the
Company in March 2019. The Company initiated a search
process at the end of 2018 for a UK Operations Director, a
non-Board position, to assume a number of the Chief
Operating Officer’s responsibilities. Following this search
process, a new UK Operations Director will join the Company,
and the Senior Management Team, shortly.
Keith Edelman was appointed to the Board as a Non-Executive
Director on 1 October 2018. In accordance with the Articles of
Association, Keith will retire from the Board at the first AGM
following his appointment and stand for election at the AGM in
May 2019. The Directors consider his appointment as a
Director of the Company to be in the best interests of the
Company and recommend shareholders to vote in favour of
the resolution, as they intend to do in respect of their own
shareholdings. The Company announced on 22 August 2018
that Alison Littley would be appointed as a Non-Executive
Director with effect from 1 January 2019. In accordance with
the Articles of Association, Alison will retire from the Board at
the first AGM following her appointment and stand for election
at the AGM in May 2019. The Directors consider her
appointment as a Director of the Company to be in the best
interests of the Company and recommend shareholders to
vote in favour of the resolution, as they intend to do in respect
of their own shareholdings.
Andrew Eastgate will step-down from the Board on 31 May
2019 following nine years as a Non-Executive Director of the
Company at that time and will not be standing for re-election
at the AGM in May 2019.
The Directors consider that following the appointment of Keith
Edelman and Alison Littley as additional Non-Executive
Directors, the size of the Board continues to be appropriate for
the Company’s size and listing.
Headlam Group plc Annual report and accounts 2018
57
NOMINATION COMMITTEE REPORT CONTINUED
Terms of reference
Full terms of reference of the Nomination Committee can be
found in the Governance section of the Company’s website. In
accordance with its terms of reference, the Nomination
Committee has also considered its own effectiveness during
the year. This allows the Nomination Committee to formally
review the way it works and in doing so, whether its strategy for
discharging its duties remains appropriate. The Nomination
Committee is satisfied that it continues to perform its duties in
accordance with its terms of reference.
Board diversity policy
The approach to Board diversity is unchanged. The Company
continues to take note of the guidance provided and to make
appointments on the basis of merit. However, it recognises the
benefit that greater diversity can bring and takes into account
such factors when considering any particular appointment.
The Board continues to keep its diversity policy under review.
Advice
The Nomination Committee has access to such information
and advice, both from within the Company and externally, at
the cost of the Company, as it deems necessary. This may
include the appointment of external executive search
consultants, where appropriate. No Director is involved in any
decisions regarding their own reappointment or re-election.
Changes to Directors’ commitments are reported to the
Nomination Committee as they arise and are considered on
their individual merits. Appointments to the Nomination
Committee are made by the Board.
Andrew Eastgate
Chair of the Nomination Committee
6 March 2019
Membership and attendance at meetings held in 2018
The Nomination Committee meets when required and met
three times in the year, the table below identifying members in
attendance.
Members
Dick Peters (stepped down 31/5/18)
Philip Lawrence
Andrew Eastgate
Amanda Aldridge (appointed to the
Committee 1/2/18)
Keith Edelman (appointed to the
Committee 19/10/2018)
Steve Wilson
Meetings
attended
Eligible to
attend
2
3
3
3
0
3
2
3
3
3
0
3
Only members of the Nomination Committee are entitled to
be present at meetings but other Directors and advisers may
be invited by the Nomination Committee to attend. The Board
has agreed the procedures to be followed by the Nomination
Committee in making appointments to the various positions
on the Board and to the Senior Management Team.
Appointment of Non-Executive Directors
In anticipation of Andrew Eastgate’s retirement from the Board
in May 2019 as announced within the interim results on 22
August 2018, the Nominations Committee undertook a skills
review and succession planning exercise to ensure the Board
comprises the skills required for the Company to deliver on its
strategy. The Nomination Committee decided that two
Non-Executive Directors would be recruited to assume
separately the Senior Independent Director role and
Remuneration Committee Chair thus providing an optimal
balance on the Board. The Committee also re-affirmed its
commitment to developing a diverse Board when considering
candidates.
The skills review identified that the Board would benefit from
additional expertise and experience in the following areas:
Supply chain management;
Change and cultural development;
Commercial development and growth, both in the UK and
Continental Europe;
Customer-led service innovation; and
Digital development.
The Nomination Committee appointed Ridgeway Partners, an
independent search and recruitment consultancy with no
other connection to the Company or its Directors, to carry out
a full market appraisal of suitable candidates in-line with a
comprehensive candidate brief developed by the Committee.
The Committee oversaw a rigorous and structured
recruitment and interview process which concluded that Keith
Edelman and Alison Littley were qualified to perform the roles
for which they had applied. Keith Edelman and Alison Littley
were subsequently appointed to the Board in October 2018
and January 2019 respectively.
58
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
AUDIT COMMITTEE REPORT
When drafting our annual Audit Committee calendar, we take
into account the external environment, internal operations of
the business and any planned accounting and regulatory
changes to ensure that all of the areas we need to prioritise are
included. In 2019 we will continue to focus on internal financial
controls and risk assurance, particularly in respect of the
performance improvement initiatives which are being trialled
and implemented across the Group which are described on
pages 18 and 19 and the principal risks and uncertainties
outlined on pages 34 and 35 and to ensure that the links
between the Board, Executive Risk Committee and Audit
Committee processes are effectively managed.
I will be available at the AGM to answer any questions about
our work.
Amanda Aldridge
Chair of the Audit Committee
6 March 2019
Dear Shareholder
As the new Chair of the Audit Committee, I am delighted to
present the Committee’s report for the year ended 31
December 2018 and to thank Philip Lawrence for his previous
leadership of the Committee. Philip stepped down as Chair of
the Committee following his appointment as Chairman of the
Board in June and from the Committee in October. I am pleased
to welcome to the Committee Keith Edelman and Alison Littley,
who joined in October 2018 and January 2019, respectively.
The Audit Committee is given its authority by the Board and we
act in accordance with our written terms of reference. An
important part of our role is to monitor the integrity of the
Group’s financial reporting and management. In performing
this role, we scrutinise the full and half yearly financial
statements and review in detail, the work of the external
auditor (‘the Auditor’) and any significant financial judgements
made by management to ensure they are appropriate. Another
important part of our role is to review the risk management and
internal control framework operating across the Group to
ensure that risks are being carefully identified and assessed
and that sound systems of internal control are in place. During
the year this has included reviewing reports from third parties
in relation to cyber risk and strengthening the Group’s IT
infrastructure as well as the results from the Group’s
accounting team’s reviews of accounting controls at each
business (which are similar to those which might be undertaken
by an internal audit function).
The Committee reviewed its terms of reference in September
2018, taking into account the requirements of the UK
Corporate Governance Code issued on 18 July 2018 and
applicable to the Group from 1 January 2019. We have also
continued to oversee the Group’s processes and reporting to
ensure that it is compliant with the requirements of IFRS 15
‘Revenue from Contracts with Customers’ and IFRS 9 ‘Financial
Instruments’ this year and that it will be compliant with the
requirements of IFRS 16 ‘Leases’ when it becomes applicable
for the year ending 31 December 2019.
In this report, we share some of the Committee’s discussions
from the year including details of the significant accounting
matters and issues in relation to the Group’s financial
statements that the Committee has assessed and we explain
why the issues were considered significant, which provides
context for understanding the Group’s accounting policies and
financial statements for the year.
Headlam Group plc Annual report and accounts 2018
59
AUDIT COMMITTEE REPORT CONTINUED
Audit Committee membership and meeting attendance
The Audit Committee has a meeting agenda linked to events in the Company’s financial calendar, meeting as a minimum twice a
year before the final and interim results announcements and subsequent publication of the respective reports. The Audit
Committee met four times in the year and attendance was as follows:
Members
Amanda Aldridge (appointed to the Committee 1/2/18, Chair of Committee from 1/6/18)
Philip Lawrence (Chair of Committee until 31/5/18, stepped down from Committee 19/10/18)
Andrew Eastgate
Keith Edelman (appointed to the Committee 19/10/18)
Dick Peters (stepped down 31/5/18)
Meetings
attended
Eligible to
attend
4
3
4
1
1
4
3
4
1
1
All members are independent Non-Executive Directors. The Committee structure requires that at least one member has recent
and relevant financial experience. This requirement was fulfilled by Philip Lawrence (from 1 January 2018 until 19 October 2018)
and by Amanda Aldridge from 1 February 2018. All members of the Committee are financially literate and have expertise relevant
to the Company’s sector, gained through a variety of corporate and professional appointments as required by the UK Corporate
Governance Code (see biographies on pages 50 and 51).
The Chief Executive, Chief Financial Officer and the Auditor also attended the Committee’s meetings at the invitation of the
Committee as did the Chairman from 19 October when he stepped down from the Committee. Meetings of the Committee with
the Auditor without the presence of management were also held during the year. The role of Secretary to the Committee is
performed by the Company Secretary.
As well as attending the Audit Committee meetings, the Committee members met with operational and finance team members
during the year.
Key activities of the Audit Committee during the year
In addition to matters relating specifically to its terms of reference, agendas incorporate matters arising and topical items on
which the Audit Committee has chosen to focus. The key activities of the Audit Committee during the year in discharging its
principal areas of responsibility were:
Area of responsibility
Key Activities
Financial Reporting
Reviewed the half year and annual financial statements and reports and the significant
financial reporting estimates and judgements.
Considered the liquidity risk and the basis for preparing the Group’s half yearly and full year
accounts on a going concern basis and reviewed the related disclosures in the annual report
and accounts.
Reviewed the Viability Statement included in the annual report and accounts in the context of
the Group’s three-year financial plan which had previously been considered by the Board.
Reviewed and considered whether the annual report and accounts is fair, balanced and
understandable, and provides information necessary for stakeholders to assess the Group’s
performance, business model and strategy.
Assessed the impact of the new accounting standards (IFRS 9, 15, and 16).
External Audit
Considered and approved the audit approach and scope of the audit work to be undertaken by
the Auditor and the audit fee.
Reviewed reports on audit findings.
Considered the independence of the Auditor.
Considered the effectiveness of the external audit.
Internal Controls and Risk
Considered reports from management, the Auditor and other third parties on their
assessment of the control environment.
Assessed the effectiveness of the Group’s internal control environment and the need for an
internal audit function.
Reviewed output from the Executive Risk Committee, and considered the systems and
processes for identifying, managing and mitigating those risks.
Reviewed reporting disclosures in relation to internal controls, risk management, principal risks
and uncertainties and the work of the Audit Committee.
Reviewed the Whistleblowing Policy and recommended its update.
60
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Significant financial reporting issues and areas of
estimate and judgement
A key responsibility of the Committee is to consider the
significant areas of complexity, management judgement and
estimation that have been applied in the preparation of the
financial statements. The Committee has received reports
and recommendations from management and the Auditor
setting out the significant areas. These areas of judgement
and estimation were discussed with management during the
year and with the Auditor, at the time the Audit Committee
reviewed and agreed the Auditor’s Group audit plan, and when
the Auditor presented its findings at the conclusion of its
year-end audit. Set out below is a description of how the
Committee concluded that such judgements and estimates
were appropriate.
Acquisition Accounting
The Company made five small acquisitions during 2018 –
details are set out on page 129. For each of these acquisitions,
management carried out an assessment of the fair value of the
consideration and the assets and liabilities on acquisition, and
performed individual purchase price allocation reviews which
involved exercise of judgement. Management were also
required to review the provisional fair values attributed to the
assets and liabilities of Domus in 2017 and to reassess their
estimate of the deferred contingent consideration likely to be
payable in respect of this acquisition.
The Audit Committee reviewed the accounting for each of the
2018 transactions, focusing on the calculation of the fair value
of consideration and the intangible assets, challenged the
assumptions used in arriving at each category of asset and
considered the useful lives over which the assets would be
amortised. Following this review and discussion with the
Auditor, the Audit Committee was satisfied with the purchase
price allocation and that the amortization charge appropriately
reflects the useful economic lives of the assets.
The Committee discussed with management the basis of their
conclusion that no adjustments to the provisional fair values of
Domus’ assets and liabilities was required and their calculation
of the deferred contingent consideration which led to a release
of £1.4m of the provision established on acquisition. Based on
this and review of the Auditor’s findings, the Committee was
satisfied that the approach adopted by management was
robust and that the assumptions made were reasonable.
Supplier arrangements
The Group has a significant number of rebate agreements with
suppliers. These agreements can contain multiple terms or
tiered arrangements based on the volume of goods purchased
and significant amounts had not been received at the year-end.
The Audit Committee reviewed management’s calculation of
amounts expected to be received. Management explained the
process of recalculating the amounts expected to be received
and confirming these balances with suppliers. The Audit
Committee challenged the assumptions used by management
and reviewed the level of cash receipts or credit notes received
after the year-end. The Audit Committee is satisfied that the
amounts recognised have been appropriately scrutinised and
that the assumptions upon which the calculation was based are
sufficiently robust.
Inventory valuation
As set out in the statement of financial position, inventory
amounts to £132.7 million and represents the Group’s second
largest asset class. Inventory is held across a broad and diverse
product range which is subject to a risk that changes in
consumer tastes and demand may result in some inventory
lines becoming slow-moving or obsolete, such that the
recoverable amount is less than the carrying value.
The Audit Committee discussed the Group’s management of
its inventory position and calculation of net cost and gave
careful consideration to the gross carrying value and related
provisions. Management explained to the Audit Committee
that the process of determining the appropriate valuation of
inventory entails close monitoring of inventory levels, review of
relevant supplier rebates and overheads which are absorbed
into the cost of inventory, review of the ageing profile and
consideration of inventory sold for less than its carrying value.
The Audit Committee reviewed the valuation basis and
challenged management’s assumptions. The Audit Committee
was satisfied that the significant assumptions used for
determining the valuation of inventory had been appropriately
scrutinised and challenged and were sufficiently robust.
Valuation of employee benefit liabilities
In the UK, the Company operates a defined benefit pension
scheme (the ‘Scheme’), further details of which are set out in
note 20 to the financial statements. At 31 December 2018, the
Scheme had assets of £109 million and liabilities, measured on
an IAS 19 basis, of £112 million, with a net deficit of £2.6 million,
after taking account of a past service cost of £1.2m in respect of
GMP equalisation. As set out in note 20 to the financial
statements, the Scheme liabilities are calculated by estimating
the amount of benefit that employees have earned for their
service in current and future periods. This estimation requires
making certain assumptions, notably in relation to inflation rates,
mortality rates and the discount rate to apply to determine
present value. The selection of these assumptions is subjective
and small changes in these assumptions can materially impact
the net IAS 19 deficit reported in the statement of financial
position. The assumptions adopted by management are set out
in note 20 to the financial statements.
In selecting the assumptions, management took advice from
the Group’s external actuary and considered the
appropriateness of this advice in light of the specific
circumstances of the Scheme. Management highlighted to the
Audit Committee how they arrived at the key assumptions.
Management also took advice from the Group’s external
actuary in assessment of the Group’s GMP liability.
The Audit Committee considered the views and procedures of
the Auditor, which entailed a benchmarking of management’s
assumptions with the Auditor’s expectations.
The Audit Committee reviewed management’s assumptions
and were satisfied that they had been appropriately scrutinised
and challenged and were robust. They also reviewed the
sensitivity analysis set out in note 20 to the financial
statements and consider it to be appropriate.
Headlam Group plc Annual report and accounts 2018
61
AUDIT COMMITTEE REPORT CONTINUED
Non-underlying items
The Group accounting policy for non-underlying items states
that performance measures will be presented which exclude
items which by virtue of their nature, size or expected
frequency, warrant separate additional disclosure in the
financial statements in order to fully understand the underlying
performance of the Group. Management must exercise
judgements in deciding whether items should be treated as
non-underlying by reference to this policy.
The Committee considered the presentation of non-
underlying items in accordance with the Group accounting
policy. The Committee received reports from management
and the Auditor, outlining the judgements applied. The most
significant items treated as non-underlying are in respect of
the amortisation of acquired intangible assets, the release of
the provision for variable consideration for Domus (described
above) and the past pension service cost arising on GMP
equalization (described above). The Committee concluded
that the disclosure of the non-underlying items was sufficient
for the user of the accounts to understand the nature of the
items and reason for their treatment as non-underlying.
Misstatements
Management reported to the Audit Committee that they were
not aware of any material misstatements or immaterial
misstatements made intentionally to achieve a particular
presentation. The Auditor reported to the Audit Committee
the misstatements that had been found in the course of the
audit work and no material amounts remain unadjusted. The
Audit Committee confirmed that it was satisfied that the
Auditor’s responsibilities had been fulfilled with diligence and
professional scepticism.
Risk management and internal control
The Board has ultimate responsibility for effective
management of risk for the Group including determining its risk
appetite and identifying key strategic and emerging risks. An
overview of the risk management process and the principal
risks and uncertainties identified is set out on pages 34 to 35.
The Executive Risk Committee serves as a governance body to
provide oversight, review and challenge of the risk
management processes, and to confirm that appropriate and
proportionate risk management procedures are in place. The
work of the Executive Risk Committee is reviewed by the
Board. The role of the Audit Committee in risk management is
to monitor and review assurance provided via the Executive
Risk Committee, including over any non-financial internal
controls and management systems requested by the Board.
In supporting the Board to assess the effectiveness of risk
management and internal control processes, the Audit
Committee relies on a number of different sources including
reports provided by management and the assurance provided
by the Auditor and other third parties in specific risk areas.
Additionally, the Audit Committee receives reports from the
Auditor on matters identified in the course of its statutory
audit work. The Audit Committee also takes into account the
resources within the finance team including the structure of
the team, and the qualifications, experience and competence
of the people within it.
During the year the Committee received reports on and/or
considered the following:
(i) Management’s follow up on control recommendations
raised by the Auditor.
(ii) Monitoring progress with implementation of
recommendations made by third parties for strengthening
the IT infrastructure and reducing risk of cyber-attack.
(iii) Internal control review work undertaken by the finance team
at each location in the Group.
(iv) Structure, qualifications, competence and experience of
the finance team.
The Group’s control framework has developed over many years
and is intended to manage rather than eliminate the risk of failure
to achieve business objectives and can only provide reasonable
and not absolute assurance against material misstatement or
loss. The control framework is evolving in-line with the strategic
objectives outlined on page 24 and monitoring this will be a key
element of the Committee’s focus in 2019.
The Audit Committee was satisfied that the reporting
disclosures in respect of internal controls and risk
management are a fair representation of the Group’s position.
Internal audit
During the year, the Audit Committee undertook an
assessment of the need for a Group internal audit function
including consideration of the various reports by management
and assurance reporting from third parties referred to above in
relation to risk and control. The Audit Committee considers
that the Group’s accounting team, control systems and
associated procedures are adequate for the business and
therefore does not currently propose to introduce a formal
Group internal audit function.
External Auditor
Each year the Audit Committee reviews the appointment and
performance of the Auditor and considers their independence
and objectivity, taking into account all appropriate guidelines.
PwC was appointed as Auditor in 2016 following a full tender
exercise. Mark Smith has been the lead audit partner since
PwC’s appointment and accordingly this is his third year in that
role. In accordance with the current professional standards the
lead audit partner responsible for the audit will change every
five years. Under current FRC guidance the Company is not
due to retender its audit until 2026, however the Audit
Committee will continue to monitor the performance of the
External Auditor during this time and make recommendations
accordingly.
The Auditor has processes in place to ensure that
independence is maintained and has written to the Audit
Committee confirming that, in its opinion, they remain
independent within the meaning of the relevant regulations on
this matter and their professional standards.
The Audit Committee has the specific task of keeping the
nature and extent of non-audit services provided by the
Auditor under review in order to ensure that objectivity and
independence are maintained. The Audit Committee
recognises that there are occasions when it is advantageous
to use the Auditor to undertake non-audit services, as it may
improve the quality of the audit and reduce cost and
complexity for the Company. Per the EU Audit Directive,
62
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
non-audit fees paid to the Auditor should not exceed 70% of
the audit fee. The Chairman of the Audit Committee is required
to authorise non-audit work above a pre-agreed threshold.
The Auditor did not perform any non-audit work for the Group
during 2018. A breakdown of audit and non-audit fees is
provided in note 3 to the Financial Statements.
The scope of the external audit for the 2018 Annual Report was
presented by the Auditor to the Committee in October 2018.
The Committee had the opportunity to discuss and challenge
the audit plan to gain a good understanding of the key elements.
The Committee assesses the effectiveness of the Auditor
during the year on the basis of meetings with management
and carries out a formal review of its performance after the
year-end audit is completed. In undertaking this assessment,
the Audit Committee considers a number of factors which
include the experience and tenure of the audit partner,
the completion of the agreed audit plan, the professional
scepticism, robustness and perceptiveness of the Auditor in
handling of key accounting judgements and the interaction
between management and the Auditor.
The Audit Committee has independent access to the Auditor
and the Auditor has direct access to the Chair of the Audit
Committee outside formal Audit Committee meetings. At
each meeting there is an opportunity for the Auditor to discuss
matters with the Audit Committee, without executive
management being present.
The Audit Committee is satisfied with the independence,
objectivity and effectiveness of the Auditor and recommends
PwC to be reappointed by the shareholders at the
forthcoming AGM.
Interaction with the FRC
Company can confirm that during the year under review it had
no interaction with the FRC’s Corporate Reporting Team or its
Audit Quality Review Team.
Fair, balanced and understandable statements
The Audit Committee undertook a detailed review of the
drafting and preparation process of the Annual Report and
Accounts to support its deliberations on whether the 2018
Annual Report and Accounts were fair, balanced and
understandable. The drafting and preparation process involved
various teams and individuals within the Group including
Executive Directors, Finance Team, Director of
Communications, Senior Managers of the businesses and
Company Secretary working together with support and advice
from the Company’s advisers. This collaborative approach
helped to ensure a consistent and detailed approach between
the Strategic Report, the Governance section and the Financial
Statements. At its meeting in March 2019, the Audit Committee
deliberated on whether the 2018 Annual Report and Accounts
were fair, balanced and understandable. Following detailed
consideration of all sections, the Audit Committee concluded
that the 2018 Annual Report and Accounts contained an
accurate reflection of the Company’s performance and
business model, correctly reflected its strategy, and included
consistent messaging throughout. It, therefore, recommended
to the Board that the 2018 Report and Accounts were, fair,
balanced and understandable and contained sufficient
information for shareholders to assess the Company’s position,
performance, business model and strategy.
Viability statement
The Audit Committee assessed the Group’s resilience to the
principal risks and uncertainties by consideration of a paper
which included stress testing forecasts through the application
of adverse scenarios. These scenarios included (A) a reduction
in market demand whilst there is ongoing inflationary fixed cost
pressure and (B) an economic crisis similar to that experienced
in 2008, both modelled over a three-year period. The testing
indicated that the Group would be able to operate within its
current facilities and meet its financial covenants, however the
scenario based on a severe economic environment did require
management to take swift action to manage the cost base in
mitigation. The Audit Committee was therefore comfortable
that the Group would maintain resilience in the event such
scenarios occurred and concluded that there was a reasonable
expectation that the Group would continue to operate and
meet its liabilities over a three-year period. The Audit
Committee agreed that the long-term viability assessment
should continue to be performed over a three-year timespan.
This conclusion was communicated and recommended to the
Board for approval.
The long-term viability statement is shown on page 36.
Whistleblowing policy, fraud and the Bribery Act
The Group has in place a whistleblowing policy that sets out
the formal process by which an employee of the business may,
in confidence, raise concerns about possible improprieties in
financial reporting or other matters. During the year, the Audit
Committee and the Board reviewed and updated the
Whistleblowing Policy.
The Group also has in place a procedure for detecting fraud
and systems in place to prevent a breach of anti-bribery
legislation. The Group is committed to a zero-tolerance
position with regard to bribery. The Anti-corruption and
Bribery, and Fraud and anti-money laundering policies were
considered by the Committee during the year and approved by
the Board in January 2019.
Committee effectiveness review
The effectiveness of the Audit Committee was evaluated this
year as part of the Board evaluation process. Details of this can
be found on page 55. The review found that the committee is
operating effectively and that its role and remit remained
appropriate for the current needs of the business. The
Committee discussed the findings of the evaluation to identify
opportunities for further improvement.
Summary
The Audit Committee has concluded, as a result of its work
during the year, that it has acted in accordance with its terms
of reference and fulfilled its responsibilities.
Amanda Aldridge
Chair of the Audit Committee
6 March 2019
Headlam Group plc Annual report and accounts 2018
63
DIRECTORS' REMUNERATION REPORT
THE CHAIRMAN’S ANNUAL STATEMENT
Dear shareholder
On behalf of the Board, I am pleased to present the Directors’
Remuneration Report for 2018, which features this statement
and the Annual Report on Remuneration for the financial year
ended 31 December 2018. At the 2018 AGM, shareholders
endorsed the 2017 Annual Report on Remuneration, with
98.62% of votes cast being in favour. The Remuneration Policy,
as required to be put to shareholders every three years, was
approved at the 2017 AGM and is designed to simplify the
previous remuneration structure and encourage a long-term
focus on the performance of the business.
The key features of the remuneration structure for Executive
Directors are:
Base salary;
Maximum bonus opportunity of 125% of base salary;
One-third of any amount earned under the bonus is
deferred into ordinary shares in the Company for two years;
This deferral element is delivered under the terms of the
Deferred Bonus Plan (‘DBP’);
A Performance Share Plan (‘PSP’) with a maximum opportunity
of 100% of base salary and a two-year holding requirement
after the awards vest. For the financial years 2017, 2018 and
2019, the opportunity has been set at 80% of base salary;
A maximum pension contribution (or cash allowance in lieu
of pension) of up to 15% of salary, although only the Chief
Financial Officer currently participates in any pension
arrangement and this is at a contribution level of 11%; and
Shareholding guidelines requiring that Executive Directors
build-up and maintain a shareholding in the Company
equivalent in value to 200% of annual base salary.
Director changes
During the year, Amanda Aldridge and Keith Edelman joined
the Board and were appointed as members of the
Remuneration Committee. Alison Littley joined the Board on
1 January 2019 and will take over as Chair of the Remuneration
Committee on 1 June 2019 following my retirement from the
Board on 31 May 2019 after nine years.
On 14 September 2018, Tony Judge, the Company’s Chief
Operating Officer, stepped down from the Board ahead of
leaving the Company on 14 March 2019. The termination
arrangements in relation to Tony Judge, are detailed on page 68.
Remuneration for 2018
As disclosed in last year’s Annual Report, the annual salary of
Chris Payne, who joined the Board as Chief Financial Officer in
September 2017, was set at £325,000 with an agreement that
it would increase to £350,000 with effect from 1 March 2018
subject to performance. The increase was confirmed following
an assessment of his performance by the Committee. There
was no other increase in base salary for Executive Directors
during 2018, with the Executive Directors waiving a base salary
increase of 2.0% for 2018 which was awarded to the
Company’s UK employees with effect from 1 January 2018.
Awards under the PSP were granted during April 2018 to the
three Executive Directors at that time (each award equating to
80% of salary). Further details of the awards and the
performance conditions attached are set out on page 68.
Bonus details and vesting outcomes for the long-term
incentive plans are explained below.
During the year, three new Non-Executive Directors were
appointed to the Board. The search process instigated a review of
fees required to find the right calibre of candidate. Fees for
64
Headlam Group plc Annual report and accounts 2018
Non-Executive Directors were increased by £5,000 in respect of
the basic fee and additionally £2,500 for Committee chairmanship
(excluding Nomination Committee chairmanship) during 2018. My
own fees remained unchanged recognising that I shall be stepping
down from the Board in May 2019. As noted last year, the
Chairman’s fees were increased to £143,500 on appointment of
Philip Lawrence in June 2018 to better reflect the duties of the role.
Business performance and incentive out-turn for 2018
For 2018, the Executive Directors had a maximum annual bonus
opportunity equal to 125% of base salary, with the bonus
assessed against the Company’s underlying profit before tax
performance metric as shown in the table on page 67. Threshold
performance was not achieved in respect of the underlying
Profit Before Tax performance metric and, therefore, the
Executive Directors will not receive an annual bonus payment in
respect of the financial year ended 31 December 2018.
Awards granted under the CIP in 2016 vest with respect to
performance for the financial year ended 31 December 2018. The
awards were subject to two performance conditions, based on EPS
growth (80% of the award) and relative TSR (20% of the award). The
combined assessment of the two performance conditions means
that 53.5% of the awards will vest, as shown on page 67.
Remuneration for 2019
The Executive Directors received an increase in base salary of
2.0% effective 1 January 2019, in-line with the 2019 2.0% pay
award to all UK employees. All aspects of variable pay remained
unchanged against that of 2018, with the same structure
applying, except that the Remuneration Committee will, in-line
with the terms of the Remuneration Policy, adjust the annual
bonus metrics so that in 2019 75% will be based on financial
performance with 25% on achievement of non-financial
strategic/personal objectives. This is to further align the annual
bonus to the Company’s strategy which comprises both
financial and non-financial targets. The combination of a
holding period requirement under the PSP, the deferral into
shares under the annual bonus scheme and the shareholding
guidelines is considered to appropriately align Executive
Director interests with the interests of shareholders and
provides a beneficial long-term framework for our business
and delivery of the strategy.
Conclusion
I would like to welcome Alison Littley who will be assuming the
Chair of the Committee on 1 June 2019. Alison brings extensive
supply chain and procurement experience and currently holds a
number of Non-Executive Director appointments, including
James Hardie Industries plc where she sits on the
Compensation Committee and Weightmans LLP where she sits
on the Remuneration Committee. She therefore brings
significant experience to her new role as Chair of this
Committee. One of her first tasks will be to conduct a review of
our remuneration policy, as this will be required to be put to a
shareholder vote at the 2020 AGM. In addition, working closely
with the Board, she will be reviewing any changes required by the
New Code from a remuneration perspective and we will be
reporting in full on these in the 2019 Annual Report.
We remain committed to a responsible approach to executive
pay, as I trust this Directors’ Remuneration Report
demonstrates. As always, I am happy to meet or speak with
shareholders if there are any questions or feedback on our
approach to executive remuneration.
Andrew Eastgate
Chairman of the Remuneration Committee
6 March 2019
Overview
Strategic Report
Governance
Financial Statements
ANNUAL REPORT ON REMUNERATION
Certain information provided in this part of the Directors’ Remuneration Report is subject to audit. This is annotated as audited.
Any information not annotated as audited is unaudited.
Single total figure of remuneration for each Director
The table below reports the total remuneration receivable in respect of qualifying services by each of the Executive Directors for
the years 2018 and 2017.
Executive Directors’ remuneration as a single figure – 2018 (audited)
Executive Directors
Steve Wilson
Tony Judge (stepped down 14/9/18)1
Chris Payne
Base salary/
fees
2018
£000
Non-salary
benefits²
2018
£000
Annual
performance
bonus
2018
£000
Share-based
incentive
schemes3,4
2018
£000
475
301
346
1,122
16
10
19
45
–
–
–
–
97
86
4
187
Pension
related
benefits
2018
£000
–
–
38
38
Other
2018
£000
–
–
–
–
Total
2018
£000
588
397
407
1,392
1 Salary and benefits for Tony Judge relate to amounts earned during the year to the date of stepping down from the Board on 14 September
2018.
2 Non-salary benefits include the provision of a company car or car allowance, private medical insurance and some fuel costs.
3 Performance conditions for the CIP were tested after 31 December 2018 and approximately 53.5% of the award is due to vest in May 2019. The
market price of the shares has been calculated based on an average market value over three months to 31 December 2018 (£4.423). The figure
shown for Chris Payne relates solely to the grant of options under the Sharesave Scheme.
4 Includes the grant of options under the Sharesave Scheme on 3 May 2018, calculated on an intrinsic value basis.
Executive Directors’ remuneration as a single figure – 2017 (audited)
Executive Directors
Steve Wilson
Tony Judge (appointed 31/3/17)1
Chris Payne (appointed 13/9/17)2
Base salary/
fees
2017
£000
Non-salary
benefits
2017
£000
Annual
performance
bonus
2017
£000
Share-based
incentive
schemes3
2017
£000
475
319
95
889
16
10
8
27
391
350
–
741
187
167
–
354
Pension
related
benefits
2017
£000
–
–
11
11
Other
2017
£000
–
–
133
133
Total
2017
£000
1,069
846
247
2,155
1 Tony Judge was appointed as an Executive Director on 31 March 2017 with his annual base salary increased to £425,000 at that time. The table
above reflects the pro-rata amount of salary received in the period after his appointment but 100% of annual bonus and an amount in respect
of share-based incentive scheme.
2 Chris Payne was appointed as an Executive Director on 13 September 2017 on an initial annual base salary of £325,000. The figures reflect the
pro-rata amounts received in the period after his appointment. Chris Payne forfeited variable pay arrangements when he left his previous role
and the Company therefore agreed to pay a bonus of £133,000 when he commenced his employment with the Company, with this figure
included in the ‘Other’ column.
3 Share based incentives vested in respect of the performance to the year ended 31 December 2017 in the form of Co-Investment Plan (‘CIP’)
awards. These CIP awards, granted on 1 May 2015, vested on 1 May 2018 and 97.5% of the matching award became due to the participants.
The long-term incentives figure for the year ended 31 December 2017 has been restated to reflect the market value of the shares on the date
of vesting (£4.355).
The table on page 66 reports the total remuneration receivable in respect of qualifying services by each of the Non-Executive
Directors for the years 2018 and 2017.
Headlam Group plc Annual report and accounts 2018
65
DIRECTORS’ REMUNERATION REPORT CONTINUED
Non-Executive Directors’ remuneration as a single figure – 2018 (audited)
Non-Executive Directors
Andrew Eastgate
Philip Lawrence (appointed Chairman 1/6/18)2
Amanda Aldridge (appointed 1/2/18)
Keith Edelman (appointed 1/10/18)
Dick Peters (stepped down 31/5/18)
Non-salary
benefits
2018
£000
Annual
performance
bonus
2018
£000
Share-based
incentive
schemes
2018
£000
Pension
related
benefits
2018
£000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Fees1
2018
£000
55
102
46
11
46
260
Total
2018
£000
55
102
46
11
46
260
1 The fees above reflect the pro-rated amounts received since appointment or to the date of stepping down from the Board.
2 Philip Lawrence’s fees until 31 May 2018 were paid to the Coal Authority which released him to perform his duties as a Non-Executive Director.
Philip resigned from the Coal Authority with effect from 31 May 2018 upon assuming his appointment as Chairman on 1 June 2018. Fees from 1
June 2018 were paid to him directly.
Non-Executive Directors’ remuneration as a single figure – 2017 (audited)
Non-Executive Directors
Andrew Eastgate
Philip Lawrence1
Dick Peters
Non-salary
benefits
2017
£000
Annual
performance
bonus
2017
£000
Share-based
incentive
schemes
2017
£000
–
–
–
–
–
–
–
–
–
–
–
–
Fees
2017
£000
55
45
110
210
Pension
related
benefits
2017
£000
–
–
–
–
Total
2017
£000
55
45
110
210
1 Philip Lawrence’s fees during 2017 were paid to the Coal Authority which released him to perform his duties as a Non-Executive Director.
Executive Directors’ external appointments
Steve Wilson is currently a Non-Executive Director of Conviviality plc, and in respect of the financial year ended 31 December
2018, received a fee of £12,500 in relation to the appointment. No other Executive Director holds any external appointments as
of the date of this report.
Individual elements of remuneration
The figures in the single figure tables above are derived from the following:
Base salary and fees
Non-salary benefits
Annual performance bonus
The amount of salary/fees received during the financial period for service on the Board.
The taxable value of benefits received in the financial period for service on the Board for each
Director. These are car benefit, private medical insurance and other benefits deemed to be
an employment benefit.
The amount of performance related bonus received in respect of the financial period in
respect of duties as an Executive Director including the value attributable to shares awarded
under the DBP as part of the bonus earned that year.
Pension related benefits
The amount of employer contribution to a scheme or paid as cash in lieu of retirement
benefits based on a fixed percentage of base salary.
Share-based incentive schemes The value of Co-Investment Plan (‘CIP’) awards that vest in respect of the financial period and
the value of Save-As-You-Earn (‘SAYE’) options granted in the financial period. The last award
made under the CIP occurred in 2016 with the final vesting included in the 2018 single figure
table. From 2017, share-based incentives were made under the PSP.
66
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Base salaries and fees for 2018
Other than in respect of Chris Payne whose annual base salary increased from £325,000 per annum in 2017 to £350,000 per
annum in 2018 with effect from 1 March 2018 (as detailed above), none of the Executive Directors received an increase in annual
base salary for 2018. A cost of living pay increase of 2.0% of base salary was awarded to all UK employees in 2018, with the
exception of the Executive Directors and Senior Management Team who elected not to receive it.
Steve Wilson
Tony Judge
Chris Payne
Changes were made to Non-Executive Directors fees as set out in the table below.
Chairman fee
Non-Executive Director fee2
Additional fee for – Chairmanship of the Remuneration Committee
– Chairmanship of the Audit Committee
– Senior Independent Director
2018
£000
475
425
350
2018
£000
143.5
45.0
7.5
7.5
10.0
2017
£000
475
425
325
2017
£000
110
40
5
5
10
Increase
%
0
0
6
Increase
%
30.4%
12.5%
50.0%
50.0%
0.0%
1 The Chairman’s fee was increased from when Philip Lawrence was appointed Chairman on 1 June 2018.
2 The general increase in fees for Non-Executive Directors was implemented for new appointments and responsibilities on or after 1 January
2018. Andrew Eastgate’s fees remained unchanged as he will be stepping down from the Board on 31 May 2019.
Annual performance bonus
For 2018, the Executive Directors were awarded a maximum annual bonus opportunity equal to 125% of base salary. The bonus
was assessed against the Company’s underlying Profit Before Tax performance metric as shown in the table below. Threshold
performance was not achieved and, therefore, the Executive Directors will not receive an annual bonus payment in respect of the
financial year ended 31 December 2018.
Performance metric
Underlying Profit Before Tax
Proportion of
bonus
determined by
metric
Threshold
performance
Target
performance
Maximum
performance
Actual
performance
Bonus earned
(% max)
100%
£42.62m
£47.3m
£56.66m
£42.4m1
0%
1 Reported underlying profit before tax of £43.4m less £1.0m reflecting a reduction in cost of sales for the anticipated early settlement
discount received from the year-end trade creditors.
In accordance with our remuneration policy, one-third of any bonus earned would have been deferred into shares for a two-year period.
Share based payments vesting in the financial year
Awards granted under the CIP in 2016 vest with respect to performance for the financial year ended 31 December 2018. The
awards were subject to two performance conditions, based on EPS growth (80% of the award) and relative TSR (20% of the
award). The performance outcome and consequent vesting was as follows:
EPS growth
Threshold: 0:6:1 match
Maximum: 2:1 match
Outcome
Vesting
Proportion of award vesting
Steve Wilson
Tony Judge
EPS
CAGR over three years
3% + RPI
6% + RPI
4.58% + RPI
66.83%
53.46%
TSR
Relative performance against FTSE SmallCap Index
Median
Upper quartile
Ranked 74th
0%
0%
Shares granted
Shares vesting
Value of shares
vesting
40,886
36,567
21,860
19,550
£96,687
£86,470
Value is based on the average share price for the final quarter of the financial year which was 442.3 pence based on the mid-
market closing share price. Tony Judge was not an Executive Director at the time of grant and his award was in-line with other
members of the Senior Management Team.
Headlam Group plc Annual report and accounts 2018
67
DIRECTORS’ REMUNERATION REPORT CONTINUED
PSP awards granted during the financial period
PSP awards were granted to Executive Directors in 2018 as follows:
Steve Wilson
Tony Judge
Chris Payne
Number of
ordinary shares
over which award
granted
86,187
77,114
63,506
Value of
Award
£000
380
340
280
226,807
1,000
% of salary
Date of Grant
Holding period
80 9 April 2018
80 9 April 2018
80 9 April 2018
2 years
2 years
2 years
The share price used to determine the number of shares under the PSP was 440.9 pence, being the average mid-market closing
share price for the five business days prior to the date of award.
There are two performance conditions attaching to the PSP award: an EPS condition which accounts for 80% of the award and a
TSR condition which accounts for 20% of the award.
The EPS target required for maximum vesting was set at 8% compound annual growth over the three years to 31 December
2020. This was above consensus market expectations at the date of the grant and above the Company’s internal business plan,
and at a level which the Remuneration Committee considered to be appropriate given the level of stretch within the forecast
numbers. Threshold performance at which 25% of the award vests is EPS growth of 5% per annum. The Remuneration
Committee is satisfied that the EPS target range appropriately reflects business risks and uncertainties.
The amount of the award which vests is also based on a TSR condition. The TSR for the period of three financial years
commencing with the financial year in which the award is granted is calculated for both the Company and a comparator group.
The comparator group is constituted from the companies making up the FTSE SmallCap Index (excluding investment trusts) at
the start of the relevant period of three financial years. If the Company’s TSR is below the median TSR for the comparative group
then none of the award is vested. If the Company’s TSR is equal to the median of the TSR of the comparator’s group then 25% of
the award shall vest. If the Company’s TSR is between the median and upper quartile of the TSR of the comparator’s group then
between 25% and 100% of the award shall vest on a straight-line basis. If the Company’s TSR is above the upper quartile of the
TSR of the comparators group then 100% of the award shall vest.
Dilution
The Remuneration Committee supports the Investment Association (‘IA’) guidelines regarding dilution and regularly monitors
compliance with these requirements. The Company’s share plan rules limit the number of newly issued shares which can be granted
in a ten-year period to 10% of the issued share capital under all employee share plans, and 5% under the discretionary share plans.
As at the date of this report, the Company’s usage of shares against the limits detailed above in respect of the all employee
schemes was 3.71% of the issued share capital (excluding treasury shares) and in respect of grants under discretionary plans was
0% of the issued share capital (excluding treasury shares). It is the Remuneration Committee’s intention that options exercised
under the SAYE scheme will continue to be satisfied by shares held in treasury.
Further information on share-based payments is set out in note 21 to the financial statements.
Pension related benefits
The only Executive Director to receive any pension benefit during the year was Chris Payne, who received pension contributions
from the Company equivalent to 11% of his base salary which is in-line with pension payments to members of the Company’s
senior management.
Payment for loss of office
No payments for loss of office were made to past Directors during the financial period other than in respect of Tony Judge who
stepped down as an Executive Director on 14 September 2018. Tony Judge remained employed by the Company until 14 March
2019 and continued to receive his base salary and normal benefits during this time. For the period between 14 September 2018
and 14 March 2019 the payment to Tony Judge relating to his salary and benefits was £217,277. The Company also made a
contribution of £12,000 plus VAT in respect of Tony's legal fees incurred in relation to his leaving arrangements. A maximum
payment of £212,500 in lieu of notice will be made in respect of the six months from 14 March 2019 in equal instalments and
subject to mitigation. As with the other Executive Directors, Tony Judge will not receive an annual bonus payment in respect of
the financial year ended 31 December 2018. As he was employed for the whole of the relevant performance period in respect of
the 2016 awards under the CIP, the awards granted in 2016 vested as set out above.
In recognition of Tony Judge’s long service with the Company, having been with the business for 26 years, it was agreed that
awards made under the PSP in 2017 and 2018 will vest to the extent that performance measures are met and subject to pro-
rating for time employed. Malus and clawback provisions apply under the terms of the rules and all such vested shares will be
released in April 2021. Awards made under the DBP (in respect of the deferred element of the 2017 annual bonus) will vest on their
normal vesting date, subject to malus and clawback.
68
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Payments to past Directors
As outlined on page 70 of the 2017 Annual Report and Accounts, Tony Brewer was permitted to retain his 2015 and 2016 CIP
awards. The 2015 CIP award vested on 1 May 2018. Accordingly, 33,805 shares vested following the application of pro-rating for
his period in office and performance conditions. The 2016 CIP award is due to vest on the 6 May 2019. Following the application of
time pro-rating and performance conditions, 7,123 shares will be issued to Tony Brewer on vesting.
No further payments to former Directors have been made in the 2018 financial year and up to the date of this Report except
those disclosed above.
Statement of Directors’ shareholding and share interests (audited)
In order to align the interests of the Executive Directors with those of the Company’s shareholders, the Remuneration
Committee encourages Executive Directors to increase their shareholdings in the Company. The Executive Directors are
required to build up and maintain a beneficial interest (including interests of connected persons) in the ordinary shares of the
Company equivalent in value to two times annual base salary. Executive Directors are required to retain half of the net of tax
vested shares under the CIP, PSP and DBP until the guideline is met.
The interests of Directors and their connected persons in the Company’s ordinary shares as at 31 December 2018 were as set
out below. There have been no changes to those interests between 31 December 2018 and the date of signing of these financial
statements and reports.
Type
Grant date
Option
price
Share price
at grant3
Steve Wilson
Tony Judge2
Chris Payne
Ordinary Shares
PSP Shares
DBP Shares
PSP Shares
2016 CIP
2014 ·SAYE
Ordinary Shares
PSP Shares
DBP Shares
PSP Shares
2016 CIP
2015 SAYE
–
9 April 2018
9 April 2018
5 July 2017
6 May 2016
8 May 2014
–
9 April 2018
9 April 2018
5 July 2017
6 May 2016
5 May 2015
9 April 2018
PSP Shares
PSP Shares 25 Sept 2017
3 May 2018
2018 SAYE
Amanda Aldridge Ordinary Shares
Andrew Eastgate Ordinary Shares
Keith Edelman
Ordinary Shares
Philip Lawrence Ordinary Shares
Dick Peters2
Ordinary Shares
–
–
–
–
–
–
Nil
Nil
Nil
Nil
381p
–
Nil
Nil
Nil
Nil
340p
Nil
Nil
353p
–
–
–
–
–
–
441p
441p
536p
477p
476p
–
441p
441p
536p
477p
461p
441p
536p
442p
–
–
–
–
–
Unvested and
subject to
performance
conditions
Unvested and
not subject to
performance
conditions
Vesting
date
Total as at
31 December
2018
–
86,187
–
70,789
40,886
–
–
77,114
–
63,338
36,567
–
63,506
48,435
–
–
–
–
–
–
–
–
– March 2021
29,514 March 2020
– March 2020
May 2019
–
July 2019
7,874
–
–
– March 2021
26,408 March 2020
– March 2020
May 2019
–
July 2020
8,823
– March 2021
– March 2020
July 2021
5,084
–
–
–
–
–
–
–
–
–
–
657,2721
86,187
29,514
70,789
40,886
7,874
129,045
77,114
26,408
63,338
36,567
8,823
63,506
48,435
5,084
–
1,000
–
–
5,000
Owned
outright
657,272
–
–
–
–
–
129,045
–
–
–
–
–
–
–
–
–
1,000
–
–
5,000
1 Steve Wilson as at 31 December 2018 held shares in excess of the shareholding guideline (based on the Company’s closing mid-market share
price on 31 December 2018).
2 The interests are shown to the date when Tony Judge and Dick Peters stepped down from the Board.
3 Share price shown to the nearest pence if applicable.
Headlam Group plc Annual report and accounts 2018
69
DIRECTORS’ REMUNERATION REPORT CONTINUED
The graph below shows the value at 31 December 2018 of £100 invested in the Company on 1 January 2009 compared to the value
of £100 invested in the FTSE SmallCap Index, making the assumption that dividends are reinvested to purchase additional equity.
500
450
400
350
300
250
200
150
100
50
0
)
0
0
1
o
t
d
e
s
a
b
e
r
(
n
r
u
t
e
R
r
e
d
o
h
e
r
a
h
S
l
l
a
t
o
T
31 Dec 08
31 Dec 09
31 Dec 10
31 Dec 11
31 Dec 12
31 Dec 13
31 Dec 14
31 Dec 15
31 Dec 16
31 Dec 17
Headlam Group plc FTSE SmallCap Index
The FTSE SmallCap Index has been selected as a comparator due to the Company being a constituent (within the Household
Goods & Home Construction sector). This allows comparison of the Company’s performance against the performance of the
Index as a whole.
Chief Executive remuneration table
The table below sets out the remuneration of the Chief Executive for the previous ten financial periods.
Period
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Steve Wilson
Steve Wilson
Steve Wilson
Tony Brewer
Tony Brewer
Tony Brewer
Tony Brewer
Tony Brewer
Tony Brewer
Tony Brewer
Tony Brewer
Chief Executive
single figure of
total
remuneration
£000
Annual bonus
(% of maximum
opportunity)
Long-term
incentive
vesting rates
against
maximum
opportunity %
588
1,069
1,0671
7372
1,175
1,134
927
1,347
1,095
1,179
1,027
0.0
65.82
76.8
n/a
87.1
81.4
42.7
65.5
66.5
64.7
77.0
53.5
97.5
98.6
88.9
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1 This remuneration is for the full year and incorporates his remuneration as Group Finance Director from 1 January 2016 until 14 September
2016 when he became Chief Executive
2 Tony Brewer stepped down as Chief Executive and a Director on 14 September 2016. The 2016 figures reflect his remuneration earned from the
start of 2016 until the date of his resignation as a Director. This remuneration is for a part year and does not include a termination payment.
70
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Percentage change in Chief Executive remuneration
The table below shows the percentage change in the Chief Executive’s remuneration and the Company’s employees as a whole
between the financial periods 2018 and 2017.
Percentage increase/(decrease) in remuneration in 2018 compared with 2017
Salary and fees
All taxable benefits
Annual bonuses
Chief Executive
0.0%
0.0%
(100.0%)
Total
Employees
2.0%
0.0%
(35.1%)
Relative importance of spend on pay
The table below shows the overall expenditure on dividends and on pay as a whole across the Company along with the
percentage change between each.
Dividends
Pay
2018
£000
20,969
103,329
2017
£000
25,729
97,707
% change
(18.5%)
5.8%
Statement of implementation of remuneration policy in 2019
Details of how the Company will operate the Remuneration Policy in 2019 is provided below.
Base salaries and fees for 2019
The Executive Directors received an increase in base salary of 2.0% for 2019 in-line with the pay award to all UK employees,
effective 1 January 2019.
In-line with the additional fees associated with Chairmanship of the Remuneration Committee and Senior Independent Director
(as detailed on page 67), in January 2019 Keith Edelman’s fee increased from £45,000 to £55,000 when he assumed the role of
Senior Independent Director, and Alison Littley’s fee will increase from £45,000 to £52,500 when she becomes Chair of the
Remuneration Committee in June 2019 having been appointed a Non-Executive Director on 1 January 2019.
Annual bonus
The maximum annual bonus opportunity for 2019 will remain at 125% of base salary. As referenced above, the Remuneration
Committee will, in-line with the terms of the Remuneration Policy, adjust the annual bonus metrics so that in 2019 75% will be
based on financial performance with 25% on achievement of non-financial strategic/personal objectives. The achievement of
these objectives would further align the achievement of annual bonus to the Company’s strategy which comprises both financial
and non-financial targets. Full disclosure of all objectives and targets, both financial and non-financial, will be provided in the 2019
Annual Report and Accounts. As previously stated, one third of any amount earned will be deferred into shares which vest two
years after the date on which the annual bonus pay-out is determined.
PSP
Awards in respect of 2019 will be granted in the form of nil cost options over ordinary shares in the Company at the level of 80% of
salary, subject to EPS and TSR metrics as described below:
Vesting (% of maximum)
0%
25%
100%
Straight-line vesting between points.
EPS growth
(80% of award)
Less than 5% p.a.
5% p.a.
8% p.a.
TSR relative to the
constituents of the FTSE
SmallCap Index
(20% of award)
Below median
Median
Upper quartile
To balance the overall long-term nature of the package, and in-line with best practice, awards will be subject to a two-year holding
period following the date of vesting.
Remuneration Committee activity
The Board approved the terms of reference, delegating certain responsibilities to the Remuneration Committee, most recently
on 21 September 2018. The terms of reference are reviewed periodically and are available on the Company’s website within the
Governance section at www.headlam.com. The Remuneration Committee comprises the Chairman and each of the other
Non-Executive Directors, and attendance at scheduled meetings of the Committee during the year was as follows:
Headlam Group plc Annual report and accounts 2018
71
DIRECTORS’ REMUNERATION REPORT CONTINUED
Members
Philip Lawrence
Dick Peters (stepped down 31/5/18)
Keith Edelman (appointed 1/10/18)
Amanda Aldridge (appointed 1/2/18)
Andrew Eastgate
Meetings
attended
Eligible to
attend
4
2
1
4
4
4
2
1
4
4
Other Directors may attend Remuneration Committee meetings by invitation, but no one attending a Remuneration Committee
meeting may participate in discussions relating to their own terms and conditions of service or remuneration.
The Remuneration Committee has responsibility for:
Selecting the framework and policy for Executive Directors remuneration and determining the remuneration packages for the
Executive Directors and Chairman.
Setting the level and structure of remuneration for the Senior Management Team.
Approving the design and operation of the Company’s short-term and long-term incentive arrangements. This includes
agreeing the targets that are applied to awards made to Executive Directors and the Senior Management Team.
Administering share plans as required.
Matters discussed at the four meetings of the Remuneration Committee were as follows:
Meeting Date
Key agenda items
1 March 2018
29 March 2018
21 September 2018
18 December 2018
Approval of 2017 annual bonus and setting 2018 annual bonus
Grant of awards under the DBP and PSP
Review of Executive Director and Senior Management Team remuneration; review of terms of
reference and Committee programme in anticipation of the New Code
Pay increases for Executive Directors and Senior Management Team and review of bonus
arrangements against anticipated performance (as detail in base salaries and fees for 2019 section
on page 71)
Advisers
Deloitte LLP were appointed as advisers to the Remuneration Committee in October 2016 to advise on the Remuneration Policy,
and on an ongoing basis. Deloitte’s fees in respect of advice to the Remuneration Committee during the period ended 31
December 2018 were £18,108 (excluding VAT) and were charged on a time and disbursements basis or fixed fee depending on the
nature of the advice. Deloitte also provided advice to the Company during the period in relation to share plans and tax matters.
Deloitte is a founder member of the Remuneration Consultants Group and as such voluntarily operates under its Code of
Conduct in relation to executive remuneration in the UK.
The Remuneration Committee is satisfied that all advice received was objective and independent.
The Remuneration Committee also receives input and advice from the Company Secretary and the People Director.
Statement of shareholders’ votes
The following table sets out the results of the advisory vote on the 2017 Annual Report on remuneration at the 2018 AGM and
binding vote on the remuneration policy at the 2017 AGM.
2017 Directors’ Remuneration Report
2017 Remuneration Policy
% of votes cast
For
% of votes cast
Against
Number of shares
Withheld
98.62
99.34
1.38
0.66
2,379,028
160,202
Key Principles of the Remuneration Policy
The key principles of the Remuneration Policy are as set out in the 2016 Annual Report and Accounts on pages 52 to 62, and can
be found on the Company’s website www.headlam.com.
This report has been approved by the Board of Directors and signed on its behalf by Andrew Eastgate, Chairman of the
Remuneration Committee.
Andrew Eastgate
Chairman of the Remuneration Committee
6 March 2019
72
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
OTHER STATUTORY DISCLOSURES
The Directors present their report, together with the audited financial statements, for the year ended 31 December 2018. This
report contains additional information which the Directors are required by law and regulation to include within the Annual Report
and Accounts.
In conjunction with the information from the Chairman’s Statement on page 12 to the Statement of Directors’ Responsibilities on
page 78 this section constitutes the Directors Report in accordance with the Companies Act 2006.
Principal activities
The principal activities of the Group are the sales, marketing, supply and distribution of floorcoverings and certain other ancillary
products in the UK and Continental Europe. The principal activity of the Company is that of a holding company and its subsidiaries
are listed on page 133. Further details of the Group’s activities and future plans are set out in the Strategic Report on pages 10 to 49.
Headlam Group plc is a company incorporated and domiciled in the UK, company number 00460129. The address of the
registered office is PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.
Strategic Report and future developments
The Group is required by the Companies Act 2006 to include a Strategic Report in this document. The information that fulfils
the requirements of the Strategic Report can be found on the inside front cover to page 49, which is incorporated in this report
by reference. The Strategic Report includes certain disclosures required to be contained in the Directors Report as follows:
approach to diversity (page 42), employee engagement (page 42), equal opportunities and employment of disabled people
(page 42), an indication of likely future developments (page 14, Chief Executive’s Review), and the approach to risk
management (page 34 to 35).
Corporate governance statement
The Corporate Governance Statement as required by the Financial Conduct Authority’s Disclosure and Transparency Rules (DTR)
7.2.1 is set out on page 53 and is incorporated into this report by reference.
Acquisitions
On 2 March 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of
Dersimo BV (‘Dersimo’) located in the western Netherlands. Dersimo is a full service distributor of both soft and hard floors from
a combination of well-known manufacturer brands as well as its own carpet and vinyl designs which are manufactured as a private
label. The Dersimo acquisition is complementary to the Company’s market-leading core business which supplies a high volume of
small orders into both the residential and commercial sectors, and increases the Company’s presence and geographical coverage
in the Netherlands.
On 30 March 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of
BETU Holdings Limited (a non-trading holding company), the parent company of CECO (Flooring) Limited (‘CECO’). CECO is a
leading provider of flooring and wallcovering products to retail and commercial customers throughout Northern Ireland and the
Republic of Ireland. The CECO acquisition diversifies and broadens the Company’s overall position in the commercial
specification market.
On 1 July 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of
Ashmount Flooring Supplies Limited (‘Ashmount’), a floorcovering distribution business based in Tottenham, North London. The
Ashmount acquisition expands the Company’s presence in commercial products in Greater London, a geographic area in which
the Company has historically had a low market share.
On 28 September 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share
capital of Rackhams Limited (‘Rackhams’) located in Highams Park, East London. Established in 1935, Rackhams is a leading
provider of retail and commercial products to customers in Greater London and the surrounding counties with a strong
Rackhams ‘brand’ having been developed in recent years. The Rackhams acquisition expands the Company’s presence in Greater
London, a geographic area in which the Company has historically had a low market share.
On 26 October 2018, a subsidiary company of Headlam Group plc completed the acquisition of all the trade and assets of Garrod
Bros Limited (‘Garrod Bros’) located in Enfield, North London. Established in 1827, Garrod Bros is a leading provider of commercial
flooring products and accessories to customers in Greater London. The Garrod Bros acquisition expands the Company’s
presence in commercial products in Greater London, a geographic area in which the Company has historically had a low market
share.
Both the Rackhams and Garrod Bros acquisitions are currently subject to a merger inquiry by the Competition and Markets
Authority (‘CMA’).
Post-balance sheet events
No post-balance sheet events have taken place since 31 December 2018 and up until the date of this report.
Headlam Group plc Annual report and accounts 2018
73
OTHER STATUTORY DISCLOSURES CONTINUED
Financial results and ordinary dividends
The results for the year and financial position at 31 December 2018 are shown in the Consolidated Income Statement on page 84
and Statements of Financial Position on page 86.
A 2018 interim dividend of 7.55p per ordinary share (2017: 7.55p) was paid on 2 January 2019 to shareholders on the register at the
close of business on 30 November 2018. The Directors propose a final dividend of 17.45p per ordinary share (2017: 17.25p), to be
paid on 1 July 2019 to shareholders on the register of members at the close of business on 7 June 2019, the associated ex-
dividend date being 6 June 2019.
This would bring the total dividend for the year to 25.0p per ordinary share (2017: 24.8p). The payment of the final dividend is
subject to shareholder approval at the AGM in May 2019.
Share capital
As at 31 December 2018, the issued share capital of the Company comprised a single class of ordinary shares of 5p each
(‘Ordinary Shares’).
The Company’s Ordinary Shares are listed on the Main Market of the London Stock Exchange. No Ordinary Shares were issued
during the year, with the Company’s total issued share capital consisting of 85,363,743 Ordinary Shares as at 31 December 2018.
During the year, the Company purchased into treasury 562,192 Ordinary Shares, in accordance with the authority granted by
shareholders at the Company’s Annual General Meeting on 24 May 2018, at an average price of 489.62p per Ordinary Share. The
highest price paid was 490.00p per Ordinary Share and the lowest price paid was 485.96p per Ordinary Share. The Ordinary
Shares were purchased on the open market to be held in treasury for the purpose of satisfying future share options and share
awards under the Company’s employee share schemes.
A total of 318,670 Ordinary Shares were transferred from treasury stock during 2018 in connection with the Company’s employee
share schemes, and the balance of shares in treasury stock following these transfers was 758,089 Ordinary Shares as at
31 December 2018.
Details of the Company’s share capital are set out in note 22 to the financial statements, which should be treated as forming part
of this report. Subject to the provisions of the Articles of Association and the Companies Act 2006, shares may be issued with
such rights or restrictions as the Company may by ordinary resolution determine or, if the Company has not so determined, as
the Directors may decide. There are, however, no restrictions on the transfer of securities in the Company, except that certain
restrictions may from time to time be imposed by law or regulation, for example, insider trading laws, and pursuant to the Listing
Rules of the Financial Conduct Authority (the ‘Listing Rules’), and the Market Abuse Regulation, whereby certain employees
require the approval of the Company to deal in the Company’s shares.
On a show of hands at a general meeting of the Company every holder of ordinary shares present in person and entitled to vote
shall have one vote, and on a poll every member present in person or by proxy and entitled to vote shall have one vote for every
ordinary share held. The Notice of AGM specifies deadlines for exercising voting rights and appointing a proxy or proxies to vote in
relation to resolutions to be passed at the AGM. All proxy votes are counted and the numbers for, against or withheld in relation to
each resolution are announced at the AGM and published on the Company’s website by the next business day after the meeting.
The holders of ordinary shares are entitled to receive the Annual Report and Accounts, to attend and speak at general meetings
of the Company, to appoint proxies and to exercise voting rights. The Company is not aware of any agreements between holders
of securities that may result in restrictions on voting rights. Further shareholder information is available in the Notice of AGM
which contains explanations as to the resolutions proposed.
Subject to certain limits, at the AGM on 24 May 2018, the Directors were granted general authority to allot shares in the Company
together with an authority to allot shares in the Company in connection with a rights issue and in respect of cash without first
offering them to existing shareholders. The Directors will be seeking to renew these authorities to allot unissued shares and to
disapply statutory pre-emption rights at the forthcoming AGM. Further details are set out in the Notice of AGM which is
contained in a separate circular to shareholders.
At the AGM on 24 May 2018, the Company was given the authority to purchase shares in the Company up to 10% of the issued
share capital. Under this authority and as detailed above, the Company purchased into treasury 562,192 Ordinary Shares between
that date and the 31 December 2018 for the purpose of satisfying future share options and share awards under the Company’s
employee share schemes. No further shares have been purchased into treasury since 1 January 2019 and to the date of signing
of this report. The Directors will be seeking to renew the authority at the forthcoming AGM. For the avoidance of doubt, the
Company does not currently intend to use the authority in relation to share buyback and cancellation of Ordinary Shares. Further
explanation and details are set out in the Notice of AGM sent in a separate circular to shareholders and which is also available on
the Company’s website, www.headlam.com.
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Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Directors
Biographies of Directors currently serving on the Board are set out on pages 50 and 51.
Changes to the Board during the period are set out on page 57. Details of the Directors’ service agreements are set out below:
Executive Directors
Steve Wilson
Chris Payne
Non-Executive Directors
Philip Lawrence
Andrew Eastgate1
Amanda Aldridge
Keith Edelman
Alison Littley
Date of
appointment
Date of
original letter
of appointment/
service agreement
Effective date of
current letter of
appointment/
service agreement
December 1991
13 September 2017
n/a
n/a
3 March 2017
13 September 2017
1 June 2015
17 May 2010
1 February 2018
1 October 2018
1 January 2019
18 June 2015
27 April 2010
12 January 2018
15 August 2018
15 August 2018
26 October 2017
17 May 2014
12 January 2018
15 August 2018
15 August 2018
Next due
for re-election
May 2019
May 2019
May 2019
n/a
May 2019
May 2019
May 2019
1 Stepping down from the Board on 31 May 2019.
The Directors shall be not less than three and not more than eight in number, although the Company may by ordinary resolution
vary these numbers. Directors may be appointed by the ordinary resolution of the shareholders or by the Board. A Director
appointed by the Board holds office only until the next AGM of the Company after their appointment, at which they are then
eligible to stand for election.
As noted elsewhere in this report, with effect from the 2019 AGM, all Directors will be subject to annual election.
Directors’ Powers
Subject to the Company’s Articles of Association, the Act and any directions given by the Company by special resolution, the
business of the Company will be managed by the Board which may exercise all the powers of the Company, whether relating to
the management of the business of the Company or otherwise. The matters reserved for the Board are detailed in a specific
schedule, which is reviewed annually and is available on the Company’s website, www.headlam.com.
Change of control
The Group has entered into certain agreements that may take effect, alter or terminate upon a change of control of the Company
following a successful takeover bid. The significant agreements in this respect are the Group’s bank facility and certain of its
employee share schemes. The Group’s term loan facilities include a provision such that, in the event of a change of control, the
lender may cancel all or any part of the facility and/or declare that all amounts outstanding under the facility are immediately due
and payable by the Group. Outstanding options granted under the SAYE scheme may be exercised within a period of six months
from a change of control of the Company following a takeover taking place.
Headlam Group plc Annual report and accounts 2018
75
OTHER STATUTORY DISCLOSURES CONTINUED
Substantial interests in voting rights
Notifications of the following voting interests in the Company’s ordinary share capital had been received by the Company (in accordance
with Chapter 5 of the DTR), with the information received from the discloser stated to be correct at the time of disclosure.
As at and up to 31 December 2018, the persons set out in the table below have notified the Company, pursuant to DTR 5.1, of
their interests in the voting rights in the Company’s issued share capital.
Ordinary shares of 5p each
Franklin Templeton Institutional, LLC
Heronbridge Investment Management LLP
Investec Asset Management Limited
Ruffer LLP
BlackRock, inc
Aggregate of Standard Life Aberdeen plc affiliated management entities
Rathbone Brothers plc
Canaccord Genuity Group Inc
Aggregate total
voting rights1
% of total
voting rights2
Indirect/direct
14.45
12,192,708
5.04
4,209,552
5.02
4,248,163
4,225,172
below 5%
below 5% below 5%
4.95
4,189,429
4.87
4,070,078
3.27
2,770,314
indirect
direct
indirect
direct
indirect
indirect
indirect
indirect
¹ Represents the number of voting rights last notified to the Company by the respective shareholder in accordance with DTR 5.1.
² Based on the Total Voting Rights in the Company as at the notification date.
As at 6 March 2019, the last practical date prior to the printing of this Report, no change in these holdings had been notified and
no further notifications of a disclosable interest had been received.
Rights under employees’ share schemes
As at 31 December 2018, Kleinwort Hambros, as trustee of the Headlam Group Employee Trust Company Limited (‘Trust’) held
765,281 shares, approximately 0.9% of the issued share capital of the Company for the purpose of satisfying options and awards
under the various employee share schemes operated by the Company. Kleinwort Hambros waives dividends due on all but 0.01p
per share of their total holding.
Details of employee share schemes are set out in note 21 to the Financial Statements. Details of long-term incentive schemes for
the Directors are shown in the Remuneration Report on pages 64 to 72.
Securities carrying special rights
There are no requirements for prior approval of any transfers and no person holds securities in the Company carrying special
rights with regard to control of the Company.
Directors’ interests and indemnity arrangements
During the year, no Director held any material interest in any contract of significance with the Company or any of its subsidiary
undertakings, other than service agreements between each Executive Director and the Company. In addition, the Company has
purchased and maintained throughout the year Directors’ and Officers’ liability insurance in respect of itself and its Directors. The
Directors also have the benefit of the indemnity provision contained in the Company’s Articles of Association. This provision
extends to include the Directors of Headlam Group Pension Trustees Limited, a corporate trustee of the Scheme, in respect of
liabilities that may attach to them in their capacity as Directors of that corporate trustee. These provisions were in force
throughout the year and are currently in force. Details of Directors remuneration, service agreements, and interests in the shares
of the Company are set out in the Directors Remuneration Report.
Modern Slavery Act
The Board fully supports the aims of the Modern Slavery Act, and an annual statement is published on the Company’s website
detailing the actions undertaken to prevent slavery and human trafficking in both the Company’s organisation and supply chain.
Environmental policy and mandatory greenhouse gas emissions reporting
The Company’s policy towards environmental issues can be found within the Strategic Report on pages 46 to 48. The Board
recognises that a responsible approach to the environment at the heart of the business is key to sustainable growth and a
good reputation.
Information on energy consumption, water usage and treatment of waste is included within the Corporate Responsibility section
of the Strategic Report on page 46 to 48.
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Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Directors’ and auditor’s responsibilities
A statement by the Directors on their responsibilities in respect of the Annual Report and Accounts is given on page 78 and a
statement by the Auditor on their responsibilities is given on page 79.
Political donations and expenditure
The Company’s policy is not to make any donations for political purposes in the UK or to donate to EU political parties or incur
EU political expenditure. Accordingly, neither the Company nor its subsidiaries made any political donations or incurred political
expenditure in the financial period under review (2017: £nil).
Charitable donations
Details are given on page 49 of the Corporate Responsibility section of the Strategic Report.
Amendments to the Articles of Association
The Company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
Financial instruments
The disclosures required in relation to the use of financial instruments by the Group together with details of our treasury policy
and management are set out in note 23 to the financial statements on pages 123 to 129.
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 Strategic Report. The financial position of the Group is described in the Financial Review on page 26. In addition,
note 23 to the financial statements on pages 123 to 129 includes the Group’s objectives, policies and processes for managing its
exposures to interest rate risk, foreign currency risk, counterparty risk, credit risk and liquidity risk.
The Board has a reasonable expectation that the Group has adequate resources to continue in operational existence for the
foreseeable future. Accordingly, the financial statements set out on pages 84 to 134 have been prepared on the going concern basis.
External auditor
PwC LLP have indicated their willingness to continue as Auditor and their reappointment has been approved by the Audit
Committee. Resolutions to reappoint them and to authorise the Directors to determine their remuneration will be proposed at
the 2019 AGM.
AGM
This year’s AGM will be held at the Company’s distribution hub in Coleshill on Friday, 24 May 2019 at 10.00am. The notice
convening this meeting is in a separate document to this Annual Report and Accounts along with the explanatory notes regarding
the resolutions that will be proposed at the meeting.
This report was approved by the Board and signed on its behalf by:
Karen Atterbury
Company Secretary
6 March 2019
Company registration number: 00460129
Headlam Group plc Annual report and accounts 2018
77
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE FINANCIAL STATEMENTS
The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law
and regulation.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have
prepared the group financial statements in accordance with International Financial Reporting Standards ('IFRSs') as adopted by
the European Union and parent company financial statements in accordance with IFRSs as adopted by the European Union.
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 the profit or loss of the group and parent company for that
period. In preparing the financial statements, the directors are required to:
select suitable accounting policies and then apply them consistently;
state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements and
IFRSs as adopted by the European Union have been followed for the company financial statements, subject to any material
departures disclosed and explained in the financial statements;
make judgements and accounting estimates that are reasonable and prudent; and
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and parent
company will continue in business.
The directors are also responsible for safeguarding the assets of the group and parent company and hence for taking reasonable
steps for the prevention and detection of fraud and other irregularities.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and
parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and parent
company and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the
Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.
The directors are responsible for the maintenance and integrity of the parent company’s website. Legislation in the United
Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors’ confirmations
The directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the group and parent company’s position and performance, business
model and strategy.
Each of the directors, whose names and functions are listed in Annual report and accounts confirm that, to the best of their
knowledge:
the parent company financial statements, which have been prepared in accordance with IFRSs as adopted by the European
Union, give a true and fair view of the assets, liabilities, financial position and profit of the company;
the group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a
true and fair view of the assets, liabilities, financial position and profit of the group; and
the Strategic Report includes a fair review of the development and performance of the business and the position of the group
and parent company, together with a description of the principal risks and uncertainties that it faces.
In the case of each director in office at the date the Directors’ Report is approved:
so far as the director is aware, there is no relevant audit information of which the group and parent company’s auditors are
unaware; and
they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant
audit information and to establish that the group and parent company’s auditors are aware of that information.
For and on behalf of the Board
Steve Wilson
Director
6 March 2019
Chris Payne
Director
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Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF HEADLAM GROUP PLC
Report on the audit of the financial statements
Opinion
In our opinion, Headlam Group plc’s group financial statements and company financial statements (the ‘financial statements’):
give a true and fair view of the state of the group’s and of the company’s affairs as at 31 December 2018 and of the group’s
profit and the group’s and the company’s cash flows for the year then ended;
have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union
and, as regards the company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and
have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements, included within the Annual Report and Accounts 2018 (the ‘Annual Report’), which
comprise: the Group and Company statements of financial position as at 31 December 2018; the Consolidated income
statement and Consolidated statement of comprehensive income, the Group and Company cash flow statements, and the Group
and Company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a
description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities
under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements section of our
report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We remained independent of the group in accordance with the ethical requirements that are relevant to our audit of the financial
statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the group or the company.
We have provided no non-audit services to the group or the company in the period from 1 January 2018 to 31 December 2018.
Our audit approach
Overview
Materiality
Overall group materiality: £2.0 million (2017: £2.0 million), based on 5% of profit before tax.
Overall company materiality: £1.9 million (2017: £1.9 million), based on 0.8% of total assets.
Audit scope
Key audit
matters
The Group financial statements are a consolidation of a number of reporting companies, comprising
the group’s operating businesses, centralised functions and non-trading group companies.
We performed full scope audits on the financial information of five UK reporting components:
HFD Limited, MCD Limited, Domus Group of Companies, Headlam (European) Limited and
Headlam Group plc (the Company) due to their size and risk characteristics. These UK reporting
components comprise 85% of consolidated revenue and 90% of consolidated operating profit.
In addition, we performed analytical procedures on insignificant trading components for group
reporting purposes.
Supplier arrangements.
Acquisition accounting.
The scope of our audit
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Capability of the audit in detecting irregularities, including fraud
Based on our understanding of the group and industry, we identified that the principal risks of non-compliance with laws and
regulations related to the listing Rules, tax legislation, pensions legislation, employment regulation, and health and safety
legislation, and we considered the extent to which non-compliance might have a material effect on the financial statements.
We also considered those laws and regulations that have a direct impact on the preparation of the financial statements such as
the Companies Act 2006. We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial
statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate
journal entries. Audit procedures performed by the engagement team included:
Discussions with management, including consideration of known or suspected instances of non-compliance with laws and
regulations, and fraud;
Headlam Group plc Annual report and accounts 2018
79
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF HEADLAM GROUP PLC
CONTINUED
Reading key correspondence with regulatory authorities, such as the Competition and Markets Authority (CMA);
Review of correspondence with legal advisors;
Challenging assumptions and judgements made by management in their significant accounting estimates; and
Review of unusual account combinations with journals to revenue, rebates and cash, as well as unusual journal descriptions.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it.
Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error,
as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in
the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our
procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by our audit.
Key audit matter
Supplier arrangements
Refer to the Audit Committee Report on page 61
and the use of estimates and judgements in the
Accounting Policies on page 90.
The group has a significant number of rebate
agreements with suppliers. These agreements
can contain multiple terms or tiered
arrangements based on the volume of goods
purchased. Consequently, the calculation of these
rebates can be complex and requires accurate
inputs and calculations to be made.
The majority of agreements are co-terminus
with the financial year, meaning that, although the
calculation of the rebate does not rely
on estimates of future purchases, there are
significant amounts of rebates receivable
subject to recovery at the year-end.
Acquisition accounting
Refer to the Audit Committee Report on page 61
and the use of estimates and judgements in the
Accounting Policies on page 90 and note 24 to the
financial statements on page 130.
The Group has made five acquisitions during 2018,
for total consideration of £13.0m. In the prior year
the Group acquired the share capital of Domus
Group of Companies Limited and its subsidiaries
(‘Domus Group’) for consideration of £29.1m.
In relation to the acquisitions in 2018, our work
focused on the acquisition accounting which is
inherently judgemental as it requires the directors
to exercise judgement and use estimates in order
to value consideration, identify and value intangible
assets and assess the fair value of other assets
and liabilities, as well as the calculation of
associated goodwill.
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Headlam Group plc Annual report and accounts 2018
How our audit addressed the key audit matter
We tested a sample of rebate balances by requesting confirmations
from the counterparty. For those balances where no counterparty
confirmation was received, we recalculated the amount due, based on
the supporting purchase agreements and tested the calculation inputs
back to underlying financial records. No material inconsistencies or
exceptions were noted.
For those balances subject to testing, we agreed post year-end
settlements back to evidence of cash receipt or credit notes received,
to provide comfort over the recoverability of the balances.
In addition, in order to assess management’s ability to accurately
calculate rebates receivable balances, we compared cash receipts
received during the year against balances accrued at the previous year
end. No material inconsistencies or exceptions were noted.
We read the sale and purchase agreements for the five acquisitions in 2018
to understand the nature of the transactions and ensure that relevant
clauses that impact the accounting had been considered by the directors.
We tested the fair values ascribed to intangible assets by understanding
the assumptions adopted in the valuation models, which include forecast
attrition rates in relation to existing customers, the expected longevity of
the customer relationships, royalty revenue rates and the financial
forecasts. We evaluated the assumptions, utilising the work of valuation
experts where appropriate, and confirmed that the directors have
adopted reasonable assumptions in each circumstance.
For the remaining fair values of other assets and liabilities, we evaluated
the assessment and calculation of material assets and provisions to
confirm that they are accurate and reflect information that was known
in relation to events that existed at the transaction date.
We reviewed the basis of the deferred and contingent consideration
and verified the expected future performance to the directors’ forecasts
and underlying agreements to conclude that the basis of recognition
was reasonable.
Overview
Strategic Report
Governance
Financial Statements
Acquisition accounting continued
The Directors are also required to reconfirm the
provisional fair values attributed in the prior year
to the Domus Group, and estimate the level of
deferred contingent consideration that is likely to
be payable under the terms of the acquisition
agreement.
The directors reviewed the acquisition accounting for the Domus
Group and concluded that no adjustments to the provisional fair values
determined in 2017 were necessary. We have considered the results of our
current year audit of the Domus Group, including reviewing key estimates
and judgements reached as part of the acquisition, and concluded that
there is no evidence that material re-measurement is required.
We reviewed the directors’ calculation of the deferred contingent
consideration for the Domus Group and have concluded that the release
of £1.4m of the provision that was established in December 2017, during
the course of 2018, as a non-underlying credit is reasonable.
We determined that there were no key audit matters applicable to the company to communicate in our report.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial
statements as a whole, taking into account the structure of the group and the company, the accounting processes and controls,
and the industry in which they operate.
The Group operates as a supplier and distributor of floorcovering products and has two operating segments; the UK and
Continental Europe. The Group financial statements are a consolidation of a number of reporting companies, comprising the
group’s operating businesses, centralised functions and non-trading group companies.
In establishing the overall approach to the group audit, we identified five UK reporting components which, in our view, required an
audit of their complete financial information both due to their size and risk characteristics: HFD Limited, MCD Limited, Domus
Group of Companies, Headlam (European) Limited and Headlam Group plc (the Company). These reporting companies were
audited by the group engagement team. In addition, we performed analytical procedures on insignificant trading components
for group reporting purposes.
The work on these five components, together with additional procedures performed at the Group level, including analytical
procedures and specific testing of the consolidation, gave us the evidence we needed for our opinion on the Group financial
statements as a whole.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent
of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of
misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Company financial statements
Overall materiality
£2.0 million (2017: £2.0 million).
£1.9 million (2017: £1.9 million).
How we determined it
5% of profit before tax.
0.8% of total assets.
Rationale for benchmark
applied
Based on the benchmarks used in the annual
report, profit before tax is the primary measure
used by the shareholders in assessing the
performance of the group, and is a generally
accepted auditing benchmark.
We believe that total assets is the primary
measure used by the shareholders in assessing
the performance of the Company, and is a
generally accepted auditing benchmark.
For each component in the scope of our group audit, we allocated a materiality that is less than our overall group materiality.
The range of materiality allocated across components was between £112,000 and £1,919,000. Certain components were audited
to a local statutory audit materiality that was also less than our overall group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £100,000
(Group audit) (2017: £100,000) and £100,000 (Company audit) (2017: £100,000) as well as misstatements below those amounts
that, in our view, warranted reporting for qualitative reasons.
Headlam Group plc Annual report and accounts 2018
81
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF HEADLAM GROUP PLC
CONTINUED
Going concern
In accordance with ISAs (UK) we report as follows:
Reporting obligation
Outcome
We are required to report if we have anything material to add
or draw attention to in respect of the directors’ statement
in the financial statements about whether the directors
considered it appropriate to adopt the going concern basis
of accounting in preparing the financial statements and the
directors’ identification of any material uncertainties to the
group’s and the company’s ability to continue as a going
concern over a period of at least twelve months from the
date of approval of the financial statements.
We have nothing material to add or to draw attention to.
However, because not all future events or conditions can
be predicted, this statement is not a guarantee as to the
group’s and company’s ability to continue as a going concern.
For example, the terms on which the United Kingdom may
withdraw from the European Union, which is currently due to
occur on 29 March 2019, are not clear, and it is difficult to
evaluate all of the potential implications on the group’s trade,
customers, suppliers and the wider economy.
We are required to report if the directors’ statement relating
to Going Concern in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit.
We have nothing to report.
Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover
the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in
this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are
required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK
Companies Act 2006 have been included.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless otherwise stated).
Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and
Directors’ Report for the year ended 31 December 2018 is consistent with the financial statements and has been prepared in
accordance with applicable legal requirements. (CA06)
In light of the knowledge and understanding of the group and company and their environment obtained in the course of the audit,
we did not identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)
The directors’ assessment of the prospects of the group and of the principal risks that would threaten the solvency or
liquidity of the group
We have nothing material to add or draw attention to regarding:
The directors’ confirmation on page 62 of the Annual Report that they have carried out a robust assessment of the principal
risks facing the group, including those that would threaten its business model, future performance, solvency or liquidity.
The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
The directors’ explanation on page 36 of the Annual Report as to how they have assessed the prospects of the group, over what
period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of
the principal risks facing the group and statement in relation to the longer-term viability of the group. Our review was substantially
less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their
statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code
(the ‘Code’); and considering whether the statements are consistent with the knowledge and understanding of the group and
company and their environment obtained in the course of the audit. (Listing Rules).
82
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Other Code Provisions
We have nothing to report in respect of our responsibility to report when:
The statement given by the directors, on page 78 that they consider the Annual Report taken as a whole to be fair, balanced
and understandable, and provides the information necessary for the members to assess the group’s and company’s position
and performance, business model and strategy is materially inconsistent with our knowledge of the group and company
obtained in the course of performing our audit.
The section of the Annual Report on page 60 describing the work of the Audit Committee does not appropriately address
matters communicated by us to the Audit Committee.
The directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from
a relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006. (CA06).
Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors Responsibilities set out on page 78, the directors are responsible for the
preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true
and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the company’s ability to continue as
a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the company or to cease operations, or have no realistic alternative but to do so.
Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report.
Use of this report
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save
where expressly agreed by our prior consent in writing.
Other required reporting
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not received all the information and explanations we require for our audit; or
adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received
from branches not visited by us; or
certain disclosures of directors’ remuneration specified by law are not made; or
the company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Appointment
Following the recommendation of the Audit Committee, we were appointed by the members on 20 May 2016 to audit the
financial statements for the year ended 31 December 2016 and subsequent financial periods. The period of total uninterrupted
engagement is 3 years, covering the years ended 31 December 2016 to 31 December 2018.
Mark Smith (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Birmingham
6 March 2019
Headlam Group plc Annual report and accounts 2018
83
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2018
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
Finance income
Finance expenses
Net finance costs
Profit before tax
Taxation
Profit for the year attributable to
the equity shareholders
Earnings per share
Basic
Diluted
Note
2
3
2
6
6
3
7
9
9
Ordinary dividend per share
Interim dividend for the financial year
Final dividend proposed for the financial year
22
22
Underlying
2018
£000
708,423
(479,349)
229,074
(134,316)
(50,485)
44,273
709
(1,593)
(884)
43,389
(7,750)
Non-underlying
(Note 3)
2018
£000
–
–
–
–
(2,942)
(2,942)
–
–
–
(2,942)
807
Total
2018
£000
708,423
(479,349)
229,074
(134,316)
(53,427)
41,331
709
(1,593)
(884)
40,447
(6,943)
Underlying
2017
£000
692,540
(474,436)
218,104
(127,145)
(47,176)
43,783
578
(1,243)
(665)
43,118
(7,976)
Non-underlying
(Note 3)
2017
£000
–
–
–
–
(2,399)
(2,399)
–
–
–
(2,399)
179
Restated*
Total
2017
£000
692,540
(474,436)
218,104
(127,145)
(49,575)
41,384
578
(1,243)
(665)
40,719
(7,797)
35,639
(2,135)
33,504
35,142
(2,220)
32,922
42.5p
42.2p
41.7p
41.5p
40.0p
39.6p
7.55p
17.45p
39.1p
38.9p
7.55p
17.25p
* The results for the year ended 31 December 2017 have been restated to reflect changes made for the year ended 31 December 2018 as
reported in note 1.
All Group operations during the financial years were continuing operations.
84
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2018
Profit for the year attributable to the equity shareholders
Other comprehensive income/(expense):
Items that will never be reclassified to profit or loss
Remeasurement of defined benefit plans
Related tax
Items that are or may be reclassified to profit or loss
Foreign exchange translation differences arising on translation of overseas operations
Effective portion of changes in fair value of cash flow hedges
Transfers to profit or loss on cash flow hedges
Related tax
Other comprehensive income for the year
Total comprehensive income attributable to the equity shareholders for the year
Note
20
2018
£000
2017
£000
33,504
32,922
8,562
(1,628)
6,934
540
–
–
–
540
9,127
(1,729)
7,398
(277)
(154)
(77)
43
(465)
7,474
40,978
6,933
39,855
Headlam Group plc Annual report and accounts 2018
85
STATEMENTS OF FINANCIAL POSITION
AT 31 DECEMBER 2018
Assets
Non-current assets
Property, plant and equipment
Investment properties
Intangible assets
Investments in subsidiary undertakings
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Bank overdraft
Other interest-bearing loans and borrowings
Trade and other payables
Employee benefits
Income tax payable
Non-current liabilities
Other interest-bearing loans and borrowings
Trade and other payables
Provisions
Deferred tax liabilities
Employee benefits
Total liabilities
Net assets
Equity attributable to equity holders of the parent
Share capital
Share premium
Other reserves
Retained earnings
Total equity
Group
2018
£000
2017
£000
Company
2018
£000
2017
£000
Note
10
10
11
12
13
14
15
16
16
17
18
20
8
17
18
19
13
20
22
22
102,048
–
50,924
–
516
153,488
132,704
119,007
44,005
295,716
101,631
–
44,662
–
648
476
81,647
–
121,380
–
146,941
203,503
131,566
127,976
42,030
301,572
–
23,491
12,573
36,064
2
83,143
–
120,640
–
203,785
–
21,320
16,646
37,966
449,204
448,513
239,567
241,751
(221)
(236)
(181,300)
–
(6,730)
–
(233)
(190,299)
(2,235)
(6,339)
–
–
(34,226)
–
(394)
–
–
(41,780)
(2,235)
(1,329)
(188,487)
(199,106)
(34,620)
(45,344)
(6,805)
(2,592)
(2,249)
(8,063)
(5,888)
(6,519)
(4,938)
(2,048)
(6,847)
(10,481)
–
(2,007)
–
(5,487)
(2,561)
(25,597)
(30,833)
(10,055)
(214,084)
(229,939)
(44,675)
–
(4,938)
–
(4,438)
(7,513)
(16,889)
(62,233)
235,120
218,574
194,892
179,518
4,268
53,512
185
177,155
235,120
4,268
53,512
2,891
157,903
218,574
4,268
53,512
13,364
123,748
194,892
4,268
53,512
16,610
105,128
179,518
The notes on pages 90 to 133 are an integral part of these consolidated financial statements.
The Company is taking advantage of the exemption in s408 of the Companies Act 2006 not to present its individual income
statement, however the profit for the year attributable to the equity shareholders is £34,350,000.
These financial statements were approved by the Board of Directors on 6 March 2019 and were signed on its behalf by
Steve Wilson
Director
Chris Payne
Director
Company Number: 00460129
86
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
STATEMENT OF CHANGES IN EQUITY – GROUP
FOR THE YEAR ENDED 31 DECEMBER 2018
Share
capital
£000
Share
premium
£000
Capital
redemption
reserve
£000
Translation
reserve
£000
Cash flow
hedging
reserve
£000
Treasury
reserve
£000
Retained
earnings
£000
Total
equity
£000
4,268
53,512
88
7,136
231
(5,183) 143,315
203,367
–
(277)
–
(231)
(277)
(231)
–
–
–
32,922
7,441
32,922
6,933
40,363
39,855
Balance at 1 January 2017
Profit for the year attributable to the
equity shareholders
Other comprehensive (expense)/income
Total comprehensive (expense)/income
for the year
Transactions with equity shareholders,
recorded directly in equity
Share-based payments
Share options exercised by employees
Consideration for purchase of own shares
Current tax on share options
Deferred tax on share options
Dividends to equity holders
Total contributions by and distributions to
equity shareholders
Balance at 31 December 2017
Balance at 1 January 2018
Profit for the year attributable to the
equity shareholders
Other comprehensive income
Total comprehensive income for
the year
Transactions with equity shareholders,
recorded directly in equity
Share-based payments
Share options exercised by employees
Consideration for purchase of own shares
Current tax on share options
Deferred tax on share options
Deferred tax on income and expenses
recognised directly in equity
Dividends to equity holders
Total contributions by and distributions to
equity shareholders
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,268
53,512
4,268
53,512
88
88
6,859
6,859
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
540
540
–
–
–
–
–
–
–
–
Balance at 31 December 2018
4,268
53,512
88
7,399
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,307
(1,180)
–
–
–
1,218
(1,504)
–
102
138
(25,729)
1,218
803
(1,180)
102
138
(25,729)
1,127
(25,775)
(24,648)
(4,056) 157,903
218,574
(4,056) 157,903
218,574
–
–
–
33,504
6,934
33,504
7,474
40,438
40,978
–
2,579
(5,825)
–
–
1,478
(1,518)
–
38
(169)
1,478
1,061
(5,825)
38
(169)
–
–
(46)
(20,969)
(46)
(20,969)
(3,246)
(21,186)
(24,432)
(7,302) 177,155
235,120
Headlam Group plc Annual report and accounts 2018
87
STATEMENT OF CHANGES IN EQUITY – COMPANY
FOR THE YEAR ENDED 31 DECEMBER 2018
Share
capital
£000
Share
premium
£000
Capital
redemption
reserve
£000
Special
reserve
£000
Cash flow
hedging
reserve
£000
Treasury
reserve
£000
Restated*
Retained
earnings
£000
Restated*
Total
equity
£000
4,268
53,512
88
20,578
231
(5,183)
85,795
159,289
Balance at 1 January 2017
Profit for the year attributable to the
equity shareholders
Other comprehensive (expense)/income
Total comprehensive (expense)/income
for the year
Transactions with equity shareholders,
recorded directly in equity
Share-based payments
Share options exercised by employees
Consideration for purchase of own shares
Current tax on share options
Deferred tax on share options
Dividends to equity holders
Total contributions by and distributions to
equity shareholders
Balance at 31 December 2017
Balance at 1 January 2018
Restatement for discounting on
inter-company receivable
Restated balance at 1 January 2018
Profit for the year attributable to the
equity shareholders
Other comprehensive income
Total comprehensive income for
the year
Transactions with equity shareholders,
recorded directly in equity
Share-based payments
Share options exercised by employees
Consideration for purchase of own shares
Current tax on share options
Deferred tax on share options
Dividends to equity holders
Total contributions by and distributions to
equity shareholders
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,268
4,268
53,512
53,512
–
–
4,268
53,512
88
88
–
88
20,578
20,578
–
20,578
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Balance at 31 December 2018
4,268
53,512
88
20,578
–
(231)
(231)
–
–
–
38,981
6,312
38,981
6,081
45,293
45,062
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,307
(1,180)
–
–
–
1,218
(1,504)
–
19
36
(25,729)
1,218
803
(1,180)
19
36
(25,729)
1,127
(25,960)
(24,833)
(4,056) 105,128
179,518
(4,056) 105,128
179,518
–
(1,601)
(1,601)
(4,056) 103,527 (177,917)
–
–
–
34,350
6,887
34,350
6,887
41,237
41,237
–
2,579
(5,825)
–
–
–
1,478
(1,518)
–
29
(36)
(20,969)
1,478
1,061
(5,825)
29
(36)
(20,969)
(3,246)
(21,016)
(24,262)
(7,302) 123,748
194,892
* Retained earnings for the Company were restated when an inter-company loan was discounted in accordance with IFRS 9 see note 1.
88
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
CASH FLOW STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2018
Cash flows from operating activities
Profit before tax for the year
Adjustments for:
Depreciation, amortisation and impairment
Finance income
Finance expense
Profit on sale of property, plant and equipment
Share-based payments
Operating cash flows before changes in working capital
and other payables
Change in inventories
Change in trade and other receivables
Change in trade and other payables
Cash generated from the operations
Interest paid
Tax paid
Additional contributions to defined benefit plan
Net cash flow from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Interest received
Acquisition of subsidiaries, net of cash acquired
Repayment of acquired borrowings on acquisition
Acquisition of property, plant and equipment
Net cash flow from investing activities
Cash flows from financing activities
Proceeds from the issue of treasury shares
Payment to acquire own shares
Drawdown of borrowings
Repayment of borrowings
Dividends paid
Net cash flow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Effect of exchange rate fluctuations on cash held
Cash and cash equivalents at 31 December
Group
2018
£000
2017
£000
Company
2018
£000
2017
£000
40,447
40,719
33,977
38,706
7,038
(709)
1,593
(50)
1,478
49,797
1,563
12,524
(13,878)
50,006
(1,426)
(7,789)
(747)
40,044
403
601
(9,141)
(435)
(4,384)
5,845
(578)
1,243
(45)
1,218
48,402
(2,210)
7,564
754
54,510
(761)
(8,388)
(2,164)
43,197
190
576
(24,763)
(7,042)
(3,058)
(12,956)
(34,097)
1,061
(5,825)
45,443
(45,232)
(20,969)
(25,522)
1,566
42,030
188
43,784
803
(1,180)
25,000
(25,230)
(25,729)
(26,336)
(17,236)
59,339
(73)
42,030
1,688
(691)
985
–
739
36,698
–
(2,170)
(10,357)
24,171
(765)
(590)
(747)
1,697
(496)
747
–
403
41,057
–
(338)
364
41,083
(246)
(229)
(2,164)
22,069
38,444
–
258
–
–
(667)
(409)
1,061
(5,825)
45,000
(45,000)
(20,969)
(25,733)
(4,073)
16,646
–
12,573
29
288
(24,180)
–
–
(23,863)
803
(1,180)
25,000
(25,000)
(25,729)
(26,106)
(11,525)
28,171
–
16,646
Note
3
6
6
3
21
20
24
10
22
16
Headlam Group plc Annual report and accounts 2018
89
NOTES TO THE FINANCIAL STATEMENTS
1 Presentation of the Financial Statements and Accounting Policies
Reporting entity
Headlam Group plc (the ‘Company’) is a company incorporated and domiciled in the UK. The address of its registered office is
PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW.
Statement of compliance
Both the Company’s and the Group’s financial statements have been prepared and approved by the Directors in accordance with
International Financial Reporting Standards as adopted by the EU (‘adopted IFRSs’). On publishing the Company’s financial
statements here together with the Group financial statements, the Company is taking advantage of the exemption in s408 of
the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved
financial statements.
The Company and Group financial statements were authorised for issuance on 6 March 2019.
Basis of preparation
The principal accounting policies applied in the preparation of the financial statements of the Company and the financial
statements of the Group are set out below. These policies have been applied consistently to all years presented, unless
otherwise stated.
Judgements made by the Directors, in the application of these accounting policies that have a significant effect on the financial
statements and estimates with a significant risk of material adjustment in the next year, are discussed below.
(a) Measurement convention
These financial statements are presented in pounds sterling, which is the Company’s functional currency. All financial information
presented in pounds sterling has been rounded to the nearest thousand.
The Company and Group financial statements are prepared on the historical cost basis with the exception of derivative financial
instruments and pension scheme assets and liabilities, both of which are stated at fair value.
The financial statements have been prepared on a going concern basis. In determining the appropriate basis of preparation of the
financial statements the Directors are required to consider whether the Group can continue in operational existence for a period
no shorter than 12 months from the date of approval of the financial statements.
The Group’s business activities, together with the factors likely to affect its future development, performance and position are
set out in the Chairman’s Statement on page 12 and Chief Executive’s Review on pages 14 to 16.
The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review
on pages 26 to 31. In addition, note 23 to the financial statements includes the Group’s objectives, policies and processes for
managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its
exposures to credit risk and liquidity risk.
The Group meets its day-to-day working capital requirements through its banking facilities. As highlighted in note 17 to the
financial statements, the Group has maintained two separate agreements with Barclays Bank PLC and HSBC Bank Plc and
these include both Sterling and Euro term facilities. The Group’s Sterling committed facilities are £72.5 million and its Euro
facilities are €8.6 million. The Group also has short term uncommitted facilities which continue at £25 million, and are renewable
on an annual basis.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for a
period no shorter than 12 months from the date of approval of the financial statements. Thus they continue to adopt the going
concern basis of accounting in preparing the annual financial statements.
b) Use of accounting estimates and judgements
Estimates
The preparation of financial statements in conformity with adopted IFRSs requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting year. Although these estimates are based on management’s best knowledge of the
amount, events or actions, actual results ultimately may differ from those estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future
periods if the revision affects both current and future periods.
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Financial Statements
The key sources of estimation uncertainty at the Statement of Financial Position date that may give rise to a material adjustment
to the carrying value of assets and liabilities within the next financial year are as follows
Supplier arrangements
The group has a number of rebate agreements with suppliers. These agreements can contain multiple terms or tiered
arrangements based on the volume of goods purchased. Consequently, the calculation of these rebates can be complex and
requires accurate inputs and calculations to be made. The majority of agreements are co-terminus with the financial year,
meaning that, although the calculation of the rebate does not rely on estimates of future purchases, there are significant
amounts of rebates receivable subject to recovery at the year-end.
Acquisition accounting
IFRS 3 ‘Business Combinations’ requires that the consideration for an acquisition is recorded at fair value. Where contingent
consideration is part of the acquisition cost then management have estimated the fair value of the amount payable.
Contingent consideration is revalued each reporting period according to the latest forecasts of the acquired business based
on the terms of the earn-out arrangement. Where deferred consideration is part of the acquisition cost then it is recorded,
discounted back to the present value and held on the balance sheet.
Taxation
Provision is made for any uncertain tax positions that the Group may be exposed to at the Statement of Financial Position
date. Deferred tax assets are recognised at the Statement of Financial Position date based on the assumption that there is a
high expectation that the asset will be realised in due course. This assumption is dependent on the Group’s ability to generate
sufficient future taxable profits.
Inventory
Inventories are valued at the lower of cost and net realisable value. Cost is the invoiced cost of materials less any supplier
discounts received and overheads incurred in bringing inventory to its present condition and location. This includes
management’s best estimates of overheads to be absorbed into the cost of inventory and discounts likely to be received
from suppliers.
Provisions to write down stock to its net realisable value are calculated based on the ageing profile and consideration of
inventory sold for less than its carrying value.
Employee benefits
The deficit relating to the Group’s defined benefit plans is assessed annually in accordance with IAS 19 and after taking
independent actuarial advice. The principal assumptions are set out in note 20. The amount of the deficit is dependent on plan
asset and liability values and the actuarial assumptions used to determine the deficit.
The assumptions include asset growth rates, pension and salary increases, price inflation, discount rate used to measure
actuarial liabilities and mortality rates.
Guaranteed Minimum Pension (GMP) equalization
In-line with the recent Lloyds judgement which has ruled that GMPs must be equalised across males and females, we have
added 1.1% to the liabilities as at 31 December 2018. This is an approximate scheme-specific allowance calculated by the
schemes actuaries which takes into account high-level summary data of the Scheme. This is detailed further in note 20.
Judgements
Judgements made by the Directors, in the application of these accounting policies that have significant effect on the financial
statements have been:
Acquisition accounting
Assets and liabilities must also be recognised at fair value on acquisition. The identification and measurement of contingent
liabilities and intangible assets are key areas of judgement.
The Group made five acquisitions during the year which are detailed in note 24. As part of these acquisitions the Group has
performed individual purchase price allocation reviews and has assessed the fair value of the assets and liabilities acquired.
Using assumptions regarding the performance of the acquired entities, management have identified additional intangibles
relating to brand names, customer relationships, non-compete clauses and order book which have been recognised and either
defined as indefinite lived or amortised over their expected useful economic life. The fair value of intangibles at the date of
acquisition are calculated by reference to the net present value of future benefits accruing to the Group from the utilisation of
the asset, discounted at the appropriate discount rate. Key assumptions in valuing the intangibles were royalty rates, discount
rates, and future cash flows which have been assessed by the directors and where appropriate bench-marked against the
market. Any excess of the purchase consideration over the estimated fair values of acquired net identified assets is recorded
as goodwill in the balance sheet and is allocated to an appropriate business segment. Any changes in the underlying
assumptions or life of the determined assets and liabilities would alter the goodwill and amortisation charges included within
the financial statements.
Headlam Group plc Annual report and accounts 2018
91
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 Accounting policies continued
Impairment of goodwill
The Group determines whether goodwill is impaired on an annual basis unless there is an indication of impairment at an earlier
date. This requires an estimation of the value in use of the cash generating units to which they are allocated. Estimating the
value in use requires the Group to make an estimate of the expected future cash flows from the cash generating unit and also
to choose a suitable discount rate in order to calculate the present value of those cash flows. Further detail on the
assumptions used in determining the value in use calculations is provided in note 11
(c) Income Statement Restatement
The Consolidated Income Statement for the year ended 31 December 2017 has been restated to reclassify a number of rebates
and prompt payment discounts between revenue, cost of sales, distribution costs and operating expenses in order to more
appropriately reflect their nature. Consequently, these adjustments mean the prior year comparatives are now presented in a
consistent manner with the current year.
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit
31 December
2018
£000
708,423
(479,349)
229,074
(134,316)
(53,427)
31 December
2017
As originally
presented
£000
707,764
(487,683)
220,081
(130,476)
(48,221)
Restated
Year ended
31 December
2017
£000
692,540
(474,436)
218,104
(127,145)
(49,575)
Adjustment
£000
(15,224)
13,247
(1,977)
3,331
(1,354)
41,331
41,384
–
41,384
d) Impact of newly adopted accounting standards
The Group and Company has adopted two new accounting standards in 2018 and these are detailed below:
IFRS 9 – Financial Instruments
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and
financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge accounting. The adoption of
IFRS 9 Financial Instruments from 1 January 2018 resulted in changes in accounting policies but did not have a significant impact
on the financial statements. The new accounting policies are set out in note 1 below. In accordance with the transitional
provisions in IFRS 9(7.2.15) and (7.2.26), comparative figures have not been restated.
There was no material impact on the group’s retained earnings as at 1 January 2018 arising from the transition but the Company’s
retained earnings were affected as follows:
In accordance with IFRS 9 the value of inter-company receivables were reviewed as at 31 December 2018. Headlam Group plc has
an inter-company balance with Headlam (European) Limited, which is supported by Headlam (European) Limited’s investment in
the Group’s French entities. The inter-company loan is due on demand and it has been valued by reference to the net present
value of the future cash flows accruing to Headlam (European) Limited from its investment in the French entities and discounted
at an appropriate discount rate.
Retained earnings
Restatement due to discounting
Restated retained earnings
Restated
1 January 2018
£000
105,128
(1,601)
103,527
IFRS 15 – Revenue from Contracts with Customers
The Group has adopted IFRS 15 ‘Revenue from Contracts with Customers’ at 1 January 2018.
This standard uses a five-step model to be applied to all sales contracts. The key principle of the standard is that revenue is
recognised when control of the goods or services passes to customers at an amount that reflects the consideration to which an
entity expects to be entitled in exchange for those goods or services.
A detailed assessment of the impacts of the new standard has been undertaken including a review of the Group’s performance
obligations, treatment of variable consideration and the timing of revenue recognition. This assessment has shown there are no
material impacts on revenue for the Group.
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(e) IFRS not yet applied
Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2018
reporting periods and have not been early adopted by the group. The group’s assessment of the impact of these new standards
and interpretations is set out below.
International Financial Reporting Standard (IFRS) 16 ‘Leases’ (replacing IAS 17).
The Standard is effective for periods beginning after 1 January 2019 and it will therefore be effective in the consolidated financial
statements for the Group for the year ending 31 December 2019. Adoption of the new standard will have a material impact on
the Group. Adoption of the new standard has also been assessed for the Company and the new standard is expected to have an
immaterial impact on the Company.
This new standard eliminates the classification of leases over 12 months in length as either operating or finance leases and
introduces a single lessee accounting model whereby all leases are accounted for on balance sheet, unless of low-value. The
standard will therefore require that the Group’s leased assets are recorded within property, plant and equipment as ‘right of use
assets’ with a corresponding lease liability which is based on the discounted value of the cash payments required under each
lease. The income statement will be affected by the replacement of the operating lease expense with a depreciation charge and a
finance expense.
The lease liability has been measured at the present value of the remaining lease payments, discounted using the incremental
borrowing rate at transition. The right-of-use asset is measured at its carrying amount as if the standard had been applied since
the commencement of the lease, discounted using the incremental borrowing rate at transition. Where data is not available to
enable this measurement to be made, the right-of-use asset is measured at an amount equal to the lease liability. Transition
recognition exemptions relating to short-term and low value leases have been applied as well as practical expedients taken, where
available, to simplify the transition process.
The Group has collated information on leases held at the 31 December 2018 for an evaluation of the impact of IFRS 16. It is
estimated that on transition the lease liability and the right-of-use asset brought on balance sheet will be valued at approximately
£48.5 million. Net current assets will be £13.2 million lower, due to the presentation of a portion of the liability as a current liability.
The group expects that the impact on the income statement for 2019 will be a reduction in the net profit before tax by
approximately £0.5 million as a result of adopting the new rules with the operating lease expense recognised under the existing
standard (IAS 17) (Full year total operating lease cost 2018:£15.3 million) being replaced by depreciation and finance costs. There
will be no overall impact on the Group’s cash and cash equivalents.
The group will apply the standard from its mandatory adoption date of 1 January 2019 using the modified retrospective approach.
Under this approach, the cumulative effect of adopting IFRS 16 will be recognised as an adjustment to the opening balance of
retained earnings on 1 January 2019, with no restatement of comparative information. All right-of-use assets will be measured at
the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).
There are no other new standards, amendments to existing standards, or interpretations that are not yet effective that would be
expected to have a material impact on the Group.
f) Accounting Policies
The Group financial statements consolidate those of the Company and its subsidiaries which together are referred to as the
‘Group’. The Company’s financial statements present information about the Company as a separate entity and not about
its Group.
Subsidiaries are entities controlled by the Group. Control exists when the Group has power over an entity, is exposed 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, potential voting rights that are currently exercisable or convertible are taken into account.
The financial statements of subsidiaries are included in the Group’s financial statements from the date that control commences
until the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.
Inter-company transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated
in the Group’s financial statements.
Headlam Group plc Annual report and accounts 2018
93
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 Accounting policies continued
Foreign currency
Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary
assets and liabilities denominated in foreign currencies at the Statement of Financial Position date are translated at the foreign
exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.
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.
Financial statements of foreign operations
The assets and liabilities of foreign subsidiaries are translated at foreign exchange rates ruling at the Statement of Financial
Position date.
The revenues, expenses and cash flows of foreign subsidiaries are translated at an average rate for the period where this rate
approximates to the foreign exchange rates ruling at the dates of the transactions.
Exchange differences arising from this translation of foreign subsidiaries are taken directly to the translation reserve and
reflected as a movement in the statement of comprehensive income.
In respect of all foreign operations, any differences that have arisen after 1 January 2004, the date of transition to IFRS, are
presented as a separate component of equity.
Foreign currency exposure
Note 23 contains information about the foreign currency exposure of the Group and risks in relation to foreign
exchange movements.
Derivative financial instruments
The Group holds derivative financial instruments to hedge its foreign currency and its interest rate risk exposures. Derivatives are
initially recognised at fair value on the date that a derivative contract is entered into, and they are subsequently remeasured to
their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the
derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The group designates certain
derivatives as either:
hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges);
hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast
transactions (cash flow hedges); or
hedges of a net investment in a foreign operation (net investment hedges).
At inception of the hedge relationship, the group documents the economic relationship between hedging instruments and
hedged items, including whether changes in the cash flows of the hedging instruments are expected to offset changes in the
cash flows of hedged items. The group documents its risk management objective and strategy for undertaking its hedge
transactions.
The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged
item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less
than 12 months. Trading derivatives are classified as a current asset or liability.
The Group enters into forward exchange contracts and the fair value is their market price at the Statement of Financial Position
date, being the present value of the forward price. The gain or loss on remeasurement to fair value of forward exchange contracts
is recognised immediately in the income statement.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised
in the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in profit
or loss, within other gains/(losses).
Where option contracts are used to hedge forecast transactions, the group designates only the intrinsic value of the options as
the hedging instrument. Until 31 December 2017, the group classified foreign currency options as held-for-trading derivatives
and accounted for them at fair value through the profit and loss (FVPL).
Gains or losses relating to the effective portion of the change in intrinsic value of the options are recognised in the cash flow
hedge reserve within equity. The changes in the time value of the options that relate to the hedged item (‘aligned time value’) are
recognised within other comprehensive income (OCI) in the costs of hedging reserve within equity.
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When forward contracts are used to hedge forecast transactions, the group generally designates only the change in fair value of
the forward contract related to the spot component as the hedging instrument. Gains or losses relating to the effective portion of
the change in the spot component of the forward contracts are recognised in the cash flow hedge reserve within equity. The
change in the forward element of the contract that relates to the hedged item (‘aligned forward element’) is recognised within OCI
in the costs of hedging reserve within equity. In some cases, a Group company might designate the full change in fair value of the
forward contract (including forward points) as the hedging instrument. In such cases, the gains or losses relating to the effective
portion of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity.
If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, then
hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until
the forecast transaction occurs. When the hedged item is a non-financial asset, the amount recognised in equity is transferred to
the carrying amount of the asset when it is recognised. In other cases the amount recognised in equity is transferred to the
income statement in the same period that the hedged item affects profit or loss.
Further information about the derivatives used by the Group is provided in note 23 below.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.
The cost of self-constructed assets includes the cost of materials, direct labour and any other costs directly attributable to
bringing the asset to a working condition for its intended use.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of
property, plant and equipment.
Depreciation is charged to the income statement on a straight-line basis in order to depreciate assets to their residual value over
their useful economic lives. Assets begin to be depreciated from the date they become available for use. The annual rates
applicable are:
Freehold and long leasehold properties – 2%
Short leasehold properties
Motor vehicles
Office and computer equipment
Warehouse and production equipment
– period of lease
– 25%
– 10% – 33.3%
– 10% – 20%
Land is not depreciated.
The residual balances are reviewed annually.
Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from
disposal with the carrying amount of property, plant and equipment and are recognised in the income statement.
Investment properties
Investment properties are stated at cost less accumulated depreciation and impairment losses.
Depreciation is charged to the income statement on a straight-line basis in order to depreciate assets to their residual value over
their useful economic lives. The annual rate applicable is:
Freehold and long leasehold properties
– 2%
The residual balances are reviewed annually.
Goodwill and other intangible assets
Goodwill
All business combinations are accounted for by applying the purchase method. Goodwill arises when a company acquires another
business and in respect of business acquisitions that have occurred since 1 January 2004, goodwill represents the difference
between the cost of the acquisition and the fair value of the identifiable assets, liabilities and contingent liabilities acquired.
Following the requirements of IFRS 3 revised, transaction costs associated with acquisitions and movements in contingent
consideration are recognised in the income statement.
Headlam Group plc Annual report and accounts 2018
95
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 Accounting policies continued
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not
amortised but tested annually for impairment, or more frequently when there is an indicator that the unit may be impaired.
In respect of acquisitions prior to 1 January 2004, goodwill is included on the basis of its deemed cost, which represents the
amount recorded under UK GAAP which was broadly comparable save that only separable intangibles were recognised and
goodwill was amortised. This is in accordance with IFRS 1.
Other intangibles
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses.
Intangible assets recognised as a result of a business combination are stated at fair value at the date of acquisition less
cumulative amortisation and impairment losses.
Amortisation
Amortisation is charged to the income statement and is split over the estimated useful lives of each separately identifiable
intangible asset unless such lives are indefinite. Amortisation occurs on brand names, order book and customer relationships and
is charged to administrative expenses in the income statement. The estimated useful lives are assessed to be:
Brand names
Order book
Customer relationships 5 – 10 years
10 – 15 years
1 – 36 months
Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each Statement of
Financial Position date. Other intangible assets are amortised from the date they are available for use.
Financial assets
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been
transferred and the group has transferred substantially all the risks and rewards of ownership.
At initial recognition, the group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value
through profit or loss (FVPL), transaction costs that are directly attributable to the acquisition of the financial asset. Transaction
costs of financial assets carried at FVPL are expensed in profit or loss. Financial assets with embedded derivatives are considered
in their entirety when determining whether their cash flows are solely payment of principal and interest.
There are three measurement categories under IFRS 9 into which debt instruments may be classified, these are;
Amortised cost;
Fair value through other comprehensive income (FVOCI);
Fair value through the profit and loss (FVPL)
All material financial assets of the Group are held at amortised cost. Financial assets that are held for collection of contractual
cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Interest
income from these financial assets is included in finance income using the effective interest rate method. Any gain or loss arising
on derecognition is recognised directly in profit or loss and presented in other gains/(losses) together with foreign exchange gains
and losses. Impairment losses are presented as separate line item in the statement of profit or loss.
Trade and other receivables
Trade receivables are recognised at the transaction price (as defined in IFRS 15) if the trade receivables do not contain a
significant financing component. Other receivables are measured at fair value on initial recognition.
Following the adoption of IFRS 9, from 1 January 2018, the Group assesses, on a forward-looking basis, the expected credit
losses associated with its trade and other receivables carried at amortised cost and fair valued through other comprehensive
income (FVOCI). The impairment methodology applied depends on whether there has been a significant increase in credit risk.
For trade receivables, the Group applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to
be recognised from initial recognition of the receivables. See note 23.
Where specific receivables are known to be ‘bad’ or it becomes apparent that payment is ‘doubtful’ then a credit loss allowance of
100% is applied.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is based on the first-in first-out principle and includes
expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. This includes
management’s best estimate of overheads to be absorbed in the cost of inventory and discounts to be received from suppliers.
Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in
marketing, selling and distribution.
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Allowances for inventory losses are determined by reference to each individual product and are calculated by assessing the age
and quantity of each individual product.
Cash and cash equivalents
Cash and cash equivalents are carried in the Statement of Financial Position at amortised cost.
Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an
integral part of cash management of both the Company and Group are included as a component of cash and cash equivalents for
the purpose only of the Cash Flow Statement.
Impairment
The carrying amounts of the Group’s assets, other than financial assets, inventories and deferred tax assets, are reviewed at
each Statement of Financial Position date to determine whether there is any indication of impairment. If any such indication
exists, the asset’s recoverable amount is estimated. Financial assets are assessed using an expected credit loss model.
The recoverable amount for goodwill is estimated at each Statement of Financial Position date.
For the purposes of impairment testing, assets are grouped together into the smallest group of assets that generates cash flows
from continuing use that are largely independent of the cash inflows from other groups of assets.
An impairment loss is recognised in the income statement whenever the carrying amount of an asset or its cash-generating unit
exceeds its recoverable amount.
Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill
allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis.
Calculation of recoverable amount
The recoverable amount of assets, with the exception of the Group’s receivables, is the greater of their fair value less cost to sell
and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an
asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating
unit to which the asset belongs.
The recoverable amount of the Group’s receivables carried at amortised cost is calculated as the present value of estimated
future cash flows, discounted at the original effective interest rate, i.e. the effective interest rate computed at initial recognition
of these financial assets. Receivables with a short duration are not discounted.
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 had 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.
Trade payables
Trade payables are initially recognised at fair value and then are stated at amortised cost.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial
recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value
being recognised in the income statement over the period of the borrowings on an effective interest basis.
Borrowing costs
Borrowing costs are capitalised where the Group constructs qualifying assets. All other borrowing costs are written off to the
income statement as incurred.
Borrowing costs are charged to the income statement using the effective interest rate method.
Headlam Group plc Annual report and accounts 2018
97
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 Accounting policies continued
Provisions
Provisions are recognised in accordance with IAS 37 ‘Provisions, Contingent Assets and Contingent Liabilities’. Provisions are
recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow
of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are made for property
dilapidations for the estimated costs of the repairs over the period of the tenancy where a legal obligation exists.
Employee benefits
The Company and the Group operate both defined benefit and defined contribution plans, the assets of which are held in
independent trustee-administered funds. The pension cost is assessed in accordance with the advice of a qualified actuary.
Defined contribution plans
Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement
as incurred.
Defined benefit plans
The Group’s net obligation in respect of defined benefit pension plans is calculated by estimating the amount of future benefit
that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its
present value, and the fair value of any plan assets is deducted. The liability discount rate is the yield at the Statement of Financial
Position date using AA rated corporate bonds that have maturity dates approximating to the terms of the Group’s obligations.
The calculation is performed by a qualified actuary using the projected unit credit method.
When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised
as an expense in the income statement immediately.
To the extent that any benefits vest immediately, the expense is recognised directly in the income statement.
Guaranteed Minimum Pensions (GMPs) must be equalised across males and females, and as a result of clarity in legislation the
Company have added 1.1% to the liabilities as at 31 December 2018. This is an approximate scheme-specific allowance calculated
by the scheme actuaries, which takes into account high-level summary data of the Scheme. The Company has allowed for the
additional liability in respect of GMP equalisation as a past service cost, which has gone through the income statement.
All actuarial gains and losses that arise in calculating the Group’s obligation in respect of a scheme are recognised immediately in
reserves and reported in the statement of comprehensive income.
Where the calculation results in a benefit to the Group, the asset recognised is limited to the present value of any future refunds
from the plan or reductions in future contributions to the plan.
The Group operates a UK defined benefit pension plan and a defined benefit plan in Switzerland. In the UK, there is no contractual
agreement or stated Group policy for allocating the net defined benefit liability between the participating subsidiaries, and as
such, the full deficit is recognised by the Company, which is the sponsoring employer.
The participating subsidiary companies have recognised a cost equal to contributions payable for the period as advised by a
professionally qualified actuary.
Share-based payment transactions
The Company and Group operate various equity-settled share option schemes under the approved and unapproved executive
schemes and savings-related schemes.
For executive share option schemes, the option price may not be less than the mid-market value of the Group’s shares at the
time when the options were granted or the nominal value.
Further details of the share plans are given in the Remuneration Report on pages 64 to 72.
The fair value of options granted is recognised as an employee expense with a corresponding increase in equity over the period
that the employees unconditionally become entitled to the award. 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 that vest except where forfeiture
is due only to market conditions such as share prices not achieving the threshold for vesting.
When options are granted to employees of subsidiaries of the Company, the fair value of options granted is recognised as an
employee expense in the financial statements of the subsidiary undertaking together with the capital contribution received. In
the financial statements of the Company, the options granted are recognised as an investment in subsidiary undertakings with a
corresponding increase in equity.
98
Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Repurchase of share capital
When share capital recognised as equity is repurchased, the amount of the consideration paid, net of any tax effects, is
recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction
from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in
equity, and the resulting surplus or deficit on the transaction is transferred to or from retained earnings.
Own shares held by Employee Benefit Trust
Transactions of the Group sponsored Employee Benefit Trust are included in the Group financial statements. In particular, the
Trust’s purchases of shares in the Company are debited directly to equity.
Revenue
Revenue from the sale of floorcoverings is measured at the fair value of the consideration and excludes intra-group sales and value
added and similar taxes. The primary performance obligation is the transfer of goods to the customer. Revenue from the sale of
floorcoverings is recognised when control of the goods is transferred to the customer (which is typically the point at which goods
are received by the customer), at an amount that reflects the consideration to which an entity expects to be entitled in exchange
for those goods. Provision for returns, discounts and other allowances are reflected in revenue at the point of recognition.
Supplier arrangements
Rebates received from suppliers comprise volume related rebates on the purchase of inventories. Volume related discounts are
accrued as units are purchased based on the percentage rebate applicable to the forecast total purchases over the rebate period,
where it is probable the rebates will be received and the amounts can be estimated reliably. Rebates relating to inventories
purchased but still held at the balance sheet date are deducted from the carrying value so that the cost of inventories is recorded
net of applicable rebates. Rebates received for the financial year are deducted from cost of sales. Rebates recoverable at the end
of the financial year are accrued within other debtors.
Lease payments
Leases are classified as finance leases whenever the lease transfers substantially all the risks and rewards of ownership to the
Group. All other leases are treated as operating leases.
Assets held under finance leases are included in property, plant and equipment at the lower of fair value at the date of acquisition
or the present value of the minimum lease payments. The capital element of outstanding finance leases is included in financial
liabilities. The finance charge element of rentals is charged to the income statement at a constant period rate of charge on the
outstanding obligations.
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the
lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.
Net financing costs
Net financing costs comprise interest payable, finance charges on shares classified as liabilities, finance leases, interest
receivable on funds invested, foreign exchange gains and losses, and gains and losses on hedging instruments as outlined in the
accounting policy relating to derivative financial instruments and hedging described above.
Interest income and interest payable is recognised in the income statement as it accrues, using the effective interest method.
The Group determines the net interest expense on the net defined benefit liability for the period by applying the discount
rate used to measure the defined benefit obligation at the beginning of the annual period to the then net defined benefit
liability, taking into account any changes in the net defined benefit liability during the period as a result of contributions and
benefit payments.
Dividends
Paid
Interim and final dividends are recognised when they are paid or when approved by the members in a general meeting. Final
dividends proposed by the Board and unpaid at the end of the year are not recognised in the financial statements.
Received
The Company receives dividends from its UK and Continental European subsidiaries. Dividends are recognised in the financial
statements when they have been received by the Company.
Headlam Group plc Annual report and accounts 2018
99
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
1 Accounting policies continued
Taxation
Income tax comprises 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 Statement of Financial Position 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. Deferred tax is not recognised for the following temporary differences:
the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting
nor taxable profit; and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse
in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial
recognition of goodwill.
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 Statement of Financial Position date.
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.
Non-underlying items
In order to illustrate the underlying trading performance of the Group, presentation has been made of performance measures
excluding those items which it is considered would distort the comparability of the Group’s results. These non-underlying items
are defined as those items that, by virtue of their nature, size or expected frequency, warrant separate additional disclosure in the
financial statements in order to fully understand the underlying performance of the Group.
2 Segment reporting
As at 31 December 2018, the Group had 63 operating segments in the UK and four operating segments in Continental Europe.
Each segment represents an individual trading operation, and each operation is wholly aligned to the sales, marketing, supply and
distribution of floorcovering products. The operating results of each operation are regularly reviewed by the Chief Operating
Decision Maker, which is deemed to be the Group Chief Executive. Discrete financial information is available for each segment
and used by the Group Chief Executive to assess performance and decide on resource allocation.
The operating segments have been aggregated to the extent that they have similar economic characteristics. The key
economic indicators considered by management in assessing whether operating segments have similar economic
characteristics are the products supplied, the type and class of customer, method of sale and distribution and the regulatory
environment in which they operate.
As each operating segment is a trading operation wholly aligned to the sales, marketing, supply and distribution of floorcovering
products, management considers all segments have similar economic characteristics except for the regulatory environment in
which they operate, which is determined by the country in which the operating segment resides.
The Group’s internal management structure and financial reporting systems differentiate the operating segments on the basis
of the differing economic characteristics in the UK and Continental Europe and accordingly present these as two separate
reportable segments. This distinction is embedded in the construction of operating reports reviewed by the Group Chief
Executive, the Board and the executive management team and forms the basis for the presentation of operating segment
information given below.
Revenue
External revenues
Reportable segment underlying
operating profit
Reportable segment assets
Reportable segment liabilities
UK
Continental Europe
Total
2018
£000
Restated*
2017
£000
2018
£000
Restated*
2017
£000
2018
£000
Restated*
2017
£000
604,150
593,476
104,273
99,064
708,423
692,540
45,163
44,765
488
1,271
45,651
46,036
304,645
(168,184)
297,325
(179,016)
42,591
(25,219)
44,515
(25,021)
347,236
(193,403)
341,840
(204,037)
* The results for the year ended 31 December 2017 have been restated to reflect changes made for the year ended 31 December 2018
reported in note 1.
100 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
During the year there were no inter-segment revenues for the reportable segments (2017: £nil).
Reconciliations of reportable segment profit, assets and liabilities and other material items:
Profit for the year
Total profit for reportable segments
Non-underlying items
Unallocated expense
Operating profit
Finance income
Finance expense
Profit before taxation
Taxation
Profit for the year
Assets
Total assets for reportable segments
Unallocated assets:
Properties, plant and equipment
Deferred tax assets
Cash and cash equivalents
Total assets
Liabilities
Total liabilities for reportable segments
Unallocated liabilities:
Employee benefits
Income tax payable
Deferred tax liabilities
Total liabilities
Other material items 2018
Capital expenditure
Depreciation
Non-underlying items
Other material items 2017
Capital expenditure
Depreciation
Non-underlying items
2018
£000
2017
£000
45,651
(2,942)
(1,378)
41,331
709
(1,593)
40,447
(6,943)
33,504
46,036
(2,399)
(2,253)
41,384
578
(1,243)
40,719
(7,797)
32,922
2018
£000
2017
£000
347,236
341,840
88,879
516
12,573
89,379
648
16,646
449,204
448,513
(193,403)
(204,037)
(5,888)
(6,730)
(8,063)
(12,716)
(6,339)
(6,847)
(214,084)
(229,939)
UK
£000
2,579
2,058
1,262
2,443
1,933
1,722
Continental
Europe
£000
Reportable
segment total
£000
Unallocated
£000
Consolidated
total
£000
1,139
751
466
615
690
677
3,718
2,809
1,728
3,058
2,623
2,399
666
2,466
1,214
–
2,291
–
4,384
5,275
2,942
3,058
4,914
2,399
In the UK the Group’s freehold properties are held within Headlam Group plc and a rent is charged to the operating segments
for the period of use. Therefore, the operating reports reviewed by the Group Chief Executive show all the UK properties as
unallocated and the operating segments report a segment result that includes a property rent. This is reflected in the
above disclosure.
Each segment is a continuing operation.
The Group Chief Executive, the Board and the senior executive management team have access to information that provides
details on revenue by principal product group for the two reportable segments, as set out in the following table:
Headlam Group plc Annual report and accounts 2018
101
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
2 Segment reporting continued
Revenue by principal product group and geographic origin is summarised below:
Revenue
Residential
Commercial
UK
Continental Europe
Total
2018
£000
400,710
203,440
604,150
Restated*
2017
£000
417,799
175,677
593,476
2018
£000
57,046
47,227
104,273
Restated*
2017
£000
52,074
46,990
99,064
2018
£000
457,756
250,667
708,423
Restated*
2017
£000
469,873
222,667
692,540
* The results for the year ended 31 December 2017 have been restated to reflect changes made for the year ended 31 December 2018
reported in note 1.
3 Profit before tax
The following are included in profit before tax:
Depreciation on property, plant and equipment
Amortisation of intangible assets
Profit on sale of property, plant and equipment
Operating lease rentals
Plant and machinery
Land and buildings
2018
£000
5,275
1,763
(50)
2017
£000
4,914
931
(45)
11,923
3,566
11,014
2,197
Non-underlying items of £2,942,000 relate to non-recurring costs relating to personnel changes, GMP equalisation, a release of
contingent consideration, intangibles amortisation relating to businesses acquired acquisitions fees, and the related tax of
£807,000 on these costs, see table below.
Non-recurring people costs
GMP equalisation
Release of contingent consideration
Amortisation of acquired intangibles
Acquisitions related fees
Auditor’s remuneration:
Audit of these financial statements
Amounts received by the Auditor and their associates in respect of:
Audit of financial statements of subsidiaries of the Company
Corporate finance services
2018
£000
836
1,214
(1,384)
1,763
513
2,942
2018
£000
111
276
–
387
2017
£000
677
–
–
931
791
2,399
2017
£000
87
175
91
353
102 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
4 Staff numbers and costs
The average number of people employed, including Executive Directors, during the year, analysed by category, was as follows:
Number of employees
Group
Company
2018
2017
2018
2017
By sector:
Floorcoverings
Central operations
By function:
Sales and distribution
Administration
The aggregate payroll costs were as follows:
Wages and salaries
Equity settled share-based payment expense (note 21)
Social security costs
Pension costs (note 20)
2,593
22
2,615
2,401
214
2,615
2,430
19
2,449
2,276
173
2,449
–
22
22
–
22
22
Group
Company
2018
£000
84,147
1,478
10,775
6,839
103,239
2017
£000
80,961
1,218
10,402
5,126
97,707
2018
£000
2,801
739
445
1,967
5,952
2018
£000
1,652
638
2,290
–
19
19
–
19
19
2017
£000
3,383
403
538
883
5,207
2017
£000
2,474
507
2,981
5 Emoluments of key management personnel
Executive and Non-Executive Directors are considered to be the key management personnel of the Group.
Short-term employee benefits
Equity settled share-based payment expense
Short-term employee benefits comprise salary and benefits earned during the year and bonuses awarded for the year. Further
details on Directors’ remuneration, share options and long-term incentive schemes are disclosed in the Remuneration Report on
pages 64 to 72.
6 Finance income and expense
Interest income:
Bank interest
Other
Finance income
Interest expense:
Bank loans, overdrafts and other financial expenses
Net interest on defined benefit plan obligations (note 20)
Other
Finance expenses
2018
£000
709
–
709
(1,331)
(232)
(30)
(1,593)
2017
£000
540
38
578
(770)
(473)
-
(1,243)
Headlam Group plc Annual report and accounts 2018
103
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
7 Taxation
Recognised in the income statement
Current tax expense:
Current year
Adjustments for prior years
Deferred tax expense:
Origination and reversal of temporary differences
Effect of change in tax rates
Adjustments for prior years
Total tax in income statement
Tax relating to items (charged)/credited to equity
Current tax on:
Income and expenses recognised directly in equity
Deferred tax on:
Share options
Income and expenses recognised directly in equity
Deferred tax on other comprehensive income:
Defined benefit plans
Cash flow hedge
Total tax reported directly in reserves
2018
£000
2017
£000
8,775
(810)
7,965
(938)
–
(84)
(1,022)
6,943
2018
£000
(38)
169
46
1,628
–
1,805
8,548
(567)
7,981
(39)
(27)
(118)
(184)
7,797
2017
£000
(150)
(138)
(18)
1,729
(43)
1,380
Factors that may affect future current and total tax charges
The UK headline corporation tax rate for the period was 19% (2017: 19.25%). The UK tax rate will be further reduced to 17% with
effect from 1 April 2020 which was enacted during 2016. The majority of the deferred tax balance in respect of UK entities has
therefore been calculated at 17% (2017: 17%) on the basis that most of the balances will materially reverse after 1 April 2020.
In addition, a reduction in the French corporation tax rate to 25% by 2022 was enacted in December 2017 which has also been
taken into account in the calculation of the related deferred tax balance.
Reconciliation of effective tax rate
Profit before tax
Tax using the UK corporation tax rate
Effect of change in UK tax rate
Effect of change in overseas tax rate
Non-deductible expenses
Effect of tax rates in foreign jurisdictions
Adjustments in respect of prior years
Total tax in income statement
Add back tax on non-underlying items
Total tax charge excluding non-underlying items
Profit before non-underlying items
Adjusted expected tax rate excluding non-underlying items
104 Headlam Group plc Annual report and accounts 2018
2018
%
19.0
0.0
(0.9)
1.3
0.0
(2.2)
17.2
£000
40,447
7,685
20
(382)
516
(2)
(894)
6,943
807
7,750
43,389
17.86%
2017
%
19.3
(0.1)
(0.1)
1.6
0.1
(1.7)
19.1
£000
40,719
7,836
(30)
(27)
646
57
(685)
7,797
179
7,976
43,118
18.50%
Overview
Strategic Report
Governance
Financial Statements
8 Current tax liabilities
The Group’s current tax liability of £6,730,000 (2017: £6,339,000) represents the amount of income tax payable in respect
of current and prior year periods which exceed any amounts recoverable. The Company’s current tax liability of £394,000
(2017: £1,329,000) represents the amount of income tax payable in respect of current and prior year periods which exceed any
amounts recoverable.
At 31 December 2018, the Group held a current provision of £1,726,859 (2017: £2,342,715) in respect of uncertain tax provisions.
Liabilities relating to these open and judgmental matters are based on an assessment as to whether additional taxes will be due,
after taking into account external advice where appropriate. The Group expects this uncertain tax provision to decrease in the
next 12 months.
9 Earnings per share
Earnings
Earnings for underlying basic and underlying diluted earnings per share
Earnings for basic and diluted earnings per share
Number of shares
Issued ordinary shares at 31 December
Effect of weighted average of shares held in treasury
2018
£000
35,639
33,504
2017
£000
35,142
32,922
2018
2017
85,363,743
(1,501,085)
85,363,743
(1,183,451)
Weighted average number of ordinary shares for the purposes of basic earnings per share
83,862,658
84,180,292
Effect of diluted potential ordinary shares:
Weighted average number of ordinary shares at 31 December
Dilutive effect of share options
83,862,658
674,621
84,180,292
549,488
Weighted average number of ordinary shares for the purposes of diluted earnings per share
84,537,279
84,729,780
Earnings per share
Basic
Diluted
40.0p
39.6p
39.1p
38.9p
At 31 December 2018, the Company held 1,523,370 shares (2017: 856,458) in relation to treasury stock and shares held in trust
for satisfying options and awards under employee share schemes. These shares have been disclosed in the treasury reserve and
are excluded from the calculation of earnings per share.
Headlam Group plc Annual report and accounts 2018
105
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
10 Property, plant and equipment
Group property, plant and equipment
Cost
Balance at 1 January 2017
Acquisitions
Additions
Disposals
Reclassification
Effect of movements in foreign exchange
Balance at 31 December 2017
Balance at 1 January 2018
Acquisitions
Additions
Disposals
Reclassification
Effect of movements in foreign exchange
Balance at 31 December 2018
Depreciation and impairment
Balance at 1 January 2017
Depreciation charge for the year
Disposals
Reclassification
Effect of movements in foreign exchange
Balance at 31 December 2017
Balance at 1 January 2018
Depreciation charge for the year
Disposals
Effect of movements in foreign exchange
Balance at 31 December 2018
Net book value
At 1 January 2017
At 31 December 2017 and 1 January 2018
At 31 December 2018
Land and
buildings
£000
Plant and
equipment
£000
Under
construction
£000
118,436
451
204
(23)
928
(129)
119,867
119,867
1,021
396
(272)
–
447
36,046
418
2,762
(1,257)
(928)
97
37,138
37,138
300
3,514
(931)
90
221
121,459
40,332
25,279
2,284
(23)
205
8
27,753
27,753
2,466
–
199
26,269
2,630
(1,113)
(205)
129
27,710
27,710
2,809
(850)
130
30,418
29,799
93,157
92,114
91,041
9,777
9,428
10,533
–
–
92
–
–
(3)
89
89
–
474
–
(90)
1
474
–
–
–
–
–
–
–
–
–
–
–
–
89
474
Total
£000
154,482
869
3,058
(1,280)
–
(35)
157,094
157,094
1,321
4,384
(1,203)
–
669
162,265
51,548
4,914
(1,136)
–
137
55,463
55,463
5,275
(850)
329
60,217
102,934
101,631
102,048
At 31 December 2018, the cost less accumulated depreciation of long leasehold property held by the Group was £7,250,000
(2017: £7,430,000).
106 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Company investment properties and plant and equipment
Cost
Balance at 1 January 2017
Disposals
Balance at 31 December 2017
Balance at 1 January 2018
Additions
Disposals
Balance at 31 December 2018
Depreciation
Balance at 1 January 2017
Depreciation charge for the year
Disposals
Balance at 31 December 2017
Balance at 1 January 2018
Depreciation charge for the year
Disposals
Balance at 31 December 2018
Net book value
At 1 January 2017
At 31 December 2017 and 1 January 2018
At 31 December 2018
Investment
properties
£000
103,396
–
103,396
103,396
190
–
103,586
18,561
1,692
–
20,253
20,253
1,686
–
21,939
84,835
83,143
81,647
Plant and
equipment
£000
Under
construction
£000
72
(62)
10
10
2
(3)
9
36
5
(33)
8
8
2
(3)
7
36
2
2
–
–
–
–
474
–
474
–
–
–
–
–
–
–
–
–
–
474
Total
£000
72
(62)
10
10
476
(3)
483
36
5
(33)
8
8
2
(3)
7
36
2
476
At 31 December 2018, the cost less accumulated depreciation of long leasehold property held by the Company was £7,250,000
(2017: £7,430,000).
Investment properties were last valued by an independent professional valuer on 17 January 2017. The valuation of the
investment properties at that date was £85.3 million. The Company will obtain an updated valuation for the year ended 31
December 2019.
Headlam Group plc Annual report and accounts 2018
107
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
11 Intangible assets – group
Cost
Balance at 1 January 2017
Addition (note 24)
Balance at 31 December 2017
Balance at 1 January 2018
Addition (note 24)
Balance at 31 December 2018
Amortisation
Balance at 1 January 2017
Charge for the year
Balance at 31 December 2017
Balance at 1 January 2018
Charge for the year
Balance at 31 December 2018
Net book value
At 31 December 2017 and 1 January 2018
At 31 December 2018
Goodwill
£000
Order book
£000
Customer
relationships
£000
Brand
names
£000
–
4,996
4,996
4,996
1,950
6,946
–
28
28
28
450
478
–
5,443
5,443
5,443
1,345
6,788
–
45
45
45
659
704
5,398
6,084
4,968
6,468
Non-
compete
£000
–
–
–
–
31
31
–
–
–
–
4
4
27
Total
£000
18,417
35,205
53,622
53,622
8,025
61,647
8,029
931
8,960
8,960
1,763
10,723
44,662
50,924
13,585
23,396
36,981
36,981
4,427
41,408
3,197
–
3,197
3,197
–
3,197
33,784
38,211
4,832
1,370
6,202
6,202
272
6,474
4,832
858
5,690
5,690
650
6,340
512
134
Cumulative impairment losses recognised in relation to goodwill is £3,197,000 (2017: £3,197,000).
Impairment tests for cash-generating units containing goodwill (‘CGU’)
Goodwill is attributed to the businesses identified below for the purpose of testing impairment. These businesses are the lowest
level at which goodwill is monitored and represent operating segments.
The aggregate carrying amounts of goodwill allocated to each CGU are as follows:
Joseph, Hamilton & Seaton
Crucial Trading
Belcolor AG
Domus Group of Companies Limited
Mitchell Carpets Limited
McMillan Flooring
CECO (Flooring) Limited
Dersimo BV
Ashmount Flooring Supplies Limited
Rackhams Limited
Other
Reported
segment
UK
UK
Continental Europe
UK
UK
UK
UK
Continental Europe
UK
UK
UK
2018
£000
4,348
1,369
3,342
22,955
345
96
2,240
1,313
437
410
1,366
38,221
2017
£000
4,348
1,369
3,342
22,955
345
96
–
–
–
–
1,329
33,784
Impairment
Each year, or whenever events or a change in the economic environment or performance indicates a risk of impairment, the
Group reviews the value of goodwill balances allocated to its cash-generating units.
An impairment test is a comparison of the carrying value of the assets of a business or CGU to their recoverable amount. The
recoverable amount represents the higher of the CGU’s fair value less the cost to sell and value in use. Where the recoverable
amount is less than the carrying value, an impairment results. During the year, all goodwill was tested for impairment, with no
impairment charge resulting (2017: no impairment).
Value in use was determined by discounting the future cash flows generated from the continuing use of the CGU on a basis
consistent with 2017, and applying the following key assumptions.
108 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Key assumptions
Cash flows were projected based on actual operating results, the approved 2019 business plan and management’s assessment
of planned performance in the period to 2023. For the purpose of impairment testing the cash flows were assumed to grow into
perpetuity at a rate of 2.0% beyond 2023.
The main assumptions within the operating cash flows used for 2019 include the achievement of future sales volumes and prices
for all key product lines, control of purchase prices, achievement of budgeted operating costs and no significant adverse foreign
exchange rate movements. These assumptions have been reviewed in light of the current economic environment.
The Directors have estimated the discount rate by reference to an industry average weighted average cost of capital. This has
been adjusted to include an appropriate risk factor to reflect current economic circumstances and the risk profile of the CGUs. A
pre-tax weighted average cost of capital of 10.7% (2017: 10.4%) has been used for impairment testing adjusted to 11.6% (2017:
11.3%) for Continental Europe to reflect the differing risk profile of that segment. The pre-tax discount rate has been applied to
the pre-tax cash flows.
The CGUs in the UK have similar characteristics and risk profiles, and therefore a single discount rate has been applied to each
UK CGU. Similarly, the Directors view the CGUs in Continental Europe as having consistent risk profiles and therefore a single risk
factor has been applied. The CGUs in Continental Europe operate under a different regulatory environment and this is therefore
reflected in the risk factor used to determine the discount rates in the UK and Continental Europe.
Sensitivity analysis
The Group has applied sensitivities to assess whether any reasonable possible changes in these key assumptions could cause an
impairment that would be material to these Consolidated Financial Statements. The sensitivity analyses did not identify any risk
of material impairment.
12 Investments in subsidiaries
Summary information on investments in subsidiary undertakings is as follows:
Cost
Balance at 1 January 2017
Share options granted to employees of subsidiary undertakings
Acquisitions (note 24)
Balance at 31 December 2017
Balance at 1 January 2018
Share options granted to employees of subsidiary undertakings
Balance at 31 December 2018
Carrying value
At 1 January 2017
At 31 December 2017
At 31 December 2018
£000
90,707
815
29,118
120,640
120,640
740
121,380
90,707
120,640
121,380
A full list of the Group’s subsidiaries are listed on page 133. There were no impairments recognised on the Company’s
investments in subsidiaries in the year ended 31 December 2018.
Headlam Group plc Annual report and accounts 2018
109
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
13 Deferred tax assets and liabilities
Group
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Assets
Liabilities
Property, plant and equipment
Intangible assets
Employee benefits
Other items
Tax assets/(liabilities)
Set-off of tax
Movement in deferred tax during the year
Property, plant and equipment
Intangible assets
Employee benefits
Other items
Movement in deferred tax during the prior year
Property, plant and equipment
Intangible assets
Employee benefits
Hedging
Other items
2018
£000
–
–
1,315
–
1,315
(799)
516
2017
£000
–
–
2,892
558
3,450
(2,802)
648
1 January
2018
£000
(7,552)
(2,097)
2,892
558
(6,199)
1 January
2017
£000
(7,871)
(180)
4,792
(40)
360
(2,939)
Company
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
2018
£000
(6,146)
(2,399)
–
(317)
(8,862)
799
(8,063)
2017
£000
(7,552)
(2,097)
–
–
(9,649)
2,802
(6,847)
Net
2018
£000
(6,146)
(2,399)
1,315
(317)
(7,547)
–
(7,547)
2017
£000
(7,552)
(2,097)
2,892
558
(6,199)
–
(6,199)
Brought in on
acquisition
£000
Recognised in
income
£000
Recognised
in equity
£000
31 December
2018
£000
–
(614)
–
87
(527)
1,406
315
220
(919)
1,022
–
(3)
(1,797)
(43)
(1,843)
(6,146)
(2,399)
1,315
(317)
(7,547)
Brought in on
acquisition
£000
Recognised
income
£000
Recognised
in equity
£000
31 December
2017
£000
–
(2,078)
–
–
164
(1,914)
255
161
(266)
–
34
184
64
–
(1,634)
40
–
(1,530)
(7,552)
(2,097)
2,892
–
558
(6,199)
Property, plant and equipment
Employee benefits
Other items
Tax assets/(liabilities)
Set-off of tax
Assets
Liabilities
2018
£000
–
647
38
685
(685)
–
2017
£000
–
1,795
54
1,849
(1,849)
–
2018
£000
(6,172)
–
–
(6,172)
685
(5,487)
2017
£000
(6,287)
–
–
(6,287)
1,849
(4,438)
Net
2018
£000
(6,172)
647
38
(5,487)
–
(5,487)
2017
£000
(6,287)
1,795
54
(4,438)
–
(4,438)
110 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Movement in deferred tax during the year
Property, plant and equipment
Employee benefits
Other items
Movement in deferred tax during the prior year
Property, plant and equipment
Employee benefits
Hedging
Other items
1 January
2018
£000
(6,287)
1,795
54
(4,438)
1 January
2017
£000
(6,571)
3,324
(40)
48
(3,239)
Recognised
in income
£000
Recognised
in equity
£000
31 December
2018
£000
115
299
(16)
398
–
(1,447)
–
(1,447)
(6,172)
647
38
(5,487)
Recognised
in income
£000
Recognised
in equity
£000
31 December
2017
£000
284
(279)
–
6
11
–
(1,250)
40
–
(1,210)
(6,287)
1,795
–
54
(4,438)
Unrecognised deferred tax assets and liabilities – Group and Company
At the Statement of Financial Position date, the Group and Company has unused capital losses of £11,197,000 (2017: £10,797,000)
available for offset against future chargeable gains. In addition to these there are Dutch tax losses of £1,273,000 (2017: £705,000)
and French tax losses of £1,376,000 (2017 £1,125,000). The Directors have considered the probability that the deferred tax assets
would be recoverable and concluded that no deferred tax assets should be recognised in respect of these amounts at this time.
14 Inventories
Goods for resale
Balance as at 31 December
Cost of sales consists of the following:
Material cost
Processing cost
Group
2018
£000
2017
£000
132,704
131,566
Group
2018
£000
475,701
3,648
479,349
2017
£000
472,208
2,228
474,436
Company
2018
£000
–
Company
2018
£000
–
–
–
2017
£000
–
2017
£000
–
–
–
The cost of inventories within cost of sales stated above includes movements in the provision for obsolete inventory of £211,000
release (2017: £727,000 release).
Headlam Group plc Annual report and accounts 2018
111
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
15 Trade and other receivables
Trade receivables
Prepayments and accrued income
Other receivables
Derivative assets used for economic hedging:
Other derivatives at fair value
Amounts due from subsidiary undertakings
Group
Company
2018
£000
89,100
4,924
24,983
–
–
2017
£000
94,652
5,105
28,211
8
–
119,007
127,976
2018
£000
–
274
213
2017
£000
–
392
468
–
23,004
23,491
–
20,460
21,320
Other receivables include balances totaling £145,000 that fall due after more than 1 year (2017: £120,000).
£1,281,000 (2017: £1,198,000) was recognised as an impairment loss in the Consolidated Income Statement in respect of trade
receivables.
The impairment loss is attributable to the reportable segments as follows:
UK
Continental Europe
16 Cash and cash equivalents
2018
£000
1,009
272
1,281
2017
£000
995
203
1,198
Cash
Bank overdrafts
Cash and cash equivalents per Statement of Financial Position
Group
2018
£000
44,005
(221)
43,784
2017
£000
42,030
–
42,030
Company
2018
£000
12,573
–
12,573
2017
£000
16,646
–
16,646
17 Other interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group’s and Company’s interest-bearing loans
and borrowings.
On 7 December 2017, the Group completed a refinancing to increase its existing facilities; this was to maintain sufficient
headroom throughout the year whilst allowing funds for the Groups acquisition and investment initiatives. The Group has
maintained two separate agreements with Barclays Bank PLC and HSBC Bank Plc and these include both Sterling and Euro term
facilities. The Group’s additional funding, increased the level of Sterling committed facilities from £47.5 million to £72.5 million,
alongside its Euro facilities of €8.6 million. The Group’s latest banking arrangements run to 7 December 2021. The Group also has
short term uncommitted facilities which continue at £25 million, and are renewable on an annual basis. The total banking facilities
available to the Group at 31 December 2018 were £112,779,000 (2017: £112,464,000).
For more information about the Group’s and Company’s exposure to interest rate and foreign currency risk, see note 23.
Current liabilities
Bank overdraft
Interest-bearing loan
Non-current liabilities
Interest-bearing loans
112 Headlam Group plc Annual report and accounts 2018
Group
2018
£000
221
236
457
2017
£000
–
233
233
6,805
6,805
6,519
6,519
Company
2018
£000
2017
£000
–
–
–
–
–
–
–
–
–
–
Overview
Strategic Report
Governance
Financial Statements
The Group has undrawn borrowing facilities at 31 December 2018, which amounted to £105,517,000 (2017: £105,712,000).
The facility conditions for drawdown had been met during the period. The facility is unsecured and there is a cross guarantee in
place between the Company and its UK, French and Dutch subsidiaries. There is a downstream guarantee from the Company in
relation to its borrowing facility in the Netherlands and France. Covenant calculations have been prepared for the year ending
31 December 2018 and there were no breaches.
The undrawn borrowing facilities are as follows:
UK
Netherlands
France
Switzerland
Interest
rate
%
1.80
1.98
1.30
1.50
2018
£000
97,500
1,563
2,472
3,983
105,518
Interest
rate
%
1.57
2.03
1.30
1.65
2017
£000
97,500
1,313
3,107
3,792
105,712
All the borrowing facilities above bear interest at floating rates. The Swiss facility may be drawn as an overdraft or fixed rate loan
with different rates depending on the term and amount.
Changes in net funds
Cash at bank and in hand
Bank overdraft
Debt due within one year
Debt due after one year
18 Trade and other payables
Current
Trade payables
Taxation and social security
Non-trade payables and accrued expenses
Amounts due to subsidiary undertakings
Derivative liabilities used for economic hedging:
Other derivatives at fair value
At
1 January 2018
£000
Cash flows
£000
Acquisitions
£000
Foreign
exchange
movements
£000
At
31 December
2018
£000
42,030
–
42,030
(233)
(6,519)
35,278
(831)
(218)
(1,049)
–
(211)
2,615
–
2,615
–
–
(1,260)
2,615
191
(3)
188
(3)
(75)
110
44,005
(221)
43,784
(236)
(6,805)
36,743
Group
2018
£000
142,382
17,069
21,826
–
2017
£000
149,594
17,954
22,751
–
Company
2018
£000
788
2,114
4,424
26,900
2017
£000
1,343
2,112
3,519
34,806
23
–
–
–
181,300
190,299
34,226
41,780
Included within current non-trade payables and accrued expenses is an amount of £nil for accrued interest on unsecured bank
loans (2017: £nil).
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 23.
Non-current
Non-trade payables and accrued expenses
Group
Company
2018
£000
2,592
2,592
2017
£000
4,938
4,938
2018
£000
2,007
2,007
2017
£000
4,938
4,938
Non-current non-trade payables and accrued expenses for the Group in 2018 relate to discounted deferred consideration for
Domus Group of Companies Limited and Betu Holdings Limited, the holding company of CECO (Flooring) Limited, see note 24
(2017: Domus Group of Companies Limited). The Company has discounted deferred consideration for Domus Group of
Companies Limited in both 2018 and 2017.
Headlam Group plc Annual report and accounts 2018
113
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
19 Provisions
Balance at 1 January
Acquired on acquisition
Charged/(credited) to the income statement:
Additional provisions
Utilisation of provisions
Balance at 31 December
The property provisions relate to property dilapidations.
Property
2018
£000
2,048
224
–
(23)
2,249
2017
£000
1,531
195
322
–
2,048
20 Employee benefits
During the year, the Group operated UK and Swiss defined benefit plans and defined contribution plans in the UK, France and
the Netherlands.
UK defined benefit plan
The Headlam Group plc Staff Retirement Benefits Scheme is the principal defined benefit plan which provides pensions in
retirement and death benefits to members. The majority of members are entitled to receive pensions from age 65, equal to
either 1/50 or 1/60 of final salary for each year of service that the employee provided, depending on which section of the plan the
member is part of.
The plan is a registered scheme under UK legislation. The plan is legally separated from the Company and assets are held
independently of the Company’s finances.
The plan is subject to the scheme funding requirements outlined in UK legislation.
The Company has a right to a refund of any surplus in the plan if the plan winds up, after payment of expenses, members benefits
and any enhancements to the members’ benefits as the Trustee sees fit. In addition, if the assets of the plan exceed the estimate
by the actuary of the cost of buying out the benefits of all beneficiaries with an insurance company, including the associated
expenses, and the plan is not being wound up, then the Company may request a payment of the excess funds. There have been
no payments made to the Company out of the plan’s assets over the year, and so no additional liability has been recognised on
the balance sheet.
There have been no amendments, curtailments or settlements made to the plan during 2018.
The plan holds a number of annuity policies which match a portion of the pensions in payment.
The plan is funded partly by contributions from members and partly by contributions from the Company at rates advised by
professionally qualified actuaries. The last scheme funding valuation of the plan was as at 31 March 2017 and revealed a funding
deficit of £2,388,000.
The main annual rate assumptions at 31 March 2017 used by the actuary for the 2017 valuation were: increase in salaries 4.69%;
increase of pensions in payment 3.19%; discount rate before retirement 3.66%; discount rate after retirement 1.91%; and inflation
3.19%.
Under the schedule of contributions dated 10 May 2018, Company contributions were fixed at 51.6% of pensionable salaries each
month. The Company is expected to pay contributions of £1,170,000 over the next accounting period for the accrual of benefits.
In accordance with the recovery plan dated 26 March 2015, payments were made to the plan during 2018 of £747,000 towards the
deficit.
Under the recovery plan dated 10 May 2018 the Company is not due to pay any contributions over the next year.
In addition, the Company is expected to meet the cost of administrative expenses and insurance premiums for the plan.
The liabilities of the plan are based on the current value of expected benefit payment cash flows to members of the plan over the
next 60 years or more. The weighted average duration of the liabilities is approximately 19 years.
114 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Swiss defined benefit plan
The plan provides occupational retirement, disability and survivors’ benefits. The members are entitled to receive pensions from
age 64 (female) or 65 (male), equal to the old age savings balance multiplied with a conversion rate of 6.8% for the mandatory part
of the savings balance and 5.2% for the part beyond the mandatory part. The minimum interest rate on old age savings has legally
been fixed.
The Company is affiliated to the Collective Foundation Sammelstiftung berufliche Vorsorge Swiss Life, Sammelstiftung mit
Anlagerisiko. The pension plans remained unchanged. The plan is legally separated from the Company. The executive body of the
collective foundation is the board of trustees, which is elected directly by the insured of the affiliated companies/occupational
benefits funds and functions independently of Swiss Life. Its members include employer and employee representatives from a
wide range of occupations and companies of different sizes. The collective foundation is reinsured for risk benefits with Swiss Life
insurance company.
There have been no amendments, curtailments or settlements made to the plan during 2018.
The occupational benefits fund commission (OBC) defines the investment strategy; the affiliated occupational benefits fund
itself bears the investment risk. The investments are managed with Credit Suisse.
The last scheme funding valuation of the plan was as at 31 December 2018 and revealed that the plan was overfunded. This
overfunding is appropriate to Swiss legislation and cannot be considered in the context of IAS 19R. According to Swiss rules there
is no need to evaluate the scheme using assumptions for future changes of salary increase, benefit increase or inflation.
The last IAS 19 valuation at year-end 2018 revealed a funding deficit of £2,965,000 (2017: £2,591,000). The Group is expected to
pay £338,000 for future service costs over the next accounting period.
The liabilities of the plan are based on the current value of expected benefit payment cash flows to members of the plan over the
next 50 years or more. The weighted average duration of the liabilities is approximately 19.55 years.
Defined benefit obligation
In the UK there is no contractual agreement or stated Group policy for allocating the net defined benefit liability between the
participating subsidiaries and as such the full deficit is recognised by the Company, which is the sponsoring employer. The
participating subsidiary companies have recognised a cost equal to contributions payable for the period as advised by a
professionally qualified actuary. The Company recognises a cost equal to its contributions payable for the period net of amounts
recharged in relation to the Group deficit to the participating subsidiary companies.
Present value of funded defined benefit obligations
Fair value of plan assets
Net obligations
Other long-term employee benefits
Total employee benefits
Analysed as:
Current liabilities
Non-current liabilities
Total employee benefits
Group
2018
£000
2017
£000
Company
2018
£000
2017
£000
(125,101)
119,576
(139,048)
126,709
(111,592)
109,031
(126,308)
116,560
(5,525)
(12,339)
(2,561)
(9,748)
(363)
(377)
–
–
(5,888)
(12,716)
(2,561)
(9,748)
–
(5,888)
(5,888)
(2,235)
(10,481)
(12,716)
–
(2,561)
(2,561)
(2,235)
(7,513)
(9,748)
Headlam Group plc Annual report and accounts 2018
115
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
20 Employee benefits continued
Movements in present value of defined benefit obligation
At 1 January
Current service cost
Past service costs
Interest cost
Net remeasurement losses/(gains) – financial
Net remeasurement (gains)/losses – demographic
Net remeasurement (gains)/losses – experience
Benefits paid
Contributions by members
Effect of movements in foreign exchange
Group
2018
£000
139,048
2,254
1,214
3,063
(14,874)
(1,005)
281
(5,914)
370
664
2017
£000
141,947
2,488
(511)
3,479
6,827
(4,598)
(6,552)
(3,740)
384
(676)
Company
2018
£000
126,308
1,462
1,214
2,966
(14,464)
(1,006)
553
(5,577)
136
–
2017
£000
128,002
1,628
–
3,410
7,527
(4,598)
(6,221)
(3,592)
152
–
At 31 December
125,101
139,048
111,592
126,308
Movements in fair value of plan assets
At 1 January
Interest income on plan assets
Return on assets, excluding interest income
Contributions by employer:
Future service contributions
Past service deficit contributions
Contributions by members
Benefits paid
Effect of movements in foreign exchange
At 31 December
The fair value of the plan assets were as follows:
Equities
Government debt
Corporate bonds
Annuities
Hedge funds
Other
Group
2018
£000
126,709
2,831
(7,036)
1,351
747
370
(5,914)
518
2017
£000
119,339
3,006
4,804
1,222
2,164
384
(3,740)
(470)
Company
2018
£000
116,560
2,753
(6,619)
1,031
747
136
(5,577)
–
2017
£000
109,719
2,957
4,265
895
2,164
152
(3,592)
–
119,576
126,709
109,031
116,560
Group
Company
2018
£000
36,557
18,244
19,209
4,870
22
40,674
2017
£000
58,062
14,760
29,630
5,074
2,918
16,265
2018
£000
33,577
18,244
14,829
4,870
22
37,489
2017
£000
55,194
14,760
25,415
5,074
2,918
13,199
119,576
126,709
109,031
116,560
Expense recognised in the income statement relating to defined benefit obligation
Service cost
Net interest on the net defined benefit liability (note 6)
Total
Group
2018
£000
3,468
232
3,700
2017
£000
1,977
473
2,450
Service costs and net interest are charged to Administration expenses and Net finance costs respectively. Included within the
service cost for 2018 is an amount of £1,214,000 for guaranteed minimum pensions (‘GMP') equalisation, this is included within
non-underlying costs. GMPs must be equalised across males and females, and as a result of clarity in legislation the Company
have added 1.1% to the liabilities as at 31 December 2018.
116 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Group
2018
£000
(14,874)
(1,005)
281
7,036
(8,562)
2017
£000
6,827
(4,598)
(6,552)
(4,804)
(9,127)
Swiss
2018
%
0.8
2.0
–
2.0
–
2017
%
0.8
2.0
–
2.0
–
Remeasurement of the net defined benefit liability in the Statement of Comprehensive Income:
Net remeasurement – financial
Net remeasurement – demographic
Net remeasurement – experience
Return on assets, excluding interest income
Principal actuarial assumptions are as follows:
Discount rate
Future salary increases
Future pension increases
Inflation rate
Mortality table assumptions:
UK pre-retirement
UK post-retirement –
future pensioners
UK post-retirement –
current pensioners
UK
2018
%
2.7
3.4
3.4
3.4
2017
%
2.4
4.9
3.4
3.4
AC00 (Ultimate)
table
AC00 (Ultimate)
table
96%(M)/98%(F) of
the S2PA tables
with future
improvements
from 2007 in-line
with the CMI
mortality
projections
model CMI_2017
with a long-term
rate of
improvement of
1.5% per annum.
96%(M)/98%(F) of
the S2PA tables
with future
improvements
from 2007 in-line
with the CMI
mortality
projections
model CMI_2017
with a long-term
rate of
improvement of
1.5% per annum.
96%(M)/98%(F) of
the S2PA tables
with future
improvements
from 2007 in-line
with the CMI
mortality
projections model
CMI_2016 with a
long-term rate of
improvement of
1.5% per annum.
96%(M)/98%(F) of
the S2PA tables
with future
improvements
from 2007 in-line
with the CMI
mortality
projections model
CMI_2016 with a
long-term rate of
improvement of
1.5% per annum.
Swiss scheme
–
–
BVG 2015
BVG 2015
Headlam Group plc Annual report and accounts 2018
117
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
20 Employee benefits continued
The mortality assumption implies the expected future lifetime from age 65 is as follows:
Non-pensioner male
Pensioner male
Non-pensioner female
Pensioner female
Group
Company
2018
£000
24.1
22.4
26.0
24.2
2017
£000
24.3
22.5
26.1
24.2
2018
£000
24.1
22.4
26.0
24.2
2017
£000
24.3
22.5
26.1
24.2
Company
The principal actuarial assumptions for the Company are the same as those disclosed for the UK above.
Sensitivity analysis
The tables below for the UK and Swiss defined benefit plans show the impact on the defined benefit obligation of changing each
of the most significant assumptions in isolation.
UK defined benefit plan
Effect in £millions
Discount rate
Rate of inflation (RPI)*
Salary increases
Assumed life expectancy
Change in assumption
Increase
Decrease
Increase
Decrease
Impact on scheme liabilities 2018
Impact on scheme liabilities 2017
0.25% movement
0.25% movement
0.25% movement
one year movement
(5.3)
4.8
1.1
5.3
5.6
(4.5)
(1.1)
(5.3)
(6.3)
5.7
1.3
6.1
6.8
(5.3)
(1.3)
(6.2)
* With corresponding changes to the salary and pension increase assumptions.
The figures in the table as at 31 December 2018 have been calculated using the same valuation method that was used to
calculate the UK defined benefit obligation at the same date. The figures in the table as at 31 December 2017 have been
calculated by applying the same percentage increase or decrease as at 31 December 2018.
Extrapolation of the sensitivity analysis beyond the ranges shown may not be appropriate.
Swiss defined benefit plan
Effect in £millions
Discount rate
Rate of inflation (RPI)*
Salary increases
Assumed life expectancy
Change in assumption
Increase
Decrease
Increase
Decrease
Impact on scheme liabilities 2018
Impact on scheme liabilities 2017
0.25% movement
0.25% movement
0.25% movement
one year movement
(0.6)
0.5
0.1
0.1
0.7
–
(0.1)
(0.1)
(0.6)
0.5
0.1
0.1
0.7
–
(0.1)
(0.1)
* With corresponding changes to the salary and pension increase assumptions.
The figures in the table as at 31 December 2018 have been calculated using the same valuation method that was used to
calculate the Swiss defined benefit obligation at the same date. The figures in the table as at 31 December 2017 have been
calculated by applying the same percentage increase or decrease as at 31 December 2018.
Extrapolation of the sensitivity analysis beyond the ranges shown may not be appropriate.
118 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
History of plans
The history of the plans for the current and prior periods is as follows:
Statement of Financial Position
Group
Present value of defined benefit obligation
Fair value of plan assets
Deficit
Company
Present value of defined benefit obligation
Fair value of plan assets
Deficit
2018
£000
2017
£000
2016
£000
2015
£000
2014
£000
(125,101)
119,576
(139,048)
126,709
(141,947)
119,339
(115,849)
97,167
(117,639)
96,190
(5,525)
(12,339)
(22,608)
(18,682)
(21,449)
2018
£000
2017
£000
2016
£000
2015
£000
2014
£000
(111,592)
109,031
(126,308)
116,560
(128,002)
109,719
(102,766)
86,601
(106,297)
86,907
(2,561)
(9,748)
(18,283)
(16,165)
(19,390)
The Group operated an employment indemnity scheme in connection with a foreign subsidiary undertaking to provide for lump
sum cash payments due to employees retiring on their normal retirement date. The present value of the retirement indemnity
obligation at 31 December 2018 is £363,000 (2017: £377,000). This is reported as other long-term employee benefits within the
employee benefits disclosure.
Total Group pension costs
Included within the total staff costs as disclosed in note 4 are costs relating to the Group’s defined contribution plans.
The pension cost for the year represents contributions payable by the Group to the plans and amounted to £3,371,000
(2017: £3,149,000). Contributions amounting to £175,000 (2017: £180,000) in respect of the December 2018 payroll
were paid in January 2019.
The total Group cost of operating the plans during the year was £6,839,000 (2017: £5,126,000) and, at 31 December 2018, there
was an amount of £346,000 (2017: £316,000) owed to the plans, being employer and employee contributions due for December
2018, which was paid in January 2019.
21 Share-based payments
Group and Company
Executive Directors and executive management currently participate in executive share option schemes. The option price may
not be less than the greater of the mid-market share price of the Group’s shares at the time when the options were granted or the
nominal value. Options granted under the 1998 Inland Revenue approved scheme are normally exercisable between the third and
tenth anniversaries of their date of grant, subject to the movement of the Group’s basic earnings per share exceeding RPI over
the relevant period.
Options granted under the 1998 unapproved scheme are normally exercisable between the third and seventh anniversaries of
their date of grant. Awards are subject to the movement of the Group’s basic earnings per share exceeding RPI between 3% and
5% per annum respectively over the relevant period.
Additionally, the Group operates a savings-related share option scheme (‘Sharesave scheme’) which is open to employees
subject to eligibility criteria determined by the Directors prior to each option grant. The most recent grant was on 1 May 2018
when employees with over one month’s service were invited to participate.
The Group also operates a 2008 HMRC approved scheme, a 2008 unapproved scheme, the Headlam Group Performance Share
Plan 2008 and the Headlam Group Co-Investment Plan 2008. Further details of these schemes and plans are given in the
Remuneration Report on pages 64 to 72.
Headlam Group plc Annual report and accounts 2018
119
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
21 Share-based payments continued
The terms and conditions of the grants are as follows, whereby all options are settled by physical delivery of shares:
Grant date/employees entitled
Five-year Sharesave scheme granted to
other employees 10 May 2013
Five-year Sharesave scheme granted to
other employees 8 May 2014
Headlam Group Co-Investment Plan
2008 granted to key management
1 May 2015*
Three-year Sharesave scheme granted
to other employees 5 May 2015
Five-year Sharesave scheme granted to
other employees 5 May 2015
Headlam Group Co-Investment Plan
2008 granted to key management
6 May 2016*
Three-year Sharesave scheme granted
to other employees 4 May 2016
Five-year Sharesave scheme granted to
other employees 4 May 2016
Headlam Group Performance Share Plan
2008 granted to key management
5 July 2017*
Three-year Sharesave scheme granted
to other employees 3 May 2017
Five-year Sharesave scheme granted to
other employees 3 May 2017
Headlam Group Performance Share Plan
2008 granted to key management
9 April 2018*
Number of instruments
2018
–
2017
36,662
Vesting conditions
Continuous service
52,347
52,661
Continuous service
–
225,874
If the real earnings per share growth is
over 3% p.a. – 50% vesting, over 6%
– 100% vesting.
TSR – if Company is ranked at median or
above – 50%, upper quartile – 100%
6,404
296,593
Continuous service
166,036
204,855
Continuous service
162,647
162,647
If the real earnings per share growth is
over 3% p.a. – 50% vesting, over 6%
– 100% vesting.
TSR – if Company is ranked at median or
above – 50%, upper quartile – 100%
176,048
219,801
Continuous service
36,701
47,044
Continuous service
239,045
239,045 Awards will vest between 25% and 100%
for performance between ‘threshold’
performance and ‘maximum’
performance
104,064
216,906
Continuous service
19,157
34,725
Continuous service
328,596
– Awards will vest between 25% and 100%
for performance between ‘threshold’
performance and ‘maximum’
performance
Three-year Sharesave scheme granted
to other employees 1 May 2018
Five-year Sharesave scheme granted to
other employees 1 May 2018
504,141
75,549
–
–
Total share options
1,870,735
1,736,813
* Further details are provided on pages 64 to 72 of the Remuneration Report.
Continuous service
Continuous service
Contractual life
of options
01/07/18 –
01/01/19
01/07/19 –
01/01/20
02/05/18 –
02/05/25
01/07/18 –
01/01/19
01/07/20 –
01/01/21
07/05/19 –
07/05/26
01/07/19 –
01/01/20
01/07/21 –
01/01/22
06/07/20 –
06/07/27
01/07/20 –
01/01/21
01/07/22 –
01/01/23
10/04/21 –
08/04/24
01/07/21 –
01/01/22
01/07/23 –
01/01/24
120 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
The number and weighted average exercise prices of share options are as follows:
Outstanding at the beginning of the year
Exercised during the year
Granted during the year
Lapsed during the year
Outstanding at the end of the year
Exercisable at the end of the year
Weighted
average
exercise
price
2018
249.3
203.2
238.6
391.1
Number
of options
2018
1,736,812
(525,905)
1,007,865
(348,037)
Weighted
average
exercise
price
2017
230.9
172.2
261.8
346.9
Number
of options
2017
1,794,868
(466,602)
502,931
(94,385)
230.1
1,870,735
249.3
1,736,812
340.0
6,404
–
–
The weighted average share price for options exercised during the year was 455.4p (2017: 591.0p).
The options outstanding at the year-end have an exercise price in the range of 0.0p to 499.0p and a weighted average contractual
life of 2.0 years.
The fair value of services received in return for share options granted are measured by reference to the fair value of share options
granted. In order to estimate the fair value of the services received the Company uses an appropriate option pricing model, either
the Black–Scholes or the Monte Carlo option pricing model.
It is expected that the options will be exercised as soon as they reach maturity.
The expected volatility is based on historic volatility calculated over the weighted average remaining life of the share options.
Details of share options granted during 2018 are shown below:
2018
Number of options
Fair value at measurement date:
No performance conditions
Performance conditions
Share price at 31 December
Exercise price
Expected volatility
Option life
Dividend yield
Risk-free rate of interest
EPS 80% & TSR 20%
Details of share options granted during 2017 are shown below:
2017
Number of options
Fair value at measurement date:
No performance conditions
Performance conditions
Share price at 31 December
Exercise price
Expected volatility
Option life
Dividend yield
Risk-free rate of interest
EPS 80% & TSR 20%
Three-year
Performance
Share Plan
2008
328,596
Three-year
Sharesave
scheme
582,621
–
374.9p
410.0p
–
66.1%
three years
5.4% p.a.
0.9% p.a.
167.9p
–
410.0p
354.0p
66.1%
three years
5.4% p.a.
0.8% p.a.
Three-year
Co-Investment
Plan
2008
Three-year
Sharesave
scheme
239,045
228,260
–
471.9p
585.0p
–
47.7%
three years
4.3% p.a.
0.4% p.a.
184.2p
–
585.0p
499.0p
47.7%
three years
3.9% p.a.
0.2% p.a.
Five-year
Sharesave
scheme
96,648
156.2p
–
410.0p
354.0p
56.9%
five years
5.4% p.a.
1.1% p.a.
Five-year
Sharesave
scheme
35,626
169.2p
–
585.0p
499.0p
39.2%
five years
3.9% p.a.
0.5% p.a.
Headlam Group plc Annual report and accounts 2018
121
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
21 Share-based payments continued
The total expenses recognised for the year arising from share-based payments are as follows:
Total expense recognised
22 Capital and reserves
Share capital
Number of shares
In issue at 1 January and 31 December – authorised
In issue at 1 January and 31 December – fully paid
Allotted, called up and fully paid
Ordinary shares of 5p each
Shares classified in Shareholders’ funds
Group
Company
Subsidiaries
2018
£000
1,478
2017
£000
1,218
2018
£000
739
2017
£000
403
2018
£000
739
2017
£000
815
Ordinary shares
2018
2017
107,840,000 107,840,000
85,363,743
85,363,743
2018
£000
4,268
4,268
4,268
4,268
2017
£000
4,268
4,268
4,268
4,268
At 31 December 2018, the Company held 1,523,370 shares (2017: 856,458) in relation to treasury stock and shares held in trust
for satisfying options and awards under employee share schemes. These shares have been disclosed in the treasury reserve.
Dividends are not payable on these shares and they are excluded from the calculation of earnings per share. The shares held in
treasury represented 1.8% (2017: 1.0%) of the issued share capital as at 31 December 2018 with a nominal value of £76,169
(2017: £42,823).
In the period from 1 January 2019 to 6 March 2019 no shares were purchased by the Company.
Ordinary shares
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.
Dividends
Interim dividend for 2017 of 7.55p paid 2 January 2018
Final dividend for 2017 of 17.25p paid 6 July 2018
Interim dividend for 2016 of 6.70p paid 3 January 2017
Special dividend for 2016 of 8.00p paid 24 April 2017
Final dividend for 2016 of 15.85p paid 1 July 2017
2018
£000
6,372
14,597
–
–
–
20,969
2017
£000
–
–
5,637
6,732
13,360
25,729
Interim dividends for 2018 of 7.55p per share (2017: 7.55p per share) are not provided for at 31 December 2018, but are recognised
in the financial statements when the dividend is paid. The dividend was paid on 2 January 2019 and totalled £6,322,000.
The final proposed dividend of 17.45p per share (2017: 17.25p per share) will not be provided for until authorised by shareholders at
the forthcoming AGM. There are no income tax consequences. The cost of the final proposed dividend will be £14,612,000.
The total value of dividends proposed but not recognised at 31 December 2018 is £20,934,000 (2017: £20,969,000).
122 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Reserves
Other reserves
Other reserves as disclosed on the Statement of Financial Position comprise the capital redemption reserve, translation reserve,
cash flow hedging reserve and treasury reserve. For the Company this also includes a special reserve.
Capital redemption reserve
The capital redemption reserve represents the nominal value of shares repurchased and cancelled during 2007.
Translation reserve
The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of
foreign subsidiaries.
Cash flow hedging reserve
The cash flow hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging
instruments relating to hedged transactions that have not yet occurred.
Treasury reserve
The treasury reserve comprises the cost of the Company’s shares held by the Group.
Special reserve
The special reserve arose on the issuance of shares in connection with acquisitions made by the Company in earlier years.
23 Financial instruments
The main financial risks arising in the normal course of the Group’s business are credit risk, liquidity risk, and market risks arising
from interest rate risk and foreign currency risk. This note presents information about the Group’s exposure to each of the above
risks, the Group’s objectives, policies and processes for measuring and managing risks and the Group’s management of capital.
Further quantitative disclosures are included throughout these financial statements.
Credit risk and credit quality
Credit risk arises from cash and cash equivalents, contractual cash flows of debt investments carried at amortised cost, at fair
value through other comprehensive income (FVOCI) and at fair value through profit or loss (FVPL), favourable derivative financial
instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers,
including outstanding receivables.
For Headlam Group plc 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 trade receivables.
The maximum exposure to credit risk is represented by the carrying amount of each financial asset and, as at the Statement of
Financial Position date, in the Directors’ opinion, there were no significant concentrations of credit risk likely to cause financial loss
to the Group.
The Group has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are
performed on all new customers requiring credit and these are frequently reviewed by management to limit exposure. Businesses
must obtain central approval from Executive Directors or senior executive management for credit limits in excess of £10,000.
The Group does not require collateral in respect of financial assets.
The credit control procedures described above, coupled with the diversified nature of the Group’s trade receivables, lead the
Directors to believe that there is limited credit risk exposure and that the credit quality of these assets is robust.
Other receivables comprise amounts due to the Group which historically have been received within three months of the year-
end. The Directors have considered the inherent risk profile of other receivables at the year-end and are of the view that this
historical experience will prevail for the foreseeable future and accordingly consider the credit quality of these assets to be robust.
Cash and cash equivalents represent deposits with reputable financial institutions in the UK and Continental Europe and hence,
the Directors consider the credit quality of cash and cash equivalents to be robust.
Headlam Group plc Annual report and accounts 2018
123
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Financial instruments continued
Impairment of financial assets
The Group has trade receivables for sales of inventory as financial assets that are subject to the expected credit loss model.
While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss
was immaterial.
The carrying amount of financial assets at the Statement of Financial Position date was:
Trade and other receivables (note 15)
Derivative assets (note 15)
Cash and cash equivalents (note 16)
Group
2018
£000
114,083
–
44,005
158,088
2017
£000
122,863
8
42,030
164,901
Company
2018
£000
23,217
–
12,573
35,790
2017
£000
20,928
–
16,646
37,574
The fair values of the above financial assets at both 31 December 2018 and 2017, are deemed to approximate to carrying value
due to the short-term maturity of the instruments.
The ageing of trade receivables at the Statement of Financial Position date was:
Group
Not past due
Past due 0 – 30 days
Past due 31–120 days
2018
2017
Gross
£000
Impairment
£000
Gross
£000
Impairment
£000
85,822
2,851
3,417
92,090
(154)
(242)
(2,594)
(2,990)
85,038
8,330
3,972
97,340
–
(415)
(2,273)
(2,688)
All other receivables and derivative financial assets are not past due (2017: not past due).
The Company had trade receivables of £nil (2017: £nil).
The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss
allowance for all trade receivables.
The expected loss rates are based on the payment profiles of sales over a period of 36 months before 31 December 2018 or 1
January 2018 respectively and the corresponding historical credit losses experienced within this period. The historical loss rates
are adjusted to reflect current and forward-looking information on macroeconomic factors affecting the ability of the customers
to settle the receivables. The group sells its goods predominantly to the countries in which it is resident and therefore any
changes in GDP and unemployment rates have been considered when looking to adjust the historical loss rates.
To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the
days past due. The loss allowance provision as at 31 December 2018 is determined as follows;
31 December 2018
Expected loss rate
Gross carrying amount – trade receivables
Loss allowance
Not past
due
Past due
0-30 days
Past due
31- 120 days
Total
0.2%
85,822
154
8.5%
2,851
242
75.9%
3,417
2,594
92,090
2,990
The loss allowance provision for trade receivables as at 31 December 2017 is the same as the balance reported and therefore no
restatement is necessary through the opening retained earnings for 1 January 2018.
The maximum exposure to credit risk for trade receivables at the Statement of Financial Position date by geographic region was:
124 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
UK
Continental Europe
Group
Company
2018
£000
76,640
12,460
89,100
2017
£000
81,989
12,663
94,652
2018
£000
–
–
–
2017
£000
–
–
–
During the year the Group’s impairment loss as a percentage of revenue amounted to 0.19% (2017: 0.17%).
Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to
managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, with
sufficient headroom to cope with abnormal market conditions. As at 31 December 2018, cash and cash equivalents covered the
amounts of borrowings maturing in the next 12 months with a net positive liquidity of £43,548,000 (2017: £41,797,000). Details of
the total facilities that the Group has access to are given in note 17.
The following are the contractual maturities of financial liabilities:
31 December 2018
Group
Non-derivative financial liabilities
Bank overdraft
Unsecured bank loans
Trade and other payables
Derivative financial liabilities
Other derivatives
31 December 2017
Group
Non-derivative financial liabilities
Unsecured bank loans
Trade and other payables
31 December 2018
Company
Non-derivative financial liabilities
Trade and other payables
31 December 2017
Company
Non-derivative financial liabilities
Trade and other payables
Carrying
amount
£000
Contractual
cash flows
£000
1 year
or less
£000
1–2 years
£000
2–5 years
£000
More than
5 years
£000
221
7,041
164,508
(221)
(7,335)
(164,508)
(221)
(313)
(164,508)
–
(310)
–
–
(6,712)
–
23
(23)
(23)
–
–
171,793
(172,087)
(165,065)
(310)
(6,712)
–
–
–
–
–
Carrying
amount
£000
Contractual
cash flows
£000
1 year
or less
£000
1–2 years
£000
2–5 years
£000
More than
5 years
£000
6,752
172,345
179,097
(7,033)
(172,345)
(307)
(167,407)
(179,378)
(167,714)
Carrying
amount
£000
Contractual
cash flows
£000
(305)
(1,489)
(1,794)
1 year
or less
£000
(6,421)
(3,449)
(9,870)
–
–
–
1–2 years
£000
2–5 Years
£000
32,112
(32,112)
(32,112)
–
–
Carrying
amount
£000
Contractual
cash flows
£000
1 year
or less
£000
1–2 years
£000
2–5 Years
£000
39,668
(39,668)
(39,668)
–
–
The value of the Group’s and Company’s financial liabilities as detailed above at 31 December 2018 and 2017 were not materially
different to the carrying value. Fair values were calculated using market rates, where available. Where market values are not
available, fair values have been estimated by discounting expected future cash flows using prevailing interest rate curves.
Amounts denominated in foreign currencies are valued at the exchange rate prevailing at the Statement of Financial
Position date.
Headlam Group plc Annual report and accounts 2018
125
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Financial instruments continued
The table below sets out the Group’s accounting classification of each class of financial assets and liabilities at 31 December 2018
and 2017.
31 December 2018
Cash and cash equivalents
Bank overdraft
Borrowings due within one year
Borrowings due after one year
Trade payables
Non-trade payables
Trade receivables
Other receivables
Provisions
Derivative liability
31 December 2017
Cash and cash equivalents
Borrowings due within one year
Borrowings due after one year
Trade payables
Non-trade payables
Trade receivables
Other receivables
Provisions
Derivative liability
Fair value
through profit
or loss (FVPL)
£000
–
–
–
–
–
(416)
–
–
–
(23)
(439)
Other
derivatives
at fair value
£000
–
–
–
–
–
–
–
–
(8)
(8)
Amortised
cost
£000
44,005
(221)
(236)
(6,805)
(142,382)
(24,002)
89,100
24,983
(2,249)
–
Total
Carrying
Value
£000
44,005
(221)
(236)
(6,805)
(142,382)
(24,418)
89,100
24,983
(2,249)
(23)
(17,807)
(18,246)
Amortised
cost
£000
44,005
(233)
(6,519)
(149,594)
(27,689)
94,652
28,211
(2,048)
–
Total
Carrying
Value
£000
42,030
(233)
(6,519)
(149,594)
(27,689)
94,652
28,211
(2,048)
(8)
(21,190)
(21,182)
All derivative financial instruments not in a hedge relationship are measured at fair value through the profit or loss. The Group
does not use derivatives for speculative purposes. All transactions in derivative financial instruments are undertaken to manage
the risks arising from underlying business activities.
Interest rate risk
The Company and Group are exposed to interest rate fluctuations on their borrowings and cash deposits. Borrowings are
principally held in sterling and euros at both fixed and floating rates. Deposits are in sterling, euros and Swiss francs at
floating rates.
Floating rate borrowings are linked to the London Interbank Offered Rate and Euribor Over Night Index Average. The Group
adopts a policy of reviewing its floating rate exposure to ensure that if interest rates rise the effect on the Group’s income
statement is manageable.
At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was:
Variable rate instruments
Financial assets
Financial liabilities
Group
Carrying amount
Company
Carrying amount
2018
£000
2017
£000
2018
£000
2017
£000
44,005
(7,262)
36,743
42,030
(6,752)
35,278
12,573
–
12,573
16,646
–
16,646
126 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Sensitivity analysis
A change of 100 basis points in the interest rates at the reporting date would have increased/(decreased) equity and profit or loss
by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant.
The analysis is performed on the same basis for 2017.
Group
Company
Profit or loss
Equity
Profit or loss
Equity
100bp
increase
£000
100bp
decrease
£000
100bp
increase
£000
100bp
decrease
£000
100bp
increase
£000
100bp
decrease
£000
100bp
increase
£000
100bp
decrease
£000
31 December 2018
Variable rate
instruments
31 December 2017
Variable rate
instruments
367
(367)
353
(353)
–
–
–
–
126
(126)
166
(166)
–
–
–
–
Commodity risk
The Company and Group are exposed to the commodity risk of rising fuel prices however on 31 December 2018 there were no
commodity transaction swaps entered into by the Group.
Foreign currency risk
The Group and Company are exposed to movements in currency exchange rates arising from transaction currency cash flows
and the translation of the results and net assets of overseas subsidiaries. The currencies giving rise to this risk are primarily the
euro, Swiss franc and US dollar.
The Group and Company use forward exchange contracts to hedge their foreign currency transactional risk. A future foreign
currency contract would be entered into where there was a known requirement for the currency due to planned imports that are
not invoiced in the functional currency of the acquiring company. These forward exchange contracts would have a maturity of
less than one year after the Statement of Financial Position date. The Group also enters into foreign currency contracts at spot
rate where the amounts are not frequent or material. Gains and losses on currency contracts recognised as a liability at
31 December 2018 amounted to £23,000 (2017: asset of £8,000).
Hedge ineffectiveness
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness
assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. For hedges of
foreign currency purchases, the Group enters into hedge relationships where the critical terms of the hedging instrument
match exactly with the terms of the hedged item. The Group therefore performs a qualitative assessment of effectiveness. If
changes in circumstances affect the terms of the hedged item such that the critical terms no longer match exactly with the
critical terms of the hedging instrument, the Group uses the hypothetical derivative method to assess effectiveness. In hedges
of foreign currency purchases, ineffectiveness may arise if the timing of the forecast transaction changes from what was
originally estimated, or if there are changes in the credit risk of Headlam Group plc or the derivative counterparty. The Group
now enters into forward rate agreements containing a delivery period in which the entity can drawdown the currency as they
require it, subject to a final delivery date. This has enabled the Group to match the forward rate agreements to the hedged item
with accuracy.
For the 12-month period to 31 December 2018, 1.2% (2017: 3.1%) of the Group’s operating profit was derived from overseas
subsidiaries and at 31 December 2018, 17.5% (2017: 18.8%) of the Group’s net operating assets related to overseas subsidiary
operations. Hedge accounting, following the adoption of IFRS, has not been applied to these operations.
The Group and Company do not use derivatives other than as described above.
Headlam Group plc Annual report and accounts 2018
127
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
23 Financial instruments continued
The exposure to foreign currency risk was as follows:
2018
Trade and other receivables
Cash and cash equivalents
Trade and other payables
2017
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Euro
amount
£000
336
2,791
(7,569)
(4,442)
Euro
amount
£000
109
364
(5,483)
(5,010)
Group
Other
amount
£000
3
38
(1,324)
(1,283)
Group
Other
amount
£000
133
109
(1,496)
(1,254)
Total
£000
339
2,829
(8,893)
(5,725)
Total
£000
242
473
(6,979)
(6,264)
Euro
amount
£000
–
244
–
244
Euro
amount
£000
–
49
–
49
Company
Other
amount
£000
–
–
–
–
Company
Other
amount
£000
–
–
–
–
Total
£000
–
244
–
244
Total
£000
–
49
–
49
Sensitivity analysis
A 10% weakening of sterling against the following currencies at 31 December would have increased/(decreased) profit or loss by
the amounts shown below; there is no equity effect. This analysis assumes that all other variables, in particular interest rates,
remain constant. The analysis is performed on the same basis for 2017.
Euro
Other
Group
Company
2018
£000
(444)
(128)
2017
£000
(501)
(125)
2018
£000
24
–
2017
£000
5
–
A 10% strengthening of sterling against the above currencies at 31 December 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.
Fair values hierarchy
The financial instruments carried at fair value are categorised according to their valuation method. The different levels have been
defined below:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly, as
prices or indirectly, derived from prices.
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Group forward currency contracts which were fair valued in accordance with level 2 (2017: level 2).
Fair values
The carrying amounts shown in the Statement of Financial Position for financial instruments are a reasonable approximation of
fair value.
Trade receivables, trade payables and cash and cash equivalents
Fair values are assumed to approximate to cost due to the short-term maturity of the instrument.
Borrowings, other financial assets and other financial liabilities
Where available, market values have been used to determine fair values. Where market values are not available, fair values have
been estimated by discounting expected future cash flows using prevailing interest rate curves. Amounts denominated in foreign
currencies are valued at the exchange rate prevailing at the Statement of Financial Position date.
128 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Capital management
The Group views its finance capital resources as primarily comprising share capital, bank loans and operating cash flow.
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain
future development of the business. The Board closely monitors its Shareholder base, dividend yield and earnings per share. In
the medium-term the Group aims to maintain a dividend cover of 1.6 times.
The Board encourages employees of the Group to hold the Company’s ordinary shares. The Group operates a number of
employee share option schemes. During the year the Company has acquired a number of its own shares under a share buy-back
programme, and some of these shares have been used for issuing shares under the Group’s various share option
incentive schemes.
Certain of the Company’s subsidiaries are required to maintain issued share capital at levels to support capital adequacy
requirements prevailing in the legislative environment in which they operate.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends made payable to Shareholders,
return capital to Shareholders, issue new shares or sell assets to reduce debt.
On 7 December 2017, the Group completed a refinancing of its banking facilities to maintain headroom whilst also providing funds
for the Groups acquisition and investment strategy. The new facilities comprise a £72.5 million sterling committed facility, a
€8.6 million euro committed facility and a £25 million sterling uncommitted facility. This represents an increase in total available
facilities of £25 million.
The uncommitted facility, coupled with cash generated from operations, is used to fund the Group’s ongoing working capital
requirements. The committed facility is in place to support the Group’s strategic investment plans.
No changes were made to the objectives, policies or processes during the years ended 31 December 2018 and 31
December 2017.
24 Acquisitions
On 2 March 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of
Dersimo BV (‘Dersimo’) located in the western Netherlands. Dersimo is a full service distributor of both soft and hard floors from
a combination of well-known manufacturer brands as well as its own carpet and vinyl designs which are manufactured as a private
label. The Dersimo acquisition is complementary to the Company’s market-leading core business which supplies a high volume of
small orders into both the residential and commercial sectors and increases the Company’s presence and geographical coverage
in the Netherlands.
On 30 March 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of
BETU Holdings Limited (a non-trading holding company) the parent company of CECO (Flooring) Limited (‘CECO'). CECO is a leading
provider of flooring and wallcovering products to retail and commercial customers throughout Northern Ireland and the Republic of
Ireland. The CECO acquisition diversifies and broadens the Company’s overall position in the commercial specification market.
On 1 July 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share capital of
Ashmount Flooring Supplies Limited (‘Ashmount’)a floorcovering distribution business based in Tottenham, North London. The
Ashmount acquisition expands the Company’s presence in commercial products in Greater London, a geographic area in which
the Company has historically had a low market share.
On 28 September 2018, a subsidiary company of Headlam Group plc entered into an agreement to acquire 100% of the share
capital of Rackhams Limited (‘Rackhams’) located in Highams Park, East London. Established in 1935, Rackhams is a leading
provider of retail and commercial products to customers in Greater London and the surrounding counties with a strong
Rackhams ‘brand’ having been developed in recent years. The Rackham’s acquisition expands the Company’s presence in
commercial products in Greater London, a geographic area in which the Company has historically had a low market share.
On 26 October 2018, a subsidiary company of Headlam Group plc completed the acquisition of all the trade and assets of Garrod
Bros Ltd (‘Garrod Bros’) located in Enfield, North London. Established in 1827, Garrod Bros is a leading provider of commercial
flooring products and accessories to customers in Greater London. The Garrod Bros acquisition expands the Company’s presence
in commercial products in Greater London, a geographic area in which the Company has historically had a low market share.
Both the Rackhams and Garrod Bros acquisitions are currently subject to a merger inquiry by the Competition and Markets
Authority (‘CMA').
The acquired businesses contributed revenues of £13.7 million and an operating profit of £0.6 million to the Group for the year
ended 31 December 2018. If the acquisitions had occurred on 1 January 2018, pro-forma revenue and operating profit for the
year ended 31 December 2018 would have increased to £717.7 million and £42.0 million respectively.
Headlam Group plc Annual report and accounts 2018
129
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
24 Acquisitions continued
Details of the acquisitions are provisional and are shown in aggregate below:
Acquiree’s
book value
£000
Fair value
adjustments
£000
Acquisition
amounts
£000
Acquiree’s provisional net assets at the acquisition date:
Intangible assets
Goodwill
Property, plant and equipment
Inventories
Trade and other receivables
Cash at bank and in hand
Trade and other payables
Provisions
Borrowings
Deferred tax
Net identifiable assets and liabilities
Goodwill on acquisition
Consideration
Satisfied by:
Cash
Deferred and contingent consideration
Analysis of cash flows:
On completion
Borrowings repayment
Cash acquired
–
653
1,321
2,545
3,225
2,615
(3,160)
(74)
(435)
(2)
6,688
3,598
(653)
–
(233)
(44)
–
(83)
(150)
–
(525)
1,910
4,426
3,598
–
1,321
2,312
3,181
2,615
(3,243)
(224)
(435)
(527)
8,598
4,426
13,024
11,356
1,668
13,024
10,921
435
(2,615)
8,741
Professional fees of £0.5 million were incurred in relation to acquisition activity and have been expensed to the income statement
within non-underlying administration expenses.
The book value of receivables given in the table above represents both the gross contracted and fair value of amounts receivable.
At the acquisition date, the entire book value of receivables was expected to be collected.
Goodwill of £4.4 million arose on the acquisitions, there were also intangible assets on acquisition of £3.6 million which were
attributed to brand names, order book, non-compete agreements and customer relationships. During the year £0.5 million of
intangibles have been amortised to the income statement on these acquisitions.
The residual goodwill reflects the significant benefit the acquisitions will have on the Group by bringing further geographic
coverage, offering an expanded product range, developing a more sophisticated customer route to market, providing an
additional avenue for growth and a different order profile.
Furthermore, acquired businesses gain access to the Group’s extensive product ranges and benefit from enhanced sales and
marketing investment. These changes typically enable acquired businesses to enhance the service provided to their customers
and ultimately, develop and grow.
Deferred and contingent consideration
The acquisition of CECO was financed by initial cash consideration of £4.3 million paid on completion and satisfied from the
Group’s existing cash and debt facilities and deferred consideration of £1.4 million. On 3 August 2018 the first of the deferred
consideration of £400,000 was paid.
The deferred and contingent consideration have been discounted back and reported at present value, and contingent
consideration has been recognised based on management’s assessment of the probability of it being paid.
130 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Prior year acquisitions
In the prior year the Group acquired Mitchell Carpets Limited, Domus Group of Companies Limited and its subsidiary entities and
the business and certain assets of McMillan Flooring.
The fair values of the assets and liabilities acquired have been reconsidered as part of the hindsight period but no adjustment was
considered necessary. In relation to Domus Group of Companies Limited the contingent consideration has been decreased as a
result of a change in forecast future profitability.
The acquired businesses contributed revenues of £4.5 million and an operating loss of £0.1 million to the Group for the year
ended 31 December 2017. If the acquisitions had occurred on 1 January 2017, pro-forma revenue and operating profit for the year
ended 31 December 2017 would have increased to £721.9 million and £44.6 million respectively.
Deferred and contingent consideration
The acquisition of Domus Group of Companies Limited was financed by initial cash consideration of £24.2 million paid on
completion and satisfied from the Group’s existing cash and debt facilities; a deferred consideration of £3.3 million, payable in
cash and Ordinary shares of 5 pence each in the capital of the Company (‘Ordinary Shares’), of which £1.6 million is payable on
7 December 2019 and £1.7 million is payable on 7 December 2020; and a further maximum contingent consideration of
£2.7 million, payable in cash based on Domus achieving certain EBITDA targets over the three-year period ending
31 December 2020.
The deferred and contingent consideration have been discounted back and reported at present value, and contingent
consideration has been recognised based on management’s assessment of the probability of it being paid. The contingent
consideration has been further reduced as at 31 December 2018 based on the EBITDA achieved to date.
25 Operating leases
The aggregate payments, for which there are commitments under non-cancellable operating leases as at the end of the year, fall
due as follows:
Group
Less than one year
Between one and five years
More than five years
Company
Less than one year
Between one and five years
More than five years
Land and
buildings
£000
4,560
9,176
6,059
19,795
Land and
buildings
£000
26
105
1,776
1,907
2018
Plant and
machinery
£000
10,359
18,420
1,862
30,641
2018
Plant and
machinery
£000
13
17
–
30
Total
£000
14,919
27,596
7,921
50,436
Total
£000
39
122
1,776
1,937
Land and
Buildings
£000
3,243
7,341
4,478
15,062
Land and
buildings
£000
26
105
1,802
1,933
2017
Plant and
machinery
£000
9,569
16,796
641
27,006
2017
Plant and
machinery
£000
8
10
–
18
Total
£000
12,812
24,137
5,119
42,068
Total
£000
34
115
1,802
1,951
The Group leases the majority of its motor and commercial vehicles on terms that range between three and seven years and
during the year ended 31 December 2018, total operating lease expense of £15,489,000 was recognised in the Consolidated
Income Statement (2017: £13,211,000).
Headlam Group plc Annual report and accounts 2018
131
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
26 Capital commitments
Group
During the year ended 31 December 2018, the Group entered into commitments to purchase property, plant and equipment for
£743,000 (2017: £358,000). These commitments are expected to be settled in the following financial year.
Company
At 31 December 2018, the Company had no commitments to purchase property, plant and equipment (2017: £nil).
27 Related parties
Group and Company
Identity of related parties
The Group has a related party relationship with its subsidiaries and with its Directors and executive officers.
Transactions with key management personnel
The Group annually re-evaluates its interpretation of key management personnel and considers that this relates to the Executive
and Non-Executive Directors of the Group as identified on pages 50 and 51.
As at 31 December 2018, Directors of the Company and their immediate relatives controlled 0.9% of the total voting rights of the
Company (2017: 0.8%).
Non-Executive Directors receive a fee for their services to the Board.
Other than as disclosed in the Remuneration Report, there were no other transactions with key management personnel in either
the current or preceding year. The cost charged to administrative expenses relating to share plans of key personnel amounted to
£638,000 (2017: £507,000).
Company only
In addition to the transactions with key personnel, the Company has the following transactions:
Transactions with other Group companies
Amounts due from subsidiaries
Amounts due to subsidiaries
Highest
during
the year
£000
Balance at
31 December
2018
£000
Highest
during
the year
£000
Balance at
31 December
2017
£000
24,605
24,605
20,460
20,460
(26,900)
(26,900)
(34,806)
(34,806)
Transactions with Group companies typically comprise management, rent and interest charges during the period.
The disclosure of the year-end balance and the highest balance during the year is considered to provide a meaningful
representation of transactions between the Company and its subsidiaries in the year. The highest balance is generally at the start
or close of the financial year since this is the time when the Company levies its recharge of its operating expenses.
Related party transactions reported in the income statement
Rental income
Dividends received
Recharge of operating expenses
Interest income
For year
ended
31 December
2018
£000
7,971
32,208
3,380
379
For year
ended
31 December
2017
£000
7,971
38,378
3,140
163
132 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
28 Subsequent events
Management has given due consideration to any events occurring in the period from the reporting date to the date these
financial statements were authorised for issue and has concluded that there are no material adjusting or non-adjusting events to
be disclosed in these financial statements.
29 Group subsidiaries
Company
HFD Limited
MCD Group Limited
CECO (Flooring) Limited
Domus Tiles Limited
Rackhams Limited
Headlam BV
Dersimo BV
LMS SA
Belcolor AG
Headlam (European) Limited
Betu Holdings Limited
Headlam Holdings BV
Headlam SAS
Domus Group of Companies Limited
Tileco (2012) Bidco Ltd
Tileco Group (2007) Ltd
Tileco Group Limited
Yourfloors Plc
Crossforge Limited
Headlam Group Employee Trust Company Limited
Headlam Group Pension Trustees Limited
Mercado Group Limited
NCT (International) Limited
Mitchell Carpets Limited
Tileright Limited
Tileco Limited
Domus Stone Limited
Surface Tiles Limited
Tile Solutions Limited
Ashmount Flooring Supplies Limited
Type
Place of incorporation
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Trading
Holding Company
Holding Company
Holding Company
Holding Company
Holding Company
Holding Company
Holding Company
Holding Company
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Great Britain*
Great Britain*
Great Britain******
Great Britain*
Great Britain*
Netherlands**
Netherlands*****
France***
Switzerland****
Great Britain*
Great Britain******
Netherlands**
France***
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
Great Britain*
The ordinary share capital of all of these subsidiaries are wholly owned and their principal activities are wholly aligned to the sales,
marketing, supply and distribution of floorcovering and certain other ancillary products.
Registered address for UK subsidiaries: PO Box 1, Gorsey Lane, Coleshill, Birmingham, B46 1LW, UK.
Registered address for these Dutch subsidiaries: Bettinkhorst 4, 7207 BP Zutphen, the Netherlands.
Registered address for French subsidiaries: 7/14 Rue Du Fosse Blanc, 92230, Gennevilliers, France.
Registered address for Swiss subsidiaries: Zücherstrasse 493, 9015 St. Gallen, Switzerland.
*
**
***
****
***** Registered address for this Dutch subsidiary: Noordzee 12, 3144 DB, Maassluis, the Netherlands.
****** Registered address for these UK subsidiaries: Unit 5 Carryduff Business Park, Comber Road Carryduff, Belfast, County Down, BT8 8AN
Headlam Group plc Annual report and accounts 2018
133
FINANCIAL RECORD
Trading results
Revenue
Gross profit
Overheads
Underlying profit before net financing costs
Net financing costs
Underlying profit on ordinary activities before tax
Taxation
Underlying profit on ordinary activities after taxation
Profit before tax
Shareholder value
Paid interim and final dividend per share
Paid special dividend per share
Proposed dividend per share
Earnings per share
Underlying earnings per share
Net assets
Non-current assets
Property, plant and equipment
Intangible assets
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Bank overdraft
Other interest-bearing loans and borrowings
Trade and other payables
Employee benefits
Income tax payable
Non-current liabilities
Other interest-bearing loans and borrowings
Trade and other payables
Provisions
Deferred tax liabilities
Employee benefits
Total liabilities
Net assets
2018
£000
Restated***
2017
£000
Restated*
& ***
2016
£000
Restated*
& ***
2015
£000
Restated**
& ***
2014
£000
708,423
229,074
(184,801)
692,540
218,104
(174,321)
677,722
210,205
(169,133)
639,260
198,693
(161,916)
620,803
188,649
(157,187)
44,273
(884)
43,389
(7,750)
35,639
40,447
24.8p
–
25.0p
40.0p
42.5p
102,048
50,924
516
153,488
132,704
119,007
44,005
295,716
43,783
(665)
43,118
(7,976)
35,142
40,719
22.55p
8.00p
24.8p
39.1p
41.7p
101,631
44,662
648
146,941
131,566
127,976
42,030
301,572
449,204
448,513
41,072
(966)
40,106
(7,601)
32,505
38,179
20.70p
6.00p
22.55p
36.8p
38.7p
102,934
10,388
1,138
114,460
126,037
128,934
59,343
314,314
428,774
(221)
(236)
(181,300)
–
(6,730)
–
(233)
(190,299)
(2,235)
(6,339)
(4)
(224)
(183,304)
(2,169)
(6,824)
36,777
(1,153)
35,624
(7,213)
28,411
35,624
17.50p
–
20.70p
33.8p
33.8p
104,677
10,388
629
115,694
118,165
120,300
63,932
302,397
418,091
–
–
(171,375)
(2,171)
(6,974)
31,462
(1,162)
30,300
(6,515)
23,785
30,300
15.30p
–
17.50p
28.6p
28.6p
106,875
10,013
515
117,403
115,591
118,962
47,589
282,142
399,545
–
(204)
(165,240)
(2,933)
(6,073)
(188,487)
(199,106)
(192,525)
(180,520)
(174,450)
(6,805)
(2,592)
(2,249)
(8,063)
(5,888)
(6,519)
(4,938)
(2,048)
(6,847)
(10,481)
(6,493)
–
(1,531)
(4,077)
(20,781)
(20,000)
–
(1,087)
(4,533)
(16,843)
(25,597)
(30,833)
(32,882)
(42,463)
(22,818)
–
(787)
(3,931)
(18,803)
(46,339)
(214,084)
(229,939)
(225,407)
(222,983)
(220,789)
235,120
218,574
203,367
195,108
178,756
* The balance sheets for 2015 and 2014 were restated in order to: align certain accounting policies of overseas companies; better reflect the
net value of certain inventory product lines; reassess deferred tax in relation to property; and to reclassify certain balances in order to
present them in a consistent manner with subsequent years. This is fully described in the Annual Report and Accounts for the year ended
31 December 2016.
** Restated to reflect the changes for revised IAS 19 and also * shown above.
*** The Condensed Consolidated Interim Income Statement for the years ended 31 December 2017, 2016, 2015 and 2014 have been restated
to reclassify a number of items between revenue, cost of sales, and operating expenses in order to more appropriately reflect their nature.
Consequently, these adjustments mean the earlier periods are presented in a consistent manner with the year ended 31 December 2018.
134 Headlam Group plc Annual report and accounts 2018
Overview
Strategic Report
Governance
Financial Statements
Solicitor
Pinsent Masons LLP
3 Colmore Circus
Birmingham B4 6BH
Stockbrokers
Investec Bank plc
30 Gresham Street
London EC2V 7QP
Panmure Gordon & Co
One New Change
London EC4M 9AF
Financial PR and IR
Buchanan
107 Cheapside
London EC2V 6DN
Registrar
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Advisers
Taxation Adviser
Deloitte LLP
Four Brindleyplace
Birmingham B1 2HZ
Principal Bankers
Barclays Bank PLC
PO Box 3333
One Snowhill
Snow Hill
Queensway
Birmingham B3 2WN
HSBC Bank Plc
Level 6, Metropolitan House
CBX 3
321 Avebury Boulevard
Milton Keynes MK9 2GA
The Royal Bank of Scotland plc
Corporate and Institutional Banking
5th Floor, 2 St Philips Place
Birmingham B3 2RB
Auditor
PricewaterhouseCoopers LLP
Cornwall Court
19 Cornwall Street
Birmingham B3 2DT
Financial Calendar
Statutory Meeting and Announcements
Annual General Meeting
Interim results announced
Final results announced
24 May 2019
28 August 2019
March 2020
Dividend Dates
Final dividend for 2018, if approved, payable to
qualifying shareholders on the register as at 7 June 2019
Interim dividend for 2019 declared
Interim dividend for 2019 payable
1 July 2019
28 August 2019
2 January 2020
Headlam Group plc Annual report and accounts 2018
135
NOTES
136 Headlam Group plc Annual report and accounts 2018
Headlam Group plc
PO Box 1
Gorsey Lane
Coleshill
Birmingham
B46 1LW
Tel: 01675 433000
Fax: 01675 433030
E-mail: headlamgroup@headlam.com
Sat Nav: B46 1JU
www.headlam.com
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