IG Design Group Plc
Annual Report 2019

Plain-text annual report

I G D e s i g n G r o u p p l c A N N U A L R E P O R T A N D F I N A N C I A L S T A T E M E N T S 2 0 1 9 IG Design Group plc ANNUAL REPORT AND FINANCIAL STATEMENTS 2019 WHAT’S INSIDE STRATEGIC REPORT GOVERNANCE A review of the Group’s strategy with a more detailed look at activity during the financial year together with its risk management. 01 About us 02 Our commitment to shareholders 04 At a glance 06 Business model 08 Our strategy 16 Social responsibility 18 Executive review 36 Principal risks and uncertainties Information on how the Group is governed and activities of the Board. 40 Board of Directors 42 Chairman’s corporate governance review 51 Audit Committee report 54 Directors’ remuneration report 59 Directors’ report 61 Statement of Directors’ responsibilities FINANCIALS – GROUP FINANCIALS – COMPANY The Group’s consolidated financial statements and comprehensive notes covering the year ended 31 March 2019. The Company’s financial statements and comprehensive notes covering the year ended 31 March 2019. 62 Independent auditor’s report 66 Consolidated income statement 112 Company balance sheet 113 Company statement of changes in equity 67 Consolidated statement of comprehensive income 114 Company cash flow statement 68 Consolidated statement of changes in equity 115 Notes to the Company financial statements 69 Consolidated balance sheet 70 Consolidated cash flow statement 71 Notes to the consolidated financial statements Alternative performance measures This review includes alternative performance measures (‘APMs’) that are presented in addition to the standard IFRS metrics. The Directors believe that these APMs provide important additional information regarding the adjusted performance of the business including trends, performance and position of the Group. APMs are used to enhance the comparability of information between reporting periods and segmental business units by adjusting for exceptional or uncontrollable factors which affect IFRS measures, to aid the understanding of the Group’s performance. Consequently, APMs are used by the Directors and management for strategic and performance analysis, planning, reporting and reward setting. In order to show when such measures have been used, the APMs are highlighted in blue throughout the executive review. The APMs are adjusted profit, adjusted EBITDA, adjusted operating profit and adjusted EPS. The definitions of the APMs used are listed below: • Adjusted EPS – Fully diluted earnings per share before tax, exceptional items, acquisition amortisation and LTIP charges • Adjusted profit – Profit before tax, exceptional items, acquisition amortisation and LTIP charges • Adjusted operating profit – Profit before interest, tax, exceptional items, acquisition amortisation and LTIP charges • Adjusted EBITDA – EBITDA before exceptional items and LTIP charges Further detail can be seen on pages 28 and 29. IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019ABOUT US We are Design Group We transform paper and a whole lot more into products that help the world celebrate life’s special occasions. We are proud to serve the best retailers around the globe with a complete end-to-end service from design to distribution. OUR GOALS ARE Customers Team Suppliers Investors to be the ‘partner of choice’ across an increasing range of products and categories where our customers value our fast pace, innovation, market focus and flexibility to have a creative and winning culture focused on developing a team that looks to accomplish great things to build relationships with suppliers who provide capacity and enable us to compete profitably and share our passion for design and innovation continue to grow our Group and deliver returns well above market performance 01 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019OUR COMMITMENT TO SHAREHOLDERS Delivering growth Adjusted EPS Continue to deliver double digit three year compound annual growth Adjusted EPS (pence) 13.2 11.5 29.3 +33% on 2018 22.1 18.6 Through organic growth and acquisitions 2015 2016 2017 2018 2019 2019 reported diluted earnings per share 16.0p (2018: 20.5p) Generating cash Average leverage Average leverage 4.1x Sustain long term average leverage between 1.0x and 2.0x 3.2x 2.3x +13% improvement on 2018 Provides capacity for future investment 1.5x 1.3x 2015 2016 2017 2018 2019 Improving returns Dividends (pence) Dividend Trend upwards until 2.5x covered (40% pay out) 8.5 +42% on 2018 6.0 4.5 Growth supported increased shareholder distributions 2.5 1.0 2015 2016 2017 2018 2019 Alternative performance measures: we use both statutory reported and adjusted measures in our strategic report. Adjusted measures in management’s view reflect the underlying performance of the business and provides a more meaningful comparison of how the business is managed and measured day-to-day. A full reconciliation between our reported and adjusted results is provided in our alternative performance measures section on pages 28 and 29. 02 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Key financial performance indicators Revenue Adjusted profit before tax £448.4m £30.3m 2018: £21.8m 2018: £327.5m +37% Reported profit before tax £17.3m 2018: £19.7m Adjusted EBITDA Average debt £38.7m £48.8m 2018: £28.0m +38% 2018: £41.9m +16% Cash conversion Return on capital employed 130.5% 2018: 80.5% 24.3% 2018: 22.5% 03 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019AT A GLANCE We’re truly international, with 11,000 customers selling our products through over 210,000 stores across more than 80 countries, we enjoy considerable market presence around the world. Revenue by customer destination ROW £10.0m 2% Australia £37.7m 8% Europe £68.3m 15% USA £235.1m 53% UK £97.3m 22% Focused on our four major product categories of Celebrations, Stationery and creative play, Gifting and ‘Not-for-resale’ consumables, we leverage our Group size and expertise whilst retaining local market knowledge and relationships through our local businesses. 04 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019This blend of global scale and local knowledge allows us to offer our customers a high quality ‘one-stop-shop’ solution from small independents to large multinational retailers and e-tailers. In addition to our own generic brands, our design-led product offerings include an excellent portfolio of licensed and customer bespoke products. Revenue by season 56% Christmas Revenue by product 77% Celebrations Revenue by source 30% 70% Manufactured in-house Sourced 39% Everyday 5% Minor seasons 11% 8% 4% Gifting Stationery(a) NFR(b) (a) Stationery and creative play. (b) ‘Not-for-resale’ consumables. 05 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019BUSINESS MODEL Design Group is a global manufacturer and distributor of design-led Celebration, Stationery and creative play, Gifting, ‘Not-for-resale’ consumables and related products. P r o duct Design & D evelopment Customers Being their Partner of choice g g M anufacturin & Sourcin D & i s F t r i u l b fi u l t i m o e n n t 06 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Customers We are proud to serve the best retailers around the world. We provide a complete end-to-end service from design concept to store shelf 11,000 customers with product in over 210,000 retail outlets in over 80 countries • It is our aim to be a partner of choice to our customers • Our customers benefit from our • Our global scale gives us the ability to access the best products at the best prices for our customers ability to deliver everything from small individual orders to large international programmes • Our local teams have the expertise to ensure we know what works well for our customers in each market Product Design & Development Design is at the heart of everything we do 230 designers across four continents in eight studios, producing thousands of designs a year • We pride ourselves on always being at the very cutting edge of design trends and product development • Our businesses can all access these great designs through our global design hub • Each business unit has a dedicated design team • We are continuously innovating fresh designs, including generic, customer bespoke and licensed branded offerings Manufacturing & Sourcing Our manufacturing facilities and global network of suppliers ensures we can turn our designs into high quality products for our customers Over 50,000 SKUs manufactured and sourced annually • We manufacture a number of our core products in-house, including gift wrap, crackers, bags and cards • For products that we source, we work with carefully selected partners to manufacture our designs • Sites in the UK, China, USA, Netherlands and Poland • We continuously invest in our manufacturing process resulting in some of the most efficient production facilities in the industry • Our manufacturing and sourcing network, which is subject to regular ethical, quality and technical audits, supported by our team of manufacturing and sourcing experts, ensures we deliver compliant and ethically sourced products Distribution & Fulfilment We understand that customers value excellent service and we have a track record of delivering on time and to high quality standards Over 750 million units sold annually • We offer everything from ‘free on • board’, where the customer handles shipping, to merchandising solutions, where we deliver items into stores depending on customer needs In each business unit across the world our experienced logistics teams process each retailer’s order through our global infrastructure of warehouses and fulfilment centres • Our ability to deliver on time/in full is a critical part of our service offering • We work with our customers to improve the process of getting stock to the shelf, helping reduce store costs and improve stock availability 07 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019OUR STRATEGY Our strategy is built on leveraging our core strengths and focusing on the market opportunities. istribution ulfilm ent D F & W o rking with t h e winners Customers Being their Partner of choice i n Manufac t u r & Sour c i n g g P r o & D d e u v c t e l o D p e s i g n m e n t n D esign & Innovatio E f fi & c i S e c n a c l e y 08 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Key strategic performance indicators Working with the winners • Increasing revenue through organic growth with both existing and new customers, suppliers and product areas Level of business with our top 10 customers Sales by channel Definition: Percentage of Group revenue from our top 10 global customers Definition: Growing our revenues across different sales channels Why chosen: We pride ourselves on having long lasting relationships with the world’s leading retailers, and nurturing and maintaining these relationships allows us to grow as they do Why chosen: Our ‘winners’ are a broad range of customers across various sales channels including mass and discount retailers, wholesalers, independents and other small channels. As the retail environment changes, we will measure our success in growth across these channels Design & innovation • Developing in new channels and New product category growth Diversifying seasonality adjacent product categories • Expanding in the growing number of events celebrated throughout the year Efficiency & scale • Driving margins through investment in processes and people • Accretive M&A opportunities to unlock synergies and strengthening our ‘one-stop-shop’ position with customers Definition: New product category growth year-on-year Definition: Year-on-year growth in categories other than Christmas products Why chosen: It is important to stay ahead of the curve and introduce new segments and products that complement our existing ranges. This helps the Group grow in other areas and diversify our offering Why chosen: We have in the past been a heavily Christmas-based business, and whilst this is still very important, we also want to focus on growing the non-Christmas (being minor seasons and everyday) part of our business Adjusted operating margin M&A and investment Definition: Adjusted operating margin as a percentage of revenue Definition: Capital expenditure and corporate acquisitions Why chosen: Delivering value to our customers is essential and we must ensure we can continue to compete in our marketplace and win against other suppliers. To do this we aim to improve our margin through improved sourcing and ongoing manufacturing efficiency gains Why chosen: Our ability to invest in efficiency improving projects helps support our competitive position, while our ability to execute earnings accretive M&A ensures the Group continues to grow its scale and reach, helping unlock new markets and synergies 09 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Growing revenue through organic growth with both existing and new customers, suppliers and product areas. Why is this important? Revenue growth is critical to the ongoing success and development of the Group. Our focus on working with the winners allows the Group to drive revenues with our key customers by being their partner of choice. As revenue grows this further underpins our relationship with our customers. Level of business with our top 10 customers (% of total revenue) 2019 2018 48% 39% Sales by channel (%) 2019 2018 62% 38% 50% 50% Mass and discount retailers Other Progress in 2019 2019 has been another successful year for the Group in this focused area of our strategy. We have retained the majority of our key customers and have driven up our revenue through these winning partnerships. We have grown our own top 10 customer revenue to 48% of Group revenues (2018: 39%). We choose to partner with those customers that we see have growth potential, and focus on excellent customer service and quality products at good value to ensure we grow as our customers do. Our sales by channel remains a key focus, in particular given the growth in mass and discount retailers in the market, such as Action, Aldi, Lidl and Dollar Tree. We continue to build our offering in this channel increasing sales by 71% to £277 million, which now represents 62% of Group revenues. Priorities for 2020 and beyond We will drive top line growth in the Group through focusing on our two main ‘working with the winners’ KPIs. Therefore our key priorities for 2020 will be: • Grow our level of business with our top 10 retailers • Grow our business within our channels This includes maintaining and developing our key customer relationships around the Group, in particular with Walmart, given its prominence within the portfolio following the acquisition of Impact Innovation, Inc. (‘Impact’). 10 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019DELIVERING OUR STRATEGYWorking with the winnersStrategy in action: Walmart Walmart is the biggest retailer in the world, with global revenues in excess of $500 billion a year. In the US they operate from nearly 5,000 stores so it is therefore no surprise that Walmart are Design Group’s largest customer, accounting for about 20% of Group revenue. Our relationship with Walmart was strengthened in the year following the acquisition of Impact Innovations, Inc. and following the transaction we are now a key partner supplying celebrations products such as seasonal décor and gift wrap. It was a very proud moment and a great reflection of the fantastic support and dedication the team at Impact has given to Walmart when in March 2019 we were awarded ‘Seasonal and Celebrations Supplier of the Year 2019’. Strategy in action: Value/ Discounter customers Value discounters are one of the fastest growing retail channels around the world and offer the Group significant growth opportunities. One of our key customers, with over 1,300 stores across Europe, is a discounter focused on non-food offering. Last year alone they grew their store base in the Netherlands, Belgium, France, Germany, Luxembourg, Austria and Poland by 21%. Design Group has become one of their key business partners, growing our revenues with this discounter 53% year-on-year. This is driven by product innovation, all round service and a proactive approach. 11 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Develop opportunities in new channels and adjacent product categories while expanding our presence in the growing market for celebration events throughout the year. Why is this important? Design and innovation are our life blood and key to the success of the Group going forward. Consumers are constantly looking for exciting ways to celebrate and our design teams are focused on providing fresh and new ways to enjoy our products. We focus on developing new ways to sell and also new product areas. 19.9 16.3 197.2 Progress in 2019 This financial year saw a first full year’s trading pattern of our ‘not-for-resale’ consumables. This exciting growth area contributed £19.9 million of our overall revenue in 2019, a 97% improvement year-on-year. On average this segment is growing at a fast pace of 53% over two years. This was supported by our investment in a second retail collateral bag machine in our manufacturing facility in Wales and should help drive this new segment even further in the coming financial year. The second of our ‘new’ segments, Creative play, introduced in 2017, has seen a huge drive forward over the past three years, with revenues increasing by 67% in 2019 and at an average of 81% over two years. As outlined in our strategy in action section we are excited to grow this segment further by cross-selling to other areas of the Group. In 2019 our Australian business sold AU$0.4 million of Anker Play Products that they hadn’t the year before. Christmas sales accounted for nearly 56% of our business in 2019 and whilst this is still a huge focus for the Group, diversifying our offering outside of Christmas is a growth area for us. In 2019 we increased our non-Christmas sales by 24% to £197.2 million, with the category growing at an average of 18% over two years. Priorities for 2020 and beyond The Group will always remain focused on being on top of the latest trends in our product categories. In addition, in order to drive the business forward, we will look to expand our product offering outside of our core segments and seasons to ensure we also remain diverse and appeal to all consumers. Therefore our key priorities for the coming fiscal year are: • Growth in new segments • Expanding our non-Christmas sales As well as these, we continue to ensure we have a high quality design and sales team attracting key talent in the industry. We will also continue to explore acquisitions that both complement, enhance and diversify our product portfolio. ‘Not-for-resale’ consumables (Revenue £m) 2019 2018 2017 10.1 8.5 Creative play products (Revenue £m) 2019 2018 2017 9.8 5.0 Seasonal diversity (Non-Christmas revenue £m) 2019 2018 2017 12 158.6 140.8 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019DELIVERING OUR STRATEGYDesign & innovationStrategy in action: Sustainable products Strategy in action: Anker Play Products Environmental challenges that we all face have led to a joint effort between our customers, our suppliers and Design Group to seek new ways to design, develop, manufacture and distribute our products to ensure we are limiting our impact on the environment. This initiative is not only good for the environment but is also good business sense as consumers raise concerns about the sustainability of products sold in stores around the world. Amongst many examples of how we have changed, the Group has reduced our ‘one use’ packaging across a wide range of goods, reducing the amount of plastic and acetate used. In addition, the UK has launched our first fully recyclable cracker, the ‘Tom Smith Kraft Cracker’ with wooden content, no finishes and no plastic. We still have more to do however and remain focused on improving each year. In 2017 we established a joint venture to build a business in the creative play category, an area we felt offered great opportunity as an adjacent category to our existing stationery and gifting product ranges. Over the past two years the business has seen significant revenue growth from $0.9 million in 2017 to $14.5 million in 2019 and continues to offer the opportunity for further successful growth. Currently the business is mainly US based but now it is more established it offers the cross selling opportunity for expansion into our other key territories – Australia, the UK and Europe. 13 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Increasing margins through investments in process and people while pursuing accretive M&A opportunities focused on unlocking synergies and strengthening our ‘one-stop-shop’ position with customers. Why is this important? Driving efficiencies through capital and people investment will help strengthen our margins, while carefully selected acquisitions that complement our business help deliver synergies and drive the overall scale of the Group. Adjusted operating margin as % of revenue 7.1% 7.3% 5.7% 2017 2018 2019 Adjusted overheads as % of revenue 14.9% 14.4% 11.7% 2017 2018 2019 Progress in 2019 Our adjusted operating margin continues to improve year-on-year partially driven by a focus on driving efficiencies in our manufacturing processes. Our continuing focus on cost management has driven adjusted overheads as a percentage of revenue down to 11.7% in 2019 compared to 14.4% in 2018. 2019 saw the first full year of our high speed printing press in Europe operating. This hugely increased our manufacturing efficiencies and overall manufacturing capacity. Further investment in processes this year included: • New ERP platform in our Americas business • A second retail collateral bag machine in Wales • New converting lines in the Netherlands We have also built the strengths of our team through investing in new roles including: • MD of Global Procurement • Group Company Secretary/Legal Counsel • Chief Information Officer • Senior VP of Sales in the USA Priorities for 2020 and beyond • • Delivering improved efficiency through further capital Increase operating margin investment 66.8 • Unlock c$5 million of synergies following the acquisition of Impact Identifying further M&A opportunities • M&A and investment (£m) 2019 2018 2017 7.9 5.1 9.4 2.7 5.2 Corporate acquisitions Capital expenditure 14 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019DELIVERING OUR STRATEGYEfficiency & scaleStrategy in action: Impact Innovations, Inc. Strategy in action: Manufacturing A new printing press On 31 August 2018 we completed the acquisition of Impact Innovations, Inc., a leading supplier of gift wrap and seasonal décor products in the US for $73.5 million, plus a working capital adjustment, representing an EBITDA multiple of 4.9x. This was a transformational deal for the Group creating the largest consumer gift packaging business in the world. It doubled our scale in the US and expanded our product range into the seasonal décor market. Furthermore the combined volumes unlocked the ability to create a world class manufacturing facility in the US, mirroring our operations in the UK and Europe, including planned operational synergies of $5 million per annum from 2021. The deal was significantly accretive from day one and was supported by shareholders with a £50 million equity raise to help finance the acquisition. In April 2018 our European manufacturing facility started production of gift wrap with its brand new state-of-the-art printing press. By June we had it printing at a record breaking 800 metres per minute, at a speed of 72 miles per hour. This investment not only increased capacity in Europe, it also delivered a significant improvement in efficiency and will pay back in just under four years. The success of this investment helped support our business case to order another press for our US operation, following the acquisition of Impact. This press will be delivered in the last quarter of the 2019 calendar year and will be a key driver in the delivery of the $5 million synergies relating to the consolidation of our US manufacturing facilities following the acquisition. 15 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019SOCIAL RESPONSIBILITY At Design Group we aim to lead the way in social responsibility through respecting our people and our environment and ensuring our supply chains are sourcing responsibly. E n v ironmental Customers Being their Partner of choice P r o & D d e u v c t e l o D p e s i g n m e n t istribution ulfilm ent D F & B u s i n e s s i n Manufac t u r & Sour c i n g g People 16 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Environmental People Business Our supply chain It’s our responsibility to make sure every worker in our supply chain is protected and respected. In our facilities, we ensure that all employees receive the relevant living wage, and we promote equality amongst our workforce across all diversities. Employee safety is paramount throughout the Group and we ensure that we operate within all safety laws and regulations within the territories where we are based. Our code of business conduct sets out our position on all of these key principles and is being rolled out across the globe to all Design Group employees. Working closely with our suppliers Design Group is committed to engage with our suppliers fairly and lawfully and source responsibly. We are SEDEX members and work closely with ‘Stronger Together’, a multi-stakeholder initiative aiming to reduce modern slavery, and our suppliers to ensure they respect human rights, promote decent working conditions and improve sustainability across our supply base. Responsible sourcing Through regular audits (ethical, quality and technical) we work to ensure the factories with which we produce goods meet relevant requirements, which comply with standards set by Business Social Compliance Initiative (‘BSCI’), Ethical Trading Initiative (‘ETI’), Workplace Conditions Assessment (‘WCA’), and Consumer Trade Partnership Against Terrorism (‘CTPAT’). Environmental Taskforce Environmental issues are taken very seriously given the nature of our business. As a Group we ensure that we are fully compliant with all legal environmental requirements. We encourage all parts of the business to look to reduce our impact on the environment and look to continually improve each year through the development of new environmentally friendly products and better processes that reduce our carbon footprint. This year saw the launch of our Environmental Taskforce across the Group who will be working with third party specialist organisations, with the aim to be regarded by our customers as leaders in bringing improved sustainable product solutions to all product categories in the Group’s portfolio. The taskforce is comprised of a select group of senior management who are charged with enabling the people in our offices, warehouses and supply chains to bring the Group’s environmental agenda to life and into the core of their business practice. Key environmental initiatives As a key part of the agenda we have identified initiatives that focus on ensuring that the Group is doing all it can to transform the effect of our business on the environment. These include using more sustainable materials in our production to move towards fully recyclable packaging, a focus on reducing our carbon footprint, reducing waste in the manufacturing process, and a continued focus on responsible sourcing. Starting with crackers A recent developments is a completely recyclable cracker range for customers in the UK. Other initiatives include removing plastic from a selection of product packaging, removing non-recyclable glitter from a number of wrap ranges and reducing the size of wrap cores to reduce the volumes and cost of our transport. We still have a long way to go, but we will continue to improve year-on-year as increasing our attention on the environmental impact of the Group is moving us forward in the right direction. A truly global workforce The average number of employees during the year was 2,364 within Design Group. Our people are based across the globe, with offices in Australia, Hong Kong, China, the Netherlands, Poland, the USA and the UK. Not to mention our global sales team across many locations around the world. Our people make us who we are Design Group wouldn’t be who we are without the passion, drive and determination of our talented teams across the globe in all disciplines. They are the key to our success and we continue to work towards ensuring that our people are committed, loyal and engaged by investing in their capabilities and desire to learn and develop. Pages 44 and 45 of our corporate governance review highlights our focus on training, talent identification and personal development mechanisms as well as employee engagement. A charitable bunch One key desire of all our teams across the Group is to ensure that Design Group is making a positive difference in its surrounding communities. Teams across the globe have been involved in many charitable initiatives this year, including; raising money for Breast Cancer, donations to support Ronald McDonald House, provider of free ‘home away from home’ accommodation; donations of toys to Family Promise as well as reading to students within the Liberty County School System; and donating blankets for the winter months to Senior Citizens Inc. in Savannah. Design Group UK has teamed up with the Trussell Trust (UK national food bank coordinator) and for every case of catering crackers sold we donate £2 to the Trussell Trust. The Group team also spent an afternoon sorting donations for Willen Hospice who are providers of specialist palliative care in Milton Keynes. 17 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019EXECUTIVE REVIEW Investing in growth, delivering record profits. Paul Fineman Chief Executive Officer Giles Willits Chief Financial Officer 18 Overview We are pleased to report that the Group has achieved another excellent year of adjusted profit and adjusted earnings per share growth as a result of strong performances from all regions. It is particularly pleasing to have delivered significant organic growth whilst also benefiting from the transformational acquisition of Impact Innovations Inc. (‘Impact’) and other capital investments across the Group. The diversified nature of our business, alongside excellent customer relationships, the strength of our design and innovation capabilities and our focus on service have combined to make this another record year for IG Design Group plc. Furthermore, our focus on cash generation has resulted in a significant increase in our year-end cash, and delivered a further reduction in average leverage, despite increased capital and acquisition investment. During the year, Group revenue increased by 37% to £448.4 million (2018: £327.5 million) with adjusted profit before tax increasing by 39% to £30.3 million (2018: £21.8 million). Adjusted earnings per share increased 33% to 29.3p (2018: 22.1p). Average leverage improved from 1.5 times to 1.3 times, whilst the year-end positive net cash balance increased from £4.4 million in 2018 to £17.1 million in 2019, reflecting the effectiveness of our focus on converting profit into cash and the highly cash generative dynamics within our business. IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Adjusted profit before tax Adjusted earnings per share Adjusted cash generated from operations £30.3m 29.3p £50.5m Reported profit before tax Reported earnings per share £17.3m 16.0p Reported profit before tax reduced from £19.7 million in 2018 to £17.3 million in the current year, primarily as a result of the exceptional cost associated with the acquisition of Impact and the subsequent restructuring in the US. Reported diluted earnings per share is 16.0p (2018: 20.5p). The results are testament to our successful focus on the Group’s key strategic drivers; working with the winners in both existing and new channels and markets; design and innovation, growing existing, new and adjacent product categories; and efficiency and scale, investing in state-of-the-art machinery across the globe, growing our scale through acquisitions and leveraging synergies from these. The combination of reduced average leverage and strong cash generation has underpinned a 42% increase in the dividend from a level of 6.0p for 2018 to a total of 8.5p for 2019. This increase not only reflects the growth in the business but also the commitment to reduce dividend cover, which decreased to 3.4 times compared to 3.7 times in the prior year. Our strategy Our business is successful as a result of our focus on growing by maximising the impact of our key strategic drivers, which underpin the Group’s ethos and are broken down into three key areas: Working with the winners We are focused on increasing our revenue and profitability through growth in both existing and new channels and markets by ensuring we maintain excellent relationships with our key customers, as well as developing relationships with new customers. We want to be part of our customers’ success stories. As the retail market evolves and progresses, we work closely with our key customers with the aim of being their partner of choice going forward. Our top 10 customers now account for 48% of our global revenues (2018: 39%). In order to do this, we need to have the capability to manufacture and/ or source a broad range of products, leveraging from improved sourcing processes as our business grows. Many of our customers work across multiple territories and have global ambitions. As such, our geographic and channel diversity in key markets is essential to help support our customers as they grow. Our businesses are experts in their territories and we ensure that we know what works well for our customers in each of those markets. Reported cash generated from operations £44.8m To continue our growth trajectory with our customers, we follow key market trends including the increase in consumer demand for mainstream mass and discount retailers, as well as specialist ‘experiential’ retailers and e-commerce opportunities. Our focus on working with the winners helps ensure we are benefiting as our customers continue to grow. But it also requires us to decide who we will not work with and this has been especially important during a year that has witnessed challenging retail markets, with a number of high profile retailers facing financial troubles. This is highlighted by our low bad debt write offs at 0.1% of revenues. The Impact acquisition has resulted in a strengthening of our relationship with Walmart, the largest retailer in the world. With over 11,000 stores worldwide, Walmart is our largest customer, and now accounts for approximately 20% of the Group’s revenue. Our focus on great customer service is a must for maintaining and developing all relationships, and we were delighted that Impact was awarded Walmart Supplier of the Year in March 2019. Next year will see us continue to grow our business with Walmart. 19 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019In 2019 over 750 million units of consumer products sold 20 EXECUTIVE REVIEW CONTINUED Revenue driven by our transformational acquisition and significant organic growth. Our strategy continued Design & innovation Our customers, as do their customers, look to us to be at the forefront of product design and innovation. This means we look to develop the best designs for innovative and quality products, while maintaining a focus on value and consumer appeal. The Group has succeeded in growing revenues through developing new and adjacent category products as well as increasing revenues in existing product areas. The addition of Impact product categories has strengthened the Group’s ability to offer a complete ‘one-stop-shop’ to customers including products not previously forming part of the Group’s portfolio such as Seasonal décor. We also continue to diversify our product range by focusing on occasions other than Christmas that are celebrated across the globe throughout the year with ‘minor seasons’ now generating over £20 million in global sales. During the year we again saw a significant increase in revenues in the US from our focus on our Creative play and related products business. We are now looking to leverage across all of the territories in which we operate around the world, while also further expanding our ‘not-for-resale’ products revenue which has now broadened in terms of product offering and geographical reach. Technological development is a key part of this strategy and this extends to adapting to changes in consumer habits and being dynamic in providing customers with new channels to purchase their celebration products. We have been busy developing new celebration product offers that work online and will be trialling these with customers during the remainder of the 2019 calendar year. Coupled with innovation in product design, we have also increased our focus on developing more sustainable products and improved sourcing, manufacturing and distribution to reduce our global carbon footprint. We believe this focus is not only the right strategy to help the environment but can also be a source of competitive advantage. Recent highlights include developing a completely recyclable cracker range for customers in the UK, removing plastic from a selection of product packaging, removing non-recyclable glitter from a number of wrap, bag and card ranges and reducing the size of wrap cores to further rationalise shipping volumes and cost. We are committed to continuously increasing our attention to the environmental impact of the Group and have recently established an Environmental Taskforce that will be working with third party specialist organisations. We wish to ensure that we can be regarded by our customers as leaders in bringing improved sustainable product solutions to all product categories in the Group’s portfolio. Efficiency & scale As we grow we remain intent on driving up operating margins through investment in processes and people as well as by unlocking synergies following acquisitions, using our global reach and capabilities to leverage Group economies of scale. The year has seen significant capital investment across the Group totalling £7.9 million (2018: £9.4 million). Key areas included investment in further bag making equipment in the UK to support the growth of our ‘not-for-resale’ business, in new paper converting lines in the Netherlands and the continued investment in our US IT capabilities. As ever, we look for quick return projects that help increase our capacity, improve our efficiency and deliver a better service. In addition we are building the capabilities of the team around the Group. In the US this included the excellent team at Impact, and a new Chief Information Officer. In Asia we have introduced a newly created position of Global Procurement Managing Director and at Group we have added a Group Legal Counsel to the team. These new positions help extend the strength of the teams around the world, bringing new skills that will ensure we are properly resourced to deliver our strategy. Furthermore, the acquisition of Impact was a pivotal moment for the Group further extending the geographical diversity of the business. Impact is one of the leading suppliers of gift wrap and seasonal décor products in the US, with long standing relationships with major US retailers. Following the acquisition in August 2018, the Group has proceeded quickly with the integration of Impact with our existing US business, combining manufacturing operations into one facility in Memphis and we are already seeing the benefits from the synergies and the increased scale of the overall business, including successes in cross selling Impact products across the Group. 21 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019EXECUTIVE REVIEW CONTINUED Strong cash conversion supported increased investment while delivering reduced average leverage. Targets for growth Our strategy focuses on delivering the following key commitments to shareholders: • double-digit growth in adjusted earnings per share – over the past five years we have averaged 28% annual growth; • maintaining average leverage between 1.0 times and 2.0 times – since 2015 the Group’s leverage has reduced from 4.1 times to 1.3 times for the year ended 31 March 2019; and • a progressive dividend policy targeting dividend cover of 2.5 times earnings per share in the near future – in 2019, dividend cover reduced to 3.4 times. Outlook The Group is focused on continuing to deliver year-on-year growth and we are greatly encouraged with prospects for this trend to continue in 2020 and beyond. Despite the ongoing challenging retail marketplace, and geo-political uncertainties, our order book across the business shows pleasing growth year-on-year. In the US we continue our focus on delivering the synergies from the acquisition of Impact and the subsequent restructuring of the business. This includes further investment in our IT systems, taking delivery of our new printing press in the US and further restructuring and rationalisation of processes. We continue to invest in building the capability and strength of our teams around the world to ensure we remain agile to the opportunities that will deliver further successes. In particular, in the US we have recently recruited new senior management to lead our sales and manufacturing teams. We continue to set ourselves ambitious targets and remain focused on creating value for all stakeholders through the delivery of our strategy. We are excited by the positive start to the new financial year and the potential to drive the business forward through compelling M&A opportunities. Acquisition of Impact drives revenue increase of 27% Adjusted operating margin increased to 7.3% Over 750 million units sold, across more than 50,000 SKUs 22 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Operational regional highlights Our Group looks to leverage our global scale as a diversified, design-led, multi-product category and multi-channel business supported by world class manufacturing and sourcing operations. With an effective mix of creativity and reliability, our teams strive to deliver commercially successful design, product development and innovation across our global customer base. The success of this can be seen by the resulting growth in all of our regions in the year ended 31 March 2019. Segmental revenue Adjusted operating profit Adjusted margin % Group revenue 2019 2018 % growth 50% Americas 28% UK 14% Europe $m £m €m 9% Australia AU$m (1%) Elims/Central costs £m 100% Total £m 289.9 127.1 73.0 70.3 (5.5) 448.4 158.8 123.3 58.5 63.1 (4.8) 327.5 83% 3% 25% 11% — 37% 2019 20.0 8.1 10.0 7.7 (4.1) 32.6 2018 % growth 12.7 7.9 7.5 5.0 (4.0) 23.2 57% 3% 33% 54% — 41% 2019 % 6.9% 6.4% 13.7% 10.9% 2018 % 8.0% 6.4% 12.9% 7.9% — 7.3% — 7.1% Americas Our Americas business has undergone significant change in 2019. With the Impact acquisition we have doubled the size of the US business, leading to a significant restructure to merge our manufacturing facilities into one location, as well as affecting the planned ERP systems implementation. Despite all of this change, the US has delivered strong results with revenue increasing 83% to $289.9 million (2018: $158.8 million), of which $114.9 million related to the Impact acquisition. Adjusted operating profit followed a similar trend, up 57% at $20.0 million (2018: $12.7 million). The Americas now accounts for 50% (2018: 37%) of the Group’s revenues. Adjusted operating margins at 6.9% were down on the previous year primarily reflecting the acquisition of Impact and the mix of product revenues. Going into 2020 margins are set to improve reflecting the full year of Impact, the delivery of synergies following the acquisition and subsequent US restructuring, as well as further improvements in product mix toward higher margin categories. The Group has shown good organic growth across all channels, but in particular in our Creative play offering in the Americas. Anker Play Products, launched as a start up in July 2016, delivered its first year of profit within just three years from launch. This is a particularly pleasing start and is set to continue with the 2020 order book already looking very promising as we continue to develop our offering both in the Americas as well as globally. The most prominent story for the US business is the acquisition of Impact. Formerly a competitor of Design Group in the US gift wrap sector, the combined synergies and expertise we now have as a result of the acquisition puts us on a great footing going forward. The integration of facilities is going to plan, with gift wrap manufacturing operations now under one roof in our Memphis facilities. This underpins our drive to improve efficiencies in our manufacturing processes in the region, and further capital investment is underway in this respect with the delivery of the new state-of-the-art printing press scheduled for the final quarter of the 2019 calendar year. Since the acquisition in August 2018 we have already seen the delivery of identified operational synergies in line with expectations, as well as strong revenue growth in their two main product categories and excellent growth of Impact’s ‘not-for-resale’ category which achieved record revenue levels. We remain firmly on track to deliver by 2021 annual operational savings of $5 million. The addition of Impact and their extended product offering allows the Group to offer adjacent product categories to our customer base and provides good cross-selling opportunities which we will continue to develop over the coming years having already seen early success in Seasonal décor in the UK. The new ERP system has gone live in the business, with additional roll-out and development by the end of 2020. The new system will not only drive further efficiencies from one standardised operating platform but also increase the US business’ capacity and is a key enabler for the growth plans in this territory. We continue to monitor the developments of the ongoing trade discussions between the US and Chinese governments. The business has been highly pro-active in implementing mitigation strategies and has to date, successfully managed the effect of the 10% tariffs introduced in September 2018, and is currently reviewing the full extent of the recent increase of tariffs to 25%. We expect the financial effect to be limited to the usual financial contingencies maintained by the Group and that the successful strategies we have adopted to date continue to be effective. 23 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 EXECUTIVE REVIEW CONTINUED Revenues of ‘not-for-resale’ products doubling to almost £20 million globally 24% increase in value of non-Christmas season products £7.9 million in fast payback capital expenditure Additional product innovation this financial year includes the development and launch of our sustainable product portfolio which includes stationery made from recycled materials. Europe Our business in Europe delivered another excellent performance in 2019 accounting for 14% (2018: 16%) of the Group’s revenue. Sales increased 25% to €73.0 million (2018: €58.5 million) with adjusted operating margins up to 13.7% (2018: 12.9%). As a result, adjusted operating profit was up 33% to €10.0 million (2018: €7.5 million). This is driven by organic growth and an excellent example of the Group’s ‘working with the winners’ strategy in action. The European business has some excellent trading relationships with key leading retailers across the region. For example, Anchor, our business in the Netherlands selling on-trend photo frames and photo-based gift accessories, has built on its relationship with its main customer, a fast-growing international non-food discounter with stores across Europe. Anchor has been a key business partner throughout their historic and continued growth. Sales in this area have achieved another record level this financial year. In addition, our Celebrations business in the Netherlands, which is benefiting from its investment in a new state-of-the-art printing press in March 2018, has also focused on extending category offerings, increasing SKUs and developing new business with key customers, including a fast-growing major discount grocer. Australia Sales in Australia achieved record levels, up 11% year-on-year at AU$70.3 million (2018: AU$63.1 million), with adjusted operating margins improving at 10.9% (2018: 7.9%), delivering adjusted operating profit up 54% at AU$7.7 million (2018: AU$5.0 million). Our business in Australia accounted for 9% of overall Group revenue (2018: 11%). The acquisition of Biscay Pty Limited (‘Biscay’) in January 2018 has delivered the expected synergies and growth in our Australian business despite market headwinds. Margins have improved as a result of focus in improved product mix. The Australian business faces challenging market conditions with some rationalisation of our national accounts. As such we expect revenues to step back in 2020 with resulting effect on operating profits, albeit the effect on EPS will be tempered by the ownership structure in this region. Operational regional highlights continued UK Sales volumes and values continue to grow in our UK business, which now accounts for 28% (2018: 38%) of our overall Group revenue. Sales in the UK increased 3% to £127.1 million (2018: £123.3 million) delivering adjusted operating profit up 3% at £8.1 million (2018: £7.9 million) in a very challenging retail market. The unification of the UK business continues to evolve, and this year saw a further rationalisation of the UK team and further development of processes and activities to leverage our scale in the UK. Whilst we are seeing benefits from the move towards increased cohesiveness, as can be seen in the revenue and profit growth, the market is still very competitive reflected by our flat adjusted operating margins. Our ‘not-for-resale’ bags initiative, launched in 2018, continues to be a growth area for the UK business. We have invested in an additional bag machine this financial year, underpinning our view that this is an excellent opportunity to grow the business with a new product offering and develop relationships with new customers. Sales in this product category alone have grown 53% compared to 2018. We expect 2020 to see further growth in bag production volumes with new customers. 24 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019In 2019 over 500 million metres of ribbon sold 25 In 2019 over 20 million photo frames sold 26 EXECUTIVE REVIEW CONTINUED Our products and brands Revenue by product category Celebrations Stationery and creative play Gifting ‘Not-for-resale’ consumables Total 31 March 2019 31 March 2018 % 77 8 11 4 £m 345.3 36.9 46.3 19.9 448.4 % 74 10 13 3 £m 243.5 31.2 42.6 10.2 327.5 Part of the Group’s ongoing strategy is to be partner of choice to our customers which means providing our broad customer base with a ‘one-stop-shop’ product offering which is a compelling blend of great design and value for money products across all our categories. This was further enhanced this year with the acquisition of Impact, adding Seasonal décor to our product categories. A key focus, more so than ever before, both this year and going forward is the development of innovative and design-led products that are highly attractive to our customers, and in turn to their customers. This, combined with our proven ability to deliver first class customer service continues to drive our business forward. Our culture is one of ongoing improvement, with a determination to perpetually ‘raise the bar’ in all aspects of our business and this continues to be a mantra we firmly adhere to. With our development of sustainable and recycled products and offering acetate free, fully recyclable packaging where possible, we aim to set an industry standard when it comes to environmental approach. Since last year, we have evolved even further as a diversified, multi-category, multi-channel and multi-product manufacturer and supplier with our activities and sales generated across four core categories: • • • • ‘Celebrations’, including gift packaging, greetings, seasonal décor and partyware products; ‘Stationery and creative play’, including home, school and office products; ‘Gifting’, our design-led giftware products category; and ‘Not-for-resale’ consumables focused on branded store bags, and now point of purchase products. All our core product categories grew in the year with strong growth specifically in Stationery and creative play and Gifting driven by our focus on new higher margin sales initiatives in these areas. This year, excluding ‘not-for-resale’ consumables, we estimate that over 750 million items, from over 50,000 SKUs have been manufactured, sourced and delivered to our customers during the year, of which 31%, £137.4 million sales, carry our Group’s generic and licensed brands. Particular growth year-on-year has been in Celebrations, Creative play products and our new Seasonal décor offering. The business successfully continued to broaden the sales generated throughout the year outside of specific Christmas based products increasing sales generated in our ‘Everyday’ and ‘Minor seasons’ by 24% year-on-year, which together account for 44% of the total revenues of the Group. The increasing retail focus on celebrating Valentines, Easter and other than Christmas events led to revenues for these occasions exceeding £20 million. This is an exciting growth opportunity for all the business units across the Group. The Group has a strong team of experts within our sourcing and manufacturing operations based in Hong Kong and China, together with a broadening base throughout Asia, which was further enhanced by Impact’s sourcing team which joined us in September 2018. The sourcing teams have maintained their continued performance record and delivered excellent standards of service that further boosts ongoing loyalty of our large customer base. Our team Design Group wouldn’t be what it is without the passion, drive and determination of our talented teams across the globe in all disciplines. They are the key to our success and we continue to further invest in our teams by building on their core capabilities. We are, once again, hugely thankful to all of our colleagues for their contribution during what has been another year of exceptional performance in ever more challenging and competitive markets. 27 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 EXECUTIVE REVIEW CONTINUED Alternative performance measures This review includes alternative performance measures (‘APMs’) that are presented in addition to the standard IFRS metrics. The Directors believe that these APMs provide important additional information regarding the adjusted performance of the business including trends, performance and position of the Group. APMs are used to enhance the comparability of information between reporting periods and segmental business units by adjusting for exceptional or uncontrollable factors which affect IFRS measures, to aid the understanding of the Group’s performance. Consequently, APMs are used by the Directors and management for strategic and performance analysis, planning, reporting and reward setting. In order to show when such measures have been used, the APMs are highlighted in blue throughout the Executive Review. The APMs are adjusted profit, adjusted EBITDA, adjusted operating profit and adjusted EPS. The definitions of APMs used are listed below: • Adjusted EPS – Fully diluted earnings per share before tax, exceptional items, acquisition amortisation and LTIP charges • Adjusted profit – Profit before tax, exceptional items, acquisition amortisation and LTIP charges • Adjusted operating profit – Profit before interest, tax, exceptional items, acquisition amortisation and LTIP charges • Adjusted EBITDA – EBITDA before exceptional items and LTIP charges Exceptional items These include acquisition related costs and reorganisation and restructuring costs. These items are excluded to present the performance of the business in a consistent manner and in line with how the business is managed and measured on a day-to-day basis. 28 They are typically gains or costs associated with events that are not considered to form part of the core operations, or are considered to be a ‘non-recurring’ event (although they may span several accounting periods). Further detail can be seen in note 10 to the financial statements. Acquisition related costs Costs directly associated with acquisitions, including legal and advisory fees on deals, form part of our reported results on an IFRS basis. These costs, however, in our view form part of the capital transaction and as they are not attributed to investment value under IFRS 3, they are excluded from our adjusted measures for the purposes of reporting underlying results. Similarly, where acquisitions have employee related payments (exclusive of LTIPs) which lock in and incentivise legacy talent, we have also excluded these costs. As these costs are employment linked, they are treated as an expense and form part of the IFRS results, however, as with transaction costs, we do not consider these to form part of the underlying results of the business. In accordance with IFRS 3, on acquisition, businesses need to be fair valued, which can result in an uplift to stock on hand relating to sales orders already attached to the acquired stock. This uplift will distort the margins associated with the stock, and typically unwinds quickly as stock is sold soon after acquisition. The unwind of the stock uplift is excluded from our adjusted results as we deem this to be a cost of the acquisition. Reorganisation and restructuring costs In order to maximise efficiencies, as well as recognise synergies from acquisitions, certain projects are undertaken to achieve these. These are projects outside of the normal operations of the business and typically are very sizeable in terms of costs. This is particularly relevant during a large scale restructuring that can result in some disruption to the normal business (for example manufacturing patterns) leading to operational inefficiencies occurring in this time frame. If we deem this to be the case, we will present the details and associated costs of the projects separately in our financial statements and exclude them from our adjusted measures. LTIP costs As part of our senior management remuneration, the Group operate a Long Term Incentive Plan (‘LTIP’) in the form of options for ordinary shares of the Group. In accordance with accounting principles, despite this plan not being a cash cost to the business, a share-based payments charge is taken to the income statement. We consider that these charges do not form part of the underlying operational costs and therefore exclude them from our adjusted measures. Acquisition amortisation costs Under IFRS, as part of the acquisition of a company, it is necessary to identify intangible assets such as customer lists and brands which form part of the intangible value of the acquired business but are not part of the acquired balance sheet. These intangible assets are then amortised to the income statement over an appropriately judged period. These are not operational costs relating to the running of the acquired business and are directly related to the accounting for the acquisition. As such we exclude them from the underlying results of the business. IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Alternative performance measures A full reconciliation between our adjusted and reported results is provided below: Adjusted EBITDA Exceptional items LTIP charges EBITDA Adjusted profit before tax Exceptional items Acquisition amortisation LTIP charges Reported profit before tax Adjusted profit after tax Exceptional items Acquisition amortisation LTIP charges Reported profit after tax Adjusted EPS Exceptional items (including tax effect) Acquisition amortisation (including tax effect) LTIP charges (including tax effect) Reported diluted EPS 31 March 2019 31 March 2018 £m £m Notes 10 25 Notes 10 12 25 Notes 23 23 23 38.7 (8.3) (3.0) 27.4 £m 30.3 (8.4) (1.6) (3.0) 17.3 £m 23.2 (6.4) (0.7) (2.8) 13.3 Pence 29.3 (8.6) (0.9) (3.8) 16.0 28.0 0.5 (2.2) 26.3 £m 21.8 0.5 (0.4) (2.2) 19.7 £m 15.6 0.8 (0.3) (1.8) 14.3 Pence 22.1 1.4 (0.3) (2.7) 20.5 The APMs are also used in a number of the Group’s performance metrics detailed below: • Adjusted overheads – Selling expense, administration expense and other operating income excluding exceptional items, acquisition amortisation and LTIP charges • Adjusted operating margin – Adjusted operating profit divided by revenue • Cash conversion – Adjusted cash generated from operations divided by adjusted EBITDA • Return on capital employed – Adjusted operating profit divided by monthly average net capital employed (excluding cash and intangibles) • Average leverage – Average debt divided by adjusted EBITDA • Dividend cover – Adjusted EPS divided by total dividends for the year • Interest cover – Adjusted finance charge divided by adjusted profit 29 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 EXECUTIVE REVIEW CONTINUED Detailed financial review The Group has delivered another excellent performance in the financial year to 31 March 2019. 31 March 2019 £m 448.4 84.6 (52.0) 32.6 7.3% (2.3) 30.3 (8.4) (1.6) (3.0) 17.3 (4.0) 13.3 31 March 2018 £m % change 327.5 70.0 (46.8) 23.2 7.1% (1.4) 21.8 0.5 (0.4) (2.2) 19.7 (5.4) 14.3 37 21 11 41 67 39 (12) (8) £0.4 million) and an LTIP charge of £3.0 million (2018: £2.2 million). Adjusted profit after tax increased 49% to £23.2 million (2018: £15.6 million) with reported profit after tax for the year at £13.3 million (2018: £14.3 million). Finance charge Finance costs at £2.3 million (excluding arrangement fees of £0.2 million relating to the additional facility to fund the Impact acquisition, which are included in exceptional costs below) compared to £1.4 million in the prior year. This reflects the increase in central banks’ base rates and the higher average debt of the Group following the acquisition of Impact. Adjusted interest cover was 14.1 times in 2019, compared to 16.7 times in 2018 reflecting the additional cost of the debt for the Impact acquisition. Exceptional items The Group incurred exceptional costs in the year totalling £8.4 million (2018: exceptional gain of £0.5 million). The costs related to three items: • Acquisition of Impact (£2.4 million) – legal and due diligence fees and deferred employee related amounts associated with locking in and incentivising the legacy Impact team. • Restructure of our US operations (£5.6 million) – these include the costs for closure of our manufacturing facility in Midway and relocation of equipment and personnel to Impact’s manufacturing site in Memphis, Tennessee. Along with manufacturing inefficiencies associated with the start up of converting operations (including machine calibration and operator training). In addition the costs include redundancies and the sale of the Midway freehold property less associated costs. • UK unification – £0.4 million of costs associated with relocating a part of our UK business to another site and associated redundancies with the move. The net cash outflow in the year associated with exceptional costs was £0.3 million, which includes the £4.8 million cash inflow from the sale of our Midway site in Georgia. LTIP charges LTIP charges have increased in the year to £3.0 million (2018: £2.2 million). The increase reflects the higher share price alongside an increase in the number of shares granted compared to the prior year. Revenue Gross profit Overheads Adjusted operating profit Adjusted operating margin % Finance charge Adjusted profit before tax Exceptional items Acquisition amortisation LTIP charges Profit before tax Tax Profit after tax Revenues for the year of £448.4 million have grown 37% over the previous year (2018: £327.5 million) of which 9.8% relates to organic growth and the remainder as a result of the acquisition of Impact. At like-for-like foreign exchange rates the overall revenue increase is the same. Adjusted operating profit increased by 41% to £32.6 million (2018: £23.2 million) and 40% at like-for-like exchange rates. Adjusted operating profit margins increased to 7.3% (2018: 7.1%) as we continue to focus on higher margin product categories along with increased efficiencies and a drive on cost management. Gross margins fell in the year, largely as a result of the effect of the acquisition of Impact and product mix to 18.9% (2018: 21.4%). Overheads as a percentage of revenue reduced to 11.7% compared to 14.4% in the prior year. Overall our adjusted profit before tax increased 39% in the year to £30.3 million (2018: £21.8 million) reflecting the strong performance of the business. Our reported profit before tax at £17.3 million (2018: £19.7 million) declined year-on-year reflecting the exceptional cost of £8.4 million (2018: exceptional gain £0.5 million), amortisation of assets acquired through business combinations of £1.6 million (2018: 30 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 In 2019 over 60 million units of Stationery and creative play products sold 31 EXECUTIVE REVIEW CONTINUED Taxation The Group aims to manage its tax affairs in an open and transparent manner, including being fully compliant with all applicable rules and regulations in tax jurisdictions in which it operates. We have not entered into any tax avoidance or otherwise aggressive tax planning schemes and the Group continues to operate its tax affairs in this manner. The tax charge is £4.0 million compared to £5.4 million in the prior year. The year-on-year reduction is driven by the increased exceptional costs in the year, part of which are allowable for tax purposes. The effective tax rate on adjusted profits is 23.4% (2018: 28.4%). The reduction primarily reflects the impact of the lower US federal tax rate following the US tax reform in January 2018. Overall tax paid in comparison to the prior year increased slightly to £3.7 million (2018: £3.1 million) largely as a result of higher profitability in tax paying territories including Europe and Australia. Earnings per share Adjusted, fully diluted earnings per share grew 33% to 29.3p (2018: 22.1p) reflecting the improved adjusted profitability of the business. Reported basic earnings per share are 16.0p (2018: 21.4p). Dividends The Board is pleased to announce a final dividend of 6.00p (2018: 4.00p) bringing our total dividend in respect of the year to 8.50p per share, up 42% (2018: 6.00p). This represents 3.4 times dividend cover compared to 3.7 times in 2018. This improvement in pay-out is in line with our progressive dividend policy and our commitment of moving our dividend cover over time towards at least two and a half times adjusted earnings per share. Return on capital employed Improving the return on capital employed is one of our promises to the shareholders and in line with this each region has its own target to improve its return on capital employed. Overall, the Group saw the return on capital employed increase to 24.3% in 2019 from 22.5% in 2018. Cash flow and net cash At 31 March 2019, the net cash position has improved by £12.7 million to £17.1 million compared to the prior year at £4.4 million. This reflects the improved adjusted profit performance in the year, with adjusted EBITDA up 38% to £38.7 million (2018: £28.0 million) and strong net working capital inflows which together delivered an outstanding EBITDA to operating cash conversion of 130.5%. Adjusted EBITDA Change in trade and other receivables Change in inventory Change in creditors, provisions and accruals Adjusted cash generated from operations Exceptional items from operations LTIP Cash generated from operations Proceeds from sale of property, plant and equipment Net capital expenditure Business acquired Cash acquired with acquisition Tax paid Interest paid (including exceptional items) Dividends paid to non-controlling interests Equity dividends paid Proceeds from issue of share capital Other Movement in net cash Opening net cash Closing net cash 32 31 March 2019 £000 38.7 25.6 4.3 (18.1) 50.5 (5.0) (0.7) 44.8 5.3 (7.9) (66.8) 1.2 (3.7) (2.1) (1.1) (4.6) 48.3 (0.7) 12.7 4.4 17.1 31 March 2018 £000 28.0 (9.1) 0.4 3.3 22.6 (0.5) (0.4) 21.7 2.6 (9.4) (5.1) — (3.1) (1.5) (0.6) (3.0) 0.1 (0.3) 1.4 3.0 4.4 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Working capital The main driver for the working capital movements in the year was the Impact acquisition. We acquired Impact on 31 August 2018 at the peak of their working capital cycle when trade receivables, inventory and creditors were close to their highest annual level. As a result following acquisition the Group benefited from a net Impact related working capital inflow of £24.8 million as inventory was despatched and receivables were collected from customers, over and above funding the creditor payments. Excluding the cash inflow from the Impact acquisition there was a net working capital outflow of £13.0 million, reflecting the need for additional working capital to support the growth of the business year-on-year. In the ever-challenging retail environment it is even more important to ensure we actively track debtor days and credit rating profiles to ensure we mitigate our exposure to credit risk with regard to our debtors. As a result we kept bad debt write off to less that 0.1% of revenue (2018: 0.1%), a testament to our active credit risk management process. Stock levels increased year-on-year, largely due to Impact, however excluding this, our UK and Europe businesses have built up stock levels earlier in the production cycle than normal to gain further efficiencies from our high-speed printing operations, and to mitigate against the potential risks to our supply chain relating to Brexit. Capital expenditure During the year we invested £7.9 million (2018: £9.4 million). The key projects include: • the acquisition of new converting lines in the Netherlands; • the introduction of a second bag machine in our UK factory to provide ‘not-for-resale’ branded bags for retailers; and • a new ERP system in the US. There are also smaller capital projects that we have invested in throughout the year and in all cases we seek rapid payback from our investment and monitor projects closely both during implementation and then through the payback period to ensure we achieve the expected returns. Impact acquisition and associated share capital issue In August 2018 the Group acquired 100% of the equity of Impact Innovations Inc. The deal completed for total consideration of $73.5 million on a cash and debt free basis representing a 4.9x adjusted EBITDA multiple with an additional working capital and other adjustment. In total, cash totalling £66.8 million was paid in the year for the business. The acquisition was funded using a combination of debt and an equity share placing. The net proceeds from the share issue were £48.3 million. Full details of the assets acquired, which included stock, customer lists and the Impact brand, can be found in note 31 to the consolidated financial statements. Average leverage and treasury As our business is very seasonal in nature we spend a period of our year in a net debt position and therefore average leverage is the key measure the Group adopts in relation to debt. We seek to maintain our average leverage position in the range between 1.0 times and 2.0 times over the long term. Average leverage for the year to 31 March 2019 was 1.3 times, down from 1.5 times in the prior year, demonstrating the continued focus on our balance sheet and working capital management throughout the year. On 5 June 2019 we entered into a new three year Group facility with a club of five banks chosen to reflect and support the geographical spread of the Group. HSBC continue to be a significant partner and have been joined in the new facility by NatWest, BNP Paribas, Sun Trust and PNC. The new Group facilities, which run to May 2022 comprise: • a revolving credit facility (‘RCF A’) of $80.0 million; • a further flexible RCF (‘RCF B’) with availability varying from month to month of up to £85.0 million. This RCF is flexed to meet our working capital requirements during those months when inventory is being built within our annual business cycle and is nil when not required minimising carry costs; and • the existing invoice financing arrangements in Hong Kong which will remain in place for a minimum of the first year. In total, the available facilities at approximately £160 million are more than sufficient to cover our peak requirements. Being partially framed in US dollars they provide a hedge against currency movements. The facilities, which do not amortise with time, include an additional uncommitted amount to finance potential acquisitions. 33 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 New accounting standards IFRS 16 ‘Leases’ is effective for accounting periods beginning on or after 1 January 2019. The Group plans on adopting the modified retrospective approach. The estimated impact to profit before tax for the 2020 financial year is a reduction of between £nil and £1.0 million. Non-current assets are expected to increase by £31.0 million and gross liabilities are expected to increase by £35.0 million. The Group has elected not to recognise right of use assets and lease liabilities for short-term leases or low-value assets and will continue to expense the lease payments associated with these leases on a straight-line basis over the term of the lease. Financial position and going concern basis The Group’s net assets increased by £75.1 million to £175.6 million at 31 March 2019 (31 March 2018: £100.5 million). The Directors acknowledge guidance issued by the Financial Reporting Council relating to going concern. The Directors consider it appropriate to prepare the consolidated financial statements on a going concern basis, as set out in note 1 to the consolidated financial statements. Paul Fineman Chief Executive Officer (CEO) Giles Willits Chief Financial Officer (CFO) 10 June 2019 EXECUTIVE REVIEW CONTINUED Average leverage and treasury continued There are financial covenants, tested quarterly, attached to the facilities as follows: • • interest cover, being the ratio of earnings before interest, depreciation and amortisation to interest on a rolling twelve-month basis; and leverage, being the ratio of debt to adjusted EBITDA on a rolling twelve-month basis. There is a further covenant tested monthly in respect of the working capital ‘RCF B’ by which available asset cover must not fall below agreed levels relative to amounts drawn. The Group currently has no interest rate hedges in place and elects to accept floating interest rates across a range of currencies. While we will keep this under review, our debt is at its lowest point in many years and is planned to fall further relative to profitability. While global rates are rising, they remain low and interest margins have further capacity to fall as leverage performance improves and we are therefore comfortable with this position. Foreign exchange The overall impact on revenue and profits from currency movements is not significant. However, we adopt an active hedging policy where required. In particular, cash flow hedging ensures further foreign exchange movements remain mitigated as far as possible. A reasonable proportion of this hedging is achieved through natural hedges whereby our purchases and sales in US dollars are offset. The balance of our hedging is achieved through forward exchange contracts and similar derivatives. 34 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019In 2019 over 10 million ‘Not-for-resale’ bags sold 35 PRINCIPAL RISKS AND UNCERTAINTIES The Group actively monitors the risk related to its business and the environment in which it operates. Risk management approach The Group’s continuing success is influenced by how well we understand and manage our risks, making risk management ever more important as part of the Group’s strategy. We have a risk management framework which helps us identify, assess and mitigate significant risks. Every year we review our approach to the Group’s risk management framework, especially given the significant growth we have experienced over the previous few years. Our approach to risk management is bottom up, with each of our Business Units maintaining risk registers for their territories, identifying, monitoring and determining mitigation plans for the key risks in their businesses. These risks feed into the Group risk summary. Risk appetite Risk appetite is an expression of the types and amount of risk that the Group is willing to take or accept to achieve its objectives. In determining our risk appetite, we ensure that it allows us to make consistent and informed decisions across the Group, whilst capturing all key and significant risks assessing them and managing them to within our tolerated levels of risk. Framework The Group’s risk management framework determines an overall risk rating for each Business Unit which in turn governs the Business Unit’s place on the Group’s risk continuum. The continuum is a sliding scale from lower risk, to higher risk and the placing on this scale then focuses the Group on where the higher risks sit and prioritises additional mitigation strategies that may be required. Link to Group strategy The risks we have identified as our key focus in 2019 and beyond can be seen in the next few pages. Where applicable we have also identified how these risks interact with our Group strategy. Our risk management framework The Board • Ownership and monitoring of risk management • Set objectives and risk appetite Audit Committee • Responsible for advising the Board on risk exposures • Review of internal controls that help manage risks Executive Committee • Management of key risks • Assessment of materiality of key risks Business Units • Identification, assessment and mitigation associated with key risks • Consider risk as part of decision making and management of external relationships Group Risk Function • Monitoring and collation of risks and actions by management from across the Group • Review and oversight of the Group’s risk management process Key Working with the winners Design & innovation Efficiency & scale 36 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Risk Mitigation Change Acquisitions Failure to identify potential acquisition opportunities or failing to successfully integrate an acquisition could affect our growth strategy Maintain an active M&A pipeline and ongoing review of market opportunities Operate strict evaluation criteria including using third party due-diligence professionals for technical areas Appropriate and effective modelling and sensitivity analysis and risk evaluation along with synergy target analysis Overseen by one or more senior management team members with regular reports to the Board Engage third party integration specialist, as required, to support critical integration processes post acquisition Increased Increased risk following the significant acquisition of Impact Pre-mitigation impact: High Post-mitigation impact: Medium Link to strategy: People Failure to recruit, develop and retain the right people could affect the Group’s ability to meet its strategic objectives A focus on succession planning and building strong teams around key individuals in each Business Unit Ensuring we review all aspects of executive and senior management remuneration and appropriate remuneration packages, alongside a standardised grading and benefits structure for all positions Appropriate policies around hiring key team members focusing on qualifications and appropriate experience for the relevant role A focus on management development to improve competencies across the business Implementation of cross-learning programmes to ensure all senior management team understand other roles Unchanged Remains low risk with continued focus and further investment in our management teams Pre-mitigation impact: Medium Post-mitigation impact: Low Link to strategy: Competition Loss of significant customers Price erosion due to pricing from competitors Customers going directly to our suppliers Focus on design, product quality and service delivery Maintain a blended and diversified portfolio of products and customers, both by market segment and geography Close management of costs and margin on a product-by-product basis Continued investment in capital expenditure to drive improved efficiency to maintain a competitive advantage Maintain close relationships with all of our key customers Increased Increased risk as retail environment becomes more challenging Pre-mitigation impact: High Post-mitigation impact: Medium Link to strategy: 37 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED Risk Mitigation Change Margin erosion Cost inflation and price competition eroding margins on already low margin products Seasonality and fashion driving inventory obsolescence Investment in production facilities and continued monitoring and improving production processes to ensure they are as efficient as possible Regular and careful review and management of product costings with senior management approval for lower margin products Regular monitoring of inventory obsolescence ensuring the business has sufficient provisions Monitor competitor activity and working closely with suppliers ensuring efficiently costed sourced product Concept selling to boost margins Unchanged Ongoing investment in efficiency improvements offsetting commercial pricing pressures Pre-mitigation impact: High Post-mitigation impact: Medium Link to strategy: Policies and procedures to efficiently manage and safely maintain continuity of supply Carefully selected suppliers whose performance is monitored closely with alternative routes of supply as back up Regular supply chain audits along with internal audits of manufacturing facilities Group insurance policy for a range of operational risks Leveraging our sourcing offices in Asia to manage and maintain supply relationships Unchanged Group wide insurance programme continues to provide effective cover alongside increased focus on managing robust supply chain Business continuity and supply chain integrity Disruption of manufacturing operations during peak season Failure of suppliers to deliver Problems with product quality or integrity of supply chain Pre-mitigation impact: Medium Post-mitigation impact: Low Link to strategy: Regular monitoring of the economic conditions in which we operate Impact analysis and response plans for significant changes to trade agreements utilising external specialists where necessary Brexit mitigation plans Increased Brexit and US tariffs on China sourced products increase risk for the Group Economic uncertainty Changes to international trade terms between core territories of operation having a significant effect in our main cost areas of raw materials, freight and people Pre-mitigation impact: High Post-mitigation impact: Medium Link to strategy: 38 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Risk Customer default Significant customer default Mitigation Change Tight credit control procedures, with regular review of credit limits Insuring credit risk where possible Close monitoring of debts and inventory levels taking provisions where required Increased Increasingly challenging retail environment Link to strategy: Unchanged Ongoing management focus maintains effective hedge to currency risk where possible Pre-mitigation impact: High Post-mitigation impact: Medium Natural hedges where possible across businesses as well as spot purchases, forward contracts and other similar instruments Ensuring financing facilities have appropriate headroom to accommodate fluctuations in currencies Currency exposure Purchases, sales and funding in a mixture of currencies Translation of overseas businesses Pre-mitigation impact: High Post-mitigation impact: Medium Link to strategy: Governance and compliance Non-compliance with legal and tax regulations in the jurisdictions in which we operate Group Legal Counsel joined the Group this year to aid with managing the Group’s compliance Specialist advisers in relevant jurisdictions used where appropriate and necessary Outsourced internal audit function Open dialogue with relevant parties (e.g. tax authorities) Pre-mitigation impact: Medium Post-mitigation impact: Low Regular cash budgeting, forecasting and monitoring Maintain borrowing lines with lending partners to a range of maturities sufficient to cover funding requirements Working closely and transparently with our lending partners ensuring the cash flow cycle is understood and monitored by all parties Liquidity and treasury management Failure to raise funds through debt or share issues Loss of support from principal banking partners Unchanged Increased regulatory environment offset by new and improved governance Link to strategy: Unchanged Ongoing focus on cash management supported by refinancing with banks on 5 June 2019 Pre-mitigation impact: High Post-mitigation impact: Medium Link to strategy: 39 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019BOARD OF DIRECTORS The Board is responsible for overseeing the management of the business and for ensuring high standards of corporate governance are maintained throughout the Group. John Charlton Non‑Executive Chairman Date of appointment John joined the Board in April 2010 and was appointed Chairman of the Board on 7 September 2011. Experience In his executive career, John was previously Senior Vice President International of American Greetings Corporation and Chief Executive of UK Greetings Ltd. He was also Chairman of Amscan International Ltd. External appointments John is Chairman of SA Greeting (Pty) Ltd, a South African company. Skills In‑depth knowledge of the international greetings, card, gift packaging, stationery and social expression gift market. Committees Paul Fineman Chief Executive Officer Date of appointment Paul joined the Board in May 2005 as Chief Executive Officer of Anker International plc. He was appointed Group Managing Director in January 2008 and then appointed Group CEO in January 2009. Experience Paul has over 40 years’ experience in the card, gift wrap and stationery industry having developed knowledge within his family’s business, Anker International, prior to its acquisition in 2005. He has led the transformation and growth of Design Group as CEO since 2009. Paul was awarded Chief Executive Officer of the Year by the Quoted Company Awards 2017. Skills Business and team development. Innovation and entrepreneurship. Giles Willits Chief Financial Officer Date of appointment Giles joined the Board in January 2018. Experience Giles has more than 20 years’ experience in senior leadership and financial roles in multiple household name businesses. He was most recently the CFO of Entertainment One Ltd (LSE: ETO), having joined prior to its IPO on AIM in 2007. Giles was also formerly Director of Group Finance at J Sainsbury plc and Woolworths Group plc and qualified as a chartered accountant at PricewaterhouseCoopers. External appointments Giles sits on the Board of Shearwater Group plc as a Non‑Executive Director. Skills Particular skills and experience in M&A, as well as being a Chartered Accountant. 40 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Anders Hedlund Founder and Non‑Executive Deputy Chairman Date of appointment Anders was appointed as Nominee Non‑Executive Director in 2007. Experience Anders founded the Group in 1979 and was joint Chief Executive Officer of the Group until December 2007. Lance Burn Executive Director Date of appointment Lance joined the Board in October 2012. Skills Significant industry knowledge. Experience Lance has been Managing Director of IG Design Group UK Limited since 2009 and the Group’s subsidiary operation in China since 2011. Lance’s previous roles included directing businesses for Rank Hovis McDougall plc, Saint Gobain Solaglas UK and also international overseas‑based roles for PepsiCo International in Africa and India. Skills Managing businesses both in the UK and abroad across a number of industry sectors. Business integration and overseas operations. Elaine Bond Non‑Executive Director Date of appointment Elaine joined the Board as a Non‑Executive Director on 1 February 2012. Experience Elaine was previously Group Operations Director of UK Greetings Ltd, the UK subsidiary of American Greetings. External appointments Non‑Executive Director at Sandgate Systems Limited. Audit Committee Skills Remuneration Committee Operational skills and experience gained over many years in the card, gift wrap and stationery industry. Nomination Committee Committees Chair Mark Tentori Non‑Executive Director Date of appointment Mark joined the Board as a Non‑Executive Director on 1 January 2016. Experience Mark has held a number of CFO and COO roles in public and private companies operating in a wide range of sectors and geographic locations. These included CFO of Deb Group Ltd, United Coffee and LINPAC Group Ltd. Mark also spent ten years with PricewaterhouseCoopers where he qualified as a Chartered Accountant. External appointments Currently Portfolio Partner at Charterhouse Capital Partners LLP. Skills Wide experience in finance and a Chartered Accountant. Committees 41 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019CHAIRMAN’S CORPORATE GOVERNANCE REVIEW We are proud to celebrate a year of outstanding performance. John Charlton Chairman Dear Shareholder We are delighted to be able to report a further year of excellent progress and a strong financial performance of our Group during the year ended 31 March 2019. I am delighted that once again we have exceeded the goals that we set ourselves in terms of adjusted profit and adjusted earnings per share. Furthermore, we are particularly pleased with the excellent levels of cash generation that we have achieved, which have supported our increased level of capital expenditure to improve our efficiency, the acquisition of Impact Innovations in the US and an increased dividend. We again end the year being cash positive, with a further reduction in average leverage. We shall continue to put considerable effort into strengthening our position as one of the world’s leading designers, manufacturers, importers and distributors of each of the core product categories on which we focus. The Board is focused on developing the Group for the long‑term benefit of all shareholders, with well‑informed and effective decision making. As part of this, the Board takes corporate governance seriously and, following updates to AIM Rule 26, adopted the QCA Corporate Governance Code in September 2018 (‘Code’). Governance framework I am pleased to share with you our governance structure and the improvements that have taken place over the past year. For ease, we have structured this to align with the principles of the Code. Finally, let me take this opportunity to thank our shareholders, customers, suppliers, bankers and advisers for their support and contributions to all our businesses. As always, we are very appreciative of the strong working relationship and partnership that we continue to enjoy with you. John Charlton Chairman, 10 June 2019 Gender 6 Male 1 Female Board Nomination Committee Remuneration Committee Audit Committee Responsible for reviewing and recommending changes to the composition of the Board and its committees Responsible for overseeing the remuneration strategy for the Group and remuneration policy for the Directors Responsible for overseeing financial reporting, risk management, internal controls and external audit Read the Committee report on page 54 to 58 Read the Committee report on page 51 to 53 Accountable to shareholders for sustainable financial performance and long‑term shareholder value Executive Board Consists of Business Unit Managing Directors responsible for the execution of the strategy, governance and business performance 1 Chair Role 3 Executive Directors 3 Non-Executive Directors Length of tenure 1 1-2 years 1 2-5 years 2 5-10 years 3 10+ years 42 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Principle 1: Establish a strategy and business model which promote long-term value for shareholders Principle 2: Seek to understand and meet shareholder needs and expectations The Group continues to operate under a governance structure, which is designed to be flexible and efficient in creating sustainable long‑term growth in shareholder value. This year has been particularly noteworthy with the Group, as part of the acquisition of Impact Innovations, Inc., raising c£50 million from investors to support the financing of the deal. This was significantly oversubscribed and a good indication of the strong relationship between the Company and its shareholders, both existing and new. Our key focus is to continue to drive the Group forward and keep us reaching for the high standards and targets we set ourselves. We do this by leveraging our strengths and the many opportunities to grow in the market. Our strategy focuses on: • Working with the winners – increasing revenue through organic growth with both existing and new customers, suppliers and product areas. • Design and innovation – developing new opportunities in new channels and adjacent product categories while expanding our presence in the growing market for celebrating events throughout the year. • Efficiency and scale – driving margins through investments in processes and people; and pursuing accretive M&A opportunities focused on unlocking synergies through economies of scale and strengthening our ‘one‑stop‑shop’ position with customers. Further detail on the Group’s strategy and business model, as well as the key challenges faced by the Company in achieving its goals, can be found on pages 36 to 39. At the start of 2019 the Company appointed Canaccord as its Nomad and Broker. Canaccord has a wide international reach and is well placed to support the Group’s ambitions for growth in the future. Our CEO and CFO have maintained regular contact with our institutional investors as can be seen in the timeline below: Shareholder engagement calendar 2018/2019 18 April 2018 Trading update 24 April 2018 Investor day 4 May 2018 Regional investor roadshow 11 May 2018 Capital market day at our business in Wales 11‑20 June 2018 Preliminary results announcement followed by an investor roadshow 26 June 2018 Investor day 3 September 2018 Equity raise 5 September 2018 Annual General Meeting 14 September 2018 Investor day 17 September 2018 Extraordinary General Meeting 27‑30 November 2018 Interim results announcement followed by an investor roadshow 8 January 2019 Appointment of new Nomad/Broker 22 January 2019 Trading update 24 January 2019 Investor day 30 January 2019 Capital market day at our business in Wales 1 February 2019 Investor day 26 March 2019 Capital market day at our business in Wales 27 March 2019 Investor day Following investor meetings, the full Board receives feedback on the views and concerns of investors and regularly receives copies of investment reports from analysts. 43 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019CHAIRMAN’S CORPORATE GOVERNANCE REVIEW CONTINUED Principle 2: continued Seek to understand and meet shareholder needs and expectations Principle 3: Take into account wider stakeholder and social responsibilities and their implications for long-term success Individual investors In addition to our focus on institutional investors, we aim to engage with individual and retail investors on a regular basis. Our AGM gives us the ideal opportunity to meet with individual investors face‑to‑face. It is important that all investors have a platform to raise questions or make comments whilst also enabling us to give visibility of, and interaction with, the Board. All our investors are regularly kept up‑to‑date with announcements, circulars, videos and reports, all of which are available on the Company’s website. In September 2018 we were proud recipients of a silver award at the Corporate & Financial Awards 2018 in the category of ‘Best printed report: AIM/small cap’. The award was in recognition of our printed annual report and financial statements and is a testament to the Group’s efforts to communicate clearly and transparently with investors. Nikky Geairns, is primarily responsible for shareholder liaison, and can be contacted at ngeairns@thedesigngroup.com. Contact details for the Company’s PR Advisers, Brokers and Registrars are also set out in the ‘Contact’ section of the Company’s website. All of our stakeholders – our employees, customers, suppliers and communities – are vital to the success of the Group. Employees We invest in our people; from training and education offered throughout the Group, through to opportunities for career progression. The Group offers an environment in which our employees are encouraged to grow and deliver their very best. It’s these same opportunities which allow the Group to attract and retain the brightest talent. Training All our Business Units provide relevant and up‑to‑date training for employees. This year Australia invested in a new Workplace Compliance System which will see a move away from ad hoc training to a more structured training of awareness programme being utilised. Initially set up to provide key training of awareness in Bullying, Sexual Harassment, Equal Opportunity, Privacy and Social Media and the Internet, the system has the capability to include additional modules in the future. The Design Group Academy operating in our Celebrations business in Europe is a powerful tool to train employees in the skills needed for their roles, as well as rolling out key compliance initiatives. The purpose built classroom provides a relaxed and comfortable environment in which employees can focus on their learning away from their usual work stations. In addition, they operate a separate programme for sales managers the ‘Sales Improvement Group’. In its second year of a three year programme the key emphasis is coaching and is specifically targeted to the day‑to‑day issues which sales managers face. Talent Our Business Unit Managing Directors were recently asked as part of our succession planning to highlight who the ‘Stars of the Future’ are within their businesses and share the development plans in place that underpin their progress. The information will be reviewed bi‑annually by the Group’s Executive Committee. Consideration will be made as to what inter‑company/ Group‑wide experience could be given and will also highlight ‘gaps’ that may need filling within the organisation for the future. In the UK we run a twelve month development programme in conjunction with an external provider for individuals who demonstrate the desire and capability for future promotion. This is a tailored training programme which also includes a dedicated mentor from the senior leadership team and one‑to‑one coaching. 44 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Relations with shareholders 45 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Information and feedbackOur Business Units use a variety of methods to enable effective two-way communication with employees. These range from semi-annual all-employee meetings (with web-ex facilities for remote team members) to smaller scale weekly catch ups. Comment boxes and staff surveys are also used and various alternatives in between. Local management in Australia catch up with the office and warehouse teams quarterly for pizza, service awards and a business review.We recently reviewed the methods by which we encourage our employees, worldwide, to raise feedback and concerns. We had a number of local country-based initiatives so knew our employees were able to speak up, however, we recognised the need for an independent telephone hotline enabling employees across the world to raise concerns confidently (and anonymously should they wish). This was rolled out at the end of March and we look forward to seeing how it is utilised over the coming year.EngagementThis year our Celebrations business in Europe redesigned its staff canteen providing comfortable seating, TV screens and table football to encourage employees to take breaks away from their desks and to mix across functions.Each location recognises birthdays and service anniversaries. The US holds employee picnics and monthly employee events often linked to key celebrations in that month e.g. Super Bowl in January, Valentine’s day in February. Similar events are held in Australia, teams within the business are tasked with running the special events which ensure that everyone is involved.CustomersThrough recognising that each of our customers is unique and so requires a different service to satisfy their needs and expectations, we work hard to build deep and lasting relationships with our customers.Highlights to note from the Americas: • Impact Innovations, Inc. was awarded ‘Supplier of the Year 2019 for Seasonal and Celebration’ by Walmart, an award which recognises outstanding service and performance. This was especially pleasing during a year of transition for Impact as they integrated into the Design Group, and recognises a cohesive team effort.• Due to the strength of our relationship with a major US retailer, we have been made a strategic partner and invited to participate in two key initiatives with them. In one of these initiatives, we are the only participant from the ‘Housewares’ department and just one of three suppliers involved. These initiatives demonstrate exceptional trust in our business and will lead to very close collaboration in supply chain efficiencies and in how to grow our business through innovation in all facets of serving the end consumer. CHAIRMAN’S CORPORATE GOVERNANCE REVIEW CONTINUED Principle 3: continued Take into account wider stakeholder and social responsibilities and their implications for long-term success Principle 4: Embed effective risk management, considering both opportunities and threats, throughout the organisation Customers continued In addition we are keen to ensure that our products keep up with key developments in our markets. For example, following the news that Australia had legalised same‑sex marriage at the end of December 2017, our Australian business celebrated in 2018 by launching Mr&Mr and Mrs&Mrs cards from its World Greetings brand. Our businesses meet with our key suppliers regularly to maintain a regular open dialogue and to share priorities both from the Group’s perspective but also those of our suppliers. Our Purchasing Managers have daily interaction with our supplier base covering a variety of topics such as quality, service levels, sourcing of raw materials etc. The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk management systems, policies and procedures are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits. Suppliers As detailed on page 17 in our social responsibility commentary, we are committed to engaging with our suppliers fairly and lawfully and that we source responsibly. We expect our supply base to do the same. Risk management processes are reviewed regularly by the Audit Committee to reflect changes in market conditions and the Group’s activities. The Board’s oversight covers all controls, including financial, operational and compliance controls and general risk management. It is based principally on reviewing reports from management to consider whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied and indicate the need for more extensive monitoring. In the past few months the Board and senior management have reviewed key policies which support risk management. These include the Code of Business Conduct, Anti‑bribery & Corruption policy and Whistleblowing. Updated versions have been rolled out to the senior management teams across the business, with a wider roll out planned to all employees in 2020. Further detail on the principal risks faced by the Group and the mitigating actions taken in respect of those risks can be found on pages 36 to 39. This year saw the creation of a new role, Global Procurement Managing Director. The intention is to develop our supply chain to be a more cohesive, transparent and joined up organisation, collaborating closely, where there are tangible Group benefits, sharing data, ideas, products and best practice, combined with a continued focus on driving country‑based success. An individual was appointed in February 2019, reporting to the Group’s Executive Committee, and their focus will include: • data quality, ease of access and transparency; • third party manufacturing base; • supplier on‑boarding; • managing Group business with suppliers; and • ensuring best practice and compliance across the supply chain. Communities Our businesses throughout the world undertake a variety of local initiatives to support their local communities and national charities. See our social responsibility section on page 17 for some examples. Further detail on how our business model identifies the key resources and relationships on which the business relies can be found on page 7. 46 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Independence Anders Hedlund, who founded our Group, is a Nominee Non‑Executive Director. Anders Hedlund is considered not to be independent, because as founder, he has served on the Board since the Company’s inception, his family hold significant interests in the shareholding of the Company and he also fulfils a consultancy role within one of the Group’s businesses. As reported in the financial statements, there are also some related party transactions between certain of the subsidiaries within our Group and companies under the ultimate control of the Hedlund family. Following a review by the Board, all of the other Non‑Executive Directors are considered to be independent. Principle 6: Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities The Board is kept informed on an ongoing basis by the Company Secretary about their duties and any update in relation to legal and governance requirements for the Group. In addition, the Board has access to the Deloitte Academy which gives each Director (Executive and Non‑Executive) access to a wide‑ranging programme of technical briefings, education, bespoke training and peer‑to‑peer networking opportunities. This is a useful resource to ensure that they keep abreast of market trends in board governance, legislative reform and keep their skills up to date. The Board is keen to obtain external, specialist advice when necessary. An example of this is when the Remuneration Committee recently appointed Deloitte LLP to provide remuneration advice in relation to employee benefit schemes. Principle 5: Maintain the Board as a well-functioning, balanced team led by the Chair The Board consists of three Executive Directors and four Non‑Executive Directors (including the Chairman). For the biographies of the Board see pages 40 and 41. There were no changes to the composition of the Board during the year. The Board met formally seven times during the 2019 financial year. All Directors were present. In addition the Board met for a strategy day, two separate days focused on M&A and carried out an in‑depth review of the 2020 budgets, annual operating plans and strategic objectives with the Executive Directors. Prior to the acquisition of Impact Innovations, Inc. the Board spent three days in Memphis, USA in August 2018 visiting the senior management, receiving presentations as to the company’s history and vision for the future and the proposed integration into the Group. The Audit Committee met three times and the Remuneration Committee met four times, all were fully attended. The Group appointed Joy Laws as Group General Counsel and Company Secretary in June 2018. She plays an important role in the governance and administration of the Group advising the Board on procedures, corporate governance, changes in legislation, strategy and decision making. 47 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019CHAIRMAN’S CORPORATE GOVERNANCE REVIEW CONTINUED The Chairman concluded the evaluation by highlighting the mix of skills which exist on the Board. Key observations and actions arising from the evaluation were: • a reminder that the agenda should retain its strategic focus whilst empowering the Executive Committee to deliver the strategy; and • the members to look into training opportunities. The Nomination Committee is responsible for identifying and nominating, for the approval of the Board, candidates to fill Board vacancies as and when they arise as well as putting in place plans for succession for Directors and Senior Executives, in particular with respect to the Chairman and the CEO. Principle 8: Promote a corporate culture that is based on ethical values and behaviours The Board helps to promote a culture of respect, integrity, openness, honesty and fulfilment within each of the businesses in our Group. We believe strongly in these objectives and we endeavour to practise these in the way that we communicate with our customers, suppliers, shareholders, advisers and of course all our teams employed in the Group. Our performance management systems and processes are designed to direct and influence behaviours. Our Senior Executives cascade our ethical values down throughout the wider organisation. Feedback from all stakeholders in the business, as set out in Principle 3, allows the Board to assess the state of its corporate culture, as well as performance against the Group’s internal targets. This year we created a Group‑wide Code of Business Conduct in recognition of our growing size and the need for consistent behaviours across the Group. This has been rolled out to the senior management teams across the businesses with an all‑employee roll out to follow in the first quarter of the financial year ending March 2020. The Board recognised that the principles contained in the Code of Business Conduct were underpinned by a set of values already present within the Group. Principle 7: Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement In November 2018 the Remuneration Committee conducted a self‑assessment based on an external template which was adapted to incorporate the guidance contained in the QCA Remuneration Committee Guide. Members were asked to rate the performance of the Remuneration Committee based on their own perceptions of the committee as a whole. Topics covered were: a) roles and responsibilities; b) terms of reference and planning; c) meetings – content and running of; d) skill set of members; and e) shareholder interaction. Responses were collated and reviewed and no significant concerns were raised. In January 2019 the Board conducted a self‑assessment. The questionnaire was split into ten sections with each section based on the principles set out in the QCA Corporate Governance Code. There was an additional section allowing the Directors to give their thoughts on areas such as the main achievements of the Board over the previous three years, and the main strengths and weaknesses of the Board. Following completion of the questionnaire, the Chairman held one‑to‑one meetings with each Director and the Company Secretary. 48 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019The Group Values Statement is as follows: Our Values • To strive for excellence in all we do • To behave ethically and with integrity • To focus on our customers and to ‘go the extra mile’ • To be open to feedback, ideas and to positive change and promote fulfilment and fun • To be good ‘citizens’ within our communities and take responsibility for our impact on our planet • To be innovative and entrepreneurial • To treat everyone with dignity and respect • To be a team that succeeds together and aims to be an ‘employer of choice’ And, for our corporate policies and practices to be consistent with these values. We encourage our employees to get involved in local community initiatives – see pages 17 for some great examples. Principle 9: Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board There is a distinct and defined division of responsibilities between the Chairman and the CEO. The Chairman is primarily responsible for the effective working of the Board in conjunction with management, and the CEO is responsible for the operational management of the business and for the implementation of the strategy agreed by the Board. The Board is responsible for setting the vision and strategy for the Company, working closely with the executive management team to deliver a successful business model for our shareholders and other stakeholders. The Group Delegation of Authority policy sets out the matters that are reserved to the Board for approval. These include: • Matters relating to the Company’s legal purpose and position and its status as a public listed company; • Changes in governance, strategy and significant changes in internal controls; and • Significant financial or contractual commitments and decisions. The Board has three committees – Remuneration, Audit and Nomination. Each of these committees comprises the Non‑Executive Chairman and our two independent Non‑Executive Directors; Elaine Bond and Mark Tentori. Elaine chairs the Remuneration Committee, Mark the Audit Committee, and John Charlton the Nomination Committee. The Nomination Committee is responsible for filling Board vacancies, reviewing the Board composition and the roles of Board members. The Audit Committee satisfies itself on the integrity of financial information and that controls and risk management systems within our businesses are robust and defensible. The Committee meets as required during the year and at least twice with the Group’s external auditor. Its role is to review the interim and final financial statements for approval by the Board, to ensure that operational and financial controls are functioning properly, and to provide the forum through which the Group’s external auditor reports to the Board. Further detail about the activities undertaken by the Audit Committee this year can be found on pages 51 to 53. The Remuneration Committee determines appropriate levels of remuneration and compensation for Executive Directors. The Committee meets as required during the year and is closely involved in agreeing the positions within our senior management team that should participate in our Long Term Incentive Plan (‘LTIP’), together with the level of awards. The Remuneration Committee is also responsible for agreeing the performance criteria for annual bonuses and LTIP for Executive Directors and senior management. Further detail about the activities undertaken by the Remuneration Committee this year can be found on pages 54 and 55. 49 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019CHAIRMAN’S CORPORATE GOVERNANCE REVIEW CONTINUED Principle 10: Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders During 2019, the Board (itself or via the Board committees) worked hard to strike that essential balance between achieving the Group’s short‑term objectives and longer‑term growth and development. Key activities included: • monitoring and review of the financial performance of the Group on an ongoing basis including capital expenditure proposals and significant projects; • review of the interim and annual results including supplementary papers; • review of the effectiveness of the Group’s internal financial controls, general internal controls and risk management systems; • monitoring and review of the effectiveness of the Business Assurance function; • overseeing the relationship with the external auditor; • approval of the strategy, three year plans and budget; • review of the Group risk register; • approval of changes to remuneration for Chairman, CEO and CEO direct reports; • approval of LTIP Scheme for 2018‑21; • approval of annual bonus payments and targets for the following financial year; • appointing Joy Laws as Group General Counsel & Company Secretary; and • assessing and approving the acquisition of Impact Innovations, Inc. Principle 9: continued Maintain governance structures and processes that are fit for purpose and support good decision-making by the Board The Terms of Reference for each committee were reviewed and updated this year and can be found on our website. In addition to the main Board and committees, the Executive Committee was established in 2017. This consists of the Managing Directors of the main Group businesses across the world plus the Group CEO and Group CFO. It plays an important role in both feeding key matters to the Board to enable well‑informed decision making and cascading Board initiatives to the wider businesses. It meets four times a year to discuss matters such as agreeing policy guidelines for business divisions based on an approved Group strategy, recommending objectives and strategy for the Group, and ensuring the control, co‑ordination and monitoring within the Group of risk and internal controls, to name a few. The Board keeps all aspects of corporate governance under review, with the governance framework developing further as the Group continues to grow. 50 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019AUDIT COMMITTEE REPORT I am pleased to present our first Audit Committee report. Mark Tentori Chair of the Audit Committee The Committee is made up of Non‑Executive Directors: me, as the Chair, with Elaine Bond and John Charlton. We regularly invite the CEO and CFO to attend our meetings as well as the external auditor (KPMG LLP). Over the year we all met on three occasions. The Board is satisfied that I, as Chairman of the Committee, have recent and relevant financial experience. I am a chartered accountant, qualifying at PWC and am currently Portfolio Partner at Charterhouse Capital Partners LLP. Dear Shareholder, On behalf of the Board I am pleased to present the Audit Committee report for the year ending 31 March 2019. The role of the Audit Committee is to assist the Board in fulfilling its corporate governance responsibilities in relation to the Group’s financial reporting, internal control and risk management systems as well as internal and external audit functions. The Committee also provides advice to the Board as to whether the annual report and financial statements taken as a whole are fair, balanced and understandable and provide the necessary information for shareholders to assess the Company’s position and performance, business model and strategy. The main duties of the Committee include: • providing oversight and challenge to the financial reporting; • ensuring the Group operates within the correct internal controls and adopts appropriate risk management systems; • ensuring the Group has suitable arrangements and policies in place to prevent fraud, bribery and other compliance concerns (and to enable employees to report such matters); • monitoring and reviewing the effectiveness of the Group’s Internal Audit (Business Assurance) function in the context of the Group’s overall risk management framework; and • overseeing the relationship with the external auditor including their appointment, remuneration, terms of engagement, and annual audit plan. The Terms of Reference set out the duties in more detail and can be found on our website. These were updated this year to reflect the adoption of the QCA Corporate Governance Code. This report highlights the key discussions, decisions and actions that have taken place this year. Mark Tentori Chair of the Audit Committee 10 June 2019 51 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019AUDIT COMMITTEE REPORT CONTINUED Key activities and actions over the year: Financial statements The Audit Committee reviewed and approved the unaudited interim financial statements for the period ending 30 September 2018 and the full year audited statements for the period ending 31 March 2019. In reviewing the financial statements the Committee considered reports from the Group finance function as well as the external auditor. Significant accounting matters The significant reporting matters and judgements the Committee considered during the year included: 1) The acquisition accounting for Impact Innovations under IFRS 3 Business Combinations, which has created both intangibles in relation to the customer lists, as well as goodwill. As part of our considerations this year, the carrying value of these, as well as already existing intangibles and goodwill, has been assessed to determine whether there is any impairment. The Committee has concluded, based on appropriate assumptions on future cash flows, discount rates used and long‑term growth rates, there is sufficient headroom available resulting in no impairment requirement. 2) The use of alternative performance 3) The adoption of new accounting measures (‘APMs’) to present adjusted profit alongside its statutory counterpart. This involved the exclusion of costs that are considered by the business to skew the reader of the financial accounts’ perception of the performance of the underlying business. These included costs that are considered to be material and exceptional in nature and share‑based payment costs (also known as LTIP costs) and the amortisation of acquisition intangibles. The Committee is satisfied that this is an appropriate approach, and gives a clear and more balanced view of the underlying performance. It is also comfortable that this is a consistent approach that the Group has adopted for a number of years in respect of exceptional and LTIP costs. Previously the acquisition amortisation relating to the Lang and Biscay acquisitions had not been excluded from our APMs, however, following the transformational acquisition of Impact this year, the APMs have been updated to exclude the amortisation of acquisition intangibles given this is now a significant charge. In addition, the rationale and explanations behind the use of APMs is clearly disclosed. standards and ensuring the Group’s compliance with the standards. This year the Group adopted two new accounting standards (IFRS 9 and IFRS 15) neither of which has a material impact on the Group’s financial position. From 1 April 2019, IFRS 16 Leases will be adopted. As per the detail on page 79 of our accounting policies note, and as has been seen amongst all adopters, this is thought to have a significant impact for the Group. The Committee has reviewed and understood the approach taken in respect of the assessment of the impact of the standard and agree with the decision of the business in respect of the methodology of adoption being ‘modified retrospective’. Internal controls The Committee continually reviews the effectiveness of the Group’s internal controls. As a decentralised business, our Business Units each have a finance function, who are responsible for determining their own processes and procedures, including financial controls and accounting policies. However, the Group function dictates a set of minimum financial controls that we expect all Business Units to adhere to, along with Group accounting policies that each Business Unit should be aligning to. This forms part of the Group’s financial control framework. 52 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Each Business Unit confirms, with every monthly accounts submission, that they are adhering to the minimum set of controls. Bi‑annually we also request a more comprehensive Self‑Assessment checklist to be completed by each Business Unit. This provides the Group finance function, and therefore the Committee, with comfort that appropriate financial controls are in place around the Group. To gain further comfort, although the Group does not have an internal audit function, we outsource this role to Mazars LLP (‘Mazars’). They have undertaken baseline control reviews around each of the Business Units (with the exception of Impact given its recent addition to the Group), identifying areas of weakness, that subsequently have been addressed with oversight from the Group function. This year has seen the commencement of an additional layer of review by the Group finance function, being detailed balance sheet and working capital reviews for each of the Business Units. The reviews have been onsite visits by the Group team, including understanding the Business Units’ approach to balance sheet reconciliations as well as a detailed review of the working capital process. Internal Audit/ Business Assurance Mazars continue to operate our Business Assurance function, and this year the Mazars team carried out a series of Business Assurance reviews around different Business Units and reported back to the Committee on their findings. One such review was undertaken during the month of July and focused on IG Design Group Americas’ readiness for the planned ERP software implementation in October 2018. The review that was conducted was a very useful tool that helped support the project team’s alignment on key areas of risk and confirm there were no issues beyond those previously identified by the project team. It was also a good mechanism to ensure business expectations were set appropriately. Code of Business Conduct and Anti‑bribery and Corruption Policy In recognising the growing size and complexity of the Group, the Audit Committee oversaw the roll out of a Group‑wide Code of Business Conduct. This contains a shared set of principles which we all agree to follow and which underpin our operations, decision‑making and general conduct. This ensures that we are all focused on operating to the same standards and know what behaviours to expect from our colleagues across the world. The Committee also took the opportunity to review and update the Group Anti‑bribery & Corruption Policy and the Whistleblowing Policy. The latter included the launch of a Group‑wide whistleblowing hotline complementing the subsidiaries’ existing employee‑reporting tools. External audit The Audit Committee monitors the Company’s relationship with the external auditor, KPMG, to ensure that external independence and objectivity are maintained. As part of its review the Committee monitors the provision of non‑audit services by the external auditor. KPMG LLP have provided audit services to the Group since 2016. Following the end of this financial year, it was felt prudent in light of the Group’s growing size and complexity to re‑tender the external audit work to ensure the Group is getting the best service and value for money. The outcome of the tender will be notified to shareholders prior to the AGM. 53 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019DIRECTORS’ REMUNERATION REPORT This report sets out the remuneration of IG Design Group Directors for the year to March 2019. Elaine Bond Chair of the Remuneration Committee Dear Shareholder, On behalf of the Board I am pleased to present to you the Remuneration Committee’s report for the year ended 31 March 2019. The Committee is chaired by me and the other members are Mark Tentori and John Charlton. We met four times formally during the year, with full attendance by the members. Part 1: Overview of the year – Chair statement Company performance As detailed in the strategic report, the Group has made significant progress and delivered strong results in the year. The key financial objectives were profit growth and the associated increase in earnings per share alongside cash generation. As can be seen in the strategic report, the Group uses adjusted measures to review the underlying performance of the business and the Remuneration Committee also uses adjusted measures to determine the Executive Directors’ annual bonus along with the Long Term Incentive Plan (‘LTIP’) performance criteria based off earnings per share growth over three years. Decisions on remuneration taken during 2019 Annual bonus The bonus opportunity for Executive Directors during the last year was based on the achievement of the following targets: • Group profit before tax, LTIP charges and Board approved exceptional items; • closing net cash; and • fully diluted earnings per share calculated before LTIP charges and Board approved exceptional items. The level of bonuses is approved by the Remuneration Committee, which retains reasonable discretion over the level of pay‑out depending on the quality of the financial performance in achieving the result. This year’s results for profit before tax, LTIP charges and Board approved exceptional items, net cash and earnings per share before LTIP charges and Board approved exceptional items will result in annual bonuses for the Executive Directors of 78% of the stretch award. See Part 3 for a full breakdown per Director. 54 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Assistance to the Committee During the period the Committee received input from the CEO, the CFO and the Company Secretary. In addition it engaged Deloitte LLP to provide remuneration advice in relation to the executive LTIP scheme. Payments made to former Directors and payments for loss of office No payments were made to former Directors during the year and no payments for loss of office were made. The Committee believes the Group’s remuneration strategy, and the structures implementing that strategy, have contributed positively to maintaining the stable and motivated management team of the Group, who have continued to deliver consistently strong performances for shareholders. Elaine Bond Chair of Remuneration Committee 10 June 2019 For 2020, the Remuneration Committee has agreed the following increases in salary/fees: • Paul Fineman to £400k per annum reflecting the significant change in the size and scale of the Group following the acquisition of Impact Innovations Inc in August 2018; • Giles Willits to £325k per annum – this reflects an increase of £25k over what had been previously agreed in his contract, following a benchmarking exercise undertaken by Deloitte; and • Lance Burn to £240k per annum. This reflects his increased responsibilities for Far East sourcing and includes 2% inflation. Other key activities of the Committee during the year • Reviewed and updated the Committee’s Terms of Reference to reflect the adoption of the QCA Corporate Governance Code • Undertook a self‑evaluation of the Committee. See page 48 for further detail • Reviewed and agreed bonus targets and bonus awards • Agreed LTIP scheme and LTIP awards • Reviewed and agreed the salary and benefits of the CEO and his direct reports • Reviewed the Business Expense Policy • Reviewed training requirements of committee members • Approved remuneration section of Company annual report and financial statements LTIP awards 2018‑2021 In September 2018 provisional share awards totalling 133,579 shares were issued to 17 members of the leadership teams across the Group. The performance condition applied was compound annual growth rate (‘CAGR’) in fully diluted earnings per share (measured before LTIP charges and exceptional items). Vesting increases on a straight‑line basis and the full number of shares are issuable when the stretch target is met. In November 2018, following a benchmarking analysis performed by Deloitte, the Remuneration Committee approved the introduction of a separate 2018‑2021 award for the Executive Directors and two members of the Executive Committee. The performance condition was in line with the above award with the introduction of a ‘super stretch’ target (with an effective cap of 1.5 as a multiplier on the whole award) and the requirement to hold the shares on vesting for a period of two years. For more details on the performance conditions of both awards see note 25. In June 2019 the Remuneration Committee approved the vesting of the 2016‑2019 LTIP awards. The results achieved by the Group for the three year period have met all of the stretch performance conditions so maximum awards have vested. 723,632 shares (after adjusting for the effect of dividends and leavers) vested. Executive Director salary reviews For 2019, the Remuneration Committee agreed an increase in salary for: • Giles Willits to £275k per annum from 1 April 2018, as per his employment contract; and • Paul Fineman to £375k per annum from 1 April 2018. This reflected a benchmarking exercise completed by Deloitte. • Lance Burn to £231k per annum from 1 April 2018 reflecting a 2.5% cost of living increase. 55 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019DIRECTORS’ REMUNERATION REPORT CONTINUED Part 2: Remuneration policy Executive Directors The Group’s remuneration policy is to ensure that the remuneration of Executive Directors is sufficiently competitive to enable the Group to retain and motivate existing Directors and attract high‑quality performers in the future. The Group aims to incentivise and reward its Executive Directors in a way that is consistent with the Group’s commercial objectives and to align the interests of the Directors with those of the shareholders. To achieve this, the Executive Directors’ total remuneration comprises both fixed remuneration and variable reward, the latter reflecting Company performance. The five main components of the Executive Directors’ remuneration packages can be seen in the table below with a clear link to the Group’s business model and strategy: Reward Base salary Link to business model and strategy ‘Working with the winners’ extends to our employees – recruiting Executive Directors with the level of skills, talent and experience needed to execute our strategy. Annual bonus LTIP The annual bonus encourages individuals to actively support and engage with the delivery of the Group strategy, with pay out directly based on Group performance. The primary purpose of the LTIP is to reward the individual for delivering the Group strategy and, in turn, increasing shareholder value. Pension Other benefits To assist in the recruitment strategy by enabling Directors to make long term provisions for their future retirement. The provision of additional benefits assists in the Group’s recruitment strategy and gives the employee comfort and assistance in carrying out their roles effectively. Operation and performance Maximum opportunity Salaries are based on a number of factors including: • the skills and experience of the individual; • the size, responsibilities and complexity of the role; • external market data; and inter‑Group comparisons. • The Remuneration Committee sets the performance measures and targets each year. Bonuses are paid in cash once the annual results have been audited and are subject to the approval of the Committee. LTIP awards are in the form of shares and are subject to performance conditions which are assessed over a three year period. The current performance condition is based on CAGR in fully diluted earnings per share (measured before LTIP charges and exceptional items). Pensions are provided in line with market practice and relevant statutory requirements. Benefits can include: Life assurance/private medical insurance/car allowance. There is no maximum. The maximum achievable is 120% of base salary. For the CEO up to 175% of base salary and for the other Executive Directors up to 150% of base salary. Both then have an out performance element of up to 50% of the initial grant. Up to 15% of base salary for the CEO. Up to 10% of base salary for other Executive Directors. Not applicable. 56 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Dilution of share capital by employee share plans The Company monitors and has complied with dilution limits in its various share scheme rules. The Board retains the flexibility of using Employee Benefit Trusts to buy ordinary shares to mitigate future dilution. Non‑Executive Directors The Group’s remuneration policy in respect of Non‑Executive Directors is to pay annual fees which reflect the responsibilities and duties placed upon them, whilst also having regard to market practice. The remuneration of the Non‑Executive Directors and of the Chairman is recommended by the Executive Directors and approved by the Remuneration Committee (with no Director being involved in any decision relating to their own remuneration). Service contracts The Executive Directors have service contracts which can be terminated by the Company with no greater than one year’s notice. Non‑Executive Directors do not have service contracts and their appointments may be terminated without compensation at any time. All Non‑Executive Directors have letters of appointment and their appointment and subsequent re‑appointment is subject to approval by shareholders. 2020 No additional significant changes to the remuneration policy are envisaged for 2020 however, the Remuneration Committee will continue to regularly review the policy to ensure it remains appropriate to the business. Part 3: Annual report on remuneration Directors’ remuneration(a) The summary of Directors’ remuneration is as follows: Remuneration Pension contribution Total remuneration Aggregate for all Directors Highest paid Director 2019 £000 2018 £000 1,835 1,637 12 9 1,847 1,646 2019 £000 716 — 716 2018 £000 678 — 678 The remuneration in respect of the year ended 31 March 2019 to the Directors, by individual, was as follows: Year ended 31 March 2019 Executive Directors Lance Burn Paul Fineman Giles Willits Total Executive Non‑Executive Directors Elaine Bond John Charlton Anders Hedlund Mark Tentori Total Non‑Executive Total Directors (a) Audited. Salary/fees £ Bonus £ Benefits(b) £ Subtotal £ Pension £ Total £ 254,987 25,000 3,049 283,036 11,571 294,607 448,050 292,500 12,749 753,299 314,500 214,500 2,761 531,761 — — 753,299 531,761 1,017,537 532,000 18,559 1,568,096 11,571 1,579,667 40,192 76,242 93,790 42,303 252,527 — — — — — 2,311 42,503 8,345 84,587 3,974 97,764 — 42,303 14,630 267,157 — — — — — 42,503 84,587 97,764 42,303 267,157 1,270,064 532,000 33,189 1,835,253 11,571 1,846,824 (b) The benefits relate primarily to private health benefits. The bonuses are the expected amounts based on the results for the current year and are expected to be paid in June/July 2019 once the year‑end statutory accounts have been approved. The highest paid Director is Paul Fineman (2018: Paul Fineman). The Group operated a Group personal pension plan to which the Group contributed for one Director (2018: one) and provides death in service life assurance to the value of between four and six times pensionable salary. An expense of £1,721,000 has been recognised in the year in respect of share‑based payments relating to Directors in respect of the Long Term Incentive Plan (2018: £1,353,000). 57 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 DIRECTORS’ REMUNERATION REPORT CONTINUED Part 3: Annual report on remuneration continued Directors’ remuneration(a) continued The remuneration in respect of the year ended 31 March 2018 to the Directors, by individual, was as follows: Year ended 31 March 2018 Executive Directors Lance Burn Paul Fineman Anthony Lawrinson(c) Giles Willits(d) Total Executive Non‑Executive Directors Elaine Bond John Charlton Anders Hedlund Mark Tentori Total Non‑Executive Total Directors (a) Audited. Salary/fees £ Bonus £ Benefits(b) £ Subtotal £ Pension £ Total £ 251,318 120,000 2,680 373,998 9,031 383,029 384,800 275,200 17,701 677,701 189,102 — 4,731 193,833 78,506 53,750 412 132,668 — — — 677,701 193,833 132,668 903,726 448,950 25,524 1,378,200 9,031 1,387,231 39,212 74,382 91,502 40,896 245,992 — — — — — 1,979 41,191 7,183 81,565 3,284 94,786 — 40,896 12,446 258,438 — — — — — 41,191 81,565 94,786 40,896 258,438 1,149,718 448,950 37,970 1,636,638 9,031 1,645,669 (b) The benefits relate primarily to private health benefits. (c) Anthony Lawrinson resigned on 31 December 2017. (d) Giles Willits was appointed on 2 January 2018. Long Term Incentive Plan(a) Annual awards to Executive Directors who served during the year are as follows: Lance Burn Paul Fineman Giles Willits (a) Audited. LTIP vested 2014‑2017 LTIP vested 2015‑2018 LTIP vested(b) 2016‑2019 LTIP not yet vested 2017‑2020 LTIP not yet vested 2018‑2021 133,678 192,963 111,882 62,296 108,264 — — 312,916 226,791 132,442 204,675 — — 172,454 128,654 (b) All of these formally vest on 5 June 2019 following the Remuneration and Audit Committees’ approval of the results for the year ended 31 March 2019. No Directors exercised any options during the year. For further details including performance conditions see note 25. Cumulative total shareholder return (dividend reinvested) vs. selected indices The graph below shows the percentage change in total shareholder return for the last six years compared to the FTSE Small Cap, FTSE AIM All‑share and the FTSE AIM UK 50. 1400 1200 1000 800 600 400 200 0 Mar 13 Sep 13 Mar 14 +1000.8% +69.7% +58.1% +35.3% Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18 Sep 18 Mar 19 IG Design Group FTSE Small Cap FTSE AIM All-share FTSE AIM UK 50 58 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 DIRECTORS’ REPORT The Directors present their annual report on the affairs of the Group, together with the financial statements and independent auditor’s report for the year ended 31 March 2019. Directors The Directors of the Company during the period under review, and subsequently to the date of this report, were: • Elaine Bond • Lance Burn • John Charlton • Paul Fineman • Anders Hedlund • Mark Tentori • Giles Willits Results and dividends Results for the year ended 31 March 2019 are set out in the consolidated income statement on page 66. The Directors are recommending a final dividend of 6.00p per share which, if approved at the AGM, will result in a full year dividend of 8.5p per share for 2019. Articles of association A copy of the full articles of association are available on request from the Company Secretary and are also available on the Group’s website www.thedesigngroup.com. Any amendments to the articles of association can only be made by a special resolution of the shareholders. Share capital and substantial shareholders Details of the issued share capital, together with details of the movements during the year, are shown in note 25 to the consolidated financial statements. The Company has one class of ordinary share which carry no right to fixed income. Each ordinary share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the articles of association and prevailing legislation. Details of share‑based payments are set out in note 25 to the financial statements and the Directors’ remuneration report. No person has any special rights or control over the Company’s share capital and all issued shares are fully paid. Directors’ indemnities and Directors and officers’ liability insurance The Company has purchased Directors’ and officers’ liability insurance during the year as allowed by the Company’s articles. At 31 March 2019, the Company had been notified of the following substantial shareholders comprising 3% or more of the issued ordinary share capital of the Company: % of issued share capital Hedlund family(a) Octopus Milton Schroders Plc BlackRock Close Brothers AM Polar Capital Paul Fineman(b) 27.97% 8.15% 5.05% 4.52% 3.99% 3.97% 3.37% 3.25% (a) In addition to the Hedlund family’s beneficial interest set out above, the Hedlund family is also interested in a further 1,150,790 ordinary shares, representing a further 1.47% of the current issued share capital of the Company. These ordinary shares are held by West Coast Trust, a trust for the benefit of Anders Hedlund’s adult children, which holds 900,790 ordinary shares. In total the Hedlund family is interested in 22,818,994 ordinary shares, representing 29.12% of the current issued share capital of Company. (b) This includes a non‑beneficial interest in 174,608 ordinary shares at 5p each. Acquisition of the Company’s own shares At the AGM held on 5 September 2018, the Company was authorised in accordance with Section 701 of the Act to make market purchases (within the meaning of Section 693(4) of the Act) of up to 6,494,839 ordinary shares (being approximately 10% of the share capital) on such terms and in such manner as the Directors of the Company may from time to time determine. This authority was not used during the year or up to the date of this report. Shareholders will be asked to renew these authorities at the AGM as detailed in the next AGM notice. The Company held no treasury shares during the year. Financial risk management Details of the Directors’ assessment of the principal risks and uncertainties which could impact the business are outlined in the principal risks and uncertainties section on pages 36 to 39. The Board manages internal risk through the ongoing review of the Group’s risk register and the Board manages external risk through monitoring of the economic and regulatory environment and market conditions. Brexit The Group continues to keep the potential implications of Brexit for the Group under review. The risk associated with Brexit is relatively limited for the Group as it is mainly applicable to our UK business which represents less than 30% of the Group. We consider the main impact on the Group will be the effect of Brexit on the strength of the sterling and FX rates. We have significant visibility of our supply chain and depending on the nature of the exit from the European Union will depend on the level of impact for us as a Group. We have workstreams in place and mitigation of the risks of Brexit are underway. We are currently fully prepared for a soft Brexit. A no deal Brexit will increase the overall impact on our UK business with the need to adjust to World Trade Organisation terms, however this is not expected to have a material effect on the Group. Going concern The Directors continue to adopt the going concern basis in preparing the annual report and financial statements. Further details are set out in note 1 to the consolidated financial statements. 59 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 DIRECTORS’ REPORT CONTINUED Post balance sheet events See note 32 for details. Political donations No political donations were made during the period under review. Health and safety The Group is committed to maintaining high standards of health and safety in every area of the business. It is the aim of the Group to exceed the requirements of health and safety legislation and we have established a health and safety co‑ordinator to ensure continuous improvement of health and safety across the Group. Employees The Group recognises the benefits of keeping employees informed on matters affecting them as employees and on the various factors affecting the performance of the Group. This is achieved through employee briefings that are held in most businesses at least twice a year and regular team briefings. The Group conforms to current employment laws on the employment of disabled persons and, where we are informed of any employee disability, management makes all reasonable efforts to accommodate that employee’s requirements. Directors’ interests The Directors who held office during the year had the following direct interests in the ordinary shares of the Company: Interest in ordinary shares at the end of the year Elaine Bond Lance Burn John Charlton(a) Paul Fineman(b) Anders Hedlund(c) Mark Tentori 2019 2018 19,301 15,816 — — 619,616 619,616 2,369,334 4,453,534 488 488 11,111 7,404 Giles Willits In addition to the above holdings: (a) 37,500 (2018: 37,500) shares are held by the wife of John Charlton. (b) Paul Fineman owns a non‑beneficial interest in 174,608 (2018: 174,608) ordinary shares of 5p each. (c) 16,642,640 (2018: 17,142,640) and 5,275,116 (2018: 5,275,116) ordinary shares of 5p each are respectively registered in the names of AC Artistic Limited (‘Artistic’) and 93,573 93,573 Malios Limited, companies incorporated in the British Virgin Islands, and under the ultimate control of the Hedlund family. In addition to the Hedlund family’s beneficial interest set out above, the Hedlund family also holds interests in a further 1,150,790 ordinary shares, representing a further 1.47% of the current issued share capital of the Company. These ordinary shares are held by West Coast Trust, a trust for the benefit of Anders Hedlund’s adult children, which holds 900,790 ordinary shares. In total the Hedlund family has interests in 22,818,994 ordinary shares, representing 29.12% of the current issued share capital of the Company. Disclosure of information to the auditor In the case of each Director in office at the date the Directors’ report is approved, the following applies: • the Director knows of no information, which would be relevant to the auditor for the purpose of their audit report, of which the auditor is not aware; and • the Director has taken all steps that he/she ought to have taken as a Director to make him/herself aware of any such information and to establish that the auditor is aware of it. Approval of the strategic report and Directors’ report The strategic report and Directors’ report were approved by the Board on 10 June 2019. Joy Laws Company Secretary 10 June 2019 60 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under the AIM Rules of the London Stock Exchange they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and they have elected to prepare the Parent Company financial statements in accordance with UK accounting standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant, reliable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the Parent Company financial statements, state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; • assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • use the going concern basis of accounting unless they either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a strategic report and a Directors’ report that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 61 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF IG DESIGN GROUP PLC • the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities are described below. We have fulfilled our ethical responsibilities under, and are independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed entities. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. 2 Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion above, the key audit matters were as follows: 1 Our opinion is unmodified We have audited the financial statements of IG Design Group plc (‘the Company’) for the year ended 31 March 2019 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated balance sheet, the consolidated cash flow statement, the company balance sheet, the company statement of changes in equity, the company cash flow statement and the related notes, including the accounting policies in note 1 to the consolidated financial statements and note 1 to the company financial statements. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 31 March 2019 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; The risk Our response The impact of uncertainties due to the UK exiting the European Union on our audit New risk Refer to page 38 (principal risks and uncertainties) and page 59 (directors’ report) Unprecedented levels of uncertainty All audits assess and challenge the reasonableness of estimates, in particular the valuation of identified intangibles on acquisition of Impact Innovations Inc, the recoverability of parent Company investment below, and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements. All of these depend on assessments of the future economic environment and the Group’s future prospects and performance. Brexit is one of the most significant economic events for the UK and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: Our Brexit knowledge: We considered the directors’ assessment of Brexit-related sources of risk for the Group’s business and financial resources compared with our own understanding of the risks. We considered the directors’ plans to take action to mitigate the risks. Assessing transparency: As well as assessing individual disclosures as part of our procedures on going concern, we considered all of the Brexit related disclosures together, including those in the strategic report and the directors’ report, comparing the overall picture against our understanding of the risks. However, no audit should be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit. 62 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019The risk Revenue recognition Risk vs 2018: tu Refer to page 76 (accounting policy) and page 82 (financial disclosures) Accounting application The majority of the revenue of the Group is derived through the provision of goods to customers during the year. There is a risk of fraud relating to revenue recognised around the year end, which requires special audit consideration because of the nature of the risk and the potential for misstatement in relation to the completeness and accuracy of revenue. Identified intangibles on acquisition of Impact Innovations Inc New risk (£19.0 million) Refer to page 74 and 75 (accounting policy) and page 110 (financial disclosures) Forecast based valuation On 31 August 2018, the Group acquired the entire share capital of Impact Innovations Inc for total consideration of £82.2 million. We identified the identification of intangible assets and the valuation of the customer relationships and the trade names intangible assets as a risk because of the inherent complexity due to the judgements and assumptions applied by the directors in assessing the fair value of the intangible asset, and because of the size of the acquisition. The effect of this matter is that, as part of our risk assessment, we determined that the valuation of intangible assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. Low risk, high value The carrying amount of the parent Company’s investments in the subsidiary companies held at cost less impairment and the carrying amount of the intra-group debtor balance together represents 54.2% (2018: 81.4%) of the parent Company’s total assets. Their recoverability is not at a high risk of significant misstatement or subject to significant judgement. However, due to its materiality in the context of the parent Company financial statements, this is considered to be the area that had the greatest effect on our overall parent Company audit. Parent: Recoverability of parent Company investment in subsidiaries and intra group debtors Risk vs 2018: tu (£72.5 million; 2018: £56.7 million) Refer to page 115 (accounting policy) and page 119 (financial disclosures) Our response Our procedures included: Tests of detail: Selected a sample of revenue transactions recognised close to the year end and agreeing them to proof of delivery in order to assess whether the revenue has been recognised in the appropriate period. Inspected a sample of credit notes raised post year end to determine whether they related to revenue recognised in the year. Our procedures included: Our valuation expertise: Used our own valuation specialists to assess the appropriateness of the valuation methodology applied. Benchmarking assumptions: Compared the Group’s assumptions to externally derived data in relation to key inputs such as revenue growth rates, customer attrition rate and discount rates. Assessing transparency: Assessed whether the Group’s disclosures relating to the valuation of acquired intangibles are appropriate. Our procedures included: Tests of detail: Compared the carrying amount of 100% of investments with the relevant subsidiaries draft balance sheet to identify whether their net assets, being an approximation of their minimum recoverable amount, were in excess of their carrying amount and assessing whether those subsidiaries have historically been profit-making. Assessing 91.7% of intra group debtors to identify, with reference to the relevant debtors’ draft balance sheet, whether they have a positive net asset value and therefore coverage of the debt owed, as well as assessing whether those debtor companies have historically been profit-making Assessing subsidiary audits: Assessed the work performed by the subsidiary audit teams on all of those subsidiaries and considering the results of that work, on those subsidiaries’ profits and net assets. Comparing valuations: For the investments where the carrying amount exceeded the net asset value, compared the carrying amount of the investment with the expected value of the business based on a suitable multiple of the subsidiaries’ profit. 63 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019INDEPENDENT AUDITOR’S REPORT CONTINUED TO THE MEMBERS OF IG DESIGN GROUP PLC 3 Our application of materiality and an overview of the scope of our audit Materiality for the Group financial statements as a whole was set at £0.91 million, determined with reference to a benchmark of Group profit before tax normalised to exclude certain costs, of which materiality represents 4.4%. The Group team performed procedures on the items excluded from normalised group profit before tax. In 2018 materiality for the Group financial statements as a whole was set at £0.8 million, determined in that year with reference to a benchmark of Group profit of £19.7 million, of which it represented 4.1%. Materiality for the parent Company financial statements as a whole was set at £0.85 million (2018: £0.70 million), determined with reference to a benchmark of Company net assets of £128.2 million (2018: £64.8 million), of which it represents 0.7% (2018: 1.1%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £45,500 (2018: £37,000), in addition to other identified misstatements that warranted reporting on qualitative grounds. Of the Group’s fourteen (2018: fourteen) reporting components, which includes the parent Company, we subjected ten (2018: eight) to full scope audits for Group purposes. The components within the scope of our work accounted for 96.1% (2018: 88.9%) of total Group revenue, 92.9% (2018: 98.2%) of Group profit before tax and 98.2% (2018: 88.6%) of total Group net assets. The remaining 3.9% (2018: 11.1%) of total Group revenue, 7.1% (2018: 1.8%) of Group profit before tax and 1.8% (2018: 11.4%) of total Group net assets is represented by four (2018: five plus one component where we performed specific risk procedures) reporting components, none of which individually represented more than 3% of any of total Group revenue, Group profit before tax or total Group assets. For these residual components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these. The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team determined the component materialities, which ranged from £0.25 million to £0.48 million (2018: £0.2 million to £0.7 million), having regard to the mix of size and risk profile of the Group across the components. The work on five of the fourteen in scope components (2018: two of the fourteen components) was performed by component auditors, and the rest, including the audit of the parent Company, was performed by the Group team. The Group audit team visited seven (2018: eight) component locations subject to full scope audits to assess the audit risk and strategy. Telephone conference meetings were held with all component auditors on completion of the component audits where the audit findings were reported to the Group audit team in more detail, and any further work required by the Group audit team was then performed by the component auditor. 4 We have nothing to report on going concern The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue as a going concern for at least a year from the date of approval of the financial statements ("the going concern period"). Our responsibility is to conclude on the appropriateness of the directors’ conclusions and, had there been a material uncertainty related to going concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a material uncertainty in this auditor’s report is not a guarantee that the group or the parent Company will continue in operation. In our evaluation of the directors’ conclusions, we considered the inherent risks to the Group’s and parent Company’s business model and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the going concern period. The risk that we considered most likely to adversely affect the Group’s and parent Company’s available financial resources over this period was the impact of a significant business continuity issues affecting a number of the Group’s key customers. As this was the risk that could potentially cast significant doubt on the Group's and the parent Company's ability to continue as a going concern, we considered sensitivities over the level of available financial resources indicated by the Group’s financial forecasts taking account of reasonably possible (but not unrealistic) adverse effects that could arise from these risks individually and collectively and evaluated the achievability of the actions the directors consider they would take to improve the position should the risks materialise. We also considered less predictable but realistic second order impacts, such as the impact of a disorderly Brexit and the erosion of customer 64 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019or supplier confidence, which could result in a rapid reduction of available financial resources. • in our opinion those reports have been prepared in accordance with the Companies Act 2006. Based on this work, we are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or there is an undisclosed material uncertainty that may cast significant doubt over the use of that basis for a period of at least a year from the date of approval of the financial statements. We have nothing to report in these respects, and we did not identify going concern as a key audit matter. 5 We have nothing to report on the other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and directors’ report Based solely on our work on the other information: • we have not identified material misstatements in the strategic report and the directors’ report; in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • 6 We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7 Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 61, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/ auditorsresponsibilities. 8 The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Peter Selvey (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Milton Keynes MK9 1NE 10 June 2019 65 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Note 2019 £000 2018 £000 4 448,362 327,516 (365,533) (257,532) 82,829 69,984 (23,095) (20,005) (40,596) (30,346) 620 19,758 (2,476) 17,282 (4,031) 1,477 21,110 (1,392) 19,718 (5,384) 13,251 14,334 7 5 8 9 11,925 13,545 1,326 789 10 12 25 32,646 23,199 (8,274) (1,609) (3,005) 19,758 539 (371) (2,257) 21,110 (2,318) (1,392) 10 (158) — (2,476) (1,392) 2019 Diluted pence 16.0 Basic pence 16.2 2018 Diluted pence 20.5 Basic pence 21.1 Note 23 CONSOLIDATED INCOME STATEMENT YEAR ENDED 31 MARCH 2019 Revenue Cost of sales Gross profit Selling expenses Administration expenses Other operating income Operating profit Finance expenses Profit before tax Income tax charge Profit for the year Attributable to: Owners of the Parent Company Non-controlling interests Operating profit analysed as: Adjusted operating profit Exceptional items Acquisition amortisation LTIP charges Operating profit Finance expenses analysed as: Adjusted finance expenses Exceptional items Finance expenses Earnings per ordinary share Earnings per share 66 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME YEAR ENDED 31 MARCH 2019 Profit for the year Other comprehensive income: Exchange difference on translation of foreign operations (net of tax) Transfer to profit and loss on maturing cash flow hedges (net of tax) Net gain/(loss) on cash flow hedges (net of tax) Other comprehensive income for period, net of tax items which may be reclassified to profit and loss in subsequent periods Total comprehensive income for the year, net of tax Attributable to: Owners of the Parent Company Non-controlling interests 2019 £000 2018 £000 13,251 14,334 240 27 118 (1,632) (271) (27) 385 13,636 (1,930) 12,404 12,372 12,001 1,264 403 13,636 12,404 67 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 MARCH 2019 At 31 March 2017 Profit for the year Other comprehensive income Total comprehensive income for the year Equity-settled share-based payment (note 25) Tax on equity-settled share-based payments Options exercised (note 22) Equity dividends paid At 31 March 2018 Profit for the year Share premium and capital redemption reserve £000 Share capital £000 Merger reserves £000 Hedging reserves £000 Translation reserve £000 Retained Shareholder equity earnings £000 £000 Non- controlling interest £000 Total £000 3,132 9,769 17,164 271 2,551 53,330 86,217 3,833 90,050 — — — — — — — — 13,545 13,545 789 14,334 (298) (1,246) — (1,544) (386) (1,930) — — — (298) (1,246) 13,545 12,001 403 12,404 — — — — — 1,677 1,677 — 1,677 — 62 — — 46 — — — — 3,194 9,815 17,164 — — — — — — — — (27) — 145 — — — (111) (37) (111) 71 — — (111) 71 (3,000) (3,000) (575) (3,575) 1,305 65,404 96,855 3,661 100,516 — 11,925 11,925 1,326 13,251 302 — 447 (62) 385 Other comprehensive income — Total comprehensive income for the year Equity-settled share-based payment (note 25) Tax on equity-settled share-based payments Shares issued Recognition of non- controlling interest Disposal of minority interest Options exercised (note 22) Equity dividends paid — — — 145 302 11,925 12,372 1,264 13,636 — — — — — 2,333 2,333 — 2,333 — — 641 63,065 — — 83 — — — 18 — — — — — — — — — — — — — — — — — — — 764 764 — 63,706 — — 764 63,706 — — (72) — — 29 311 (110) — 311 (110) 29 (4,553) (4,553) (1,075) (5,628) At 31 March 2019 3,918 72,898 17,164 118 1,607 75,801 171,506 4,051 175,557 Merger reserve The merger reserve comprises premium on shares issued in relation to business combinations. Capital redemption reserve The capital redemption reserve comprises amounts transferred from retained earnings in relation to the redemption of preference shares. For ease of presentation, the amount of £1.34 million relating to the capital redemption reserve has been included within the column of share premium and capital redemption reserve in the balances at both the beginning and end of each year, with no movements during the year. Hedging reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments related to hedged transactions that qualify for hedge accounting and have not yet matured. Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. Shareholders’ equity Shareholders’ equity represents total equity attributable to owners of the Parent Company. 68 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 CONSOLIDATED BALANCE SHEET AS AT 31 MARCH 2019 Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Total non-current assets Current assets Inventory Trade and other receivables Derivative financial assets Cash and cash equivalents Total current assets Total assets Equity Share capital Share premium Capital redemption reserve Reserves Retained earnings Equity attributable to owners of the Parent Company Non-controlling interests Total equity Non-current liabilities Loans and borrowings Deferred income Provisions Other financial liabilities Deferred tax liability Total non-current liabilities Current liabilities Loans and borrowings Deferred income Provisions Income tax payable Trade and other payables Other financial liabilities Total current liabilities Total liabilities Total equity and liabilities Note 2019 £000 2018 £000 11 12 13 14 15 26 16 22 17 18 19 20 13 17 18 19 21 20 4 4 39,835 83,690 3,610 127,135 69,571 45,405 129 19,458 35,499 36,547 2,663 74,709 49,311 37,369 113 9,031 134,563 95,824 261,698 170,533 3,918 71,558 1,340 18,889 75,801 171,506 4,051 3,194 8,475 1,340 18,442 65,404 96,855 3,661 175,557 100,516 1,421 751 2,671 1,817 692 7,352 953 99 1,090 3,370 58,563 14,714 3,781 998 894 1,440 373 7,486 894 99 429 3,364 38,757 18,988 78,789 62,531 86,141 70,017 261,698 170,533 These financial statements were approved by the Board of Directors on 10 June 2019 and were signed on its behalf by: Paul Fineman Director Giles Willits Director The notes on pages 71 to 111 form part of the financial statements. 69 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 CONSOLIDATED CASH FLOW STATEMENT YEAR ENDED 31 MARCH 2019 Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortisation of intangible assets Impairment of goodwill Finance expenses Income tax charge Profit on sales of property, plant and equipment Loss on disposal of intangible fixed assets Equity-settled share-based payment Operating profit after adjustments for non-cash items Change in trade and other receivables Change in inventory Change in trade and other payables Change in provisions and deferred income Cash generated from operations Tax paid Interest and similar charges paid Net cash inflow from operating activities Cash flow from investing activities Proceeds from sale of property, plant and equipment Acquisition of businesses Cash acquired with acquisition Acquisition of intangible assets Acquisition of property, plant and equipment Receipt of government grants Net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of share capital Repayment of secured borrowings Payment of finance lease liabilities New bank loans raised Loan arrangement fees Equity dividends paid Dividends paid to non-controlling interests Net cash inflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Effect of exchange rate fluctuations on cash held Cash and cash equivalents at end of the period 70 Note 2019 £000 2018 £000 13,251 14,334 11 12 12 8 9 25 5,328 2,309 — 2,476 4,031 (6) 331 3,005 30,725 25,616 6,508 (17,949) (137) 44,763 (3,694) (2,053) 39,016 5,312 31 (66,809) 12 11 1,208 (2,190) (5,699) — 4,345 818 36 1,392 5,384 (1,953) 1 2,257 26,614 (9,133) 819 3,612 (199) 21,713 (3,099) (1,483) 17,131 2,596 (5,145) — (1,377) (7,992) 15 (68,178) (11,903) 22 48,348 24 (2,350) — — (30) (4,553) (1,075) 40,340 11,178 9,031 (751) 16 19,458 71 (165) (46) 5,108 (111) (3,000) (575) 1,282 6,510 2,743 (222) 9,031 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED 31 MARCH 2019 1 Accounting policies IG Design Group plc (the ‘Company’) is a public limited company, incorporated and domiciled in England and Wales. The Company’s ordinary shares are listed on the Alternative Investment Market (‘AIM’). These financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). The Group financial statements have been prepared and approved by the Directors in accordance with EU adopted International Financial Reporting Standards. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. Judgements made by the Directors in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in the policies below. Going concern basis The financial statements have been prepared on the going concern basis. In forming their conclusion that the business is and will remain a going concern, the Directors have reviewed the budgets and forecasts prepared and sensitivity analysis thereon. The business is highly seasonal and this results in peak funding demands. On 5 June 2019, to meet the funding requirements, the business has refinanced with a banking group comprising HSBC, NatWest, BNP Paribas, Sun Trust and PNC Bank as part of a three year deal. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least twelve months from the date of signing these financial statements. Thus, they continue to adopt the going concern basis of accounting in preparing the financial statements. Measurement convention The financial statements are prepared on the historical cost basis except derivative financial instruments which are stated at their fair value. Changes in accounting policies The majority of the accounting policies adopted in the preparation of the financial statements are consistent with those followed in the preparation of the Group’s annual financial statements for the year ended 31 March 2018 with the exception of IFRS 9 (Financial Instruments) and IFRS 15 (Revenue from Contracts with Customers) which were new accounting standards adopted for the first time in these financial statements with IFRS 15 being adopted retrospectively. Accounting policies have been updated to reflect the new standards although there was no material impact of adopting either standard. Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The Group considers all facts and circumstances in assessing whether it has the power to control the relevant activities of investee and to benefit from the results thereof, including rights arising from shareholder agreements, contractual arrangements and potential voting rights held by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences to the date that control ceased. Business combinations are accounted for using the acquisition method as at the date on which control is transferred to the Group. For acquisitions on or after 1 January 2010, the Group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the result is negative, a ‘bargain purchase’ gain is recognised immediately in the income statement. Provisional fair values allocated at a reporting date are finalised within twelve months of the acquisition date. Foreign currency translation The consolidated financial statements are presented in pounds sterling, which is the Company’s functional currency and the Group’s presentational currency. Transactions in foreign currencies are translated at the foreign exchange rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the foreign exchange rate prevailing at that date. Foreign exchange differences arising on translation are recognised in the income statement. 71 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 1 Accounting policies continued Foreign currency translation continued The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated at foreign exchange rates prevailing at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the period where this rate approximates to the foreign exchange rates prevailing at the dates of the transactions. Exchange differences arising from this translation of foreign operations, and of related qualifying hedges, are taken directly to the translation reserve. They are released into the income statement upon disposal or loss of control and on maturity or disposal of the hedge, respectively. Exchange differences arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income in the translation reserve. The cumulative translation differences previously recognised in other comprehensive income (or where the foreign operation is part of a subsidiary, the parent’s interest in the cumulative translation differences) are released into the income statement upon disposal of the foreign operation or on loss of control of the subsidiary that includes the foreign operation. Financial instruments (policy adopted from 1 April 2018) (i) Recognition and initial measurement Trade receivables are initially recognised when they are originated. All other financial assets and financial liabilities are initially recognised when the Company becomes a party to the contractual provisions of the instrument. A financial asset (unless it is a trade receivable without a significant financing component) or financial liability is initially measured at fair value, plus, for an item not at fair value through profit or loss (‘FVTPL’), transaction costs that are directly attributable to its acquisition or issue. A trade receivable without a significant financing component is initially measured at the transaction price less attributable transaction costs. (ii) Classification and subsequent measurement Financial assets a) Classification On initial recognition, a financial asset is classified as measured at amortised cost or FVTPL. Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model. A financial asset is measured at amortised cost if it meets both of the following conditions: • • it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All financial assets not classified as measured at amortised cost are measured at FVTPL. This includes all derivative financial assets. Investments in subsidiaries are carried at cost less impairment in accordance with IFRS 9. b) Subsequent measurement and gains and losses Financial assets at FVTPL – these assets (other than derivatives designated as hedging instruments) are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognised in profit or loss. Financial assets at amortised cost – These assets are subsequently measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses. Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss. Classification of financial instruments issued by the Group Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held-for-trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognised in profit or loss. Any gain or loss on derecognition is also recognised in profit or loss. 72 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Trade and other receivables The Group have trade receivables without significant financing components. These assets are recognised initially at transaction price less attributable transaction costs. Trade and other receivables are subsequently reviewed for recoverability and impairment with any losses taken to profit and loss immediately. If the arrangement constitutes a financing transaction, for example if payment is deferred beyond normal business terms, then it is measured at the present value of future payments discounted at a market rate of instrument for a similar debt instrument. Trade and other payables Trade and other payables are stated at their nominal value which is considered to be their fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents comprise cash balances. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purposes of the cash flow statement. 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 using the effective interest method. Derivative financial instruments and hedging Derivative financial instruments Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised as other comprehensive income in the hedging reserve. Any ineffective portion of the hedge is recognised immediately in the income statement. Amounts previously recognised in other comprehensive income are transferred to the income statement in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). When a hedging instrument expires or is sold, terminated or exercised, or the entity revokes designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in other comprehensive income and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in other comprehensive income is recognised in the income statement immediately. Impairment of financial instruments The Company recognises loss allowances for expected credit losses ('ECLs') on financial assets measured at amortised cost. The Company measures loss allowances at an amount equal to lifetime ECLs, except for other debt securities and bank balances for which credit risk (i.e. the risk of default occurring over the expected life of the financial instrument) has not increased significantly since initial recognition, which are measured as twelve-month ECLs. Loss allowances for trade receivables and contract assets are always measured at an amount equal to lifetime ECLs. When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s historical experience and informed credit assessment and including forward-looking information. Lifetime ECLs are the ECLs that result from all possible default events over the expected life of a financial instrument. twelve-month ECLs are the portion of ECLs that result from default events that are possible within the twelve months after the reporting date (or a shorter period if the expected life of the instrument is less than twelve months). The maximum period considered when estimating ECLs is the maximum contractual period over which the Company is exposed to credit risk. 73 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 1 Accounting policies continued Impairment of financial instruments continued Measurement of ECLs ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Company expects to receive). ECLs are discounted at the effective interest rate of the financial asset. Credit-impaired financial assets At each reporting date, the Company assesses whether financial assets carried at amortised cost are credit-impaired. A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Write-offs The gross carrying amount of a financial asset is written off (either partially or in full) to the extent that there is no realistic prospect of recovery. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Where separately identifiable 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. Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Where land and buildings are held under finance leases the accounting treatment of the land is considered separately from that of the buildings. Leased assets acquired by way of a finance lease are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Lease payments are accounted for as described below. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows: • freehold buildings leasehold land • and buildings • plant and equipment • fixtures and fittings • motor vehicles 25-30 years life of lease 4-25 years 3-5 years 4 years No depreciation is provided on freehold land. Included within plant and machinery are assets with a range of depreciation rates. These rates are tailored to the nature of the assets to reflect their estimated useful lives. Depreciation methods, useful lives and residual values are reviewed at each balance sheet date. Business combinations and goodwill Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the purchase method. Goodwill represents amounts arising on acquisition of subsidiaries. In respect of business acquisitions that have occurred since 1 April 2006, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable. Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested every half year for impairment. In respect of acquisitions prior to 1 April 2006, goodwill is included on the basis of its deemed cost, which represents the amount recorded under UK GAAP at that time which was broadly comparable save that only separable intangibles were recognised and goodwill was amortised. Goodwill written off to reserves under UK GAAP prior to 1998 has not been reinstated. If the cost of an acquisition is less than the fair value of the Group’s share of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Computer software Computer software is capitalised at its initial cost and amortised over its useful life. 74 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Other intangible assets Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred. Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. All other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows: • Computer software • Trade names • Customer lists 3-5 years 3-5 years 3-15 years Amortisation charges are included under ‘administrative expenses’ in the income statement. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is based on a weighted average and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Impairment of non‑financial assets excluding inventories and deferred tax The carrying amounts of the Group’s assets other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of the Group’s assets is the greater of their fair value less costs 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. An impairment in respect of goodwill is not reversed. In respect of other assets, an impairment is reversed when there is an indication that the impairment may no longer exist and there has been a change in the estimates used to determine the recoverable amount. An impairment 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 had been recognised. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as borrowing costs. 75 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 1 Accounting policies continued Revenue recognition During the year, as required by IFRS, a new accounting standard has been adopted retrospectively – IFRS 15 Revenue from Contracts with Customers. This introduces the concept of a performance obligation which is effectively a written or unwritten contract for a good or a service. The Group recognise revenue on sales of Celebration, Stationery and creative play, Giftware and ‘Not-for- resale’ consumable products across four geographical segments. Typically the products that we supply form the only performance obligations within a customer agreement, and although the Group can provide ancillary services such as merchandising, these are not separately identifiable obligations. Revenue recognised in respect of these obligations represents the amounts, net of discounts, allowances for volume and promotional rebates and other payments to customers (excluding value added tax) derived from the provision of goods and services to customers during the year. Revenue is generated solely from contracts with customers and is measured based on the consideration specified in a contract with a customer. The Group recognises revenue when it transfers control over a good to a customer. We evaluate our Revenue with customers based on the five-step model under IFRS 15 Revenue from Contracts with Customers: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognise revenues when (or as) each performance obligation is satisfied. Provisions are made for volume and promotional rebates where they have been agreed or are reasonably likely to arise, based upon actual and forecast sales. Revenue is only recognised when highly probable that a significant reversal in the amount of cumulative revenue will not be required. Where goods are sold on a sale or return basis, revenue is initially booked net of any expectation of the proportion that will be returned by the customer, which is based on historical experience. This is updated for the final value of returns on payment by the customer. Where goods are sold on a consignment basis, the revenue is booked when the goods have been sold by the customer. The Group disaggregates its revenue across four geographical segments. Geographical information about revenues from external customers can be found in note 4. Government grants Government grants for specific expenses are recognised in the profit and loss in the same period as the relevant expense or when there is reasonable assurance that the Company will comply with the conditions attached to it and that the grant will be received. Capital-based government grants (i.e. those relating to depreciable assets) are usually included within other financial liabilities in the balance sheet and recognised in profit or loss over the periods and in the proportions in which depreciation expense on those assets is recognised. Supplier income The Group does not have material retrospective supplier incentive arrangements, but where these do arise, they are recognised within cost of sales on an accruals basis as earned for each relevant supplier rebate. Expenses Operating lease payments Payments made and lease incentives received under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Finance lease payments Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Finance income and expenses Finance expenses comprise interest payable, finance charges on finance leases, amortisation of capitalised fees, and unwinding of discounts on provisions. Net movements in the fair value of derivatives which have not been designated as an effective hedge, and any ineffective portion of fair value movement on derivatives designated as a hedge are also included within finance income or expense. Interest income and interest payable is recognised in the income statement as it accrues, using the effective interest method. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised in other comprehensive income or equity respectively. 76 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date and any adjustment to tax payable in respect of previous years. Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. 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. Dividend distribution Final dividends to shareholders of IG Design Group plc are recognised as a liability in the period that they are approved by shareholders. Employee benefits Pensions The Group operates a defined contribution personal pension scheme. The assets of this scheme are held separately from those of the Group in an independently administered fund. The pension charge represents contributions payable by the Group to the fund. The Netherlands subsidiary operates an industrial defined benefit fund, based on average wages, that has an agreed maximum contribution. The pension fund is a multi-employer fund and there is no contractual or constructive obligation for charging the net defined benefit cost of the plan to participating entities other than an agreed maximum contribution for the period, that is shared between employer (4/7) and employees (3/7). The Dutch Government is not planning to make employers fund any deficits in industrial pension funds; accordingly the Group treats the scheme as a defined contribution scheme for disclosure purposes. The Group recognises a cost equal to its contributions payable for the period. Share-based payment transactions The cost of equity-settled transactions with employees is measured by reference to the fair value of the options at the date on which they are granted. The fair value is determined by using an appropriate pricing model. The fair value cost is then recognised over the vesting period, ending on the date on which the relevant employees become fully entitled to the award. The quantum of awards expected to vest and the relevant cost charged is reviewed annually such that at each balance sheet date the cumulative expense is the relevant share of the expected total cost, pro-rated across the vesting period. No expense is recognised for awards that are not expected to ultimately vest, for example due to an employee leaving or business performance targets not being met. The annual expense for equity settled transactions is recognised in the income statement with a corresponding entry in equity. Social security charges on share-based incentives Employer’s social security charges are accrued, where applicable, at a rate which management expects to be the prevailing rate when share-based incentives are exercised and is based on the latest market value of options expected to vest or having already vested. Own shares held by Employee Benefit Trust Transactions of the Group-sponsored ‘International Greetings Employee Benefit Trust’ are included in the Group financial statements. In particular, the trust’s purchases and sales of shares in the Company are debited and credited directly to equity. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective asset. Costs directly attributable to the arrangement of new borrowing facilities are included within the fair value of proceeds received and amortised over the life of the relevant facilities. Other borrowing costs which can include costs associated with the extension of existing facilities are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. 77 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 1 Accounting policies continued Use of non‑GAAP measures These financial statements include alternative performance measures (‘APMs’) that are presented in addition to the standard GAAP metrics. The Directors believe that these APMs provide important additional information regarding the underlying performance of the business including trends, performance and position of the Group. APMs are used to enhance the comparability of information between reporting periods and segmental business units by adjusting for exceptional or uncontrollable factors which affect IFRS measures, to aid the understanding of the Group’s performance. Consequently, APMs are used by the Directors and management for strategic and performance analysis, planning, reporting and reward setting. The APMs are adjusted profit, adjusted EBITDA, adjusted operating profit and adjusted EPS. The adjustments made to these adjusted results are: Exceptional items These include acquisition related costs and reorganisation and restructuring costs. These items are excluded to present the performance of the business in a consistent manner and in line with how the business is managed and measured on a day-to- day basis. They are typically gains or costs associated with events that are not considered to form part of the core operations, or are considered to be a ‘non-recurring’ event (although they may span several accounting periods). Further detail can be seen in note 10 to the financial statements. Acquisition related costs Costs directly associated with acquisitions, including legal and advisory fees on deals, form part of our reported results on an IFRS basis. These costs however, in our view, form part of the capital transaction, and as they are not attributed to investment value under IFRS 3, they are excluded from our adjusted measures for the purposes of reporting underlying results. Similarly, where acquisitions have employee related payments (exclusive of LTIPs) which lock in and incentivise legacy talent, we have also excluded these costs. As these costs are employment linked, they are treated as an expense and form part of the IFRS results, however, as with transaction costs, we do not consider these to form part of the underlying results of the business. In accordance with IFRS 3, on acquisition, businesses need to be fair valued, which can result in an uplift to stock on hand relating to sales orders already attached to the acquired stock. This uplift will distort the margins associated with the stock, and typically unwinds quickly as stock is sold soon after acquisition. The unwind of the stock uplift is excluded from our adjusted results as we deem this to be a cost of the acquisition. Reorganisation and restructuring costs In order to maximise efficiencies as well as recognise synergies from acquisitions, certain projects are undertaken to achieve these. These are projects outside of the normal operations of the business and typically are very sizeable in terms of costs. This is particularly relevant during a large scale restructuring that can result in some disruption to the normal business (for example manufacturing patterns) leading to operational inefficiencies occurring in this time frame. If we deem this to be the case, we will present the details and associated costs of the projects separately in our financial statements and exclude them from our adjusted measures. IFRS 2 (LTIP) costs As part of our senior management remuneration, the Group operate a Long Term Incentive Plan (‘LTIP’) in the form of options for ordinary shares of the Group. In accordance with accounting principles, despite this plan not being a cash cost to the business, a share-based payments charge is taken to the income statement. We consider that these charges do not form part of the underlying operational costs and therefore exclude them from our adjusted measures. Acquisition amortisation costs Under IFRS, as part of the acquisition of a company, it is necessary to identify intangible assets such as customer lists and brand which form part of the intangible value of the acquired business but are not part of the acquired balance sheet. These intangible assets are then amortised to the income statement over an appropriately judged period. These are not operational costs relating to the running of the acquired business and are directly related to the accounting for the acquisition. As such we exclude them from the underlying results of the business. 2019 is the first year that these costs have been included given the significant acquisition of Impact Innovations, Inc. Like‑for‑like comparators Figures quoted at like-for-like exchange rates are calculated by retranslating the previous year’s figures at the current year’s exchange rates. 78 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019The Group plans on adopting the modified retrospective approach. The estimated impact to profit before tax for the 2020 financial year is a reduction of between £nil and £1.0 million. Non-current assets are expected to increase by £31.0 million and gross liabilities are expected to increase by £35.0 million. The Group has elected not to recognise right of use assets and lease liabilities for short-term leases or low-value assets and will continue to expense the lease payments associated with these leases on a straight-line basis over the term of the lease. New standards and interpretations not applied Management continually reviews the impact of newly published standards and amendments and considers, where applicable, disclosure of their impact on the Group. At the date of the authorisation of these financial statements, the following standards and interpretations that are relevant to the Group, which have not been applied in these financial statements, were in issue but not yet effective. New or amended EU endorsed accounting standards The Group has adopted IFRS 15 Revenue from Contracts with Customers from 1 April 2018. The standard has not had a material effect on the Group’s financial statements. The Group has adopted IFRS 9 Financial Instruments. The standard sets out a single impairment model to ensure expected credit losses on financial instruments are always recognised as soon as they are forecast. The Group has assessed the credit risk around the financial instruments and expected credit losses under IFRS 9 compared the credit loss provisioning method formerly used under IAS 39 Financial Instruments: Recognition and Measurement and has not found a material difference. As a result prior year balances have not been restated and there has been no material impact on the Group’s Income statement, Balance sheet and Cash flow statement. New accounting standards not yet adopted IFRS 16 Leases IFRS 16 Leases is effective for annual reporting periods beginning on or after 1 January 2019 and replaces IAS 17 Leases. The Group will adopt IFRS 16 from 1 April 2019. For lessees, the new standard requires leases to be recognised on the balance sheet as a right-of-use asset (representing the right to use the leased item) and a liability, representing the obligation to make future lease payments. Under IFRS 16, the operating lease expense will be replaced with a depreciation charge for the right-of-use asset and interest expense on the lease liability. New and amended accounting standards endorsed by the EU IFRS 16 Leases IFRIC 23 Uncertainty over Income Tax Treatments Prepayment features with Negative Compensation (Amendments to IFRS 9) Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28) Annual Improvements to IFRSs 2015-2017 Cycle (Amendments to IFRSs 3 & 11, IASs 12 & 23) Effective date 1 Jan 2019 1 Jan 2019 1 Jan 2019 1 Jan 2019 To be adopted by the Group 1 Apr 2019 1 Apr 2019 1 Apr 2019 1 Apr 2019 1 Jan 2019 1 Apr 2019 No other standards, interpretations or amendments, other than IFRS 16, which have been issued but are not yet effective are expected to significantly impact the Group’s results or assets and liabilities and are not expected to require significant disclosure. 79 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 Provision for slow moving inventory The Group has guidelines for providing for inventory which may be sold below cost due to its age or condition. Directors assess the inventory at each location and in some cases decide that there are specific reasons to provide more than the guideline levels, or less if there are specific action plans in place which mean the guideline provision level is not required. Determining the level of inventory provision requires an estimation of likely future realisable value of the inventory in various time frames and comparing with the cost of holding stock for those time frames. Regular monitoring of stock levels, the ageing of stock and the level of the provision is carried out by the Directors. Details of inventory carrying values are provided in note 14. At the year end the Group has provisions of £8,827,000 (2018: £7,757,000) over the total inventory value. 2 Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in note 1, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these 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 only affects that period or in the period of revision and future periods if the revision affects both current and future periods. The estimates and assumptions that have had a significant bearing on the financial statements in the current year or could have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Critical judgements in applying the Group’s accounting policies The following are the critical judgements that the Directors have made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. Consolidation of less than 100% owned subsidiaries Where the Company owns less than 100% of the share capital and voting rights of Group companies, the decision of whether or not the investee should be treated as a subsidiary and consolidated in full in the Group accounts requires judgement. Management consider the individual facts and circumstances relating to the ability to control and benefit from the risks and rewards of investee trading in determining the appropriate treatment, which is then adopted consistently and reviewed annually for any changes in these facts and circumstances. Key sources of estimation uncertainty There are no key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year. Other sources of estimation uncertainty are discussed in the strategic report and below. 80 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Since the acquisition of Impact Innovations, Inc. the Group now has a second China factory (wholly owned) and Asian procurement which form part of Impact’s operations and therefore is included in the overall US segment. Inter-segment pricing is determined on an arm’s length basis. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Financial performance of each segment is measured on adjusted operating profit before management recharges. Interest and tax are managed on a Group basis and not split between reportable segments. However the related financial liability and cash has been allocated out into the reportable segments as this is how they are managed by the Group. Segment assets are all non-current and current assets, excluding deferred tax and income tax, which are shown in the eliminations column. Where cash shown in one segment is offset within the Group’s banking facilities against overdrafts in other segments, the elimination is shown in the eliminations column. Inter-segment receivables and payables are eliminated similarly. Share‑based payments The Directors are required to estimate the fair value of the awards granted and the quantum of awards expected to vest. This entails the use of pricing models for the fair value calculation and the Directors use specialist advisers to support on this calculation where the pricing model is complex. The estimate of awards expected to vest requires judgement and is reliant on the accuracy of management forecasts. Details of the key assumptions made in the measurement of share-based payments are provided in note 25. Taxation There are many transactions and calculations for which the ultimate tax determination is uncertain. Significant judgement is required in determining the Group’s tax assets and liabilities. Deferred tax assets have been recognised to the extent they are recoverable based on profit projections for future years. Income tax liabilities for anticipated issues have been recognised based on estimates of whether additional tax will be due. Notwithstanding the above, the Group believes that it will recover tax assets and has adequate provision to cover all risks across all business operations. See note 13 for more details. 3 Financial risk management Risk management is discussed in the strategic report and a discussion of risks and uncertainties can be found on pages 36 to 39 along with the Group’s key risks. See note 26 for additional information about the Group’s exposure to each of these risks and the ways in which they are managed. Below are key financial risk management areas: • currency risk is mitigated by a • mixture of forward contracts, spot currency purchases and natural hedges; liquidity risk is managed by monitoring daily cash balances, weekly cash flow forecasts, regular reforecasting of monthly working capital and regular dialogue with the Group’s banks; and • credit risk is managed by constant review of key debtors and banking with reputable banks. 4 Segmental information The Group has one material business activity being the design, manufacture and distribution of gift packaging and greetings, stationery and creative play products, seasonal décor, design-led giftware, and ‘not-for-resale’ consumables. For management purposes the Group is organised into four geographic business units. The results in this note are allocated based on the region in which the businesses are located; this reflects the Group’s management and internal reporting structure. The Group has a China factory and Asian procurement operations which are overseen by our UK operational management team and we therefore continue to include UK owned and managed Asian operations within the internal reporting of the UK operations, comprising one operating segment. 81 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 4 Segmental information continued Year ended 31 March 2019 Revenue – external – inter segment Total segment revenue Segment result before exceptional items, acquisition amortisation, LTIP charges and management recharge Exceptional items Acquisition amortisation LTIP charges Operating profit Finance expenses Finance expense treated as exceptional Income tax Profit for the year ended 31 March 2019 Balances at 31 March 2019 Segment assets Segment liabilities Capital expenditure additions UK(a) £000 Europe £000 USA(a) £000 Australia £000 Central & eliminations £000 Group £000 123,006 63,188 223,101 39,067 — 448,362 4,112 1,377 — — (5,489) — 127,118 64,565 223,101 39,067 (5,489) 448,362 8,073 8,871 15,522 4,278 (4,098) 32,646 (8,274) (1,609) (3,005) 19,758 (2,318) (158) (4,031) 13,251 188,766 19,240 36,306 13,776 3,610 261,698 (28,295) (10,457) (35,931) (7,396) (4,062) (86,141) – property, plant and equipment 2,635 901 1,780 383 — 5,699 – property, plant and equipment on acquisition of business – intangible assets – intangible assets on acquisition of business Depreciation Amortisation (a) Including Asian manufacturing and sourcing. — 285 — 2,333 167 — 12 — 920 35 9,313 1,893 47,042 1,452 1,781 — — — 623 326 — — — — — 9,313 2,190 47,042 5,328 2,309 82 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Year ended 31 March 2018 Revenue – external – inter segment Total segment revenue Segment result before exceptional items, acquisition amortisation, LTIP charges and management recharge Exceptional items Acquisition amortisation LTIP charges Operating profit Net finance expenses Income tax Profit for year ended 31 March 2018 Balances at 31 March 2018 Segment assets Segment liabilities Capital expenditure additions UK(a) £000 Europe £000 USA £000 Australia £000 Central & eliminations £000 Group £000 119,283 50,977 120,284 36,972 — 327,516 4,031 786 — — (4,817) — 123,314 51,763 120,284 36,972 (4,817) 327,516 7,899 6,697 9,608 2,998 (4,003) 23,199 539 (371) (2,257) 21,110 (1,392) (5,384) 14,334 123,310 15,146 14,064 15,350 2,663 170,533 (31,916) (8,695) (15,983) (9,686) (3,737) (70,017) – property, plant and equipment 4,078 2,786 333 – property, plant and equipment on acquisition of business – intangible assets — 109 – intangible assets on acquisition of business — Depreciation Amortisation (a) Including Asian manufacturing and sourcing. 2,229 219 — 50 — 722 27 — 1,218 — 871 474 795 798 — 2,624 523 98 — 7,992 — — — — — 798 1,377 2,624 4,345 818 • Capital expenditure consists of additions of property, plant and equipment, intangible assets and goodwill. • The Group has one customer that accounts for 18% of the total Group revenues. In the year ended 31 March 2019 total sales to that customer were £79,138,000 (2018: £15,978,000). This customer falls solely within the USA operating segment above. No other single customer accounts for over 10% of total sales. • The assets and liabilities that have not been allocated to segments consist of deferred tax assets £3,160,000 (2018: £2,663,000), income tax payable of £3,370,000 (2018: £3,364,000) and deferred tax liability £692,000 (2018: £373,000). Geographical information The Group’s information about its segmental assets (non-current assets excluding deferred tax assets and other financial assets) and revenue by customer destination and product are detailed below: UK and Asia USA Europe Australia Non-current assets 2019 £000 2018 £000 40,539 40,126 61,559 9,076 16,350 16,610 5,077 6,234 123,525 72,046 83 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 4 Segmental information continued Revenue by customer destination UK USA Europe Australia Rest of the world All revenue arose from the sale of goods. 5 Expenses and auditor’s remuneration Included in profit are the following charges/(credits): Depreciation Loss on sales of property, plant and equipment and intangible assets Release of deferred grant income Amortisation of intangible assets Operating lease payment – minimum lease payment Sub-lease rental income Write down of inventories to net realisable value Reversal of previous write downs on inventory Loss on foreign exchange Auditor’s remuneration: Amounts receivable by auditor and its associates in respect of: Audit of these financial statements Audit of financial statements of subsidiaries pursuant to legislation – Overseas subsidiaries – UK subsidiaries Tax services Services relating to corporate finance transactions Other services 2019 £000 2018 £000 97,260 89,292 235,092 136,782 68,314 37,707 9,989 58,080 36,972 6,390 2019 % 22 53 15 8 2 2018 % 27 42 18 11 2 448,362 327,516 100 100 Note 11 7 12 27 7 14 14 2019 £000 2018 £000 5,328 4,345 325 (247) 2,309 4,865 (583) 4,173 (478) 814 17 (99) 818 5,289 (710) 5,491 (197) 373 2019 £000 2018 £000 90 37 326 66 40 — 10 184 51 31 54 5 84 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 6 Staff numbers and costs The average number of persons employed by the Group (including Directors) during the year, analysed by category, was as follows: Selling and administration Production and distribution The aggregate payroll costs of these persons were as follows: Wages and salaries Share-based payments – Long Term Incentive Plan Social security costs Other pension costs Number of employees 2019 641 1,723 2,364 2018 520 1,434 1,954 2019 £000 2018 £000 62,083 51,283 3,005 4,795 3,532 2,257 3,950 3,634 73,415 61,124 Note 25 For information on Directors’ remuneration please refer to the section titled ‘Directors’ remuneration’ within the Directors’ remuneration report (pages 57 and 58) and Long Term Incentive Plan (page 58), which form part of these audited financial statements. 7 Other operating income Grant income received Sub-lease rentals credited to the income statement Other Exceptional items 8 Finance expenses Interest payable on bank loans and overdrafts Other similar charges Finance charges in respect of finance leases Unwinding of fair value discounts Interest payable under the effective interest method Derivative financial instruments at fair value through the income statement Exceptional items 10 2019 £000 247 583 (210) 620 — 620 2019 £000 2,334 (74) — 86 2018 £000 99 710 (424) 385 1,092 1,477 2018 £000 946 332 2 80 2,346 1,360 (28) 2,318 158 2,476 32 1,392 — 1,392 85 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 9 Taxation Recognised in the income statement Current tax charge Current year Adjustments for previous periods Deferred tax charge/(credit) Origination and reversal of temporary differences Adjustments in respect of previous periods Total tax in income statement Total tax charge/(credit) on adjusted items Total tax on profit before exceptional items, acquisition amortisation and LTIP costs Total tax on exceptional items Total tax on acquisition amortisation Total tax on LTIP costs Total tax in income statement Reconciliation of effective tax rate Profit before tax Profit before tax multiplied by the standard rate of corporation tax rate of 19% in the UK (2018: 19%) Effects of: Income not taxable Expenses not deductible for tax purposes Movement in unrecognised tax assets Effect of tax rate changes Differences between UK and overseas tax rates Movement in uncertain tax provision Local tax incentives Other items Adjustments in respect of previous periods Total tax in income statement 2019 £000 2018 £000 4,770 38 4,808 (617) (160) (777) 4,031 7,094 (2,038) (847) (178) 3,355 128 3,483 1,986 (85) 1,901 5,384 6,188 (238) (121) (445) 4,031 5,384 2019 £000 17,282 3,284 2018 £000 19,718 3,746 (88) 208 296 33 (502) 249 270 593 1,053 1,637 (408) (100) (125) (122) (400) (108) (90) (11) 4,031 5,384 86 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 10 Exceptional items These include acquisition related costs and reorganisation and restructuring costs. These items are excluded to present the performance of the business in a consistent manner and in line with how the business is managed and measured on a day-to-day basis. They are typically gains or costs associated with events that are not considered to form part of the core operations, or are considered to be a ‘non-recurring’ event (although they may span several accounting periods). Acquisition related costs Costs associated with acquisitions, including legal and advisory fees on deals, form part of our reported results on an IFRS basis. These costs, however, in our view form part of the capital transaction and as they are not attributed to investment value under IFRS 3, they are excluded from our adjusted measures for the purposes of reporting underlying results. Similarly, where acquisitions have employee related payments (exclusive of LTIPs) which lock in and incentivise legacy talent, we have also excluded these costs. As these costs are employment linked, they are treated as an expense and form part of the IFRS results, however, as with transaction costs, we do not consider these to form part of the underlying results of the business. In accordance with IFRS 3, on acquisition, businesses need to be fair valued, which can result in an uplift to stock on hand relating to sales orders already attached to the acquired stock. This uplift will distort the margins associated with the stock, and typically unwinds quickly as stock is sold soon after acquisition. The unwind of the stock uplift is excluded from our adjusted results as we deem this to be a cost of the acquisition. Reorganisation and restructuring costs In order to maximise efficiencies, as well as recognise synergies from acquisitions, certain projects are undertaken to achieve these. These are projects outside of the normal operations of the business and typically are very sizeable in terms of costs. This is particularly relevant during a large scale restructuring that can result in some disruption to the normal business (for example manufacturing patterns) leading to operational inefficiencies occurring in this time frame. If we deem this to be the case, we will present the details and associated costs of the projects separately in our financial statements and exclude them from our adjusted measures. Year ended 31 March 2019 Transaction costs(a) UK unification(b) US restructure(c) Total before tax Income tax credit Exceptional items after tax (a) Transaction costs relating predominantly to the acquisition of Impact Innovations Inc. Cost of sales £000 — — (1,748) (1,748) Selling expenses £000 — — (222) (222) Admin expenses £000 (2,254) (428) (3,622) (6,304) Other finance expenses £000 Total £000 (158) (2,412) — — (158) (428) (5,592) (8,432) 2,038 (6,394) (b) Remaining unification cost associated with relocating a part of our UK business to another site and associated redundancies with the move. (c) The restructure of our US operations including the profit on sale of our manufacturing facility in Midway and closure costs. The cost of relocating equipment and personnel to Memphis, Tennessee along with manufacturing inefficiencies associated with the start up of converting operations. The charge relating to the unwind of the inventory fair value adjustment arising on acquisition and final charges in relation to the Lang integration. Year ended 31 March 2018 Transaction costs(d) Sale of Hirwaun property(e) Total before tax Income tax credit Exceptional items after tax Admin expenses £000 (553) — (553) Other operating income £000 — 1,092 1,092 Total £000 (553) 1,092 539 238 777 (d) Transaction costs relate predominantly to the acquisition of the trade and certain assets of Biscay Greetings Pty Limited (Biscay) and of the remaining costs from the acquisition of Lang. (e) The exceptional gain on the sale of the Hirwaun property in Wales, comprises of the sale proceeds net of any related costs including restructuring for the rationalisation of operations to suit the revised footprint. 87 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 10 Exceptional items continued The cash flow effect on exceptional items There was £287,000 net outflow on the current year’s cash flow (2018: £1,637,000 inflow) which included £473,000 (2018: £350,000) of outflow deferred from last year. 11 Property, plant and equipment Cost Land and buildings Freehold £000 Leasehold £000 Plant and equipment £000 Fixtures and fittings £000 Motor vehicles £000 Total £000 Balance at 1 April 2017 21,393 10,501 48,172 3,460 955 84,481 Additions Disposals Additions on acquisition of business Transfers to computer software Effect of movements in foreign exchange Balance at 1 April 2018 Additions Disposals Additions on acquisition of business Transfers between fixed asset categories Transfers to computer software Effect of movements in foreign exchange Balance at 31 March 2019 Depreciation and impairment Balance at 1 April 2017 Depreciation charge for the year Disposals Transfers to computer software Effect of movements in foreign exchange Balance at 1 April 2018 Depreciation charge for the year Disposals Transfers between fixed asset categories Transfers to computer software Effect of movements in foreign exchange 432 (1,903) — — 174 20,096 1,078 (405) 462 (57) — (127) 138 — — — (1,006) 9,633 126 (8,252) — 83 — 636 6,588 (4,148) 424 — (963) 804 (216) 27 294 (128) 30 (18) 347 — (60) 7,992 (6,285) 798 294 (1,983) 50,073 4,241 1,254 85,297 3,712 (352) 8,851 (43) (620) 351 550 (285) — 17 — 62 233 (351) — — — (8) 5,699 (9,645) 9,313 — (620) 914 21,047 2,226 61,972 4,585 1,128 90,958 (11,511) (5,036) (32,268) (2,575) (749) 1,349 — (67) (470) — — 447 (2,590) 4,079 — 544 (389) 205 (239) 76 (10,978) (5,059) (30,235) (2,922) (769) 152 6 — 57 (414) 3,769 — — (301) (3,478) 86 35 170 (224) (502) 248 (41) — (44) (484) (147) 9 — 18 (604) (165) 84 — — 6 (51,874) (4,345) 5,642 (239) 1,018 (49,798) (5,328) 4,339 — 170 (506) Balance at 31 March 2019 (11,532) (2,005) (33,646) (3,261) (679) (51,123) Net book value Balance at 31 March 2019 At 31 March 2018 9,515 9,118 221 28,326 4,574 19,838 1,324 1,319 449 650 39,835 35,499 Depreciation is charged to either cost of sales, selling costs or administration costs within the income statement depending on the department to which the assets relate. Security All freehold properties are subject to a fixed charge. 88 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 12 Intangible assets Cost Balance at 1 April 2017 Additions Additions on acquisition of businesses Transfer from fixed assets Disposals Effect of movements in foreign exchange Balance at 1 April 2018 Additions Additions on acquisition of businesses Transfer from fixed assets Disposals Effect of movements in foreign exchange Balance at 31 March 2019 Amortisation and impairment Balance at 1 April 2017 Amortisation for the year Impairments Transfers from fixed assets Disposals Effect of movements in foreign exchange Balance at 1 April 2018 Amortisation for the year Transfers from fixed assets Disposals Effect of movements in foreign exchange Goodwill £000 Computer software £000 Trade names £000 Customer lists £000 Other intangibles £000 Total £000 42,474 — 1,703 — — (809) 43,368 — 28,042 — (33) 404 4,151 1,377 — (294) (40) (325) 4,869 2,190 — 620 (940) 246 320 — 197 — — (44) 473 — 680 — 724 — — (110) 1,294 — 1,846 17,154 — — 20 — — 44 133 47,758 — — — — — 133 — — — — — 1,377 2,624 (294) (40) (1,288) 50,137 2,190 47,042 620 (973) 714 71,781 6,985 2,339 18,492 133 99,730 (10,443) (3,204) — (36) — — 785 (447) — 239 39 228 (9,694) (3,145) — — 33 (475) (700) (170) 609 (101) (80) (120) — — — 14 (186) (392) — — (11) (260) (233) — — — 36 (457) (1,214) — — (26) (90) (18) — — — — (14,077) (818) (36) 239 39 1,063 (108) (13,590) (3) — — — (2,309) (170) 642 (613) Balance at 31 March 2019 (10,136) (3,507) (589) (1,697) (111) (16,040) Net book value Balance at 31 March 2019 At 31 March 2018 61,645 33,674 3,478 1,724 1,750 16,795 287 837 22 25 83,690 36,547 The aggregate carrying amounts of goodwill allocated to each geographical segment are as follows: UK and Asia Europe USA Australia Total 2019 £000 2018 £000 25,600 25,600 5,248 5,329 28,042 2,755 — 2,745 61,645 33,674 89 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 12 Intangible assets continued Impairment The Group tests goodwill each year for impairment, or more frequently if there are indications that goodwill might be impaired. For the purposes of impairment testing, goodwill considered significant in comparison to the Group’s total carrying amount of such assets has been allocated to the business unit, or group of business units, that are expected to benefit from the synergies of the combination (see table on page 89), which represents the lowest level within the Group at which the goodwill is monitored for internal management purposes, and is referred to below as a cash-generating unit. During the last few years the businesses have begun to work more closely with each other, exploiting the synergies that arise. The recoverable amounts of cash-generating units are determined from the higher of value in use and fair value less costs to sell. The Group prepares cash flow forecasts for each cash-generating unit derived from the most recent financial budgets for the following three years which are approved by the Board. The key assumptions in those budgets are sales, margins achievable and overhead costs, which are based on past experience and future expectations. The Group then extrapolates cash flows for the following five years plus a terminal value based on a conservative estimate of market growth of 0.5% (2018: between 0.5% and 2.0%). Generally the Group’s post tax weighted average cost of capital ('WACC') is 8% and this has been compared to other similar companies and is felt to be appropriate. The cash-generating units used the following pre-tax discount rates which are derived from an estimate of the Group’s future WACC adjusted to reflect the market assessment of the risks specific to the current estimated cash flows over the same period. Pre-tax discount rates used were: UK and Asia Europe USA Australia 2019 10.9% 11.7% 12.5% 13.4% 2018 10.4% 10.7% — 12.4% All of the cash-generating units’ values in use were determined to be higher than fair value less costs to sell, thus this was used as the recoverable amount. In all businesses, the carrying value of the goodwill was supported by the recoverable amount and there are currently no reasonably foreseeable changes to assumptions that would give rise to an impairment of the carrying value. The Directors do not believe a reasonably possible change to the assumptions would give rise to an impairment. The Directors have considered a 3% movement in the discount rate and a flat budget growth rate assumption in their sensitivity assessment; with these changes in assumptions there is still considerable headroom and no indication of impairment. 90 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 13 Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: At 1 April 2018 (Charge)/credit to income statement (Charge)/credit to equity At 31 March 2019 Deferred tax liabilities Deferred tax assets At 1 April 2017 (Charge)/credit to income statement (Charge)/credit to equity Acquisitions At 31 March 2018 Deferred tax liabilities Deferred tax assets Property, plant Tax losses and equipment carried forward Share-based payments Other timing differences(a) (1,137) (2,653) (115) (3,905) (4,159) 254 (3,905) 584 1,103 187 1,874 — 1,874 1,874 1,943 1,004 (358) 2,589 — 2,589 2,589 900 1,325 135 2,360 (205) 2,565 2,360 Tax losses Property, plant and equipment carried forward Share-based payments Other timing differences(a) (1,173) 75 (39) — (1,137) (1,318) 181 (1,137) 1,794 (1,152) (58) — 584 — 584 584 1,949 2,303 150 (156) — 1,943 — 1,943 1,943 (974) (216) (213) 900 (140) 1,040 900 Total 2,290 779 (151) 2,918 (4,364) 7,282 2,918 Total 4,873 (1,901) (469) (213) 2,290 (1,458) 3,748 2,290 (a) Other timing differences include a closing balance of £905,000 (2018: £819,000) in respect of provision for doubtful debts and £1,851,000 (2018: £1,086,000) provision for inventory. Deferred tax is presented net on the balance sheet in so far as a right of offset exists. The net deferred tax asset is £3,610,000 (2018: £2,663,000) and the net deferred tax liability is £692,000 (2018: £373,000). The deferred tax asset in respect of tax losses carried forward at 31 March 2019 of £1,874,000 (2018: £584,000) comprises UK tax losses of £991,000 (2018: £440,000) and US losses of £883,000 (2018: £144,000). The majority of the US tax losses carried forward will become irrecoverable in March 2029. UK tax losses may be carried forward indefinitely. The deferred tax assets have been recognised where the Board considers there is sufficient evidence that taxable profits will be available against which the tax losses can be utilised. The Board expects that the tax losses will be recoverable against future profits. Deferred tax assets in respect of taxable losses that are expected to be recovered outside this forecast period have not been recognised. This includes unrecognised deferred tax assets in respect of UK losses of £574,000 (2018: £310,000), £369,000 (2018: £490,000) in respect of China, and £235,000 (2018: £221,000) in respect of Asia. A deferred tax liability of £237,000 (2018: £153,000) has been recognised based on the tax cost of remitting earnings from China. No other deferred tax liability has been recognised on unremitted earnings of the overseas subsidiaries as if all unremitted earnings were repatriated with immediate effect, no other tax charge would be payable. A 17% UK corporate tax rate was substantively enacted on 6 September 2016 and will replace the current effective rate of 19% from 1 April 2020. A reduction in the US federal corporation tax rate from 35% to 21% was announced in 2017 and enacted effective 1 January 2018. These rate reductions have been reflected in the calculation of deferred tax at the balance sheet date. Included within current tax liabilities is £1,263,000 (2018: £1,670,000) in respect of uncertain tax positions. This consists of various tax risks which individually are not material. These risks arise because the Group operates in a complex multinational tax environment. The position is reviewed on an ongoing basis and generally these tax positions are released at the end of the relevant territories’ statute of limitations. A total tax credit of £764,000 has been recognised through the statement of changes in equity in respect of share-based payments (consisting of a deferred tax debit and current tax credit of (£358,000) and £1,122,000 respectively). There are no deferred tax balances with respect to cash flow hedges. 91 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 14 Inventory Raw materials and consumables Work in progress Finished goods 2019 £000 19,242 7,818 42,511 69,571 2018 £000 6,325 8,927 34,059 49,311 Of the £69,571,000 (2018: £49,311,000) stock value £63,001,000 (2018: £46,984,000) is held at cost and £6,570,000 (2018: £2,327,000) is held at net realisable value. The write down in the year of inventories to net realisable value amounted to £4,173,000 (2018: £5,491,000). The reversal of previous write downs amounted to £478,000 (2018: £197,000). The reversal is due to the inventory being either used or sold. Materials, consumables, changes in finished goods and work in progress recognised as a cost of sale amounted to £323,486,000 (2018: £228,776,000). 15 Trade and other receivables Trade receivables Prepayments and accrued income Other receivables VAT receivable 2019 £000 2018 £000 39,778 32,490 4,822 171 634 1,553 3,015 311 45,405 37,369 The Group had receivable financing arrangements in the UK, Europe, the US and Hong Kong. None of this facility was drawn at 31 March 2019 (2018: £nil). Please see note 17 for more details of the banking facilities. There are no trade receivables in the current year (2018: £nil) expected to be recovered in more than twelve months. The Group’s exposure to credit and currency risks and provisions for doubtful debts related to trade and other receivables is disclosed in note 26. 16 Cash and cash equivalents/bank overdrafts Cash and cash equivalents per cash flow statement Net cash Cash and cash equivalents Bank loans and overdrafts Loan arrangement fees Net cash as used in the financial review 2019 £000 2018 £000 19,458 9,031 Note 17 2019 £000 19,458 (2,405) 31 17,084 2018 £000 9,031 (4,780) 105 4,356 The Group’s exposure to interest rate risk and sensitivity analysis for financial assets and liabilities are disclosed in note 26. The bank loans and overdrafts are secured by a fixed charge on certain of the Group’s land and buildings, a fixed charge on certain of the Group’s book debts and a floating charge on certain of the Group’s other assets. See note 17 for further details of the Group’s loans and overdrafts. 92 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 17 Loans and borrowings This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 26. Non-current liabilities Secured bank loans (see page 94) Loan arrangement fees Current liabilities Current portion of secured bank loans (see page 94) Loan arrangement fees Terms and debt repayment schedule Due within one year: Bank loans and borrowings (see page 94) Due between one and two years: Secured bank loans (see page 94) Due between two and five years: Secured bank loans (see page 94) Changes in liabilities from financing activities Balance at 1 April 2017 Changes from financing cash flows New bank loans raised Repayment of borrowings New loan arrangement fees Other changes Amortisation of loan arrangement fees Effect of movements in foreign exchange Balance at 1 April 2018 Changes from financing cash flows Repayment of borrowings New loan arrangement fees Other changes Amortisation of loan arrangement fees Effect of movements in foreign exchange Balance at 31 March 2019 2019 £000 2018 £000 1,421 — 1,421 3,791 (10) 3,781 984 (31) 953 2019 £000 989 (95) 894 2018 £000 984 989 984 989 437 2,405 2,802 4,780 Loans and borrowings £000 Loan arrangement fees £000 — (271) 5,108 (165) — — (163) 4,780 (2,350) — — (25) 2,405 — — (111) 277 (105) — (30) 104 — (31) 93 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 17 Loans and borrowings continued Secured bank loans The wholly owned Group during the year was funded by HSBC. The facilities comprise: • a three-year revolving credit facility (‘RCF’) for £28 million which is sufficient to fund the Group’s core financing requirements; • receivables financing arrangements for an initial term of three years in the UK, Europe, USA and Hong Kong; and • a further flexible ‘working capital’ RCF with availability varying from month to month to meet requirements during the seasonal inventory build. This is reviewed annually but capable of extension to match the maturity of the core RCF. While the facilities have no overall limit in total the Group, estimates the effectively available facilities at over £139.0 million, more than sufficient to cover the peak requirements. The facilities have flexible elements within them that mean they can grow with the Group’s requirements. The facility was capable of extension for two further years at the same terms should the parties agree. The second one year extension was agreed in May 2018. This takes the date for maturity of the facility to May 2021. Invoice financing arrangements are secured over the trade receivables that they are drawn on. The RCF facilities are secured with a fixed and floating charge over all other assets of the Group. The facilities do not amortise with time. There are financial covenants, tested quarterly, attached to the existing facilities as follows: • • interest cover, being the ratio of earnings before interest, depreciation and amortisation to interest on a rolling twelve-month basis; and leverage, being the ratio of debt to pre-exceptional EBITDA on a rolling twelve-month basis. There is a further covenant tested monthly in respect of the working capital RCF by which available asset cover must not fall below agreed levels relative to amounts drawn. In January 2018, the Group’s Australia business obtained a secured loan from Westpac of £5,108,000 (AU$9,000,000). This is repayable monthly over a five year period. It is subject to a variable interest rate linked to the Australian base rate. £2,350,000 was repaid during the year which, along with £25,000 exchange movement results in a balance at 31 March 2019 of £2,405,000 (AU$4,400,000). On 5 June we entered into a new three year Group facility with a club of five banks chosen to reflect and support the geographical spread of the Group. HSBC continue to be significant partner and have been joined in the new facility by NatWest, BNP Paribas, Sun Trust and PNC. The new Group facilities, which run to May 2022, comprises of: • a revolving credit facility (‘RCF A’) of $80.0 million; • a further flexible revolving credit facility (‘RCF B’) with availability varying from month to month of up to £85.0 million. This RCF is flexed to meet our working capital requirements during those months when inventory is being built within our annual business cycle and is nil when not required, minimising carry costs; and • the existing invoice financing arrangements in Hong Kong which will remain in place for a minimum of the first year. In total, the available facilities at approximately £160 million are more than sufficient to cover our peak requirements. Being partially framed in US dollars they provide a hedge against currency movements. The facilities, which do not amortise with time, include an additional uncommitted amount to finance potential acquisitions. See pages 33 and 34 of the executive review for further details. 94 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 201918 Deferred income Included within non-current liabilities Deferred grant income Included within current liabilities Deferred grant income 2019 £000 2018 £000 751 998 99 99 The deferred grant income is in respect of government grants relating to the development of the site in Wales. 19 Provisions Balance at 1 April 2018 Additions on acquisition of business Reclassified from other creditors Provisions made in the year Provisions released during the year Unwinding of fair value discounts Provisions utilised during the year Effect of movements in foreign exchange Balance at 31 March 2019 Non-current Current Property £000 986 2,197 180 67 (9) 86 (71) (2) Other £000 337 — — 335 (340) — — (5) Total £000 1,323 2,197 180 402 (349) 86 (71) (7) 3,434 327 3,761 2019 £000 2,671 1,090 3,761 2018 £000 894 429 1,323 The property provision represents the estimated reinstatement cost of six of the Group’s leasehold properties under fully repairing leases and a provision for an onerous lease for one of those properties. A professional valuation was performed during 2016 for one of the leasehold properties and the provision was reassessed and is stated after discounting. £935,000 (2018: £882,000) of the non-current balance relates to a lease expiring in 2036; the balance relates to items between one and five years. Other provisions represents management’s best estimate in respect of minor claims arising in the normal course of business. 20 Other financial liabilities Included within non-current liabilities Other creditors and accruals Included within current liabilities Other creditors and accruals Interest rate swaps and forward foreign currency contracts carried at fair value through the income statement Interest rate swaps and forward foreign exchange contracts carried at fair value through the hedging reserve 2019 £000 2018 £000 1,817 1,440 14,712 18,832 — 2 40 116 14,714 18,988 95 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 21 Trade and other payables Trade payables Other payables including income taxes and social security VAT payable 2019 £000 2018 £000 57,336 37,056 947 280 817 884 58,563 38,757 22 Share capital Authorised share capital at 31 March 2019 and 2018 was £6,047,443 divided into 120,948,860 ordinary shares of 5p each. In thousands of shares In issue at 1 April Options exercised during the year Share issue as part of the consideration for Impact Innovations, Inc. Share placing In issue at 31 March – fully paid Allotted, called up and fully paid Ordinary shares of £0.05 each Ordinary shares 2019 2018 63,890 62,642 1,655 3,017 9,804 1,248 — — 78,366 63,890 2019 £000 2018 £000 3,918 3,194 Of the 78,366,000 shares in the Company, 31,000 (2018: 31,000) are held by the International Greetings Employee Benefit Trust. Share options exercised during the year resulted in 200,000 ordinary shares being issued (2018: 510,000) which generated cash proceeds of £28,000 (2018: £71,000). LTIP options exercised during the year resulted in 1,455,000 ordinary shares being issued at nil cost (2018: 738,000 ordinary shares being issued at nil cost). On 31 August 2018, the Group acquired Impact Innovations, Inc. Part of the consideration was settled by 3,017,000 shares. On 29 August 2018, the Group raised £31,926,000 (before expenses) by way of a share placing of 6,260,000 new ordinary shares at a price of £5.10 per share. On 19 September 2018, the Group raised an additional £18,074,000 (before expenses) by way of a share placing of 3,544,000 new ordinary shares at a price of £5.10 per share. 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. 96 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 23 Earnings per share Adjusted earnings per share excluding exceptional items, acquisition amortisation and LTIP charges(a) Cost per share on exceptional items Adjusted earnings per share excluding acquisition amortisation and LTIP charges(b) Cost per share on acquisition amortisation Adjusted earnings per share excluding LTIP charges(c) Cost per share on LTIP charge Earnings per share(d) 2019 Diluted pence 29.3 (8.6) 20.7 (0.9) 19.8 (3.8) 16.0 Basic pence 29.6 (8.7) 20.9 (0.9) 20.0 (3.8) 16.2 2018 Diluted pence 22.1 1.4 23.5 (0.3) 23.2 (2.7) 20.5 Basic pence 22.7 1.4 24.1 (0.2) 23.9 (2.8) 21.1 (a) Excludes exceptional items, acquisition amortisation and LTIP charges of £12,891,000 (2018: £1,889,000) and tax relief attributable to those items of £3,016,000 (2018: £765,000), to give adjusted profit (including the effect of non-controlling interest) of £21,800,000 (2018: £14,669,000). (b) Excludes acquisition amortisation and LTIP charges of £4,459,000 (2018: £2,589,000) and tax relief attributable to those items of £978,000 (2018: £554,000), to give adjusted profit (including the effect of non-controlling interest) of £15,406,000 (2018: £15,580,000). (c) Excludes LTIP charges of £3,005,000 (2018: £2,257,000) and tax relief attributable to those items of £178,000 (2018: £445,000), to give adjusted profit (including the effect of non-controlling interest) of £14,752,000 (2018: £15,357,000). (d) The basic earnings per share is based on the profit attributable to equity holders of the Company of £11,925,000 (2018: £13,545,000) and the weighted average number of ordinary shares in issue of 73,661,000 (2018: 64,538,000) calculated as follows: In thousands of shares Issued ordinary shares at 1 April Shares held by Employee Benefit Trust Shares relating to share options Shares issued as part of the consideration for Impact Shares issued in respect of share placing Weighted average number of shares at 31 March 2019 2018 63,890 62,642 (31) 2,506 1,752 5,544 (31) 1,927 — — 73,661 64,538 Diluted earnings per share The average number of share options under the Executive share options 2008 scheme outstanding in the year is nil (2018: 612,795 at an average exercise price of 14p). The average number of share options under the LTIP scheme outstanding in the year is 1,366,118 (2018: 1,371,743) at nil cost. The diluted earnings per share is calculated assuming all these options were exercised, and taking into account LTIP awards whose specified performance conditions were satisfied at the end of the reporting period of 723,632 share options. At 31 March 2019 the diluted number of shares was 74,385,000 (2018: 66,358,000). 97 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 24 Dividends paid and proposed A final dividend for year ending 31 March 2018 of 4.00p (for year ending 31 March 2017: 2.75p) was paid on 6 September 2018. An interim dividend of 2.50p was paid on 18 January 2019 (2018: 2.00p). The Directors are recommending a final dividend of 6.00p per share in respect of the year ended 31 March 2019 (2018: 4.00p). If approved it will be paid in September 2019 to shareholders on the register at the close of business on 2 August 2019. Final equity dividend for prior year Interim equity dividend for current year Dividends paid in the year Proposed for approval at Annual General Meeting Final equity dividend for the current year 2019 2018 Pence per share 4.00 2.50 2019 Pence per share 6.00 £000 2,597 1,956 4,553 £000 4,702 Pence per share 2.75 2.00 2018 Pence per share 4.00 £000 1,734 1,266 3,000 £000 2,556 25 Share‑based payments Executive share options 2008 Options to subscribe for ordinary shares of a nominal value of 5p each were granted, pursuant to the Company’s approved and unapproved employee share option schemes, which are exercisable at dates ranging from December 2011 to December 2018 and at an exercise price of 14.00p. There were no performance conditions attached to the approved options (other than continued employment). For the unapproved options awarded to Executive Directors there were conditions related to profitability for the two years to March 2011. These conditions were fully met. As at 31 March 2019 there were no approved options outstanding (2018: 200,000) with a weighted average contractual life of 0 years (2018: 0.7 years). No share options were granted under this scheme during the year (2018: nil). The number and weighted average exercise prices of share options are as follows: Outstanding at the beginning of the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period 2019 2018 Weighted average exercise price pence Weighted average exercise price pence Number of options 14.00 200,000 14.00 (200,000) 14.00 14.00 — — 14.00 14.00 14.00 14.00 Number of options 710,000 (510,000) 200,000 200,000 The weighted average share price at the date of exercise of share options exercised during the period was 547.8p (2018: 376.0p). 98 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Long Term Incentive Plan On 31 March 2014, the Group announced the introduction of a new Long Term Incentive Plan (‘LTIP’). Under the LTIP, options to subscribe for ordinary shares of a nominal value of 5p each ('ordinary shares') may be awarded annually to Executive Board Directors of the Company, Managing Directors and other selected senior management team members within the Group. Ordinary shares only vest to the degree that stretching performance conditions are met. The maximum dilution under the LTIP is 15% over a ten year period, excluding an award made under the 2012-2015 LTIP, of which 1,107,652 share options have vested. The scheme rules, which have been agreed by the Remuneration Committee, include reasonable provisions in the event of change of control, suitable flexibility to modify performance targets in specified situations and also a mechanism for claw-back under certain circumstances. The Board retains the flexibility to buy ordinary shares through an Employee Benefit Trust to mitigate future dilution should it need to do so. The performance period for each award under the LTIP is three years. The cost to employees of ordinary shares issued under the LTIP if the performance criteria are met is nil. In principle the number of ordinary shares to be granted to each employee under the LTIP will not be more than 325% in value of the relevant employee’s salary base. The maximum opportunity available is up to 175% for the CEO and for other Executive Directors up to 150% of base salary. For the 2018-21 scheme grant B there is an outperformance element of up to 50% of the initial grant. Vested LTIP schemes – outstanding options 2014-2017 LTIP scheme 2015-2018 LTIP scheme 2016-2019 LTIP scheme(a) Number of ordinary shares 273,921 577,832 723,632 1,575,385 Exercise price pence nil nil nil Exercise dates June 2017-August 2024 June 2018-January 2028 June 2019-January 2028 All performance criteria have been met for the above schemes. Outstanding at the beginning of the period Options vesting during the period(a) Exercised during the period Outstanding at the end of the period Exercisable at the end of the period 2019 2018 Weighted average exercise price pence Weighted average exercise price pence Number of options Number of options nil 2,306,034 nil 723,632 nil (1,454,281) nil 1,575,385 nil 1,575,385 nil 1,830,351 nil nil 1,213,794 (738,111) nil 2,306,034 nil 2,306,034 (a) The shares relating to the 2016-2019 scheme formally vest on 5 June 2019 following the Remuneration Committee and Audit Committee approval of the results of the year ended 31 March 2019. 99 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 25 Share‑based payments continued Scheme details for LTIPs in vesting periods during the year During the financial year to 31 March 2019 there were three LTIP schemes still within their vesting periods (2018: three). The award and performance targets for these are in the tables below. Awards Fair value per share (£) Number of participants awarded Initial award Dividend shares awarded Lapses and forfeitures 2016-2019 2017-2020 2018-2021 Grant A Grant B Grant A Grant B Grant A Grant B 1.82 23 4.04 1 3.71 24 4.04 2 5.55 20 5.56 5 827,220 72,885 347,101 297,844 151,859 633,372 23,283 2,714 7,097 7,053 575 2,708 (202,470) — (48,797) — (18,280) — Expected to vest as at 31 March 2019 648,033 75,599 305,401 304,897 134,154 636,080 Expected to vest as at 31 March 2018 720,395 75,582 347,278 304,829 — — The LTIP awards ‘Grant A’ were made in 2017, 2018 and 2019 respectively. The LTIP awards ‘Grant B’ were made in January 2018 to Paul Fineman in respect of the 2015-2018 and 2016-2019 schemes and to Paul Fineman and Giles Willits in respect of the 2017-2020 scheme. There was also a ‘Grant B’ award in respect of the 2018-2021 scheme to Paul Fineman, Giles Willits, Lance Burn and the other two member of the Executive Committee in November 2018. The grant date fair value of the options granted in the year assuming they are to vest in full is £4,364,000 (2018: £3,191,000). The exercise price is nil. Performance targets Awards are granted with threshold and stretch targets. 25% of the weighted awards vests if the relevant threshold target is achieved with straight-line vesting of the balance up to 100% of the weighted award if the stretch target is achieved. The EPS(a) target for the 2016-2019 scheme is the sole exception to this: the threshold of 7.5% CAGR(b) pays out at 0%, with the award vesting straight-line from here to 100% at stretch. The ‘Grant B’ of the 2018-2021 scheme also includes a super stretch target which will vest in accordance with the following bands relating to CAGR(b) in EPS(a): • more than 17% but not more than 20%: 10% x number of shares in respect of which the base award vests; • more than 20% but not more than 22.5%: 22% x number of shares in respect of which the base award vests; • more than 22.5% but not more than 25%: 35% x number of shares in respect of which the base award vests; and • more than 25%: 50% x number of shares in respect of which the base award vests. Weighting Threshold Stretch Super stretch 2016-19 scheme EPS(a) PBT(a) 2017-20 scheme EPS(a) 2018-21 scheme EPS(a) 60% 40% CAGR(b) 7.5% CAGR(b) 10% CAGR(a) 17.5% CAGR(a) 17.5% 100% CAGR(b) 10% CAGR(a) 17.5% 100% CAGR(b) 10% CAGR(a) 17.0% CAGR(a) 25.0% (a) EPS before LTIP charges and Board approved exceptional items. (b) CAGR = compound annual growth rate. 100 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Share-based payments charges The total expense recognised for the period arising from equity-settled share-based payments are as follows: Charge in relation to the 2015-2018 LTIP scheme Charge in relation to the 2016-2019 LTIP scheme Charge in relation to the 2017-2020 LTIP scheme Charge in relation to the 2018-2021 LTIP scheme Equity-settled share-based payments Social security charge on 2008 executive share option awards Social security charge on LTIP awards Total equity-settled share-based payments 2019 £000 — 637 1,083 613 2,333 — 672 2018 £000 913 473 291 — 1,677 29 551 3,005 2,257 Social security charges on share-based payments Social security is accrued, where applicable, at a rate which management expects to be the prevailing rate when share-based incentives are exercised and is based on the latest market value of options expected to vest or having already vested. The total social security accrual outstanding at the year end in respect of share-based payment transactions was £1,088,000 (2018: £1,197,000). 26 Financial instruments Derivative financial assets Financial assets designated at fair value through the income statement 2019 £000 129 2018 £000 113 a) Fair values of financial instruments The carrying values for each class of financial assets and financial liabilities in the balance sheet, which are given below, are not considered to be materially different to their fair values. As at 31 March 2019, the Group had derivative contracts, which were measured at Level 2 fair value subsequent to initial recognition, to the value of an asset of £129,000 (2018: £113,000) and a liability of £2,000 (2018: £156,000). Derivative financial instruments The fair value of forward exchange contracts is assessed using valuation models taking into account market inputs such as foreign exchange spot and forward rates, yield curves and forward interest rates. Fair value hierarchy Financial instruments which are recognised at fair value subsequent to initial recognition are grouped into Levels 1 to 3 based on the degree to which the fair value is observable. The three levels are defined as follows: • Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; • Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and • Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. 101 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 26 Financial instruments continued Derivative financial assets continued b) Credit risk Financial risk management Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers and investment securities. The Group’s exposure to credit risk is managed by dealing only with banks and financial institutions with strong credit ratings. The Group’s financial credit risk is primarily attributable to its trade receivables. The main customers of the Group are large and mid-sized retailers, other manufacturers and wholesalers of greetings products, service merchandisers and trading companies. The Group has established procedures to minimise the risk of default of trade receivables including detailed credit checks undertaken before new customers are accepted and rigorous credit control procedures after sale. These processes have proved effective in minimising the level of provisions for doubtful debts required. The amounts presented in the balance sheet are net of allowances for doubtful receivables estimated by the Group’s management, based on prior experience and their assessment of the current economic environment. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. Therefore, the maximum exposure to credit risk at the balance sheet date was £59,536,000 (2018: £44,649,000) being the total of the carrying amount of financial assets, excluding equity investments above. The maximum exposure to credit risk for trade receivables at the balance sheet date by geographic region was: UK and Asia USA Europe Australia 2019 £000 8,998 21,614 5,303 3,863 2018 £000 10,685 12,863 4,549 4,393 39,778 32,490 Credit quality of financial assets and impairment losses There was no change to the level of provision for doubtful debts upon the adoption of IFRS 9. The ageing of trade receivables at the balance sheet date was: Not past due Past due 0-60 days 61-90 days More than 90 days 2019 2018 Expected loss rate % Provisions for Gross doubtful debts £000 £000 Expected loss rate % Provisions for Gross doubtful debts £000 £000 0.6 5.4 18.4 90.9 13.2 31,666 6,854 1,601 5,727 (200) (369) (295) (5,206) 45,848 (6,070) — 1.0 14.8 24.7 2.4 19,786 10,404 628 2,476 33,294 — (100) (93) (611) (804) There were no unimpaired balances outstanding at 31 March 2019 (2018: £nil) where the Group had renegotiated the terms of the trade receivable. The provisions for doubtful debts more than 90 days include £3,700,000 relating to doubtful debts in the opening balance sheet of Impact Innovations, Inc. 102 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Expected credit loss assessment For the Group’s trade receivables, expected credit losses are measured using a provisioning matrix based on the reason the trade receivable is past due. The provision matrix rates are based on actual credit loss experience over the past three years and adjusted, when required, to take into account current macro-economic factors. The Group applies experienced credit judgement that is determined to be predictive of the risk of loss to assess the expected credit loss, taking into account external ratings, financial statements and other available information. The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 April Charge for the year Unused amounts reversed Acquisition of businesses Amounts written off Effects of movement in foreign exchange Balance at 31 March 2019 £000 804 1,697 (51) 3,724 (407) 303 6,070 2018 £000 822 434 (237) — (149) (66) 804 The allowance account for trade receivables is used to record provisions for doubtful debts unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amounts considered irrecoverable are written off against the trade receivables directly. c) Liquidity risk Financial risk management The Group’s policy with regard to liquidity ensures adequate access to funds by maintaining an appropriate mix of short-term and longer-term facilities, which are reviewed on a regular basis. The maturity profile and details of debt outstanding at 31 March 2019 are set out in note 17. The following are the contractual maturities of financial liabilities, including estimated interest payments: 31 March 2019 Non-derivative financial liabilities Carrying amount £000 Contractual cash flows £000 One year or less £000 One to two years £000 Two to five years £000 More than five years £000 Note Secured bank loans – Australian dollar(a) 2,405 (2,532) (1,069) (1,023) 20 21 21 16,529 (16,529) (14,712) (373) 57,336 (57,336) (57,336) 1,227 (1,227) (1,227) — — (440) (171) — — — (1,273) — — Other financial liabilities(b) Trade payables(b) Other payables(b) Derivative financial liabilities Forward foreign exchange contracts carried at fair value through the hedging reserve (b) (a) Nominal interest rate 4.49%. (b) Measured at Level 2. 2 (248) (248) — — — 77,499 (77,872) (74,592) (1,396) (611) (1,273) 103 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 26 Financial instruments continued Derivative financial assets continued c) Liquidity risk continued Financial risk management continued 31 March 2018 Non-derivative financial liabilities Carrying amount £000 Contractual cash flows £000 One year or less £000 One to two years £000 Two to five years £000 More than five years £000 Note Secured bank loans – Australian dollar(a) 4,780 (5,242) (1,162) Other financial liabilities(b) Trade payables(b) Other payables(b) Derivative financial liabilities Forward foreign exchange contracts carried at fair value through the income statement(b) Forward foreign exchange contracts carried at fair value through the hedging reserve(b) (a) Nominal interest rate 3.57%. (b) Measured at Level 2. 20 21 21 20,272 (20,272) (18,832) 37,056 (37,056) (37,056) 1,701 (1,701) (1,701) 40 — — 116 (5,835) (5,835) (1,121) (176) (2,959) — (10) (1,254) — — — — — — — — — — — — 63,965 (70,106) (64,586) (1,297) (2,969) (1,254) The following table shows the facilities for bank loans, overdrafts, asset-backed loans and revolving credit facilities: 31 March 2019 31 March 2018 Carrying amount £000 Facility used contractual cash flows £000 Facility unused £000 Total facility £000 Carrying amount £000 Facility used contractual cash flows £000 Facility unused £000 Total facility £000 Secured bank loans 2,405 (2,532) — (2,532) 4,780 (5,242) — (5,242) Corporate revolving credit facilities Receivables financing Bank overdraft — — — — — — (29,602) (29,602) (15,967) (15,967) (3,249) (3,249) — — — — — — (19,622) (19,622) (17,981) (17,981) (3,654) (3,654) 2,405 (2,532) (48,818) (51,350) 4,780 (5,242) (41,257) (46,499) The receivables financing facilities are dependent upon the levels of the relevant receivables. The major bank facilities vary in the year depending on forecast debt requirements. The maximum limit across all facilities with the major bank was £139.0 million (2018: £127.9 million). At 31 March 2019 the facility amounted to £45.6 million (2018: £37.6 million). Additional facilities were available at other banks of £3.2 million (2018: £3.7 million). On 5 June 2019 we entered into a new three year Group banking facility, see note 17 for more information. 104 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 d) Cash flow hedges The following table indicates the periods in which the cash flows associated with cash flow hedging instruments are expected to occur: 31 March 2019 Forward exchange contracts: Liabilities 31 March 2018 Forward exchange contracts: Liabilities Carrying amount £000 Contractual cash flows £000 One year or less £000 2 (248) (248) Carrying amount £000 Contractual cash flows £000 One year or less £000 116 (5,835) (5,835) The Group has forward currency hedging contracts outstanding at 31 March 2019 designated as hedges of expected future purchases in US dollars and Chinese renminbi and sales in euros for which the Group has firm commitments. The forward currency contracts are being used to hedge the foreign currency risk of the firm commitments. The terms of the forward currency hedging contracts have been negotiated to match the terms of the commitments. The cash flow hedges of the expected future purchases in 2020 were assessed to be highly effective and as at 31 March 2019 a net unrealised gain of £118,000 (2018: £27,000 loss) with related deferred tax credit of £nil (2018: £nil) was included in other comprehensive income in respect of these hedging contracts. e) Market risk Financial risk management Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices, will affect the Group’s income or the value of its holdings of financial instruments. The Group hedges a proportion, as deemed appropriate by management, of its sales and purchases of inventory denominated in foreign currency by entering into foreign exchange contracts. Such foreign exchange contracts typically have maturities of less than one year. The Group rarely hedges profit translation exposure, since such hedges provide only a temporary deferral of the effects of movement in foreign exchange rates. Similarly, the Group does not hedge its long-term investments in overseas assets. However, the Group holds loans that are denominated in the functional currency of certain overseas entities. The Group’s exposure to foreign currency risk is as follows. This is based on the carrying amount for monetary financial instruments, except derivatives, when it is based on notional amounts. 31 March 2019 Cash and cash equivalents Trade receivables Other receivables Financial assets at fair value through the income statement Secured bank loans Loan arrangement fees Trade payables Other payables Balance sheet exposure Notes 16 15 17 17 21 21 Sterling £000 Euro £000 US dollar £000 65,845 (4,617) (46,596) 7,731 966 5,403 22,793 22 1,651 110 — 31 — — — — — — Other £000 4,826 3,851 40 19 Total £000 19,458 39,778 2,679 129 (2,405) (2,405) — 31 (10,494) (7,013) (30,378) (9,451) (57,336) (541) (409) — (277) 63,648 (6,614) (52,530) (3,397) (1,227) 1,107 105 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 26 Financial instruments continued Derivative financial assets continued e) Market risk continued Financial risk management continued 31 March 2018 Cash and cash equivalents Trade receivables Other receivables Financial assets at fair value through the income statement Secured bank loans Loan arrangement fees Trade payables Other payables Balance sheet exposure Note 16 15 17 17 21 21 Sterling £000 1,040 9,337 1,169 85 — 105 Euro £000 22 US dollar £000 3,237 4,525 14,053 25 574 — — — — — — Other £000 4,732 4,575 — 28 Total £000 9,031 32,490 1,768 113 (4,780) (4,780) — 105 (10,009) (5,368) (16,260) (5,419) (37,056) (978) 749 (497) (1,293) — (226) (1,701) 1,604 (1,090) (30) The following significant exchange rates applied during the year: Euro US dollar Average rate Reporting date spot rate 2019 1.13 1.31 2018 1.14 1.34 2019 1.16 1.30 2018 1.14 1.40 Sensitivity analysis A 10% weakening of the following currencies against sterling at 31 March 2019 would have affected equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant. The analysis was performed on the same basis for 31 March 2018. Euro US dollar Equity Profit/(loss) 2019 £000 601 4,775 2018 £000 118 (146) 2019 £000 6 883 2018 £000 (879) (521) On the basis of the same assumptions, a 10% strengthening of the above currencies against sterling at 31 March 2019 would have affected equity and profit or loss by the following amounts: Equity 2019 £000 (735) (5,837) Profit/(loss) 2018 £000 (144) 178 2019 £000 (8) (1,079) 2018 £000 1,075 637 Euro US dollar 106 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Profile At the balance sheet date the interest rate profile of the Group’s interest-bearing financial instruments was: Variable rate instruments Financial assets Financial liabilities Loan arrangement fees Net debt Note 2019 £000 2018 £000 19,458 (2,405) 31 16 17,084 9,031 (4,780) 105 4,356 A change of 50 basis points (0.5%) in interest rates in respect of financial assets and liabilities at the balance sheet date would have affected equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date. This analysis assumes that all other variables, in particular foreign currency rates, remain constant and considers the effect on financial instruments with variable interest rates, financial instruments at fair value through profit or loss. The analysis is performed on the same basis for 31 March 2018. Sensitivity analysis Equity Increase Decrease Profit or loss Increase Decrease 2019 £000 2018 £000 85 — 85 — 21 — 21 — f) Capital management 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 Group is dependent on the continuing support of its bankers for working capital facilities and so the Board’s major objective is to keep borrowings within these facilities. The Board manages as capital its trading capital, which it defines as its net assets plus net debt. Net debt is calculated as total debt (bank overdrafts, loans and borrowings as shown in the balance sheet), less cash and cash equivalents. The banking facilities with our principal bank have covenants relating to interest cover, cash flow cover and leverage, and our articles currently permit borrowings (including letter of credit facilities) to a maximum of four times equity. Net assets attributable to owners of the Parent Company Net cash Trading capital Equity 2019 £000 2018 £000 Note 171,506 96,855 16 (17,084) (4,356) 154,422 92,499 The main areas of capital management relate to the management of the components of working capital including monitoring inventory turn, age of inventory, age of trade receivables, balance sheet reforecasting, monthly profit and loss, weekly cash flow forecasts and daily cash balances. Major investment decisions are based on reviewing the expected future cash flows and all major capital expenditure requires sign off by the CFO and CFO or above certain limits, by the Board. There were no major changes in the Group’s approach to capital management during the year. A particular focus of the Group is leverage measured as the ratio of average monthly net debt to EBITDA before exceptional items, acquisition amortisation and LTIP charges. 107 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 27 Operating leases Non-cancellable operating lease rentals are payable as follows: Less than one year Between one and five years More than five years Non-cancellable operating leases are receivable as follows: Between one and five years 2019 £000 5,236 10,257 16,443 31,936 2018 £000 5,108 9,925 17,807 32,840 2019 £000 837 2018 £000 1,728 The Group leases a number of warehouse and factory facilities as well as vehicles and office equipment under operating leases. The leases of warehouse and factory facilities typically have an option to renew at the end of the lease term with lease payments subject to five-yearly rent reviews. One of the leased properties has been sublet by the Group and part of a second. The main sub-leases have periods to run of between one and five years. Sub-lease payments of £583,000 (2018: £710,000) were received during the financial year. During the year, £4,865,000 was recognised as an expense in the income statement in respect of operating leases (2018: £5,289,000). 28 Capital commitments At 31 March 2019, the Group had outstanding authorised capital commitments to purchase plant and equipment for £2,647,000 (2018: £551,000). 29 Related parties Sale of goods: Hedlunds Pappers Industri AB Festive Productions Ltd Hedlund Import AB S A Greetings (South African Greetings) Purchase of goods: Mattr Media Ltd Receivables Hedlund Import AB S A Greetings (South African Greetings) Balance at 31 March 108 2019 £000 2018 £000 69 12 2,955 126 3,162 56 56 29 31 60 172 24 2,718 91 3,005 62 62 17 — 17 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Identity of related parties and trading Hedlund Import AB and AB Alrick-Hedlund are under the ultimate control of the Hedlund family who are a major shareholder in the Company. Anders Hedlund is a director of Hedlunds Pappers Industri AB which is under the ultimate control of the Hedlund family. Festive Productions Ltd is a subsidiary undertaking of Malios Holding AG, a company under the ultimate control of the Hedlund family. John Charlton is Chairman of SA Greetings (pty) Ltd and Elaine Bond is a shareholder. During the year the Company paid £56,000 (2018: £62,000) for marketing services to Mattr Media Ltd, a company controlled by Joshua Fineman, who is the son of the Group CEO. The above trading takes place in the ordinary course of business and on normal commercial terms. Other related party transactions Directors of the Company and their immediate relatives have an interest in 34% (2018: 45%) of the voting shares of the Company. The shareholdings of Directors and changes during the year are shown in the Directors’ report on page 60. See the Directors’ remuneration report on pages 57 to 58 for more detail. 30 Subsidiary with significant non‑controlling interest The Company has two subsidiary companies which have a material non-controlling interest, IG Design Group Australia Pty Ltd ('Australia') and Anker Play Products LLC ('APP'). Summary financial information in relation to Australia and APP is shown below. Non-controlling interest – balance sheet as at 31 March Non-current assets Current assets Current liabilities Non-current liabilities Non-controlling interest – comprehensive income for the year ended 31 March Revenue Profit after tax Total comprehensive income Non-controlling interest – cash flow for the year ended 31 March Net increase/(decrease) in cash and cash equivalents Non-controlling interest 1 April Share of profits for the year Other comprehensive income Recognition of non-controlling interest Disposal of Urban Dollar Dividend paid to the non-controlling interest Currency translation 31 March 2019 Australia £000 4,582 10,052 APP £000 16 Total £000 4,598 3,219 13,271 2018 Australia £000 5,538 7,637 (6,755) (2,600) (9,355) (5,604) (143) — (143) Australia £000 2019 APP £000 Total £000 Australia £000 39,067 11,078 50,145 36,972 2,434 2,229 531 531 2,965 2,760 2019 APP £000 (35) 2019 APP £000 — — — 311 — — — Total £000 409 Total £000 3,661 1,326 (10) 311 (110) (1,075) (52) Australia £000 444 Australia £000 3,661 1,326 (10) — (110) (1,075) (52) 3,740 (45) 2018 1,265 1,345 2018 Australia £000 550 2018 Australia £000 3,833 789 40 — — (575) (426) 311 4,051 3,661 109 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 31 Acquisitions of subsidiaries Acquisitions in the current period Impact Innovations Inc. On 31 August 2018, the Group acquired 100% of the equity of Impact Innovations Inc. ('Impact'), a leading supplier of gift packaging and seasonal décor products in the US. The acquisition, made through a wholly owned subsidiary of IG Design Group plc, IG Design Group Americas Inc., was satisfied by total consideration of £82.2 million ($107.2 million), £66.8 million paid in cash and the remaining £15.4 million settled in shares in IG Design Group plc. The consideration (excluding the working capital adjustment) represents 4.9 times underlying EBITDA multiple. Founded in 1968 and employing more than 250 staff globally, Impact is a designer, manufacturer and distributor of seasonal and special occasions products specialising in paper, fabric and décor. The company is headquartered in Clara City, Minnesota, where its fabric and décor business is located, and its gift wrap manufacturing, warehousing and distribution facilities are located in Memphis, Tennessee. Impact has additional manufacturing operations in Shaoxing, China and offices in Hong Kong. Impact has long-term relationships with major US retailers, including Walmart, Target, Kroger and Meijer, all of which have been in place for in excess of 20 years. Walmart is expected to account for nearly 20% of total Group revenue following the acquisition. The Directors believe that the acquisition will: • create the world’s largest consumer gift packaging business; • deliver significant earnings accretion in each of the next three financial years; • deliver annual synergies in excess of $5.0 million by year three; and • enable expansion into the growing and adjacent seasonal décor product category both in North America and in established Design Group markets around the world. In the period from acquisition to 31 March 2019, Impact contributed sales of £88,693,000 to the consolidated Group revenue for the period ended 31 March 2019. If the acquisition had occurred on 1 April 2018, Group revenue would have been £489,756,000. Following the restructuring of the US business to combine manufacturing facilities into one operation, it is no longer possible to separately disclose the profit of the Impact business. Effect of acquisition of Impact The acquisition had the following effect on the Group’s assets and liabilities. Property, plant and equipment Intangible assets Inventories Trade and other receivables Cash Trade and other payables Provisions Net identifiable assets and liabilities Consideration paid in shares Consideration paid in cash Total consideration Goodwill Fair value adjustments were made to trade names, customer relationships and inventory. 110 Recognised fair values on acquisition £000 9,313 19,000 26,295 31,966 1,208 (31,433) (2,197) 54,152 15,385 66,809 82,194 28,042 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 The valuation techniques used for measuring the fair value of material assets acquired were as follows: • property, plant and equipment has been valued using market comparison and cost techniques. The valuation model considers market prices for similar items when they are available, and depreciated replacement costs when appropriate. Depreciated replacement cost reflects adjustments for physical deterioration as well as functional and economic obsolescence; intangible assets are made up of customer relationships which have been valued using a Multi-period Excess Earnings Method (‘MEEM’) approach and brands valued using the relief-from royalty method; and inventories have been valued at book value being cost to buy/manufacture, less provisions where this is above net realisable value. This is felt to be materially aligned with market value. • • The goodwill recognised above includes certain intangible assets that cannot be separately identified and measured due to their nature. This includes control over the acquired business, the skills and experience of the assembled workforce, the increase in scale, significant synergies and the future growth opportunities that the business provide to the Group’s operations. The goodwill recognised arises in the USA and is deductible for tax purposes (capitalised and written down over 15 years). If new information is obtained within one year of the date of acquisition about the facts and circumstances that existed at the date of acquisition which identifies adjustments to the fair values above or any additional provisions that existed at the date of the acquisition, then the accounting for the acquisition will be revised. Acquisitions in the prior year On 9 January 2018, the Group acquired the trade and certain assets of Biscay Greetings Pty Limited (‘Biscay’), a leading greetings card and paper products business based in Australia. The acquisition, made through IG Design Group Australia Pty Limited, was satisfied by a cash consideration of £5.1 million (AU$8.9 million) using local debt facilities. The consideration represented 2.7x EBITDA for the year ended 30 June 2017 although an injection of working capital of up to £1.7 million (AU$3.0 million) might also be required. Biscay provides greetings cards and related products to an extensive base of almost 2,000 customers through regional, wholesale, and independent retail channels across Australia and New Zealand. From the date of acquisition to 31 March 2018 the Biscay business contributed £1,253,000 to the revenue of the Group. If the acquisition had occurred on 1 April 2017, Group revenue for the year ended 31 March 2018 would have been £334,854,000. The trade of Biscay has been incorporated into that of IG Design Group Australia Pty Limited and therefore it is not possible to disclose separately the profit of the Biscay business. Effect of acquisition of Biscay The acquisition had the following effect on the Group’s assets and liabilities: Property, plant and equipment Intangible assets Inventories Trade and other payables Deferred tax liabilities Net identifiable assets and liabilities Total cash consideration paid Goodwill Recognised fair values on acquisition £000 798 921 2,149 (213) (213) 3,442 5,145 1,703 There has been no adjustment to the fair value relating to the Biscay acquisition. 32 Non‑adjusting post balance sheet events On 5 June 2019 we entered into a new three year Group facility with a club of five banks chosen to reflect and support the geographical spread of the Group. HSBC continue to be significant partner and have been joined in the new facility by NatWest, BNP Paribas, Sun Trust and PNC. See note 17 for further details. 111 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 COMPANY BALANCE SHEET AS AT 31 MARCH 2019 Fixed assets Intangible assets – software Tangible assets Investments Total non-current assets Current assets Debtors – due within one year Debtors – due after more than one year Derivative financial assets Cash at bank and in hand Notes 3 4 5 6 7 8 10 2019 £000 — 2 2018 £000 26 25 44,630 44,632 27,972 28,023 1,973 2,105 28,847 28,618 110 58,093 89,023 34 10,807 41,564 Creditors: amounts falling due within one year 11 (5,369) (4,655) Net current assets Creditors: amounts falling due after more than one year Provisions for liabilities – other provisions Net assets Capital and reserves Called up share capital Share premium account Capital redemption reserve Merger reserve Hedging reserve Profit and loss account Equity shareholders’ funds 12 14 15 83,654 36,909 — (115) 10 (104) 128,171 64,838 3,918 71,558 1,340 17,164 110 34,081 128,171 3,194 8,475 1,340 17,164 (91) 34,756 64,838 IG Design Group plc is registered in England and Wales, number 1401155. These financial statements were approved by the Board of Directors on 10 June 2019 and were signed on its behalf by: Paul Fineman Director Giles Willits Director The notes on pages 115 to 124 form part of the financial statements. 112 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 COMPANY STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 MARCH 2019 At 31 March 2017 Profit for the year Other comprehensive income for the period Options exercised Equity-settled share-based payments Tax on equity-settled share-based payments Share options charge relating to subsidiary employees Equity dividend paid At 31 March 2018 Profit for the year Other comprehensive income for the period Options exercised Equity-settled share-based payments Tax on equity-settled share-based payments Share options charge relating to subsidiary employees Shares issued Equity dividend paid At 31 March 2019 Share capital £000 3,132 Share premium account £000 8,429 Capital redemption reserve £000 1,340 Merger reserves £000 17,164 — — 62 — — — — — — 46 — — — — — — — — — — — — — — — — — — 3,194 8,475 1,340 17,164 — — 83 — — — 641 — — — 18 — — — 63,065 — — — — — — — — — — — — — — — — — Cash flow hedging reserve £000 146 — (237) — — — — — (91) — 201 — — — — — — Profit and loss account £000 32,901 3,017 — (37) 1,019 198 658 Total equity £000 63,112 3,017 (237) 71 1,019 198 658 (3,000) (3,000) 34,756 64,838 1,160 1,160 — (72) 201 29 1,478 1,478 457 855 — 457 855 63,706 (4,553) (4,553) 3,918 71,558 1,340 17,164 110 34,081 128,171 Within the profit and loss account is a cumulative amount of £2,776,000 (2018: £1,909,000) which is unrealised in respect of share options granted to subsidiary employees. See the consolidated statement of changes in equity for descriptions of reserve. 113 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 Notes 2019 £000 2018 £000 1,160 3,017 3, 4 62 (418) (1,186) (668) (2,834) 2,064 228 (1,592) 4 (948) 1,287 (64) (1,313) 1,983 670 42 572 (1,064) 367 (5,884) 1,502 (144) (1,592) (12) 387 6,229 (72) 4,940 2,673 7,613 2,834 5,884 4 (13) — 2,821 5,884 48,348 2 (4,553) 43,795 47,286 10,807 58,093 10 71 (3,000) (2,929) 10,568 239 10,807 COMPANY CASH FLOW STATEMENT YEAR ENDED 31 MARCH 2019 Cash flows from operating activities Profit for the year Adjustments for: Depreciation and amortisation Foreign exchange (gains)/losses Interest receivable and similar income Interest payable and similar charges Dividends received from Group undertakings Equity-settled share-based payment expenses Taxation Operating loss after adjustments for non-cash items Decrease/(increase) in trade and other debtors (Increase)/decrease in trade and other creditors Decrease in amounts owed by Group undertakings Increase in provisions Cash (used in)/generated from operations Interest received Net cash from operating activities Cash flows from investing activities Dividends received Acquisition of tangible fixed assets Net cash from investing activities Cash flows from financing activities Net proceeds from the issue of share capital(a) Equity dividends paid Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at 31 March 2019 (a) See note 22 in the Group’s financial statements. 114 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE COMPANY FINANCIAL STATEMENTS YEAR ENDED 31 MARCH 2019 1 Accounting policies – Company Basis of preparation IG Design Group plc (the ‘Company’) is a company limited by shares and incorporated and domiciled in the UK. The Company financial statements present the information about the Company as a separate entity and not about the Group. These financial statements were prepared in accordance with Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland (‘FRS 102’) as issued in August 2014. The amendments to FRS 102, issued in July 2015, have been applied. The presentation currency of these financial statements is sterling. All amounts in the financial statements have been rounded to the nearest £1,000. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements. Judgements made by the Directors in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 20. Under Section 408 of the Companies Act 2006 the Company is exempt from the requirement to present its own profit and loss account on the grounds that a parent undertaking includes the Company in its own published consolidated financial statements. Measurement convention The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments classified at fair value through the profit and loss account and financial instruments at fair value through the hedging reserve. Going concern See note 1 to the Group accounting policies on page 71. Based on the financial performance of the Group, the Directors have a reasonable expectation that the Company has adequate resources to continue its operational existence for at least twelve months from the date of signing these financial statements. For this reason they continue to adopt the going concern basis of accounting in preparing the annual financial statements. Foreign currencies Transactions in foreign currencies are recorded using the rate of exchange prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the rate of exchange prevailing at the balance sheet date and the gains or losses on translation are included in the profit and loss account except for differences arising on the retranslation of qualifying cash flow hedges and items which are accounted for at fair value with changes taken to other comprehensive income, which are recognised in other comprehensive income. Basic financial instruments Trade and other debtors Trade and other debtors are recognised initially at transaction price less attributable transaction costs. Trade and other debtors are subsequently reviewed for recoverability and impairment with any losses taken to profit and loss immediately. If the arrangement constitutes a financing transaction, for example if payment is deferred beyond normal business terms, then it is measured at the present value of future payments discounted at a market rate of instrument for a similar debt instrument. Trade and other payables Trade and other payables are stated at their nominal value which is considered to be their fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. Interest-bearing borrowings classified as basic financial instruments Interest-bearing borrowings are recognised initially at the present value of future payments discounted at a market rate of interest, less direct arrangement costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method, less any impairment losses. Investments in subsidiaries Investments in subsidiaries are carried at cost less any provision for impairment. Cash and cash equivalents Cash and cash equivalents comprise cash balances. Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement only. 115 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 Intangible fixed assets – software Software is stated at cost less amortisation. Cost is amortised over three years to write off the asset over its useful economic life. Tangible fixed assets – property, plant and equipment and depreciation Tangible fixed assets are stated at cost less accumulated depreciation. Depreciation is provided by the Company to write off the cost less the estimated residual value of tangible property, plant and equipment by equal instalments over their estimated useful economic lives as follows: • fixtures and fittings – three to five years. Provisions A provision is recognised in the balance sheet when the Company has a present legal or constructive obligation as a result of a past event, that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are recognised at the best estimate of the amount required to settle the obligation at the reporting date. Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within the Group, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee. Leases Where the Company enters into a lease which does not entail taking substantially all the risks and rewards of ownership of an asset, the lease is accounted for as an ‘operating lease’ and the rentals payable are charged to the profit and loss account on a straight-line basis over the life of the lease. Share‑based payments The cost of equity-settled transactions with employees is measured by reference to the fair value of the option at the date on which they are granted and is recognised as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. Fair value is determined by using an appropriate pricing model. In valuing equity-settled transactions, no account is taken of any service and performance (vesting conditions). No expense is recognised for awards that do not ultimately vest. At each balance sheet date before vesting, the cumulative expense is calculated, representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The movement in cumulative expense since the previous balance sheet date is recognised in the income statement, with a corresponding entry in equity. 1 Accounting policies – Company continued Other financial instruments Financial instruments not considered to be basic financial instruments (other financial instruments) Other financial instruments not meeting the definition of basic financial instruments are recognised initially at fair value. Subsequent to initial recognition other financial instruments are measured at fair value with changes recognised in profit or loss except that hedging instruments in a designated hedging relationship shall be recognised as set out below: Derivative financial instruments and hedging Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement of fair value is recognised immediately in profit or loss, except where it qualifies for hedge accounting. Cash flow hedges Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a recognised asset or liability, or a highly probable forecast transaction, the effective part of any gain or loss on the derivative financial instrument is recognised directly in other comprehensive income. Any ineffective portion of the hedge is recognised immediately in profit or loss. When a hedging instrument expires or is sold, terminated or exercised, or the Company discontinues designation of the hedge relationship but the hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately. 116 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the profit and loss account except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised directly in equity or other comprehensive income accordingly. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided on timing differences which arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in the financial statements. Deferred tax is not recognised on permanent differences arising because certain types of income or expense are non-taxable or are disallowable for tax or because certain tax charges or allowances are greater or smaller than the corresponding income or expense. Deferred tax is provided in respect of the additional tax that will be paid or avoided on differences between the amount at which an asset (other than goodwill) or liability is recognised in a business combination and the corresponding amount that can be deducted or assessed for tax. Goodwill is adjusted by the amount of such deferred tax. Deferred tax is measured at the tax rate that is expected to apply to the reversal of the related difference, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax balances are not discounted. Unrelieved tax losses and other deferred tax assets are recognised only to the extent that is it probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits. Employee benefits Pensions The Company operates a defined contribution personal pension scheme. The assets of this scheme are held separately from those of the Company in an independently administered fund. The pension charge represents contributions payable by the Company to the fund. Where the Company grants options over its own shares to the employees of its subsidiaries, it recognises an increase in the cost of investment in its subsidiaries equivalent to the equity-settled share-based payment charge recognised in its subsidiaries’ financial statements with the corresponding credit being recognised directly in equity. Amounts recharged to the subsidiary are recognised as a reduction in the cost of investment in subsidiary. If the amount recharged exceeds the increase in the cost of investment, the excess is recognised as a dividend to the extent that it reflects post-acquisition profits of the subsidiary. Own shares held by Employee Benefit Trust Transactions of the Group-sponsored ‘International Greetings Employee Benefit Trust’ are included in the Group financial statements. In particular, the trust’s purchases and sales of shares in the Company are debited and credited directly to equity. Dividends on shares presented within shareholders’ funds Dividends unpaid at the balance sheet date are only recognised as a liability at that date to the extent that they are appropriately authorised and are no longer at the discretion of the Company. Unpaid dividends that do not meet these criteria are disclosed in the notes to the financial statements. 117 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 2 Dividends paid and proposed A final dividend for year ending 31 March 2018 of 4.00p (for year ending 31 March 2017: 2.75p) was paid on 6 September 2018. An interim dividend of 2.50p was paid on 18 January 2019 (2018: 2.00p). The Directors are recommending a final dividend in respect of the year ended 31 March 2019 of 6.00p per share (2018: 4.00p). If approved, it will be paid in September 2019 to shareholders on the register at the close of business on 2 August 2019. Dividends paid in the year Final equity dividend for prior year Interim equity dividend for current year Dividends paid in the year Proposed for approval at Annual General Meeting Final equity dividend for current year 3 Intangible assets – software Cost Balance at 1 April 2018 and 31 March 2019 Depreciation and impairment Balance at 1 April 2018 Amortisation charge for the year Balance at 31 March 2019 Net book value At 31 March 2019 At 31 March 2018 2019 2018 Pence per share 4.00 2.50 Pence per share 2.75 2.00 £000 2,597 1,956 4,553 2019 2018 Pence per share 6.00 £000 4,702 Pence per share 4.00 £000 1,734 1,266 3,000 £000 2,556 Software £000 86 (60) (26) (86) — 26 118 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 4 Tangible assets Cost Balance at 1 April 2018 Additions Balance at 31 March 2019 Depreciation and impairment Balance as at 1 April 2018 Depreciation charge for the year Balance at 31 March 2019 Net book value At 31 March 2019 At 31 March 2018 5 Investments Cost At 1 April 2017 Additions – share option charge relating to subsidiary employees Effects of movement in foreign exchange At 31 March 2018 Additions – share option charge relating to subsidiary employees Additions – investment in subsidiary Effects of movement in foreign exchange At 31 March 2019 Provisions At 31 March 2018 and 2019 Net book value At 31 March 2019 At 31 March 2018 Fixtures and fittings £000 165 13 178 (140) (36) (176) 2 25 Total £000 Shares in Group Loans to Group undertakings £000 undertakings £000 24,546 6,000 30,546 658 — — (572) 658 (572) 25,204 5,428 30,632 855 15,386 — — — 417 855 15,386 417 41,445 5,845 47,290 (2,660) — (2,660) 38,785 22,544 5,845 5,248 44,630 27,972 119 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 5 Investments continued The Company has the following investments in subsidiaries: Trading companies IG Design Group UK Ltd(c) IG Design Group Americas Inc(d) Impact Innovations, Inc.(e) Impact Innovations Asia Ltd(f) Zhejiang Shaoxing Royal Arts and Crafts Co., Ltd(g) The Lang Companies Inc(d) Anker Play Products, LLC(d) International Greetings Asia Ltd(h) The Huizhou Gift International Greetings Company Limited(i) Greetings Ningbo Business Consulting Ltd (formerly IG Design (Ningbo) Ltd)(j) IG Design Group BV (formerly Hoomark BV)(k) Anchor International BV(l) IG Design Group S.p.z.o.o (formerly Hoomark S.p.z.o.o)(m) IG Design Group Australia Pty Ltd(n) Non-trading and dormant companies Anker International plc(c) Belgrave Graphics Ltd(c) Britesparks Ltd(c) Concorde Industries Ltd(c) Copywrite Designs Ltd(c) Credit Collection Consultants Ltd(c) Hoopack Hoogeveen BV(g) Howard Industries Ltd(c) IG Design Group (Lang), Inc(d) IG Design Group Europe BV (formerly IG Europe BV)(g) IG Employee Share Trustee Ltd(c) Impact Paper Products, LLC(e) Impact Paper Hong Kong Ltd(f) Polaris Plastics Ltd(c) Santa’s Collection Shaoxing Co., Ltd(o) School Supplyline Ltd(c) Scoop Designs Ltd(c) Tom Smith Christmas Crackers Ltd(c) Tom Smith Crackers Ltd(c) Tom Smith Group Ltd(c) Tom Smith Ltd(c) Tom Smith Online Ltd(c) Weltec BV(h) Variety Accessories, LLC(e) (a) Indirect holding. (b) 50% direct/50% indirect holding. (c) Registered office: No 7 Water End Barns, Water End, Eversholt MK17 9EA. (d) Registered office: 5555 Glenridge Connector, Suite 300, Atlanta, GA 30342, USA. 120 Country of incorporation Percentage of ordinary shares held 2019 Percentage of ordinary shares held 2018 Great Britain US US Hong Kong China US US Hong Kong China China Netherlands Netherlands Poland Australia Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Netherlands Great Britain US Netherlands Great Britain US Hong Kong Great Britain China Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Great Britain Netherlands US 100(b) 100 100(a) 100(a) 100(a) 100(a) 50(a) 100 100(a) 100(a) 100(a) 100(a) 100(a) 50 100(a) 100 100 99(a) 100 50(a) 100(a) 100(a) 100(a) 100 100(b) 100(a) 100(a) 100(a) 100(a) 100(a) 100(a) 100(a) 100 100(b) 100 100(a) 100(a) 100(a) 100(b) 100 — — — 100(a) 50(a) 100 100(a) 100(a) 100(a) 100(a) 100(a) 50 100(a) 100 100 99(a) 100 50(a) 100(a) 100(a) 100(a) 100 100(b) — — 100(a) — 100(a) 100(a) 100(a) 100 100(b) 100 100(a) 100(a) — IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 (e) Registered office: 233 SE 1st Avenue, Clara City, Minnesota 5622, USA. (f) Registered office: Flat 11A, Eldex Industrial Building, 21 Ma Tam Wai Road, To Kwa Wan Kowloon, Hong Kong. (g) Registered office: Floor 2, A Zone, Floor 1, Building 3, Northeast Corner of Sanjiang Road and Tanggong Road, Paojiang Shaoxing Zhejiang, China. (h) Registered office: 21F, 69 Jervois Street, Sheung Wan, Hong Kong. (i) Registered office: Fuda industrial Zone, Futian Town, Bolao, Huizho City, Guangdong, China (j) Registered office: 13-8, Building 003, No 3, 5 and 6 of Century Oriental Business Plaza, Yinzhou, Ningbo, China. (k) Registered office: Industrieweg 62, 7903 AK Hoogeveen, The Netherlands. (l) Registered office: Voltastraat 12, 3281 NG Numansdorp, The Netherlands. (m) Registered office: Jędrzychowice 116A, 59-900 Zgorzelec, Poland. (n) Registered office: 121 Rayhur Street, Clayton, South Victoria 3169, Australia. (o) Registered office: 3 Sanjiang Road West, Paojiang Ind Zone, Paojiang Shaoxing Zhejiang, China. Class of shares held are ordinary shares for companies incorporated in Great Britain or the equivalent for the overseas subsidiaries. Concorde Industries Ltd and Credit Collection Consultants Ltd are dormant companies that have never traded and both have net assets of £2. 6 Debtors – due within one year Trade debtors Amounts owed by Group undertakings Other debtors Prepayments 7 Debtors – due after more than one year Amounts owed by Group undertakings(a) Deferred tax assets (a) Attracts interest at market rate and is repayable on 31 July 2020. 8 Derivative financial assets Financial assets designated at fair value through profit and loss Financial assets designated at fair value through hedging reserve 9 Deferred tax asset Accelerated capital allowances Tax loss carried forward Other timing differences 10 Cash and cash equivalents/bank overdrafts Cash at bank and in hand 2019 £000 17 2018 £000 — 1,065 1,892 757 134 58 155 1,973 2,105 Note 9 2019 £000 2018 £000 26,849 26,849 1,998 28,847 1,769 28,618 2019 £000 — 110 110 2019 £000 81 760 1,157 1,998 2018 £000 10 24 34 2018 £000 88 264 1,417 1,769 2019 £000 2018 £000 58,093 10,807 121 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 11 Creditors: amounts falling due within one year Loan arrangement fees Trade creditors Amounts owed to undertakings Other taxes and social security Other creditors and accruals Other financial liabilities Note 13 2019 £000 (31) 130 1,533 203 3,534 — 5,369 2018 £000 (95) 462 398 187 3,550 153 4,655 Refer to note 17 to the Group’s financial statements for more details of the terms of the bank borrowings. 12 Creditors: amounts falling due after more than one year Loan arrangement fees 13 Other financial liabilities falling due within one year Financial liabilities designated as fair value through profit and loss Financial liabilities designated as fair value through hedging reserve 14 Provisions Balance at 1 April Reclassified from other creditors Provisions made in the year Provisions used during the year Unwinding of discounted amount 2019 £000 — 2019 £000 — — — 2019 £000 104 43 7 (71) 32 115 2018 £000 (10) 2018 £000 38 115 153 2018 £000 149 — — (72) 27 104 The provisions represent a provision for an onerous lease and dilapidations provision. The dilapidations provision relates to a property lease that expires in August 2021. The onerous lease expires in November 2019 and the provision will be fully utilised at that point. 15 Share capital Allotted, called up and fully paid 78,365,046 (2018: 63,889,942) ordinary shares of 5p each 2019 £000 2018 £000 3,918 3,194 Of the 78,365,046 shares in the Company, 31,208 (2018: 31,208) are held by the International Greetings Employee Benefit Trust. Refer to note 22 to the Group’s financial statements for details of movements and note 25 for details of share options and LTIP schemes. 122 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 16 Share‑based payments Refer to note 25 to the Group’s financial statements for details of share-based payments. 17 Financial instruments (a) Carrying amount of financial instruments The carrying amounts of the financial assets and liabilities include: Assets measured at fair value through profit or loss Assets measured at fair value through the hedging reserve Assets measured at amortised cost Liabilities measured at fair value through profit or loss Liabilities measured at fair value through the hedging reserve Liabilities measured at amortised cost 2019 £000 — 110 2018 £000 10 24 86,781 39,606 — — (1,663) (38) (115) (860) 85,228 38,627 (b) Financial instruments measured at fair value Derivative financial instruments The fair value of forward exchange contracts is assessed using valuations models taking into account market inputs such as foreign exchange spot and forward rates, yield curves and forward interest rates. (c) Hedge accounting The following table indicates the periods in which the cash flows associated with cash flow hedging instruments are expected to occur as required by FRS 102.29(a) for the cash flow hedge accounting models, which is in line with when they are expected to affect profit and loss. Forward exchange contracts: Assets Liabilities Carrying amount £000 2019 Expected cash flows £000 One year or less £000 Carrying amount £000 2018 Expected cash flows £000 110 — 110 5,799 5,799 — — 5,799 5,799 24 (115) (91) 2,405 6,317 8,722 One year or less £000 2,405 6,317 8,722 The Company uses cash flow hedge accounting in line with FRS 102.12, by entering into forward exchange contracts to hedge foreign exchange exposure. Fair value at 31 March 2019 was £110,000 asset (2018: £91,000 liability) recognised in other comprehensive income. The amount recognised in the profit and loss account for the year was £nil (2018: £28,000 charge). (d) Fair values The amounts for all financial assets and financial liabilities carried at fair value are as follows: Forward exchange contracts: Assets – forward exchange contracts Liabilities – forward exchange contracts Total liability Fair value 2019 £000 Fair value 2018 £000 110 — 110 34 (153) (119) 123 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED YEAR ENDED 31 MARCH 2019 18 Contingencies The Company has given, together with certain of its subsidiary undertakings, an unlimited composite joint and several guarantee in respect of the HSBC facilities of itself and its subsidiaries. At 31 March 2019, the Company had cash of £58.7 million which offset net borrowings elsewhere in the Group of £44.7 million. Therefore, the total of this guarantee at the year end, in relation to the Company only, was £44.7 million (2018: £20.1 million). The Company has given HSBC Bank (China) Company Ltd a guarantee of RMB15.4 million (£1.8 million) on behalf of its subsidiary Huizhou Gift International Greetings Company Ltd. As part of the Group refinancing completed in June 2016 the Company provided guarantees to HSBC banks in the Netherlands of €1.2 million (£1.0 million), the USA $84.5 million (£65.0 million) and in Hong Kong $18.5 million (£14.2 million) on behalf of the Group’s trading subsidiaries in those countries. 19 Related parties Identity of related parties with which the Company has transacted: Group undertakings: International Greetings Asia Ltd; IG Design Group UK Ltd; IG Design Group Americas, Inc; Impact Innovations Inc; • • • • Lang Companies Inc; • • The Huizhou Gift International Greetings Company Ltd; IG Design Group BV; • • Anchor International BV; • • IG Design Group S.p.z.o.o; and IG Design Group Australia Pty Ltd. Transactions with key management personnel – total compensation (made up solely of short-term benefits) of key management personnel (the Directors) in the year amounted to £1,867,000 (2018: £2,999,000). For further details see the Directors’ remuneration report (pages 54 to 58). Related party transactions – transactions with Group undertakings Management recharges Receivables outstanding Creditors outstanding 2019 £000 2,613 27,914 (1,533) 2018 £000 2,546 28,741 (398) During the year the Company paid £56,000 (2018: £62,000) for rebranding and marketing services to Mattr Media Ltd, a Company controlled by Joshua Fineman, who is the son of the Group CEO. 20 Accounting estimates and judgements Management does not consider that there are any significant accounting estimates or judgements other than those showing in note 2 to the Group financial statements. 21 Non‑adjusting post balance sheet event On 5 June 2019 we entered into a new three year Group facility with a club of five banks chosen to reflect and support the geographical spread of the Group. HSBC continue to be significant partner and have been joined in the new facility by NatWest, BNP Paribas, Sun Trust and PNC. See note 17 of the Group’s financial statements for further details. 124 IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 ADVISERS AWARDS Financial and nominated adviser and broker Canaccord Genuity Limited 88 Wood Street London EC2V 7QR Share registrar Link Asset Services The Registry 34 Beckenham Road Beckenham BR3 4TU Design Group was delighted that Impact Innovations, acquired in August 2018, have been awarded Walmart’s Celebration and Seasonal ‘Supplier of the Year’ award for 2019. By phone: UK 0871 664 0300, Overseas +44 (0) 371 664 0300 By email: enquiries@linkgroup.co.uk Visit us online at thedesigngroup.com Auditor KPMG LLP Altius House One North Fourth Street Milton Keynes MK9 1NE Public relations Alma PR 71‑73 Carter Lane London EC4V 5EQ Registered office No 7, Water End Barns Water End Eversholt MK17 9EA IG Design Group plc is registered in England and Wales, number 1401155 Designed and produced by www.lyonsbennett.com The paper used in this report is produced using virgin wood fibre from well‑managed forests with FSC© certification. All pulps used are elemental chlorine free and manufactured at a mill that has been awarded the ISO 14001 and EMAS certificates for environmental management. The use of the FSC© logo identifies products which contain wood from well‑managed forests certified in accordance with the rules of the Forest Stewardship Council. Printed by CPI Colour, an FSC© and ISO 14001 accredited company, who is committed to all round excellence and improving environmental performance as an important part of this strategy. IG Design Group plcANNUAL REPORT AND FINANCIAL STATEMENTS 2019 I G D e s i g n G r o u p p l c A N N U A L R E P O R T A N D F I N A N C I A L S T A T E M E N T S 2 0 1 9 IG Design Group plc No 7 Water End Barns Water End Eversholt MK17 9EA T +44 (0)1525 887 310 thedesigngroup.com 

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