M&C Saatchi
Annual Report 2013

Plain-text annual report

Annual Report 2013 Words Page 3 Pictures Page 9 Numbers Page 19 1 2 RESULTS REVENUE +5% PROFIT +8% EARNINGS +15% EPS +11% All on a pro forma basis as defined in note 3. 3 4 NEW BUSINESS BASF DOUWE EGBERTS COMPARETHEMARKET HMG CYBER SECURITY LAND ROVER O2 BOOTS DE BEERS RBS ALLIANSEN CARLSBERG LG SPP VIASAT MINI CITY OF CAPE TOWN THE DEMOCRATIC ALLIANCE HEINEKEN PRIMUS VOLTAREN 10X GUINNESS IMAGE NATION MUBADALA SENAAT MICROSOFT 1MALAYSIA JAGUAR LAND ROVER SINGAPORE TOURISM BOARD CITYMD KIND HEALTHY SNACKS PROFOOT GENERAL ELECTRIC PERNOD RICARD CEREBOS GUARDIAN LIFE JOHN LEWIS MAGNERS NORTH FACE PERNOD RICARD SUNCORP WAGAMAMA 5 6 Chairman The year has seen progress on most fronts. Revenue1 up 5%, profit1 up 8% and EPS1 up 11%. M&C Saatchi Mobile and LIDA our CRM agency, had an outstanding year. David and Jamie will go into the detail behind these headline figures. But this movement is all in the right direction. Shareholders will know that we sold just over 75% of our interest in Walker Media to the Publicis Groupe in November. The board decided that for Walker Media and its people to grow, to attract the major global players, it needed the international clout and buying power that the world’s largest agency can offer. It is our hope that our remaining 24.9% will be worth more than the 100% of Walker we used to own. By way of precedent, in 2010, we reduced our shareholding in Talk PR from 100% to 51%. The PBT then was £149k. Three years later, in 2013, the PBT is £583K. In halving our share, our income increased by 70%. Investors will also know that more than half of the £32 million Walker proceeds were returned to shareholders by way of a share buyback. In order to avoid directors’ shareholding going above 29%, triggering a takeover, we also scaled down our holding. I’d like to thank Marcus Anselm our advisor at Clarity, for successfully steering us through this deal. It seems fair to report that after some years of seeing our share price becalmed in the doldrums in spite of rising PBT, EPS etc, investors now seem to have taken to our story. Our strategy of New Business and New Businesses marches on. Some of the work that our companies round the world are producing is remarkable. A small sample is included after this statement. The quality of the work is our great asset. It is the spark that attracts customers to our clients and clients to our companies. Jeremy Sinclair Chairman 19 March 2014 1 All on a pro forma basis as defined in note 3. 7 8 Europ Assistance The Milan agency achieved worldwide coverage for its insurance client Europ Assistance. An inept submarine crew find themselves surfacing near the Duomo in the centre of Milan. This resulted in 80,000 people visiting the event, 5,000 going to the store, 5,000,000 impressions on Twitter and an estimated worldwide reach of 100,000,000. youtube.com/watch?feature=player_embedded&v=BePXj5CYVVM Amnesty International The Sydney agency graphically showed how signing a petition can save a life. This Arms Trade Treaty campaign produced 15,000 new Amnesty members. 34,000 signatories, which were handed to the Australian Foreign Minister, which in turn became part of 621,833 signatures presented to UN Secretary General Ban Ki-moon. On April 3rd 2013, the UN passed the first ever Global Arms Trade Treaty. mcsaatchi.com/amnesty-international Virgin Holidays The UK Agency invented ‘The Tanuary Sale’ to promote Virgin Holidays during their key winter sales period. EE M&C Saatchi PR demonstrated the brilliance of EE’s technology by having ‘fanbots’ talking to the stars on the red carpet at the BAFTA’s. EE customers (fans) at home talked (via the robots) to Lily Allen and Michael Sheen. They also spoke to: Helen Mirren, Judi Dench, Amy Adams, Ron Howard, Steve Coogan, John Ridley, Barkhad Abdi, Will Poulter, Léa Seydoux, George Mackay, Tinie Tempah, Laura Mvula, Christoph Waltz, Stanley Tucci, Douglas Booth, David Morrissey, Ruth Wilson, Luke Evans, Samantha Barks, Claudia Winkleman and David Gandy. youtube.com/watch?v=K8W51IpdauU Tourettes Action The company’s star performer, LIDA, won awards and praise for their email for Tourettes Action. In order to bypass the filters that would exclude the sort of message that demonstrates what it is like to suffer from this disease, they had the brilliant idea to turn the offending words on their heads. The result was a forwarding rate of 25%, a doubling of the charity’s engagement rate to 18% and an estimated 88,659 impressions, from one email. tourettes-action.org.uk/breakthroughemail Strategic report 19 Chief Executive Summary of results 2013 saw another strong performance with revenue momentum and earnings growth. We have monitored the 2013 results on a pro forma basis, this assumes we have owned Walker Media for the full year (see note 3). On this basis Headline revenues increased 4.7% (6.5% in constant currencies). The overall Group headline profit before tax advanced an impressive 8% to £18.6m. Headline net earnings rose 15% to £11.0m, aided by a reduced corporation tax rate (30.0% in 2013, compared with 32.4% in 2012). UK (Excluding Walker Media) Revenue in the UK was up 13%, with both CRM and Mobile particularly strong. UK headline operating profit improved 12% on 2012. Our success with new business, including HMG Cyber Security, Land Rover, O2 and the Boots, De Beers and RBS digital business more than offset the loss of Dixons in January 2014. Our international capabilities were recognised by BASF and Douwe Egberts, both of whom appointed us globally. Our CRM offering through LIDA remains outstanding and they deservedly won Customer Engagement Agency of the year. We are now exporting CRM and PR to our overseas offices, alongside Sport & Entertainment and Mobile. Our disciplined approach to cost and margins resulted in the headline operating margin improving slightly to 16.2% (2012: 16.1%). Europe European revenues increased 20% year on year. Operating profit fell 18%, impacted by the investment associated with opening our Stockholm office. Stockholm has started well and clients include Alliansen, Carlsberg, LG, SPP and Viasat. In spite of a difficult advertising market the French office successfully won the Mini account in October. Additionally, we are benefitting from PR and digital diversification. Germany and Italy continue to perform well. Middle East and Africa Revenues increased 22% with strong contributions from both Cape Town and Johannesburg. Headline operating profit was up 59% but the headline operating margin remained low due to investment in Abu Dhabi. Key new business wins in the year were the City of Cape Town, the Democratic Alliance, Heineken, Primus, Voltaren and 10X Investments. We have formed a new unit to service a growing African market and they are working with Guinness in Ghana. We have strengthened the management in Abu Dhabi and they have been looking to build revenues beyond the Etihad account. Projects won in the second half came from Image Nation, Mubadala and Senaat. 20 Asia and Australasia In Asia and Australasia, revenue was impacted by currency headwinds, down 10% (5% in constant currencies), and the channelling of our Chinese revenues through our new associate, aeiou. Headline operating profit for the region rose 29% with headline operating margin up to 9.2%. The improved profitability came largely from the successful merger with aeiou in China. aeiou are proving a valuable addition to the network and have already started winning business, adding some Microsoft business. Another key driver of the increased profitability was an improving New Zealand office, which won some Government work whilst significantly downsizing their cost base. Malaysia continued to excel and had another very good year with key client wins including 1Malaysia. Japan and India both returned modest profits. We are looking for a new Indian partner as an associate to bolster our operation there. Singapore also made a small profit in their second year of trading, winning Jaguar Land Rover and the Singapore Tourism Board as well as continuing to win Government work. The Australian business responded quickly to the loss of the David Jones account, protecting profits through cutting costs accordingly. Americas Revenues increased 31% with a small operating loss of £90k as a result of our investment in New York office, which continues to be an invaluable asset for global pitches. The team there have focused on developing key relationships and wins include CityMD, Kind Healthy Snacks and Profoot as well as projects from General Electric and Pernod Ricard. We made good progress in Los Angeles and opened a Mobile office in San Francisco. Additionally, we are upgrading our São Paulo office, replicating the investment approach we took in China, and we have found a strong independent agency in which we plan to take a 20% shareholding. Clear Clear had a much improved year following a restructure undertaken in the fourth quarter of 2012. Clear’s operating profit improved threefold, from £0.3m to £0.9m as a result of a streamlined cost base, and new client wins included Cerebos, Guardian Life, John Lewis, Magners, North Face, Pernod Ricard, Suncorp and Wagamama. Their new business pipeline remains promising, fuelled by their Brand Desire research. 21 Chief Executive Continued Discontinued operations’ Walker Media Walker Media saw a small 3% headline revenue increase, though planned resource investment saw headline operating profit (excluding the impact of Group recharges) decrease 10.1% to £5.0m for the full year. On 27th November last year, we sold 75.1% of our shareholding in Walker Media to Publicis. The strategic rationale for this was clear; in all our businesses we look for entrepreneurial competitive advantage. However, one exception is media buying, where scale is a critical factor and we have been increasingly unable to compete with the larger groups. We very much believe in our media leadership and talent. During 2013 we therefore sought a new home for Walker Media, with the objectives of seeking a good price, retaining a 24.9% stake and developing a worldwide media partnership. This led to the successful sale to Publicis and we are satisfied that with the support of a large group’s media buying infrastructure that our investment will continue to grow. Following on from this sale, on 23rd January 2014 we returned a majority of the proceeds to shareholders by way of a share buyback. Outlook 2013 was another year of outstanding progress for M&C Saatchi. Our proven strategy of winning new business and starting new businesses continues to deliver with the Group producing record revenue and profits. The strategic sale of 75% of Walker Media, and the current strong performance across the Global Network positions us well for the future. David Kershaw Chief Executive 19 March 2014 22 Finance Director Objectives and strategic priorities Key performance indicators The Group manages its operational performance through a number of key performance indicators: • Revenue growth, both regionally and within marketing disciplines; • Continual improvement of operating margins; • Enhancement of net cash from operating activities; • Earnings per share growth; and • Improvement of the talent levels within the Group, in particular our creative capabilities, as well as the reputation of all our businesses. Operating profit and margin At a Group level, we have monitored results on a pro forma basis, which assumes we held Walker Media for the full year. Our focus on revenue growth and margin improvement leaving our local CEOs to manage their cost base to their revenues. This local focus on cost has helped increase operating margins with our headline operating margin being 10.4% (2012: 10.1%). 2013’s headline operating margin is after the investment of £2.0m (2012: £1.5m) in three new offices (Abu Dhabi, New York and Stockholm). Ignoring the impact of these investments, the like-for-like 2013 headline operating margin improved to 11.5% (2012: 10.9%). Headline revenues increased 4.7% in 2013 to £177.4m (2012: £169.5m). Excluding currency movement, the main influence being the positive effect of a strengthening of sterling against the US dollar, the South African rand and the Australian dollar, the like-for-like revenue increase was 6.5%. This resulted in headline operating profit increasing 8% to £18.5m (2012: £17.1m). Non-headline operating profit increased to £16.7m (2012: £15.8m) with a charge of £1.8m (2012: £1.3m) for non-headline items. Headline results The Group has used a pro forma headline basis to describe its results; this is not a defined term in IFRS. The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill, but excluding software) acquired in business combinations, changes to contingent and deferred consideration taken to the income statement; impairment of investment in associate; and fair value gains and losses on liabilities caused by our put and call option agreements. Headline results treat discontinued operations as if they had not been disposed. See note 3 for a reconciliation of non-headline to headline results. 23 Finance Director Continued Statutory results Leaving our improved trading performance aside, the reduced year-on-year profit before tax of £8.6m and basic earnings per share reduction was in the most part caused by the large increase in our share price over 2013 from £1.805 to £3.33 that caused a £15.5m accounting charge for minority put options (2012: £4.4m) (note 27), offset by £6.5m effect disposal of 75% of Walker Media and a reduced impairment charge of £2.2m. The Group’s continuing operations, which exclude Walker Media, achieved revenue of £162.0m (2012: £154.5m) a growth of 5%. Due to the minority put option charge the continuing operations made a loss before tax of £2.6m (2012: profit £4.6m), and basic EPS was (13.0)p (2012: (2.3)p). Amortisation and impairment of acquired intangibles We have reviewed the carrying values for intangible assets at the end of 2013. As can be seen in note 17, apart from Clear, the other carrying values are significantly above the recoverable amounts in all cash generating units (CGU). Financial income and expense The Group’s headline net interest receivable was £158k (2012: £23k). There was no significant change in the interest expense incurred on the Group debt. Minority put option revaluations are excluded from the headline results as the charge can vary significantly each year and does not reflect the business’s underlying performance. The accounting of this produces counterintuitive effects, with increases in our share price and increases in the actual or expected performance of our subsidiaries with put options, creating a charge to our accounts and reducing our profits. The £15.5m charge for non-headline fair value adjustment to minority put option liabilities was almost entirely caused by our share price movement in 2013, which increased 85% from £1.805 as at 1st January to £3.333 as at 31st December. Further details can be seen in note 27. 24 Tax The tax rate on headline profit before tax was 30.0% (2012: 32.4%). This was in spite of our investment in new offices increasing to £2.0m (2012: £1.5m). The Group does not recognise a deferred tax asset on these losses until the future profits of these businesses are probable (note 14). As these offices become profitable, we will see a positive effect on the tax rate, which will be enhanced in New York where we can access the historic losses that we incurred there. Otherwise, the Group benefited from lower rates in the UK and improved profitability from some of the newer offices utilising losses brought forward. Due to the accounting charge for minority put options, the tax rate on statutory profit before tax was 61.2% (2012: 54.2%) Non controlling interest The proportion of headline profits attributable to non controlling shareholders was almost unchanged at £2.0m (2012: £2.1m). Dividend As part of a progressive dividend policy, the Board is proposing to pay a final dividend of 4.24p per share (2012: 3.85p), giving a total dividend of 5.45p compared to 4.95p in 2012, which is an increase of 10% compared with our earnings growth of 15%. The final dividend will be paid, subject to shareholder approval at the 11 June 2014 AGM, on 4 July 2014 to shareholders on the register at 6 June 2014. Net assets, cash flow and banking arrangements Net assets reduced to £50.8m (2012: £56.2m) mainly due the effect of share price on value put option liability. Cash net of bank borrowings at 31 December 2013 was £33.2m compared to £17.9m at 31 December 2012. The Group continued to generate cash which it used to make small tactical acquisitions and fund new offices. The 2013 year-end balance includes the benefit of the disposal of 75.1% of our shareholding in Walker Media. This was completed on 27th November 2013 and resulted in a net cash receipt of £15.1m. The Group subsequently undertook a tender offer which completed on 23rd January 2014, resulting in 6,337,800 ordinary shares being bought back at a price of £3.35 each for a total cost of £21.2m. As part of this exercise, the Group renewed its banking covenants with RBS on 21st November 2013. These comprise a revolving credit facility totalling £14.5m, which has been agreed to 30 April 2017. 25 Finance Director Continued Capital expenditure Total capital expenditure for 2013 was flat at £2.8m (2012: £2.8m). The main components of this spend were the refurbishment of some new additional office space in London, as we expanded into additional offices within Golden Square. In addition, there was some IT investment across the Group as well as expenditure to accommodate our 6% increase in staff. Associates The return from our established associates was a modest loss of £21k (2012: profit of £91k). Our share of losses from M&C Saatchi SAL, our associate that covers the Middle East and North Africa region, was £152k (2012: profit of £102k). In Asia and Australasia, our share of profits from associates of £67k (2012: nil) came mainly from aeiou, our new associate in China, whilst our share of our European associates based in Russia and Spain was a profit of £23k (2012: loss of £88k). The profit share of our UK associates, Milk Data Strategy and Human Digital, was £41k (2012: £77k). Long term incentive plan On 4 February 2013, we announced that the conditional share awards granted to four of the Company’s Executive Directors on 14 October 2010 under the Company’s Long Term Incentive Plan vested on 31 December 2012, in accordance with the scheme’s rules. The awards reflect the achievement of targets for both share price performance and total shareholder return conditions compared with the Company’s listed peer group. M&C Saatchi share price increased 123% from 81p as at 31 December 2009 to £1.805 as at 31 December 2012. In addition, M&C Saatchi was ranked first among the 15 comparator companies for total shareholder return. When the Long Term Incentive Plan was adopted, each of the participants paid £97,250 to participate in the scheme. This sum was not refundable in the event that the vesting conditions were not met. As a result of the vesting, a total of 3,546,932 M&C Saatchi plc ordinary shares were awarded to the following M&C Saatchi Directors: Jeremy Sinclair, David Kershaw, Maurice Saatchi and Bill Muirhead, with each Director receiving 886,733 shares. Principal activity, trading review and future developments See Directors’ Report on page 30. 26 Principal risks and uncertainties Client losses hurt, although some turnover over time is normal and expected. Losses can happen for a variety of reasons. Our client profile is in line with those of our major competitors, and we continue to attract new clients on the basis of our creative excellence, the commitment of our people and our unique portfolio of services. There is also the risk, as a result of client cash shortages (caused both by economic and political factors), that budgets and fees are reduced or clients stop trading or run out of funding after work has been commissioned. As our offerings develop to reflect clients’ changing marketing mix and cross selling opportunities, there is reduced visibility of future income. The other risks the Group faces are financial (details of which can be seen in note 5 of the financial statements), the risk that key staff leave, and the risk that regulatory and legal changes affect our trading or ownership structures. Strategic report approval By order of the Board Jamie Hewitt Finance Director 19 March 2014 27 Board Executive Directors Jeremy Sinclair Chairman David Kershaw Chief Executive Non Executive Directors Lloyd Dorfman Non Executive Director Adrian Martin Non Executive Director 28 Maurice Saatchi Executive Director Bill Muirhead Executive Director Jamie Hewitt Finance Director Jonathan Goldstein Non Executive Director 29 Directors’ Report The Directors submit their report together with the audited financial statements of the Group and Company for the year ended 31 December 2013. Results and dividends The consolidated income statement on page 38 shows the result for the year. The Directors approved an interim dividend of £825,000 (2012: £697,000) and recommend a final dividend of 4.24p pence totalling £2,629,000 (2012: £2,596,000). Principal activity, trading review and future developments The principal activity of the Group during the year was the provision of advertising and marketing services. The review of trading, future developments and key performance indicators (being revenue growth, disposal of Walker Media, headline operating margin, headline profit before tax, headline tax rate, and cash generation) is on pages 7 to 27. Other risks and uncertainties The Strategic Report deals with the principal risks and uncertainties. The Group trades internationally both through its local offices and via direct contracts in countries that we do not have offices. This trade exposes the Group to foreign exchange risk, political risk and in some locations physical risk. Other risks the Group is exposed to include client credit risk; the risk that the financial markets cause liquidity risk in addition to this client risk (given we have financial services clients); and cash flow risks. The Group mitigates such risks through monitoring, reviewing the available information and management’s judgement on contractual terms. Further details of our risks and risk management can be seen in note 5. Going concern The Directors have a reasonable expectation that the company has adequate resources to continue in operational existence for the foreseeable future. The Directors continue to adopt the going concern basis in preparing the annual financial statements. The company’s business activities, together with the factors likely to affect its future development, performance and position is set out in this Annual Report. 30 Financial instruments Details of the use of financial instruments by the Group are contained in notes 23 to 25 of the financial statements. Political contributions During the year the Group made no political donations (2012: £1,000). Directors The names of the Directors are given on pages 28 and 29. Insurance The Company purchases insurance to cover its directors and officers against costs they may incur in defending themselves in legal proceedings instigated against them as a direct result of duties carried out on behalf of the Company. Substantial shareholdings As at 18 March 2014 the Company had been notified by shareholders representing 3% or more of issued share capital of the following interests: Number of shares Aviva plc & its subsidiaries David Kershaw Bill Muirhead Maurice Saatchi Jeremy Sinclair Herald Investment Trust plc Hargreave Hale RWC 6,920,090 4,127,060 4,127,060 4,127,060 4,127,060 4,039,900 3,050,814 2,948,131 % 11.2% 6.7% 6.7% 6.7% 6.7% 6.5% 4.9% 4.8% Regularly updated details of the Directors and substantial shareholders can be found on our corporate website www.mcsaatchiplc.com. 31 Directors’ Report Continued Events since the end of the financial year On 23 January 2014 the Company acquired by way of a tender offer and cancelled 6,337,800 of its 1p Ordinary shares, returning £21,231,630 to shareholders. We have been informed that the shareholders of 20% of the Group’s Australian subsidiary wish to put their shares. This obligation will be fulfilled in July 2014 in accordance with the rules of their put option. The Directors are not aware of any other events since the end of the financial year that have had, or may have a significant impact on the Group’s operations, the results of those operations, or the state of affairs of the Group in future years. Employees & equal opportunities The Group’s equal opportunities policy is not to discriminate on any grounds other than someone’s ability to work effectively. We will make reasonable adjustments to working arrangements or to a physical aspect of the workplace. The Group recognises that its principal asset is its employees and their commitment to the Group’s service, standards and customers. Decisions are made wherever possible in consultation with local management. Communication methods to employees vary according to need and local business size and can include all methods of communication. 32 Treasury shares At the Annual General Meeting (AGM) in 2013 the Directors were given the authority to purchase up to 6,337,800 of its ordinary shares. The Directors will seek to renew this authority at the next AGM. During the year the Company held 700,000 of its ordinary shares (‘treasury shares’). The Directors will use them to fulfil option obligations at a later date. Directors’ power to issue shares At the AGM in 2013 the directors were given the authority to issue up to 42,718,400 of its ordinary shares of which 6,337,800 were approved to be issued for cash. During the year the Company issued 4,961,475 shares to fulfil options and to acquire equity (note 29). The Company did not issue any shares for cash. Agreements that vest on change of control Depending on the circumstance, some of our put option agreements vest on change of control. Directors’ responsibilities The Directors are responsible for preparing the Annual Report, the Directors’ 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. As required by the AIM Rules of the London Stock Exchange, they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the EU and applicable law, and have elected to prepare the parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). 33 Directors’ Report Continued Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent company and of their profit or loss for that period. In preparing each of the Group and parent company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the European Union; and • 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. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities. Website publication 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. 34 Auditors All the current Directors have taken all the steps that they ought to have taken to make themselves aware of any information needed by the Company’s auditors for the purposes of their audit and to establish that the auditors are aware of that information. The Directors are not aware of any relevant audit information of which the auditors are unaware. KPMG has instigated an orderly wind down of KPMG Audit Plc as a result of an internal reorganisation and requested that going forward the audit is instead undertaken by KPMG LLP (an intermediate parent of KPMG Audit Plc). KPMG Audit Plc will not therefore be seeking re-appointment as auditor of the Company and in accordance with the Companies Act 2006, a resolution proposing the appointment of KPMG LLP as our auditors will be put to the 2014 AGM. By order of the Board Andy Blackstone Company Secretary 19 March 2014 35 Remuneration Report Policy on Directors’ remuneration Attracting and retaining high calibre executives is a key Company objective. We seek to reward them in a way that encourages the creation of value for shareholders. Directors’ pension arrangements The Company contributes to the Directors’ money purchase pension schemes. Directors’ contracts All executive Directors listed in the remuneration report have service contracts with 12 month notice periods. All non Executive Directors have contracts with a nil to 30 day notice period dependent on the circumstances. Directors’ options Jamie Hewitt Scheme1 LTIP Maximum M&C Saatchi Plc shares awardable 110,759 Directors’ interests in subsidiaries Scheme1 New LTIP New LTIP New LTIP New LTIP Shares in M&C Saatchi Worldwide Ltd 55,675 B shares 55,675 B shares 55,675 B shares 55,675 B shares Scheme1 2012 LTIP Shares in M&C Saatchi Network Ltd 153,000 G shares David Kershaw Bill Muirhead Maurice Saatchi Jeremy Sinclair Jamie Hewitt 1 See note 30. New LTIP In 2010, each of the four participants paid £97,250 for the award. This would not have been refundable if the share price hurdles and a total shareholder return (TSR) conditions were not met. During the year 3,546,932 (2012: nil) M&C Saatchi plc shares were issued in return for Directors’ M&C Saatchi Worldwide Ltd A ordinary shares. The Directors will receive further M&C Saatchi plc shares for their M&C Saatchi Worldwide Ltd shares if the Company’s average ninety day closing mid-market share price as at 31 December 2014 is greater than or equal to 198.9p. If this condition is fulfilled then the participants are entitled to receive an award worth, in aggregate, ten percent of the Company’s increase in market capitalisation above its 31 December 2013 value of £114.9m (i.e. 181.4p share price).The award causes an accounting charge of £156,000 (2012: £653,000). 2012 LTIP The 2012 LTIP was issued on 19 January 2012 when the Company’s share price was 123.5p. Each participant paid the fair market price for the award of £1,530. The award can be vested once at either 31 December 2014, 31 March 2015 or 30 September 2015. The condition for vesting is that the Company’s share price is greater than or equal to 200.0p. The maximum number of the Company’s shares awarded is equal to the number of M&C Saatchi Network Ltd G shares issued; this award reduces as the share price increase. The accounting charge per this arrangement is £19,000 (2012: 11,000). LTIP The LTIP award was issued in October 2010. The maximum award will vest if, over three years, the headline diluted earnings per share grows at 10% plus RPI or more. If the headline diluted earnings per share grows by 3% plus RPI or more, but less than 10% plus RPI, the award will vest proportionately between 30% and 100%. At a headline diluted earnings per share growth of less than 3% plus RPI, the award will not vest. Other benefits No Director of the Company has received or become entitled to receive a benefit (other than a fixed salary as an employee / consultant of the Company, the options indicated in this report, or a benefit included in the aggregate amount of remuneration shown in the financial statements) by reason of a contract made by the Company or a related corporation of which he is a member or with a Company in which he has a substantial financial interest. By order of the Board Andy Blackstone Company Secretary 19 March 2014 36 2013 Directors David Kershaw Bill Muirhead Maurice Saatchi Jeremy Sinclair Jamie Hewitt Total Non executive directors Lloyd Dorfman Adrian Martin Jonathan Goldstein Total TOTAL REWARDS 2012 Directors David Kershaw Bill Muirhead Maurice Saatchi Jeremy Sinclair Jamie Hewitt Total Non executive directors Lloyd Dorfman Adrian Martin Jonathan Goldstein Total TOTAL REWARDS Basic salary £000 Bonus £000 Benefits in kind1 £000 Pension £000 374 325 374 374 220 1,667 40 40 40 120 1,787 – – – – – – – – – – – 52 52 47 50 81 282 – – – – 282 1 49 – – 15 65 – – – – 65 Total £000 427 426 421 424 316 2,014 40 40 40 120 2,134 Basic salary £000 Bonus £000 Benefits in kind1 £000 Pension £000 Total £000 374 325 374 374 220 1,667 40 40 40 120 1,787 – – – – – – – – – – – 54 55 52 49 80 290 – – – – 290 1 49 – – 12 62 – – – – 62 429 429 426 423 312 2,019 40 40 40 120 2,139 37 1 Benefits in kind include car allowances and permanent health insurance benefit. Consolidated income statement Continuing operations 2012 £000 290,948 Discontinued operations* 2012 £000 211,790 Total 2012 £000 502,738 154,476 (143,895) 10,581 15,010 (9,836) 169,486 (153,731) 5,174 15,755 – – – 116 – 5,290 91 (1,552) – 422 (4,835) 9,881 (1,355) (5,357) 3,935 4,524 3,935 – 3,935 6.21p 5.73p 2,463 2,061 4,524 3.89p 3.59p 17,068 17,182 9,560 15.10p Year ended 31 December Billings Note Revenue Operating costs Operating profit Share of results of associates and joint ventures Impairment of associate Gain on disposal of discontinued operations Finance income Finance costs (Loss) / profit before taxation Taxation (Loss) / profit for the year Attributable to: Equity shareholders of the Group Non controlling interests (Loss) / profit for the year Earnings per share Basic (pence) Diluted (pence) 3 6 3 9 20 16 10 11 3 13 3 3 3 3 3 Headline results** Operating profit Profit before tax Profit after tax attributable to equity shareholders Basic earnings per share (pence) Continuing operations 2013 £000 Discontinued operations* 2013 £000 Total 2013 £000 320,288 162,039 (149,282) 12,757 163 – – 376 (15,852) (2,556) (4,207) (6,763) (8,610) 1,847 (6,763) 198,618 518,906 13,562 175,601 (9,588) (158,870) 3,974 16,731 – – 163 – 7,048 117 – 7,048 493 (15,852) 11,139 8,583 (1,046) (5,253) 10,093 3,330 10,093 – 10,093 1,483 1,847 3,330 91 (1,552) – 306 (4,835) 4,591 (4,002) 589 (1,472) 2,061 589 (13.03)p (13.03)p 15.27p 14.38p 2.24p 2.11p (2.32)p (2.32)p 18,460*** 18,597*** 11,033*** 16.69p*** * The results of Walker Media have been presented as a discontinued operations (note 16). **The reconciliation of headline to statutory results above can be found in note 3. ***On a pro forma basis (note 3). The notes on pages 46 to 88 form part of these financial statements. 38 Consolidated statement of comprehensive income Continuing operations 2013 £000 Discontinued operations 2013 £000 (6,763) 10,093 Total 2013 £000 3,330 Continuing operations 2012 £000 Discontinued operations 2012 £000 589 3,935 Year ended 31 December (Loss) / profit for the year Other comprehensive income*: Exchange differences on translating foreign operations before tax Tax benefit Other comprehensive income for the year net of tax (1,302) – (1,302) – – – (1,302) – (1,302) Total comprehensive income for the year (8,065) 10,093 2,028 Total comprehensive income attributable to: Equity shareholders of the Group Non controlling interests (Loss) / profit for the year (9,912) 1,847 (8,065) 10,093 – 10,093 181 1,847 2,028 * There are no items in other comprehensive income that would never be reclassified to the income statement. The notes on pages 46 to 88 form part of these financial statements. (518) 56 (462) 127 (1,934) 2,061 127 Total 2012 £000 4,524 (518) 56 (462) – – – 3,935 4,062 3,935 – 3,935 2,001 2,061 4,062 39 Consolidated balance sheet At 31 December Non current assets Intangible assets Investments in associates Plant and equipment Deferred tax assets Other non current assets Current assets Trade and other receivables Current tax assets Cash and cash equivalents Current liabilities Bank overdraft Trade and other payables Current tax liabilities Other financial liabilities Deferred and contingent consideration Minority shareholder put option liabilities Net current assets Total assets less current liabilities Non current liabilities Deferred tax liabilities Other financial liabilities Minority shareholder put option liabilities Other non current liabilities Total net assets The notes on pages 46 to 88 form part of these financial statements. 40 Note 2013 £000 2012 £000 17 20 21 14 22 23 24 25 26 27 14 25 27 28 35,269 13,099 7,310 1,313 5,316 62,307 61,478 1,355 33,702 96,535 (115) (64,004) (3,552) (20) (420) (21,844) (89,955) 6,580 68,887 (486) (356) (16,325) (896) (18,063) 50,824 60,540 756 7,237 1,612 5,041 75,186 95,248 881 22,332 118,461 (84) (106,872) (3,809) (131) – (2,549) (113,445) 5,016 80,202 (669) (4,322) (17,933) (1,092) (24,016) 56,186 At 31 December Equity Equity attributable to shareholders of the Group Share capital Share premium Merger reserve Treasury reserve Minority interest put option reserve Non controlling interest acquired Foreign exchange reserve Retained earnings Total shareholders’ funds Non controlling interest Total equity Note 29 2013 £000 2012 £000 690 16,402 16,736 (792) (16,587) (1,532) 544 33,070 48,531 2,293 50,824 641 14,625 20,669 (792) (13,675) (1,085) 1,846 31,373 53,602 2,584 56,186 These financial statements were approved and authorised for issue by the Board on 19 March 2014 and signed on its behalf by: Jamie Hewitt Finance Director M&C Saatchi plc Company Number 05114893 The notes on pages 46 to 88 form part of these financial statements. 41 Consolidated statement of changes in equity At 1 January 2012 Acquisitions Acquired non controlling interest Issues of shares to minorities Impairment of New Zealand Subsidiary Share buyback of own equity from a non controlling shareholder Exchange rate movements Issue of minority put options Cancellation of minority put options Option exercise Share option charge Dividends Total transactions with owners Total comprehensive income for the year At 1 January 2013 Acquisitions Disposals* Exercise of put options Issues of shares to minorities Exchange rate movements Issue of minority put options Option exercise Share option charge Dividends Total transactions with owners Total comprehensive income for the year At 31 December 2013 Share capital £000 Share premium £000 Note 18 27 27 30 30 15 18 27 27 30 30 15 635 – 1 – – – – – – 5 – – 6 – 641 – – 5 – – – 44 – – 49 – 13,832 – 115 – – – – – – 678 – – 793 – 14,625 – – 1,281 – – – 496 – – 1,777 – 690 16,402 Merger reserve £000 21,194 – – – (525) Treasury reserve £000 (792) – – – – – – – – – – – (525) – 20,669 – (3,933) – – – – – – – (3,933) – 16,736 – – – – – – – – – (792) – – – – – – – – – – – (792) The definitions of the reserves reported in the above can be found in note 2. The notes on pages 46 to 88 form part of these financial statements. 42 MI put option reserve £000 Non controlling interest acquired £000 Foreign exchange reserves £000 Retained earnings £000 Non controlling interest in equity £000 Subtotal £000 (14,305) – 73 – – – – (480) 1,037 – – – 630 – (13,675) (1,661) – 447 (484) – (1,214) – – – (2,912) – (297) – (120) – – (668) – – – – – – (788) – (1,085) – – (447) – – – – – – (447) – (16,587) (1,532) 2,308 – – – – – – – – – – – – (462) 1,846 – – – – – – – – – – (1,302) 544 30,808 – – (11) 525 – – – 329 (686) 855 (2,910) (1,898) 2,463 31,373 – 3,933 – (170) – – (418) 290 (3,421) 214 1,483 33,070 53,383 – 69 (11) – (668) – (480) 1,366 (3) 855 (2,910) (1,782) 2,001 53,602 (1,661) – 1,286 (654) – (1,214) 122 290 (3,421) (5,252) 181 48,531 2,663 71 (18) 26 – (632) (61) – – – – (1,526) (2,140) 2,061 2,584 321 (100) – 417 (77) – (155) – (2,544) (2,138) 1,847 2,293 Total £000 56,046 71 51 15 – (1,300) (61) (480) 1,366 (3) 855 (4,436) (3,922) 4,062 56,186 (1,340) (100) 1,286 (237) (77) (1,214) (33) 290 (5,965) (7,390) 2,028 50,824 * Amounts were released from merger reserve to retained earnings on disposal of discontinued operations in respect of the investments that create the related merger reserve. See definition of terms in note 2. 43 Consolidated cash flow statement and analysis of net debt Year ended 31 December Revenue* Operating expenses* Operating profit (continuing)* Adjustments for: Operating profit from discontinued operations (note 16)* Depreciation of plant and equipment Loss on sale of plant and equipment Loss on sale of software intangibles Amortisation of acquired intangible assets Impairment of goodwill Amortisation of capitalised software intangible assets Equity settled share based payment expenses Operating cash before movements in working capital Decrease / (increase) in trade and other receivables (Decrease) / increases in trade and other payables Cash generated / (consumed) from operations Tax paid Net cash from operating activities Investing activities Acquisitions of subsidiaries net of cash acquired Disposal of discontinued operations, net of cash disposed of Acquisitions of investments Proceeds from sale of plant and equipment Purchase of plant and equipment Purchase of capitalised software Dividends received from associates Interest received Net cash from / (consumed) by investing activities Net cash from operating and investing activities The notes on pages 46 to 88 form part of these financial statements. 44 Note 2013 £000 162,039 (149,282) 12,757 2012 £000 154,476 (143,895) 10,581 3,974 2,233 23 – 900 – 143 290 20,320 5,464 (6,743) 19,041 (5,080) 13,961 (3,101) 15,082 (800) 20 (2,771) (90) 73 473 8,886 22,847 5,174 2,289 99 35 705 608 141 855 20,487 (5,717) 4,194 18,964 (5,178) 13,786 (3,199) – – 28 (2,652) (163) – 422 (5,564) 8,222 19 16 22 Year ended 31 December Net cash from operating and investing activities Financing activities Dividends paid to equity holders of the Company Dividends paid to non controlling interest Subsidiaries sale of own shares to non controlling interest Repayment of finance leases Inception of bank loans Repayment of bank loans Interest paid Net cash consumed by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate fluctuations on cash held Cash and cash equivalents at the end of the year Bank loans and borrowings NET CASH CAPITAL TOTAL CAPITALISATION (at 333.25p; 180.5p ) TOTAL CAPITAL GEARING RATIO * 2012 comparatives have been restated for discontinued operations (note 16). Gearing ratio and net cash are not defined under IFRS; see note 2. Note 15 2013 £000 22,847 (3,421) (2,544) 1 (42) 4,261 (8,200) (321) (10,266) 12,581 22,248 (1,242) 33,587 (356) 33,231 227,740 227,740 nil 2012 £000 8,222 (2,910) (1,526) 30 (214) 5,416 (4,755) (390) (4,349) 3,873 18,779 (404) 22,248 (4,322) 17,926 114,396 114,396 nil 45 Notes 1. Summary accounting policies Basis of preparation The Group’s financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union. In accordance with IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, the comparative income statement has been re-presented so that the disclosures in relation to discontinued operations relate to all operations that have been discontinued by the balance sheet date. Going concern Given the strength of the Group’s balance sheet, its net cash, the risks the Group faces (note 5) and expected trading performance the management believe it is correct to account for the Group as a going concern for foreseeable future. Headline results The Directors believe that the headline results and headline earnings per share provide additional useful information on the underlying performance of the business. In addition, the headline results are used for internal performance management, the calculation of rewards in the Group’s Long Term Incentive Plan (LTIP) scheme and minority shareholder put option liabilities. The term headline is not a defined term in IFRS. Our segmental reporting reflects our headline results in accordance with IFRS 8. The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill, but excluding software) acquired in business combinations, changes to contingent and deferred consideration taken to the income statement; impairment of investment in associate; and fair value gains and losses on liabilities caused by our put and call option agreements. Headline results treats discontinued operations as if they had not been disposed. Accounting developments and changes There are no significant accounting developments and changes during 2013 that affect these accounts. Other future developments are described in note 34. IFRS choices IFRS provides certain options available within accounting standards. Material choices we have made and continue to make, include the following: • Goodwill and intangible asset acquisition – the Group does not recognise the non controlling interests share of goodwill. • Timing of goodwill impairment reviews – occur at the end of each year following the conclusion of the budgetary process, or if a significant event occurs to indicate impairment. 46 Critical accounting policies Revenue recognition Billings comprises the gross amounts billed to clients in respect of commission based and fee based income together with the total of other fees earned. Revenue comprises commission and fees earned in respect of amounts billed. Revenue and billings is stated exclusive of VAT, sales taxes and trade discounts. Each type of revenue is recognised on the following basis: a) Project fees are recognised over the period of the relevant assignments or agreements, in line with incurred costs. b) Retainer fees are spread over the period of the contract on a straight line basis. c) Commission on media spend is recognised when the advertisements appear in the media. Employee benefits – share based compensation Certain employees receive remuneration in the form of share based payments, including shares or rights over shares. Share based payments include options issued to employees, phantom bonuses and other long term equity linked bonuses. Payments may be in the form of cash or equity. Minority shareholder put option liabilities Liabilities in respect of put option agreements that allow the Group’s subsidiaries’ equity partners to require the Group to purchase the non controlling interest are measured as liabilities on a gross basis at the present value of the exercise price; this is deemed a proxy for the fair value. The fair value of such put option liabilities is remeasured at each period end in accordance with IFRS 13. The movement in the fair value is recognised in the income statement as part of finance income or cost. The Group measures fair value as its best estimate of the amount it is likely to pay, should these put options be exercised by the non controlling interests, as a liability in the balance sheet. On inception of a put option, the liability is recognised on the balance sheet and a corresponding debit is included in the minority put option reserve (note 2). On exercise the liability is extinguished, and its related minority interest put option reserve is moved to the non controlling interest acquired reserve (note 2). Assets and liabilities in respect of put options held by shareholders in associates are accounted for as derivatives and not recognised until the Group gains control and fully consolidates the entity. Sensitivities to accounting estimates Our results and financial position are sensitive to assumptions made in determining accounting estimates, as set out below: Management are satisfied that the only possible changes in key assumptions, which would cause the recoverable amount of any of our CGUs to be below their carrying amount, is if Clear Ideas Ltd do not increase their future monthly profitability in line with their forecast, or other CGUs have a significant loss of clients. For all entities except for Clear Ideas Ltd (note 17), Management have tested the key assumptions on pre-tax discount rates and management forecasts and projections by adjusting them 50% and 20% respectively, which would not lead to impairment. The remaining accounting policies, details of IFRS 13 hierarchy’s and additional details on the above, are set out in note 34. 2. Definition of terms Foreign exchange reserve For overseas operations, results are translated at the average rate of exchange and balance sheets are translated at the closing rate of exchange. The average rate of exchange approximates to the rate on the date that the transactions occurred. Exchange differences arising from the translation of foreign subsidiary are taken to a separate component of equity. Such translation differences will be recognised as income or expense in the period in which the operation is disposed of. Gearing ratio Is equal to net debt divided by market capitalisation. Key management The Group has defined the key management as the M&C Saatchi plc Directors and the Executive Board. Net cash (debt) Cash and cash equivalents at the end of the year less external borrowings. Merger reserve Premium paid for shares above the nominal value of share capital, caused by the acquisition of more than 90% of subsidiaries’ shares. The merger reserve is released to retained earnings when there is a disposal or impairment charge or amortisation charge posted in respect of the investment that created it. Minority interest put option reserve Corresponds to the initial fair value of the liability in respect of the put options at creation. When the put option is exercised, the related amount in this reserve is taken to non controlling interest acquired reserve. All revaluations of the put option goes via the income statement to profit and loss reserve. Non controlling interest Contains the non controlling interest’s share of equity reserves in our subsidiaries. Non controlling interest acquired reserve From 1 January 2010 a non controlling interest acquired reserve is used when the Group acquires an increased stake in a subsidiary. If the stepped acquisition is due to a put option then the non controlling interest acquired reserve is equal to the minority interest put option reserve transferred less book value of the minority interest acquired. Otherwise the non controlling interest acquired reserve is equal to the consideration paid less book value of the minority interest acquired. If the equity stake in the subsidiary is subsequently sold then balances from this reserve will be taken to retained earnings. Retained earnings Cumulative gains and losses recognised. Share premium Premium paid for shares above the nominal value of share capital, where that premium was not taken to merger reserve. Treasury reserve Amount paid for own shares acquired. 47 Notes Continued 3. Headline results and earnings per share The analysis below provides a reconciliation between the Group’s statutory continuing results and the headline continuing results. Then between the headline continuing results and pro forma headline results, which assume that the discontinued operations continued as a 100% subsidiary. The pro forma headline results with full year consolidation of discontinued operations as a 100% owned continued operations have been what management have used for management and control. Continuing operations 2013 £000 Amortisation of acquired intangibles (note 17) £000 Note Fair value adjustments to minority put option liabilities (note 27) £000 4 6 9 20 16 10 11 4 13 162,039 12,757 163 – – 376 (15,852) (2,556) (4,207) (6,763) (1,847) – 900 – – – – 900 (230) 670 (134) – – – – – – 15,503 15,503 – 15,503 – Headline continuing operations 2013 £000 162,039 13,657 163 – – 376 (349) 13,847 (4,437) 9,410 (1,981) Discontinued operations 2013 £000 Full year effect of discontinued operations* £000 Pro forma headline and segmental results* £000 13,562 3,974 – – 7,048 117 – 11,139 (1,046) 10,093 – 1,824 177,425 829 18,460 (184) – (7,048) 14 – (6,389) (100) (6,489) – (21) – – 507 (349) 18,597 (5,583) 13,014 (1,981) (8,610) 536 15,503 7,429 10,093 (6,489) 11,033 Year ended 31 December 2013 Revenue Operating profit Share of results of associates & JV Impairment of associate Gain on disposal of discontinued operations Finance income Finance cost Profit before taxation Taxation Profit for the year Non controlling interests Profit attributable to equity holders of the Group * Unaudited. The Directors believe that the pro forma headline results and headline earnings per share provide additional useful information on the underlying performance. The pro forma headline result is used for internal performance management, calculating the value of subsidiary convertible shares and minority interest put options. The term pro forma headline is not a defined term in IFRS. The items that are excluded from headline results are the amortisation or impairment of intangible assets (including goodwill, but excluding software) acquired in business combinations, changes to contingent and deferred consideration taken to the income statement; impairment of investment in associate; and fair value gains and losses on liabilities caused by our put and call option agreements. Pro forma headline results treats discontinued operations as if they had not been disposed. 48 Continuing operations 2012 £000 Amortisation of acquired intangibles (note 17) £000 Note Impairment of goodwill & associate (note 16 & 20) £000 Fair value adjustments to minority put option liabilities (note 27) £000 4 6 9 20 16 10 11 4 13 154,476 10,581 91 (1,552) – 306 (4,835) 4,591 (4,002) 589 (2,061) – 705 – – – – – 705 (185) 520 (19) – 608 – 1,552 – – – 2,160 – 2,160 – – – – – – – 4,436 4,436 – 4,436 – Headline continuing operations 2012 £000 154,476 11,894 Total Headline and segmental results £000 Discontinued operations 2012 £000 15,010 169,486 5,174 17,068 91 – – 306 (399) 11,892 (4,187) 7,705 (2,080) – – – 116 5,290 (1,355) 3,935 – 91 – – 422 (399) 17,182 (5,542) 11,640 (2,080) (1,472) 501 2,160 4,436 5,625 3,935 9,560 Year ended 31 December 2012 Revenue Operating profit Share of results of associates Impairment of associate Gain on disposal of discontinued operations Finance income Finance cost Profit before taxation Taxation Profit for the year Non controlling interests Profit attributable to equity holders of the Group 49 Notes Continued 3. Headline results and earnings per share continued Basic and diluted earnings per share is calculated by dividing profit attributable to equity holders of the Group by the weighted average number of shares in issue during the year. Year ended 31 December 2013 Profit attributable to equity holders of the Group Basic earnings per share Weighted average number of shares (thousands) Basic EPS Diluted earnings per share Weighted average number of shares (thousands) as above Add – UK growth shares – Options – LTIP – 2012 LTIP – New LTIP – Dilutive put options** Total Diluted earnings per share*** Continuing operations 2013 £000 Discontinued operations 2013 £000 (8,610) 10,093 Pro forma headline and segmental results £000 11,033 Total 2013 £000 1,483 66,094 (13.03)p 66,094 15.27p 66,094 2.24p 66,094 16.69p 66,094 66,094 66,094 66,094 631 128 102 230 2,751 359 70,295 (3.03)p 631 128 102 230 2,751 359 70,295 14.38p 631 128 102 230 2,751 359 70,295 2.11p 631 128 102 230 2,751 359 70,295 15.70p 50 Year ended 31 December 2012 Profit attributable to equity holders of the Group Basic earnings per share Weighted average number of shares (thousands) Basic EPS Diluted earnings per share Weighted average number of shares (thousands) as above Add – UK growth shares – Options – LTIP – New LTIP Total Diluted earnings per share*** Continuing operations 2012 £000 Discontinued operations 2012 £000 (1,472) 3,935 63,317 (2.32)p – 6.21p Headline and segmental results £000 9,560 63,317 15.10p Total 2012 £000 2,463 – 3.89p 63,317 63,317 63,317 63,317 1,581 128 111 3,547 68,684 (2.32)p 1,581 128 111 3,547 68,684 5.73p 1,581 128 111 3,547 68,684 3.59p 1,581 128 111 3,547 68,684 13.92p **Apart from one entity, in 2013, all the other put options detailed in note 27 are non dilutive as the exercise price approximates fair value of the underlying non controlling interest. *** There is no dilutive effect on losses. 51 Notes Continued 4. Segmental information Segmental and headline income statement Year ended 31 December 2013 Revenue Operating profit excluding Group costs Group costs Operating profit Share of results of associates Financial income and cost Profit before taxation Taxation Profit for the year Non controlling interests Profit attributable to equity shareholders of the Group Headline basic EPS Discontinued operations (for year) £000 UK £000 Europe £000 Middle East and Africa £000 Asia and Australasia £000 Americas £000 Clear £000 Total £000 15,386 68,147 19,424 8,055 48,299 10,502 7,612 177,425 4,985 (185) 11,057 (4,546) 4,800 6,511 – 131 41 (45) 4,931 6,507 (1,146) (1,560) 3,785 – 4,947 (1,232) 1,902 (71) 1,831 23 (55) 1,799 (670) 1,129 (208) 376 – 376 (152) 104 328 (186) 142 (214) 4,438 (234) 4,204 67 37 4,308 (1,671) 2,637 (811) (90) (91) (181) – (19) (200) (137) (337) 509 919 – 919 – 5 924 (213) 711 (25) 23,587 (5,127) 18,460 (21) 158 18,597 (5,583) 13,014 (1,981) 3,785 3,715 921 (72) 1,826 172 686 11,033 16.69p Non cash costs included in operating profit: Depreciation Amortisation of software Share option charges Office location (176) – – (966) (38) (290) London London (229) (39) – Paris Berlin Madrid Geneva Milan Moscow Stockholm (172) (29) – (454) (14) – (82) (23) – (154) – – (2,233) (143) (290) Los Angeles São Paulo New York London New York Sydney Singapore Beirut Cape Town Johannesburg Abu Dhabi Sydney Melbourne Auckland Wellington New Delhi Mumbai Kuala Lumpur Hong Kong Beijing Shanghai Tokyo Singapore Segmental results are reconciled to the income statement in note 3. Our segmental and headline results are one and the same. The above segments reflect the fact that our business is run on an operating unit basis. In accordance with IFRS 8 paragraph 12 we have aggregated our operating units into regional segments. Clear has a different nature of service, and it is reported to the Board on a consolidated basis rather than on an office basis; as with other operating units, therefore, we have disclosed Clear as a separate segment. 52 Segmental and headline income statement Year ended 31 December 2012 Revenue Operating profit excluding Group costs Group costs Operating profit Share of results of associates Financial income and cost Profit before taxation Taxation Profit for the year Non controlling interests Profit attributable to equity shareholders of the Group Headline basic EPS Discontinued operations (for year) £000 UK* £000 Europe £000 Middle East and Africa £000 Asia and Australasia £000 Americas £000 Clear £000 Total £000 15,010 60,391 16,164 6,604 53,798 8,031 9,488 169,486 5,544 9,708 (370) (3,899) 5,174 5,809 – 116 77 (41) 5,290 5,845 (1,355) (1,601) 3,935 – 4,244 (1,231) 2,331 (71) 2,260 (88) (45) 2,127 (743) 1,384 (435) 237 – 237 102 15 354 (167) 187 (98) 3,443 (110) 3,333 – 14 3,347 (1,566) 1,781 (565) 66 (87) (21) – (38) (59) (52) (111) 255 276 – 276 – 2 278 (58) 220 (6) 3,935 3,013 949 89 1,216 144 214 21,605 (4,537) 17,068 91 23 17,182 (5,542) 11,640 (2,080) 9,560 15.10p Non cash costs included in operating profit: Depreciation Amortisation of software Share option charges (307) – – (811) (1) (855) Office location London London (250) (30) – Paris Berlin Madrid Geneva Milan Moscow Stockholm (144) (25) – (527) (61) – (79) (24) – (171) – – (2,289) (141) (855) Los Angeles São Paulo New York London Hong Kong New York Sydney Singapore Beirut Cape Town Johannesburg Abu Dhabi Sydney Melbourne Auckland Wellington New Delhi Mumbai Kuala Lumpur Hong Kong Beijing Shanghai Tokyo Singapore *The discontinued operations only affect the UK segment; these items have been restated. The discontinued operations is accounted for in sterling so is not affected by translation differences. 53 Notes Continued 4. Segmental information continued Segmental balance sheet Year ended 31 December 2013 Total assets Total liabilities Associates included in total assets Non-headline amortisation Capital expenditure Depreciation Year ended 31 December 2012 Total assets Total liabilities Associates included in total assets Non-headline amortisation Capital expenditure Depreciation UK discontinued £000 Note UK £000 – – 99,587 (18,588) Middle East and Africa £000 3,475 (3,068) Europe £000 14,542 (13,519) Asia and Australasia £000 Americas £000 Clear £000 Total £000 21,506 (17,371) 7,391 (8,462) 9,673 (4,312) 156,174 (65,320) 9,148 610 64 – 3,277 – – 13,099 – 24 (175) (630) 1,921 (967) – 205 (229) – 205 (172) (270) 230 (454) – 71 (82) – 51 (154) (900) 2,707 (2,233) UK discontinued £000 Note UK £000 Europe £000 58,544 (43,276) 70,909 (14,863) 12,102 (11,780) Middle East and Africa £000 5,316 (4,601) Asia and Australasia £000 Americas £000 29,403 (23,283) 5,484 (6,287) Clear £000 9,396 (3,874) Total £000 191,154 (107,964) 20 17 21 21 – 569 41 146 – – – 756 – 41 (307) (76) 1,692 (810) (65) 262 (250) – 340 (144) (220) 207 (527) (303) 91 (79) (41) 133 (172) (705) 2,766 (2,289) Reportable segment assets are reconciled to total assets as follows: 2013 £000 156,174 1,355 1,313 158,842 2012 £000 191,154 881 1,612 193,647 Segment assets Current tax asset Deferred tax asset Total assets per balance sheet 54 Reportable segment liabilities are reconciled to total liabilities as follows: Segment liabilities Deferred tax liabilities Current tax liabilities Current tax liabilities held for sale Other current liabilities and overdraft Other non current liabilities Minority shareholder put option liabilities Total liabilities per balance sheet Additional regional splits required for IFRS 8 2013 £000 (65,320) (486) (3,552) – (135) (356) (38,169) (108,018) 2012 £000 (107,964) (669) (2,937) (872) (215) (4,322) (20,482) (137,461) Year ended 31 December 2013 Revenue Non current assets Year ended 31 December 2012 Revenue Non current assets UK discontinued £000 13,562 – UK discontinued £000 15,010 26,522 UK £000 72,873 50,775 Europe £000 19,322 3,767 UK £000 65,366 36,608 Europe £000 16,867 3,679 Middle East and Africa £000 7,976 581 Middle East and Africa £000 5,888 694 Australia £000 37,847 4,447 Australia £000 41,723 4,420 Asia and New Zealand £000 12,113 662 Asia and New Zealand £000 14,571 838 Americas £000 11,908 762 Total £000 175,601 60,994 Americas £000 10,061 813 Total £000 169,486 73,574 55 Notes Continued 4. Segmental information continued Segmental income statement translated at 2012 exchange rates It is normal practice in our industry to provide like-for-like results. In the year we had not acquired any significant new businesses therefore the only difference in our like-for-like results is the impact from movements in exchange rates. Had our 2013 results been translated at 2012 exchange rate then our results would have been: Year ended 31 December 2013 Revenue Operating profit excluding Group costs Group costs Operating profit Share of results of associates Financial income and cost Profit before taxation Taxation Profit for the year Increase / (decrease) in 2013 results caused by translation differences UK discontinued £000 UK £000 Europe £000 Middle East and Africa £000 Asia and Australasia £000 Americas £000 15,386 68,147 18,560 9,123 50,845 10,771 4,985 11,057 1,819 (185) (4,546) (68) 4,800 6,511 1,751 – 131 4,931 (1,146) 3,785 41 (45) 6,507 (1,560) 4,947 23 (56) 1,718 (640) 1,078 475 – 475 (150) 122 447 (213) 234 4,711 (252) 4,459 63 38 4,560 (1,749) 2,811 (54) (99) (153) – (21) (174) (135) (309) Clear £000 7,650 Total £000 180,482 923 – 923 – 5 928 (214) 714 23,916 (5,150) 18,766 (23) 174 18,917 (5,657) 13,260 – – 51 (92) (174) (28) (3) (246) The key currencies that affect us and the average exchange rate used were: 2013 1.5643 4.9279 1.6212 15.0952 3.3772 1.1776 2012 1.5849 4.8926 1.5306 13.0054 3.0955 1.2332 US dollar Malaysian ringgit Australian dollar South African rand Brazilian real Euro 56 5. Risk and risk management M&C Saatchi plc have identified specific categories of business risk and developed policies for their management and control. These policies are kept under constant review as risk and risk perceptions change. Currency risk (see below, and note 23 and 24) Interest rate risk (note 12) Share price risk (note 27 and 30) Market risk (see below) Credit risk (note 23) Talent risk (Directors’ report) Income statement currency exposure The Group’s results are presented in sterling and are subject to fluctuation as a result of exchange rate movements. The Group continues to review its exposure to exchange rate movements and considers methods to reduce the exchange rate risk. 2013 profits would have changed as follows, had average exchange rates been changed by: Increase / (decrease) in profit before tax £000 Increase / (decrease) in profit after tax £000 (555) 679 (304) 373 Exchange rate +10% (10)% See note 4 for the income statement translated at prior year exchange rates. Market risk The Group does not have a substantial market share in any market. The key risk the Group is exposed to is the loss of clients. The Group has policies to monitor client feedback and act where there are issues. Largest clients as a % of total revenue Top client Top 10 Top 15 Top 30 2013 % 7.0 34.1 41.1 53.5 2012 % 5.7 32.9 39.5 52.5 Liquidity risk Centrally the Group ensures that bank facilities are available to meet the Group’s liquidity needs. Liquidity is monitored centrally and managed locally. Spare local cash is released to the centre by way of dividends and loan repayments. In managing its liquidity risk, management considers its net cash and minimises its gearing ratio, and where working capital is utilised to fund the business, management makes sure that the Group has sufficient bank facilities to cope with an unwinding of positive working capital flows and to fund the negative working capital effect of revenue growth. Our bank debt maturity analysis can be seen in note 25 and financial liability maturity analysis can be seen in note 24. Capital risk The Group’s capital reserves consist of all its equity reserves with the exclusion of the minority interest put option reserve. The Group maintains its capital reserves to safeguard the Group’s going concern, as well as providing adequate return to its shareholders. The capital reserves total £67,411k (2012: £69,861k). The Group minimises the amount of debt it uses to finance its activities, to reduce the risk to the shareholders. Excess working capital is used to reduce debt. Excess cash is used to invest or is returned to shareholders by way of dividend or through buying shares into treasury. Our key process for managing capital is regular Board reviews of our capital structure and needs. Key estimates Management’s estimates of the future profitability of the Group can be significantly affected by single account wins or losses, and to a lesser extent by the estimated phase of a project, exchange rates and underlying economic growth rates. We have therefore based our estimates on the budgets for the coming year and estimated growth rates and margins thereafter. Changes in these underlying assumptions could give rise to material adjustments as set out in the following notes: Note 17 – Intangible assets – Goodwill estimation of value in use; Note 27 – Minority shareholder put options liabilities; and Note 30 – Share based payments – Conditional share awards. Key judgements Management has made the following key judgements, which have a significant effect: deciding which of its leases are operating and which are finance leases; deciding which of its shareholder contracts are share options and which are put options; deciding to what extent tax losses are recognised as an asset in the balance sheet; useful lives of assets – tangible and intangible; recoverability of amounts receivable, and to use a discount to value an associate when it is created from selling a controlling stake in a subsidiary. Projections Projections take account of management’s view of the local operation’s future profitability, given expected market growth, inflation, exchange rates and rapidly growing / shrinking markets. They are based on our budgets for 2014. They are used in calculating the fair value of minority put options, management’s assessment of value in use calculations and in calculating the value of conditional share awards. IFRS 13 disclosures with respect of fair value have been detailed in note 34 and relevant notes. 57 Continuing operations 2013 £000 Discontinued operations 2013 £000 Total 2013 £000 6,082 3,506 9,588 112,034 46,836 158,870 2012 £000 107,234 46,497 153,731 Notes Continued 6. Operating costs Year ended 31 December Total staff costs Other costs Operating costs Other costs include: Loss / (profit) on exchange Amortisation of intangibles – Acquired intangibles – Capitalised software Goodwill impairment Depreciation of plant and equipment Loss on disposal of capitalised software Loss on disposal of fixed assets Year ended 31 December Operating lease rentals Plant Property Year ended 31 December Note 7 3 3 105,952 43,330 149,282 487 900 143 – 2,058 – 23 Total commitments Plant and equipment Commitments for future minimum lease payments under non cancellable operating leases, which fall due as follows: – Within one year – Between two and five years Property Commitments for future minimum lease payments under non cancellable operating leases, which fall due as follows: – Within one year – Between one and five years – Greater than five years 58 – 487 (40) – – – 175 – 900 143 – 2,233 – 23 2013 £000 304 5,699 6,003 2013 £000 705 141 608 2,289 35 99 2012 £000 356 6,753 7,109 2012 £000 660 786 801 509 1,446 1,310 12,861 21,310 19,860 54,031 6,904 21,787 24,608 53,299 7. Staff costs Staff costs (including Directors) comprise: Year ended 31 December Wages and salaries Social security costs Defined contribution pension scheme costs Other staff benefits Share based incentive plans Cash settled Equity settled Total staff costs Staff cost to revenue ratio Staff cost in respect of discontinued operations Staff numbers UK discontinued operations UK Europe Middle East and Africa Asia and Australia America Clear 2013 £000 95,665 10,404 2,892 2,617 111,578 166 290 456 112,034 64% 6,082 117 616 198 175 516 130 54 1,806 2012 £000 91,294 9,388 3,007 2,620 106,309 70 855 925 107,234 63% 5,883 104 552 165 120 602 91 74 1,708 Pensions The Group does not operate any defined benefit pension schemes. The Group makes payments, on behalf of certain individuals, to personal pension schemes. Payments of £2,931k (2012: £3,007k) were made in the year and charged to the income statement in the period they fall due. At the year end there were unpaid amounts included within accruals totalling £75k (2012: £114k). Key management remuneration Short term employee benefit Post employment benefit Share based payments Total 2013 £000 4,427 153 354 4,933 2012 £000 4,652 173 776 5,601 59 Notes Continued 8. Auditors’ remuneration Services provided by the Group’s auditors and network firms. Year ended 31 December Audit services Audit of the Company and its consolidated accounts Audit of the Company’s subsidiaries pursuant to legislation Other services provided by the auditors Taxation compliance services Taxation advisory services Other advice Total 9. Share of associates and joint ventures Year ended 31 December Share of associates’ profit before taxation Share of associates’ taxation 10. Finance income Year ended 31 December Bank interest receivable Other interest receivable Total interest receivable In respect of discontinued operations Total finance income 11. Finance costs Year ended 31 December Bank interest payable Interest payable on finance leases Total interest payable Fair value adjustments to minority shareholder put option liabilities (note 27) Total finance costs 60 2013 £000 100 187 287 7 33 1 41 328 2013 £000 195 (32) 163 2013 £000 173 203 376 117 493 2013 £000 (342) (7) (349) (15,503) (15,852) 2012 £000 100 182 282 14 5 15 34 316 2012 £000 120 (29) 91 2012 £000 282 24 306 116 422 2012 £000 (390) (9) (399) (4,436) (4,835) 12. Interest rate risk The Group is exposed to interest rate risk on both interest bearing assets and liabilities. The majority of interest paying and earning assets are exposed to UK inter bank rates. An analysis of net interest by our segmented geographic regions is provided in note 4. At the year end the Group had a £14.5m bank facility, which runs out in April 2017. The facility can borrow in sterling or euros. At 31 December 2013, £0.3m (2012: £4.3m) of this loan was drawn down. The Group regularly reviews its treasury structures to minimise commercial interest rate margins. 13. Taxation Year ended 31 December Current taxation Taxation in the year – UK – Overseas Withholding taxes payable Utilisation of previously unrecognised tax losses Adjustment for under provision in prior periods Total Deferred taxation Origination and reversal of temporary differences Recognition of previously unrecognised tax losses Effect of changes in tax rates Total Total taxation Continuing operations 2013 £000 Discontinued operations 2013 £000 Continuing operations 2012 £000 Discontinued operations 2012 £000 Total 2013 £000 Total 2012 £000 1,945 2,756 9 – 72 4,782 (658) 83 – (575) 4,207 1,046 – – – – 1,046 – – – – 1,046 2,991 2,756 9 – 72 5,828 1,784 2,916 – (147) 86 4,639 1,339 – – 268 1,607 3,123 2,916 – (147) 354 6,246 (658) (632) (245) (877) 83 – (575) 5,253 (11) 6 (637) 4,002 – (7) (252) 1,355 (11) (1) (889) 5,357 61 Notes Continued 13. Taxation continued The differences between the actual tax and the standard rate of corporation tax in the UK applied to profits for the year are as follows: Continuing operations 2013 £000 Discontinued operations 2013 £000 Continuing operations 2012 £000 Discontinued operations 2012 £000 Total 2013 £000 (2,556) 11,139 8,583 4,591 5,290 Year ended 31 December Profit before taxation Taxation at UK corporation tax rate of 23.25% (2012: 24.5%) Tax effect of associates Non controlling interest share of partnership income Expenses not deductible for tax Option charges not deductible for tax Different tax rates applicable in overseas jurisdictions Effect of changes in tax rates on deferred tax Withholding taxes payable Utilisation of previously unrecognised tax losses Recognition of previously unrecognised tax losses Adjustment for current tax under provision in prior periods Adjustment for deferred tax over provision in prior periods Tax losses for which no deferred tax asset was recognised Fair value adjustments on minority shareholder put options Non-taxable gain on disposal of discontinued operations Impairment of goodwill and investment in associates 594 38 112 (125) (50) (685) – (9) – 83 (72) – (489) (3,604) – – (4,207) (2,590) – – (94) – – – – – – – – – – 1,638 – (1,996) 38 112 (219) (50) (685) – (9) – 83 (72) – (489) (3,604) 1,638 – (1,046) (5,253) (1,125) 22 69 (181) (201) (452) (6) – 147 (11) (86) 12 (574) (1,087) – (529) (4,002) Total 2012 £000 9,881 (2,421) 22 69 (216) (201) (452) 1 – 147 (11) (354) 249 (574) (1,087) – (529) (1,296) – – (35) – – 7 – – – (268) 237 – – – – (1,355) (5,357) 2013 £000 18,597 21 18,618 (4,329) 112 (124) (50) (705) – (9) – 83 (72) – (489) (5,583) 30.0% 2012 £000 17,182 (91) 17,091 (4,187) 69 (216) (201) (465) 1 – 147 (11) (354) 249 (574) (5,542) 32.4% Year ended 31 December Headline profit before taxation Less associates loss / (profit) Headline profit before tax and associates Taxation at UK corporation tax rate of 23.25% (2011: 24.5%) Non controlling interest share of partnership income Expenses not deductible for tax Option charges not deductible for tax Different tax rates applicable in overseas jurisdictions Effect of changes in tax rates on deferred tax Withholding taxes payable Utilisation of previously unrecognised tax losses Recognition of previously unrecognised tax losses Adjustment for current tax under provision in prior periods Adjustment for deferred tax over provision in prior periods Tax losses for which no deferred tax asset was recognised Headline effective tax rate 62 14. Deferred taxation Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and the Group intends to settle its current tax assets and liabilities on a net basis. At 31 December Deferred tax assets Deferred tax liabilities Net deferred tax The movement on the net deferred tax asset is as follows: At 1 January Exchange differences Income statement credit Acquisitions Disposed as part of discontinued operations At 31 December 2013 £000 1,313 (486) 827 2013 £000 943 (201) 575 (189) (301) 827 There was no 2013 deferred tax movement in relation to discontinued operations. The following is the deferred tax asset (liability) recognised by the Group and movements in 2013 and 2012: Capital allowances and amortisation £000 Options and bonus accruals £000 Working capital differences £000 Tax losses £000 At 1 January 2012 Exchange differences Income statement credit / (charge) Acquisitions At 31 December 2012 Exchange differences Income statement credit / (charge) Acquisitions Disposed as part of discontinued operations At 31 December 2013 (767) 1 335 (171) (602) (14) 461 (189) (301) (645) 369 (34) (100) – 235 (23) 150 – – 362 59 – 50 – 109 – 25 – – 134 624 (27) 604 – 1,201 (164) (61) – – 976 2012 £000 1,612 (669) 943 2012 £000 285 (60) 889 (171) – 943 Total £000 285 (60) 889 (171) 943 (201) 575 (189) (301) 827 Within capital allowances and amortisations, £933k (2012: £858k) relates to intangibles created as part of acquisition accounting. 63 Notes Continued 14. Deferred taxation continued Unrecognised deferred tax asset in respect of carried forward tax losses: At 1 January 2013 Exchange differences Change in potential tax rates Disposal of subsidiaries Losses utilised in year Losses in year At 31 December 2013 Expiry date of losses 1 to 5 years 5 to 10 years 10 years or more Total Unrecognised deferred tax £000 3,534 (145) 16 (254) (59) 584 3,676 2012 £000 165 1,217 2,152 3,534 Loss £000 11,297 (473) – (1,117) (191) 2,040 11,556 2013 £000 25 1,535 2,116 3,676 A deferred tax asset in respect of certain losses in overseas territories has not been recognised as there is insufficient certainty of future taxable profits against which these would reverse. 15. Dividends Year ended 31 December 2012 final dividend paid 3.85p on 5 July 2013 (2011: 3.50p) 2013 interim dividend paid 1.21p on 15 November 2013 (2012: 1.10p) Proposed final dividend of 4.24p totalling £2,629k. Dividends relate to the profit of the following years: Year ended 31 December First interim dividend paid 15 November 2013 Final dividends payable 4 July 2014 * Headline dividend cover 2013 £000 2,596 825 3,421 2013 £000 825 2,629 3,454 3.2 2012 £000 2,213 697 2,910 2012 £000 697 2,596 3,293 2.9 Headline dividend cover is calculated by taking headline profit after tax attributable to equity shareholders and dividing it by the total dividends that relate to that year’s profits. The Group seeks to maintain a long term headline dividend cover of between 3 and 4. * 2012 dividend has been restated to reflect the number of shares in issue when the dividend was paid, as opposed to the number of shares in existence at 31 December 2012. 64 16. Discontinued operations On 28 November 2013 the Group sold its 75.1% of Walker Media Limited. No gain or loss arose on the measurement to fair value less cost to sell on this reclassification. 75.1% of Walker Media Limited was sold for £36.0m cash and a pre-tax and post-tax gain of £7.0m was recorded. At the time of disposal it was stated that the majority of proceeds would be returned to shareholders. On 23 January 2014 the Company completed a tender offer returning £21.2m to shareholders in return for 6,337,800 M&C Saatchi plc shares that were cancelled. The results of discontinued operations can be seen in note 3 and on face of the income statement. Net cash used in operating activities Net cash used in investing activities Net cash from financing activities Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Net cash from (used in) discontinued operations Effect of the disposals on individual assets and liabilities: Plant and equipment Deferred tax assets Trade and other receivables Cash and cash equivalents Trade and other payables Current tax liabilities Net identifiable assets and liabilities Consideration received, satisfied in cash, net of expenses Cash disposed of Net cash (inflow) 11 Months 2013 £000 2,072 (6) (383) 1,683 15,194 16,877 Year 2012 £000 (916) (41) (1,384) (2,341) 17,535 15,194 28 November 2013 £000 31 December 2012 £000 211 301 24,930 16,877 (33,501) (1,046) 7,772 31,959 (16,877) 15,082 367 301 33,200 15,194 (42,993) (872) 5,197 – – – 65 Notes Continued 17. Intangible assets Cost At 1 January 2012 Exchange differences Acquired Disposal At 31 December 2012 Exchange differences Acquired Disposal Disposal of subsidiaries (note 20) Disposal discontinued operations (note 16) At 31 December 2013 Accumulated amortisation and impairment At 1 January 2012 Exchange differences Amortisation charge Impairment charge Disposals At 31 December 2012 Exchange differences Amortisation charge Disposal Disposal of subsidiaries (note 20) At 31 December 2013 Net book value At 1 January 2012 At 31 December 2012 At 31 December 2013 Goodwill £000 Brand name £000 Customer relationships £000 Software £000 58,104 (163) 1,157 – 59,098 (60) 1,076 – (704) (26,155) 33,255 1,714 (40) – 608 – 2,282 – – – (704) 1,578 56,390 56,816 31,677 2,835 (2) 319 – 3,152 (48) 234 – – – 5,010 (22) 256 – 5,244 (40) 584 – – – 3,338 5,788 105 – 108 – – 213 (37) 344 – – 520 2,730 2,939 2,818 4,130 (28) 597 – – 4,699 (32) 556 – – 5,223 880 545 565 996 (28) 159 (1) 1,126 (62) 133 (107) (40) – 1,050 767 (20) 141 – (2) 886 (41) 143 (107) (40) 841 229 240 209 Total £000 66,945 (215) 1,891 (1) 68,620 (210) 2,027 (107) (744) (26,155) 43,431 6,716 (88) 846 608 (2) 8,080 (110) 1,043 (107) (744) 8,162 60,229 60,540 35,269 Goodwill’s accumulated amortisation and impairment all relate to impairments all other columns relate to amortisations. 66 Goodwill is allocated to the Group’s cash generating units (CGU). Goodwill is made up of: Cash generating units (CGU) Walker Media Ltd (note 16) M&C Saatchi (UK) Ltd LIDA Ltd M&C Saatchi Sport & Entertainment Ltd M&C Saatchi Export Ltd M&C Saatchi Mobile Ltd M&C Saatchi Merlin Ltd* M&C Saatchi Berlin GmbH M&C Saatchi GAD SAS and associates, including Direct One SAS M&C Saatchi Agency Pty Ltd (Australia) Bang Pty Ltd (Australia) Samuelson Talbot & Partners Pty Ltd (Australia)* Clear Ideas Ltd Total of the four CGUs with goodwill less than £0.5m Total Goodwill 31 December 2013 £000 Goodwill 31 December 2012 £000 – 5,067 1,462 690 600 1,814 539 1,293 886 2,658 1,012 537 14,518 601 31,677 26,155 5,067 1,462 690 600 1,814 – 1,261 864 2,591 1,197 – 14,518 597 56,816 Segment UK UK UK UK UK UK UK Europe Europe Asia and Australasia Asia and Australasia Asia and Australasia Clear Various * Apart from these CGUs, whose movements are described in this note, all other movements are due to exchange. Goodwill and other intangibles are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the assets may be impaired. The 2013 review was undertaken in the last quarter of the year in conjunction with our annual business planning process, no goodwill or other intangible asset impairments were identified (2012: £608k). Management have approved the forecasts for 2014 and have prepared additional projections based on the 2014 numbers for the next four years. This were used as the basis for determining the recoverable amount of each CGU. Details of uncertainties in our forecasts are described in note 5. In conducting the review we used a residual growth rate of 3% from year five onwards and a market beta of 1. The pre-tax discount rates are based on the Group’s weighted average cost of capital adjusted for specific risks relating to the country and market in which the CGU operates. Management are satisfied, with exception of Clear Ideas Ltd, that no possible changes in key assumptions, apart from a significant loss of clients by a CGU, would cause the recoverable amount of any of our CGUs to be below their carrying amount. Management have tested the key assumptions on pre-tax discount rates and management forecasts and projections by adjusting them individually 50% and 20% respectively, which would not lead to impairment. In respect of Clear Ideas Ltd, the company continues to recover from its weak performance in 2012 by controlling cost; a focused proposition; and a more focused organic investment strategy. In the event that the pre-tax discount rate should be 20% higher or management revenue forecasts and projections are 20% lower, the impairment will be £1.8m or £1.3m respectively. 67 Notes Continued 17. Intangible assets continued Key assumptions UK Asia and Australasia Europe Clear Residual growth rates 2012 and 2013 % 3 3 3 3 Pre-tax discount rates 2013 % 14–15 13–17 15–19 14 Pre-tax discount rates 2012 % 14–15 14–15 14–18 14 We do not expect the residual growth rates to exceed the long term growth rates in each location. Brand name This is made up of the brands that we acquired with acquisitions. Brand name CGU Year acquired Cost 2013 £000 Cost 2012 £000 Amortisation period Clear Inside Mobile Direct One Bang ST&P Merlin Elite Clear Ideas Ltd M&C Saatchi Mobile Ltd M&C Saatchi GAD SAS Bang Pty Ltd (Australia) Samuelson Talbot & Partners Pty Ltd (Australia) M&C Saatchi Merlin Ltd 2007 2010 2010 2012 2013 2013 2,640 103 91 270 48 186 3,338 2,640 103 90 319 – – 3,152 Infinity Immediately Infinity 3 years Immediately Immediately There is no foreseeable limit to the duration of the ‘Clear’ and ‘Direct One’ brands as we continue to use them for existing and future clients; hence the brands have been treated as having indefinite lives. Inside Mobile, ST&P and Merlin Elite were immediately amortised as we stopped using the names shortly after acquisition. Bang is amortised over 3 years as no decision has been made over the long term use of the name. 68 Subsidiaries The Group’s significant subsidiary undertakings included in the consolidation are: Name M&C Saatchi (UK) Ltd LIDA Ltd Talk PR Ltd M&C Saatchi Sport & Entertainment Ltd Walker Media Ltd (Note 16) Clear Ideas Ltd M&C Saatchi Mobile Ltd M&C Saatchi Agency Pty Ltd M&C Saatchi GAD SAS* M&C Saatchi Berlin GmbH Country of incorporation or registration UK UK UK UK UK UK UK Australia France Germany Proportion of voting rights and ordinary share capital held at 2013 100% 100% 51% 97% – 100% 70% 80% 80% 80% 2012 100% 100% 51% 97% 100% 100% 75% 80% 61% 80% Trading / dormant Advertising Direct marketing PR Sport & Entertainment Media buying Brand consulting Mobile Advertising Advertising Advertising * On 1 May 2013 the Group acquired 19% of M&C Saatchi GAD SAS on exercise of a put option. 69 Notes Continued 18. Acquisitions With the exception of Merlin Elite Ltd and Samuelson Talbot & Partners Pty Ltd there were no acquisitions during the year that resulted in a change of control. Income statement effects of 2013 acquisitions 60% of shares and voting rights of Merlin Elite Ltd (renamed M&C Saatchi Merlin Ltd) was acquired by M&C Saatchi (UK) Ltd on 17 January 2013 to enable the Group to have a have talent management offering. The results of this acquisition date as included in the consolidated income statement for the reporting period were revenue £911k and profit before tax of £81k. The results between 1 January 2013 and the acquisition date were not significant. Subsequently 5% was sold to management. On 26 September 2013 M&C Saatchi Agency Pty Ltd (Australia) acquired 60% of share capital of Samuelson Talbot and Partners Pty Ltd to and merged it into its Melbourne office to create a combined CGU. The results of the CGU were not material. Goodwill on 2013 acquisition 2013 Consideration, satisfied by: Cash Contingent consideration Total consideration Less – Fair value of net assets made up of: Intangibles Plant and equipment Other non current assets Cash Other current assets Deferred tax liability Non controlling interests 40% share of assets – Total fair value of net assets Note Merlin Elite Ltd £000 Samuelson Talbot and Partners Pty Ltd £000 926 – 926 387 59 – 474 (181) (94) (258) 387 539 420 420 840 431 27 5 433 (296) (95) (202) 303 537 Total 1,346 420 1,766 818 86 5 907 (477) (189) (460) 690 1,076 Goodwill arising 17 Samuelson Talbot and Partners Pty Ltd’s contingent consideration is dependent on its results in the half year to 31 December 2013 and the year to 30 June 2014. Details of valuation can be found in note 26. Put options were negotiated in both acquisitions (note 27). 70 Income statement effects of 2012 acquisitions 85% of shares and voting rights of Bang Pty Ltd was acquired by M&C Saatchi Agency Pty Ltd on 10 January 2012 to enable the Group to have a PR offering in Australia. Goodwill on 2012 acquisition 2012 Consideration, satisfied by: Cash Less – Fair value of net assets made up of: Intangibles Plant and equipment Cash Other current assets Deferred tax liability Non controlling interests 15% share of assets – Total fair value of net assets Goodwill arising Goodwill relates to value of the business’s staff. There is no local tax deduction for goodwill. Note Bang Pty Ltd £000 1,666 575 56 7 113 (171) (71) 509 1,157 17 71 Notes Continued 19. Cash consumed by acquisitions Cash consideration – M&C Saatchi Mobile Ltd* – M&C Saatchi GAD SAS (part of 4% put) – Clear USA LLC (20%) – Bang Pty Ltd (85%) – Direct One SAS (final payments for 70%) – M&C Saatchi Communications Pvt Ltd (2012: 5%) – FCINQ SAS (2013: 2%) – M&C Saatchi Merlin Ltd (2013: 60%) – Samuelson Talbot and Partners Pty Ltd (2013: 60%) Less cash and cash equivalents acquired Purchase of associates * Share buyback of 20% of company’s equity. 20. Associates and joint venture 2013 £000 – – – – – – (12) (926) (480) (1,418) 906 (512) (2,589) (3,101) 2012 £000 (1,300) (45) (64) (1,666) (126) (5) – – – (3,206) 7 (3,199) – (3,199) The following associates and joint ventures are included in the consolidated financial statements: Name Nature of business Country of incorporation or registration Walker Media Limited (from discontinued operations, note 16) Human Digital Limited Milk Data Strategy Limited M&C Saatchi Russia Limited Zapping / M&C Saatchi S.A. and subsidiaries M&C Saatchi SAL* M&C Saatchi (Hong Kong) Limited M&C Saatchi World Services Pakistan (PVT) Ltd (joint venture) Media buying Social web insight and strategy Data strategy Advertising Advertising Advertising Advertising UK UK UK UK Spain Lebanon China Development marketing Pakistan * Influence exerted through our board membership and contractual relationship. Proportion of voting rights and ordinary share capital held at 2013 25% 25% 25% 50% 25% 10% 20% 50% 2012 100% 25% 25% 50% 25% 10% 100% nil 72 At 1 January Exchange movements Acquisition of associates Transferred from discontinued operations Impairment of associate Share of profit after taxation At 31 December 2013 £000 756 2 3,214 8,964 – 163 13,099 2012 £000 2,226 (9) – – (1,552) 91 756 China transaction 2013 During the year the group transferred the trade and assets of M&C Saatchi (Hong Kong) Limited to a local entity in China, aeiou. In return the group received 20% of the combined entity. The fair value of the consideration was deemed to be £3.2m, of which £1.9m was satisfied in cash. Impairment of associate 2012 Given the trading performance of the Zapping / M&C Saatchi SA group and the present prospects for the Spanish economy we decided to fully impair this Spanish associate. The Group’s unrecognised share of the Zapping / M&C Saatchi S.A group’s trading loss is £172k (2012: £30k). Summarised financial information Income statement Revenue Operating profit Profit before taxation Profit after taxation Our share Balance sheet Total assets Total liabilities UK discontinued £000 1,824 826 840 740 184 UK £000 1,856 207 204 163 41 Europe £000 Middle East and Africa £000 Asia and Australasia £000 2,621 194 194 155 23 4,203 (1,406) (1,519) (1,519) (152) 558 452 452 452 67 2013 £000 11,062 273 171 (9) 163 2012 £000 13,081 1,287 1,173 970 91 UK discontinued £000 UK £000 Europe £000 Middle East and Africa £000 Asia and Australasia £000 2013 £000 2012 £000 50,970 (42,472) 713 (518) 1,944 (1,661) 5,812 (6,268) 2,168 (1,015) 61,607 (51,934) 11,882 (10,010) 73 Notes Continued 21. Plant and equipment Cost At 1 January 2012 Exchange differences Additions Acquisition of a subsidiary Disposals At 31 December 2012 Exchange differences Additions Acquisition of subsidiaries Disposals Disposal of subsidiaries Discontinued operations At 31 December 2013 Depreciation At 1 January 2012 Exchange differences Depreciation charge Disposals At 31 December 2012 Exchange differences Depreciation charge Disposals Disposal of subsidiaries Discontinued operations At 31 December 2013 Net book value At 1 January 2012 At 31 December 2012 At 31 December 2013 Leasehold improvements £000 Furniture, fittings and other equipment £000 Computer equipment £000 Motor vehicles £000 4,371 (83) 1,017 12 (19) 5,298 (228) 1,438 – (20) (183) (218) 6,087 1,668 (41) 531 (13) 2,145 (163) 660 (10) (197) (135) 2,300 2,703 3,153 3,787 5,760 (128) 955 12 (389) 6,210 (208) 516 63 (279) (183) (350) 5,769 3,237 (129) 1,056 (307) 3,857 (145) 633 (70) (144) (396) 3,735 2,523 2,353 2,034 5,162 (69) 752 6 (96) 5,755 (241) 717 21 (556) (456) (631) 4,609 3,542 (5) 669 (85) 4,121 (211) 915 (739) (427) (452) 3,207 1,620 1,634 1,402 161 (6) 42 26 (72) 151 (15) 36 – (21) 0 – 151 66 (3) 33 (42) 54 (6) 25 (9) – – 64 95 97 87 Net book value of assets, included in the above balances which have been purchased through finance lease arrangements are: Leasehold improvements £000 – – – Furniture, fittings and other equipment £000 18 168 8 Computer equipment £000 Motor vehicles £000 101 101 48 67 67 99 At 1 January 2012 At 31 December 2012 At 31 December 2013 74 Total £000 15,454 (286) 2,766 56 (576) 17,414 (692) 2,707 84 (876) (822) (1,199) 16,616 8,513 (178) 2,289 (447) 10,177 (525) 2,233 (828) (768) (983) 9,306 6,941 7,237 7,310 Total £000 186 336 155 22. Other non current assets Investments* Rent deposits Loans to employees** Call option provision Total other non current assets 2013 £000 800 2,069 2,393 54 5,316 2012 £000 – 2,377 2,610 54 5,041 * The Group is engaging in corporate venturing, investing in companies that have technologies that relate or could enhance to the services the Group sells, or when mature will be in industries that will be a heavy user of the Group’s services. Under IFRS 13 these items are valued as a level 3 given they are recent investments they have been recorded at cost. We will review their value periodically. ** This relates to the £1.2m and the AUD2.0m loans that the Group lent local management of M&C Saatchi Agency Pty Ltd, in 2010, to enable them to acquire 20% of that business. The loan is repayable if the purchasers no longer have a beneficial interest in the shares of the Australian Group. The loan is unsecured and charges interest at the Bank of England’s base rate of interest; interest on the loan compounds annually and is payable on repayment. The carrying value of the loan approximates to fair value. 23. Trade and other receivables Trade receivables Provision for bad debts Net trade receivables Prepayments and accrued income Amounts due from associates VAT and sales tax recoverable Other debtors Total trade and other receivables The carrying amount of trade and other receivables approximates to their fair value. Movement in the bad debt provision As at 1 January Exchange movements Charged to the income statement Released to income statement Utilisation of provision As at 31 December 2013 £000 42,352 (186) 42,166 14,186 624 1,101 3,401 61,478 2013 £000 (139) 19 (126) 16 44 (186) 2012 £000 77,338 (139) 77,199 13,170 149 1,245 3,485 95,248 2012 £000 (160) 9 (92) 51 53 (139) 75 Notes Continued 23. Trade and other receivables continued As at 31 December the following trade receivables were past their due date (of 0 to 3 months) but not impaired. It is management’s belief that these debts will be fully repaid. 3 to 6 months Over 6 months Total net trade receivables 2013 £000 1,838 301 42,166 2013 % 4% 1% 100% The carrying amount of the Group’s trade and other receivables are denominated in the following currencies: Sterling US dollars Australian dollars Malaysian ringgit Euros South African rand Brazilian real Other 2013 £000 34,194 4,239 6,300 2,703 7,583 1,562 1,425 3,472 61,478 2013 % 54% 7% 11% 4% 12% 3% 2% 6% 100% 2012 £000 2,180 285 77,199 2012 £000 60,861 3,714 10,617 3,320 7,532 2,513 2,459 4,232 95,248 2012 % 3% 0% 100% 2012 % 64% 4% 11% 3% 8% 3% 3% 4% 100% Credit risk The Group monitors credit risk at both a local and Group level. Credit terms are set and monitored at a local level according to local business practices and commercial trading conditions. The age of debt is reported regularly. Age profiling is monitored both at local customer level and a consolidated entity level. Bad debt provisions are determined locally. There is only local exposure to debt from our significant global clients. Whilst the Group has some exposure to foreign currency risk this is limited by the proportion of debt denominated in sterling. The Group continues to review its debt exposure to foreign currency movements and will review efficient strategies to mitigate risk as the Group’s overseas debt increases. There are no significant concentrations of credit risk in the Group. 24. Trade and other payables Amounts falling due within one year Trade creditors Sales taxation and social security payables Employment benefit accruals Accruals and deferred income Other payables 2013 £000 (21,537) (7,253) (2,143) (31,474) (1,597) (64,004) 2012 £000 (46,062) (7,507) (2,189) (46,904) (4,210) (106,872) The carrying amount of trade and other payables approximates to their fair value. Settlement of trade and other payables is in accordance with our terms of trade established with our local suppliers. 76 The carrying amount of the Group’s trade and other payables are denominated in the following currencies: Amounts falling due within one year Sterling US dollars Australian dollars Malaysian ringgit Euros South African rand Brazilian real Other 2013 £000 (34,830) (3,069) (7,116) (4,650) (7,960) (2,690) (1,227) (2,462) (64,004) 2013 % 57% 5% 10% 7% 12% 4% 2% 4% 2012 £000 (73,721) (3,279) (9,397) (5,135) (6,794) (2,383) (2,419) (3,744) 2012 % 69% 3% 9% 5% 6% 2% 2% 4% 100% (106,872) 100% The table below analyses the Group’s financial liabilities and derivative financial liabilities into relevant maturity groupings based on the period remaining until the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (including interest), so will not reconcile with amounts disclosed on the statement of financial position: Non derivatives Up to 6 months 6–12 months Later than 1 year and not later than 5 years Put options Up to 6 months 6 months to 1 year Later than 1 year and not later than 5 years Greater than 5 years Total derivative and non derivative 2013 £000 (48,173) (8) (1,031) (49,212) (14,552) (8,814) (15,857) (598) (38,299) (89,033) 2012 £000 (86,658) (4) (5,101) (91,763) (2,549) – (17,465) (598) (20,612) (112,375) The value of put options represents the minority shareholder put option liability excluding any discount for time. The majority of these financial instruments will be fulfilled by the issue of equity (note 27). The above table is an indicator of our liquidity risk. The risk is mitigated by the receipt of cash from trade and other receivables, and in the case of put options, the majority of the liability will be fulfilled by the issue of equity (note 29). 77 Notes Continued 25. Other financial liabilities Amounts falling due within one year Obligations under finance leases Other bank loans Amounts falling due after one year Obligations under finance leases Secured bank loans 2013 £000 (17) (3) (20) 2013 £000 (52) (304) (356) 2012 £000 (8) (123) (131) 2012 £000 (88) (4,234) (4,322) Obligations under finance leases and hire purchase contracts are due as follows: In one year or less, or on demand In more than one year but not more than two years 2013 £000 (17) (52) (69) 2012 £000 (8) (88) (96) 26. Deferred and contingent consideration Amounts falling within one year – Contingent (note 18) 2013 £000 2012 £000 420 – 2013 £000 – – 420 – 420 2012 £000 (128) 2 – 126 – The carrying value of bank loans approximates to their fair value. Secured bank loans The Group has a banking facility of up to £14.5m (2012: £10m) plus a one year £0.3m (2012: £0.3m) overdraft facility. The facility has floating rates of interest set at 1.75% above LIBOR and the overdraft has floating rates of interest set at 1.75% above Bank of England base rate. The facility matures on 30 April 2017. At 1 January Exchange difference Acquisition Consideration paid At 31 December The consideration is dependent on its results in the half year to 31 December 2013 and year to 30 June 2014 (IFRS 13 level 3). The key assumptions taken into consideration when measuring the contingent consideration are the performance expectations of the acquisition. Due to the short term nature of this liability, there is no impact of discounting on the liability. There is no reasonable change in discount rate or performance targets that would give rise to a material change in the liability at year end. Our operations in India have overdrafts and local short term bank loans that are guaranteed by the Group. The balances outstanding at the year end were £115k (2012: £84k). Gross secured bank loans Capitalised finance costs Net secured bank loans Future interest payable on secured bank loans at balance sheet date Total secured bank loans and future interest 2013 £000 (333) 29 (304) 2012 £000 (4,324) 90 (4,234) (30) (147) (334) (4,381) Total secured bank loans and future interest are due as follows: In one year or less, or on demand In more than one year but not more than five years 2013 £000 (10) (324) (334) 2012 £000 (98) (4,283) (4,381) 78 27. Minority shareholder put option liabilities The movements in the year relating to the minority interest put options that are payable in cash and in equity are as follows: Some of our subsidiaries’ minorities have the right to a put option. The put options give the minorities a right to exchange their minority holdings in the subsidiary into shares in M&C Saatchi plc or cash (as per the agreement). Amounts falling due within one year – Cash – Equity Amounts falling due after one year – Cash – Equity At 1 January Exchange difference Additions Exercises Termination Income statement charge due to – Change in estimates – Change in share price – Time Total income statement charge 2013 £000 2012 £000 (3,642) (18,202) (21,844) (847) (1,702) (2,549) (684) (15,641) (2,450) (15,483) (16,325) (17,933) (38,169) (20,482) 2013 £000 (20,482) 4 (3,359) 1,171 – 1,333 (16,760) (76) (15,503) 2012 £000 (17,092) (1) (480) 161 1,366 2,627 (6,932) (131) (4,436) At 31 December (38,169) (20,482) Cash based At 1 January Exchange difference Reclassified from share based Additions Income statement charge due to – Change in estimates – Change in share price At 31 December Equity based At 1 January Exchange difference Additions Exercises Reclassified to cash based Terminations Income statement charge due to – Change in estimates – Change in share price – Time 2013 £000 (3,297) 158 – (684) 2012 £000 (234) – (2,863) – (136) (367) (71) (129) (4,326) (3,297) 2013 Equity* (9,517) – (803) 512 – – 2013 £000 (17,185) (154) (2,675) 1,171 – – 2012 £000 (16,858) (1) (480) 161 2,863 1,366 297 (621) (23) 1,469 (16,393) (76) 2,698 (6,803) (131) At 31 December (10,156) (33,843) (17,185) * The estimated number of M&C Saatchi plc shares that will be issued, in thousands, to fulfil. 79 Notes Continued 27. Minority shareholder put option liabilities continued Put options are exercisable from: % of subsidiaries’ shares exchangeable 16.0 50.0 20.0 2.8 5.0 4.0 4.0 13.0 10.0 17.0 19.6 15.0 5.0 12.5 20.0 20.0 35.0 12.5 10.0 49.0 49.0 35.0 29.8 40.0 31.2 22.5 30.0 10.0 10.0 5.0 49.9 8.8 22.5 10.0 Subsidiary Year M&C Saatchi LA Inc M&C Saatchi Marketing Arts Ltd M&C Saatchi (M) SDN BHD M&C Saatchi Sports & Entertainment Ltd Influence Communications Ltd M&C Saatchi Europe Holdings Ltd M&C Saatchi German Holdings Ltd M&C Saatchi Communications Pty Ltd M&C Saatchi Berlin GmbH Talk PR Audience Ltd M&C Saatchi GAD SAS** FCINQ SAS** M&C Saatchi Berlin GmbH Clear Ideas Consulting LLP M&C Saatchi Mobile Ltd* M&C Saatchi Agency Pty Ltd M&C Saatchi PR LLP (US) Clear Ideas Consulting LLP M&C Saatchi Mobile Ltd* M&C Saatchi Sport & Entertainment Pty Ltd Talk PR Ltd M&C Saatchi UK PR LLP M&C Saatchi Corporate SAS M&C Saatchi (Switzerland) SA Samuelson Talbot and Partners Pty Ltd* M&C Saatchi Merlin Ltd* The Source (London) Ltd Direct One SAS Direct One SAS M&C Saatchi Berlin GmbH* M&C Saatchi Brazil Cominicação LTDA Samuelson Talbot and Partners Pty Ltd* M&C Saatchi Merlin Ltd* Direct One SAS* * New or amended options in 2013. ** Holding changed or shares put in 2013. 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2015 2015 2015 2015 2015 2015 2015 2016 2016 2016 2016 2016 2017 2017 2017 2018 2018 2018 80 At each period end the fair value of the put options’ liability is calculated in accordance with the shareholders’ agreement and any movement is charged to the income statement. Where the agreement gives a right to convert to a variable number of shares (rather than a value), the number of shares is converted to a value by using the period end share price (2013: 333.3p, 2012: 180.5p). The liability will vary with our share price, and with the results of the subsidiary companies. Current liabilities are determined by our year end share price and the 2013 results of the companies who can exercise in 2014. Non current liabilities are determined by our year end share price and the projected results of the companies who can exercise after 2014. The projected results show management’s best estimate of the growth rates and margin of the companies who can exercise after 2014, given that these companies are small, single account wins / losses can have a significant effect on their results. Such account wins are far more significant than changes to exchange rates and underlying economic growth rates. The fair value of minority shareholder put option liabilities is measured using some inputs that are not based on observable market data (i.e. IFRS13, Level 3 fair value measurement). Share price risk Changes in our year end share price will impact the fair value adjustment to minority shareholder put options. The year end share price was 333.3p (2012: 180.5p). The 2013 charges would have changed as follows, had the share price been: Increase / (decrease) in profit before and after tax £000 £(6,644) £(5,528) £(3,420) – £3,446 £6,913 Movement % +30% +20% +10% – (10)% (20)% Share price 433.3p 400.0p 366.6p 333.3p 300.0p 266.6p Forecast accuracy Difference in actual and projected results of the companies could have an impact on the fair value adjustments as follows: Result +10% (10)% Increase / (decrease) in profit before and after tax £000 £(1,277) £1,265 28. Other non current liabilities 29. Issued share capital Employment benefit provisions* Other 2013 £000 (222) (674) (896) 2012 £000 (313) (779) (1,092) * This relates to long term service leave in some locations. Allotted, called up and fully paid At 1 January 2012 Fulfilment of options Acquisition of 4.0% of M&C Saatchi GAD SAS At 31 December 2012 Fulfilment of options Acquisition of 5.0% of M&C Saatchi GAD SAS At 31 December 2013 Number of shares 63,529,133 471,183 77,202 64,077,518 4,449,180 512,295 69,038,993 1p Ordinary shares £000 635 5 1 641 44 5 690 The Group holds 700,000 of the above M&C Saatchi plc shares in treasury. Capital management The Group aims to use cash generated from our operations to fund growth. Debt is used to fund short term investment and working capital cycles. Long term and major investment obligations are fulfilled by issuing equity e.g. put options (note 27). In this way we reduce the financial risk of debt markets being closed or rationed. The Group will minimise the amount of equity issues when long term and major investment obligations vest by using any available cash instead of equity. Our long term targets are to be debt free and to minimise the dilution to our shareholders and maximise our organic growth. 81 Notes Continued 30. Share based payments Share based payments include vested share options and conditional share awards. Expense recognised in year: Equity settled Cash settled TOTAL Vested share options Year of grant 2004 At 1 January 2012 Vested Exercised paid in equity* At 31 December 2012 Vested Exercised paid in equity* At 31 December 2013 2013 £000 290 166 456 Description Vested options Vested options number 128,495 – – 128,495 – – 128,495 Exercise price (pence) 1 Exercise period 2009–2014 2013 number 128,495 LTIP – – – – – – – New LTIP UK growth shares – 3,546,932 – 3,546,932 – (3,546,932) – – 471,183 (471,183) – 902,248 (902,248) – 2012 £000 855 70 925 2012 number 128,495 Total number 128,495 4,018,115 (471,183) 3,675,427 902,248 (4,449,180) 128,495 * The average price when these options were excised was 270.0p (2012: 145.6p). The LTIP were conditional that the employee remains employed by the Group on the day of exercise; the vested options do not have this condition. The number of shares granted under the UK growth shares and LTIP is dependent on the subsidiaries’ and Group’s profits. The number of shares granted under the New LTIP and 2012 LTIP is dependent on the Company’s share price. As the number of shares to be awarded is variable, and it has not been included in the table above. Conditional share awards UK growth shares M&C Saatchi (UK) Ltd has classes of equity whose restrictions classify them as share options under IFRS 2. The equity is convertible into M&C Saatchi plc’s equity based on a valuation formula. If the participants exercise their rights to convert their equity in 2014, management estimate that this equity will exchange into 631,379 shares of M&C Saatchi plc (2012: 1,570,008). 82 During the year, 902,248 (2012: 471,183) M&C Saatchi plc shares were issued in return for subsidiaries’ equity. The participants in this share scheme made a £2.7m gain, the highest payment to one person was £0.9m. During the year a total of 3,546,932 (2012: nil) M&C Saatchi plc shares were issued equally to four Directors of the Company in return for subsidiaries’ equity. The four Company Directors shared equally in a £9.4m gain. The options were valued based on the following assumptions: Vesting and exercised at end Share price at grant date Vesting period Dividend yield Risk free rate Fair value of option (per M&C Saatchi plc share issued) The final award will vest in 2014 if the Company’s average ninety day closing mid-market share price as at 31 December 2014 is greater than or equal to 198.9p and if the Company’s TSR is in the top half of the comparator group. If this condition is fulfilled then the participants are entitled to an award worth, in aggregate, ten percent of the Company’s increase in market capitalisation above its 31 December 2013 value of £114.9m (i.e. 181.4p share price). 2011 £0.50 3 years 7.24% 1.47% 2010 £0.50 2 years 7.24% 1.47% £0.40 £0.43 The accounting charge for the New LTIP in 2013 was £156,000 (2012: £653,000). As these options are nil value options, volatility has no effect on their fair value and there is no maximum term to these options. Valuation method used Black Scholes. Conditional share awards LTIP In 2010 the Group issued new options under its long term incentive plan (LTIP) for senior employees. This could result in the issue of up to 110,759 (2012: 110,759) ordinary shares between 2014 and 2020 and a maximum bonus of £369,104 (based on our 31 December 2013 share price of 333.25p). The number of shares under option will vary with the real increase in diluted earnings per share. The maximum award will vest if real diluted earnings per share grows by 10% or more. At a real diluted earnings per share growth of 3%, 30% of the options will vest. Below 3% earnings per share growth no options will vest. Grant date Share price at grant date Exercise price Maximum unvested shares under option Vesting period (years) Dividend yield Risk free rate Fair value of option 14 October 2010 £1.16 £0 110,759 4 to 5 3.12% 1.06% £1.02 As these options are nil value options volatility has no effect on their fair value. Valuation method used Black Scholes. New LTIP In 2010 each of the four participants paid £97,250 for the award, in the form of equity in a subsidiary. This is not refundable if the share price hurdles and a total shareholder return (TSR) conditions are not met. At exercise the subsidiaries’ equity is converted into equity in the Company. Grant date Share price at grant date Vesting period (years) Dividend yield Risk free rate Volatility Total fair value of option 14 October 2010 £1.16 2 to 4 3.12% 1.06% 30.77% £1,756,000 Valuation method used Monte Carlo. Share price risk New LTIP On top of the 3,546,932 shares that vested in 2012, the number of shares that will vest in 2014 depends on the share price: Share price Movement %* 366.8p 333.3p 300.0p 270.8p 180.4p +10.0% – (10.0)% (18.7)% (45.6)% Number of shares to issue ‘000 Percentage of share capital 3,065 2,751 2,369 1,956 – 4.94 % 4.25% 3.82% 3.15% – The table has been adjusted for the 6,337,800 shares that the Company cancelled following the tender offer on 23 January 2014, as well as the 2,236,168 shares that the four participants sold. * The movement is based on a yearend share price of 333.25p. 83 Notes Continued 30. Share based payments continued 32. Commitments 2012 LTIP The 2012 LTIP was issued on 19 January 2012 when the Company’s share price was 123.5p. The participants paid the fair market price for the award of £2,550. The award can be vested once at either 31 December 2014, 31 March 2015 or 30 September 2015. The condition for vesting is that the Company’s share price is greater than or equal to 200.0p. The maximum number of the Company’s shares awarded is equal to 255,000 M&C Saatchi Network Ltd G shares issued. This award reduces as the share price increases. Grant date Share price at grant date Vesting period (years) Dividend yield Risk free rate Volatility Total fair value of option 14 October 2011 £1.24 3 3.6% 1.02% 50% £0.23 Valuation method used Black Scholes binominal pricing model. Share price risk 2012 LTIP The number of shares that will be issued: Number of shares to issue ‘000 Percentage of share capital1 230 255 128 – 0.37% 0.41% 0.21% – Movement % (10.0)% (25.0)% (40.0)% (40.3)% Share price 300.0p and above 250.0p 200.0p 199.0p 1 The table has been adjusted for the 6,337,800 shares that the Company cancelled following the tender offer on 23 January 2014. Liability arising from share based payment The following balances relate to cash based equity payments and employer’s tax on share and cash based payments. Capital commitments There are no other significant capital commitments contracted for but not provided. Operating leases Commitments under operating leases are reported within note 6. 33. Related party transactions Key management remuneration Key management remuneration is disclosed in note 7. Unaudited detail on Directors’ remuneration is disclosed in the Remuneration Report on pages 36 and 37. Other related parties During the year, the Group entered into the following transactions with related parties: Lloyd Dorfman is chairman of Travelex Holdings Ltd. During the year the Group charged subsidiaries of Travelex Holdings Ltd, on an arm’s length basis, £105k (2012: £263k) for advertising and marketing services, of which £34k (2012: £109k) was outstanding at the year end. Lloyd Dorfman is also chairman of The Office Group. During the year the Group charged The Office Group, on an arm’s length basis, nil (2012: £10k) for advertising and marketing services, of which nil (2012: nil) was outstanding at the year end. Tom Dery is a director of Australian Cancer. During the year the Group passed on third party costs to Australian Cancer of £2k (2012: nil), and charged them nil (2012: £4k) in fees, of which nil (2012: nil) was outstanding at the year end. Maurice Saatchi is a trustee of Josephine Hart Foundation. During the year the Group charged, on an arm’s length basis, Josephine Hart Foundation £94k (2012: £153k), of which £8k (2012: nil) was outstanding at the year end. 2013 £000 312 2012 £000 146 Lara Hussein has an equity interest in Brand Energy. During the year the Group was charged, on an arm’s length basis, by Brand Energy £833k, of which £177k was unpaid at the year end. Share based payment liabilities 31. Post balance sheet events Following General Meeting approval on 7 January 2014, on 23 January 2014 the Company acquired and cancelled, by way of a tender offer, 6,337,800 shares at 335p each. The tender offer returned £21.2m of cash to shareholders. We have been informed that the shareholders of 20% of the Group’s Australian subsidiary wish to put their shares. This obligation will be fulfilled in July 2014 in accordance with the rules of their put option. There are no other significant post balance sheet events. 84 David Kershaw is a member of board of governors of South Bank Enterprises. During the year the Group charged, on an arm’s length basis, South Bank Enterprises £2k (2012: nil), of which nil (2012: nil) was outstanding at the year end. During the year the Group made purchases of £66k (2012: £32k) from its associates. At 31 December 2013, there was £48k due to associates in respect of these transactions (2012: £33k). During the year, £1,084k (2012: £255k) of fees were charged by Group companies to associates. At 31 December 2013, associates owed Group companies £624k (2012: £149k). To assist Tom Dery and Tom McFarlane (subsidiary directors) in acquiring 20% of M&C Saatchi Agency Pty Ltd in 2010, loans of £1.2m and AUD 2.0m (2012: £1.2m and AUD2.0m) were issued. These loans remain outstanding (see note 22 for further details). During the year the Company recharged its subsidiaries and indirect subsidiaries with £1,006k (2012: £1,191k) of its costs, £202k (2012: £291k) of interest and paid £1k (2012: £2k) of interest. The balance outstanding can be seen in note 37 and 38. 34. Accounting policies Critical accounting policies are set out in note 1. Additional accounting policies followed by the group are: the interest in the fair value of the identifiable net assets acquired. Cost comprises the fair value of assets given, liabilities assumed (contingent and deferred consideration) and equity instruments issued. In 2009 and before, where the Group increased its stake in a subsidiary, goodwill equals the difference between the consideration paid and the fair value of the minority interest acquired. In 2010 and beyond, such balances are taken to reserves in accordance with IAS 27. The amendment to the standard did not require retrospective restatement. Goodwill relating to associates is included within the carrying value of the investment in associates. Cost convention The financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial instruments. The principal accounting policies are set out below. Following initial recognition, goodwill is carried at cost less any accumulated impairment losses. Goodwill recognised under UK GAAP prior to the date of transition to IFRS is stated at net book value as at that date. Basis of consolidation The M&C Saatchi plc consolidated financial statements incorporate the financial statements of M&C Saatchi plc and entities (including special purpose entities) controlled by M&C Saatchi plc (and its subsidiaries). Control is achieved where M&C Saatchi plc has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Where subsidiaries are acquired in the year, their results and cash flows are included from the date that we gain control up to the balance sheet date. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra Group transactions, balances, income and expenses are eliminated on consolidation. Where a consolidated company is less than 100% owned by the Group, the non controlling interest share of the results and net assets is recognised at each reporting date. Subsidiary acquisitions The acquisition of subsidiaries is accounted for using the purchase method. The cost of acquisition is measured at the aggregate of the fair values of the assets given, liabilities incurred or assumed and the equity instruments issued by the Group in exchange for control. The identifiable assets and liabilities (including contingent liabilities) acquired that meet the conditions for recognition under IFRS 3 are recognised at their fair values at the date of acquisition. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. All acquisition costs are expensed to income statement in the period that they occur. Goodwill Goodwill arising on the acquisition of a subsidiary is recognised as an asset, being the excess of the cost of the business combination over For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units expected to benefit from the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication of impairment. Any impairment is recognised immediately in the income statement and is not subsequently reversed. The impairment test is based on management’s projections for the next five years and regional growth rates thereafter. Goodwill arising from foreign investments is retranslated at the year end rate. Disposals of subsidiaries’ equity that do not affect control The difference between the consideration received and the credit to the non controlling interest reserve is credited directly to retained earnings. In the event that equity had previously been acquired under this revised standard then such a disposal will result in a release from non controlling interest acquired reserve to retained earnings. Acquisitions of subsidiaries’ equity that do not affect control From 1 January 2012, acquisitions of subsidiaries’ equity that do not affect control have been accounted for using non controlling interest reserve. How the non controlling interest reserve is used is described in note 2. Corporate venturing investments Investments in debt and equity securities held by the Group are classified as being available-for-sale and are stated at fair value, with any resultant gain or loss being recognised directly in equity (in the fair value reserve), except for impairment losses and, in the case of monetary items such as debt securities, foreign exchange gains and losses. When these investments are derecognised, the cumulative gain or loss previously recognised directly in equity is recognised in profit or loss. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in profit or loss. 85 Notes Continued 34. Accounting policies continued Associates and joint ventures Associates and joint ventures are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 10% and 50% of the voting rights, minority or equal board representation and, in case of shareholdings of between 10% and 20%, the Group treats the entity as an Associate where there are significant minority and contractual protections that allow us to influence dividend and investment flows. Investments in associates and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates and joint ventures includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ and joint ventures’ post acquisition profits or losses is recognised in the income statement, and its share of post acquisition movements is recognised in other comprehensive income. The cumulative post acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate or joint venture equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. Discontinued operations Discontinued operations are a component of the Group’s business that represents a separate major line of business or geographical area of operation that has been disposed of or is held for sale. Classification as discontinued operations occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative income statement is restated as if the operation has been discontinued from the start of the comparative period. Intangible assets Separately acquired intangible assets are capitalised at cost. Intangible assets acquired as part of a business combination are capitalised at fair value at the date of acquisition if they arise from contractual or other legal rights, and sufficient information exists to measure the fair value of the asset. Intangible assets that relate to associates are included within the carrying value of the investment in associates. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques. Intangible assets are stated at historical cost less accumulated amortisation and impairment. Amortisation is provided to write off the cost of all intangible assets, less estimated residual values, evenly over their expected useful lives. The charge in the income statement is included in operating costs. Intangible assets are amortised to residual values over the useful economic life of the asset as follows: Software Customer relationships Brand name – 3 years – 1 to 5 years – 0 to infinity The need for any intangible asset impairment write down is assessed by comparison of the carrying value of the asset against the higher of value in use and fair value less cost to sell. Plant and equipment Tangible fixed assets are stated at historical cost less accumulated depreciation. Depreciation is provided to write off the cost of all fixed assets, less estimated residual values, evenly over their expected useful lives. Depreciation is calculated at the following annual rates: Leasehold improvements Furniture and fittings Computer equipment Other equipment Motor vehicles – over the period of the lease – 10% in equal instalments – 33% in equal instalments – 25% in equal instalments – 25% in equal instalments The need for any fixed asset impairment write down is assessed by comparison of the carrying value of the asset against the higher of fair value less cost to sell and the value in use. Cash and cash equivalents Cash and cash equivalents include, for the purposes of the balance sheet and cash flow statement, cash at bank and in hand and deposits with an original maturity of three months or less, net of legally offsettable overdraft, which are managed as part of cash balances. Leased assets Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance lease agreements are treated as if they had been purchased outright. The amount capitalised is the present value of the minimum lease payments payable over the term of the lease. The corresponding leasing commitments are shown as amounts payable to the lessor. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Where operating lease agreements include a fixed uplift for rental payments, the expense is straight lined, except in cases where another systematic basis better represents the benefit to us. Reverse premiums and similar incentives to enter into operating lease agreements are initially recorded as deferred income and released to profit or loss on a straight line basis over the lease term. 86 Segmental reporting Segmental reporting reflects how management controls the business. Sales between business units are on an arm’s length basis. The assets and liabilities of the segments reflect the assets and liabilities of the underlying companies involved. Our business is run on an operating unit basis. In accordance with IFRS 8 paragraph 12, we have aggregated our operating units into regional segments. Clear has a different nature of service, and it is reported to the Board on a consolidated basis rather than on an office basis, as with other operating units; we therefore have allocated Clear as a separate segment. Employee benefits – pensions Contributions to personal pension plans are charged to the income statement in the period in which they are due. UK growth shares Some of our UK subsidiaries have shares that do not pay a dividend but instead have a right attached to the share allowing them to be exchanged into shares of M&C Saatchi plc via a put / call option. The value of the option, which can be exchanged into M&C Saatchi plc shares, is based on the Group’s headline profit after tax multiple and excludes loss making companies. The valuation uses the growth of normalised post-tax profits of the subsidiary company above that company’s 2007 profits plus a compounded growth factor. The Group has a nominal value call option in the event that the shareholders are no longer employed. This transaction has been treated as an equity settled transaction under IFRS 2. The cost of equity settled transactions with these shareholders is measured and accounted for in accordance with the Group’s stated policy for equity settled share based compensation. M&C Saatchi Worldwide Ltd A and B shares Some of the Company’s Directors have purchased M&C Saatchi Worldwide Ltd A and B shares. These shares have rights to be converted into shares of the Company (see note 30). This transaction has been treated as an equity settled transaction under IFRS 2. Taxation Current tax, including UK and foreign tax, is provided for, using the tax rates and laws that have been substantively enacted at the balance sheet date. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not provided for temporary differences that arise: from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profits or loss; and on the initial recognition of goodwill. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and the Group intends to settle its current tax assets and liabilities on a net basis. Dividends Interim dividends are recorded when they are paid and the final dividends are recorded when they become legally payable. Earnings per share The dilutive effect of unvested outstanding options is calculated based on the number that would vest had the balance sheet date been the vesting date. This dilution is reflected in the computation of diluted earnings per share. Foreign currency Foreign currency transactions arising from normal trading activities are recorded in functional currency at the rate prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are translated at the year end exchange rate. Where they form part of the net investment in foreign operations the gain or loss is charged directly to the foreign exchange reserve. Foreign currency gains and losses are credited or charged to the income statement as they arise. For overseas operations, results are translated at the average rate of exchange and balance sheets are translated at the closing rate of exchange. The average rate of exchange approximates to the rate on the date that the transactions occurred. Exchange differences arising from the translation of foreign subsidiary results are taken to a separate component of equity. Such translation differences will be recognised as income or expense in the period of disposal. Financial instruments Financial assets and financial liabilities principally include the following: Trade receivables Trade receivables do not carry any interest and are stated at amortised cost. Impairment provisions are recognised when there is objective evidence that the Group will be unable to collect all of the amounts due under the terms receivable. 87 Notes Continued 34. Accounting policies continued Trade and other liabilities Trade and other liabilities are not interest bearing and are stated at their amortised cost. Classification of financial instruments The financial assets and liabilities of the Group are classified into the following financial statement captions in accordance with IAS 39 financial instruments: Loans and receivable Measured at amortised cost, separately disclosed as cash and cash equivalents; current tax assets; trade and other receivables (with the exclusion of prepayments); and loans to employees within other non current assets. Financial liabilities at fair value through profit or loss Separately disclosed as minority shareholder put option liabilities. Financial liabilities measured at amortised cost Separately disclosed as trade and other payables; current tax liabilities; other financial liabilities; deferred and contingent consideration; and other non current liabilities. Bank borrowings Interest bearing bank loans and overdrafts are initially recorded as the proceeds received, net of direct issue costs. Direct issue costs are amortised over the period of the loans and overdrafts to which they relate. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are charged to the income statement using the effective interest method and are added to the carrying value of the instrument to the extent that they are not settled in the period in which they arise. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. though may hold such items during the year. These items include forward foreign exchange contracts. Level 3 Fair values measured using inputs for assets or liabilities that are not based on observable market data. Such items include the Group’s put option liability, contingent consideration, investments, and some inputs to profit based share options. Standards effective for the first time this year A number of new and amended standards became effective for periods beginning on or after 1 January 2013. The Directors consider the impact of these standards on the Group and conclude that none are material to the Group’s results and financial position. They include: IFRS 13 defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosures about fair value measurements. (Effective for accounting periods beginning on or after 1 January 2013.) Standards not yet effective New standards, amendments and interpretations to existing standards that are mandatory for the Group’s accounting periods beginning after 1 January 2014 and which the Group has decided not to adopt early. None of these standards have a material effect on our accounts. Those that are relevant to the Group are: IFRS 9 Financial Instruments will eventually replace IAS 39 in its entirety. (Effective for accounting periods beginning on or after 1 January 2018.)* IFRS 10 Consolidated Financial Statements establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. The new standard replaces the consolidation requirements in SIC-12 Consolidation – Special Purpose Entities and IAS 27 Consolidated and Separate Financial Statements (effective for accounting periods beginning on or after 1 January 2014). Treasury shares When the Group reacquires its own equity instruments, those instruments (treasury shares) are debited to treasury reserve. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s treasury shares. Such treasury shares may be acquired and held by other members of the Group. Consideration paid or received is recognised directly in equity. IFRS 13 hierarchy – Capital structure and finance cost IFRS 11 Joint arrangements treats accounting of joint ventures the same as associates (effective for accounting periods beginning on or after 1 January 2014). IFRS 12 Disclosure of Interests in Other Entities includes the disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities (effective for accounting periods beginning on or after 1 January 2014). Level 1 Fair values measured using quoted (unadjusted) prices in active markets for assets and liabilities (e.g. cash, debtors and creditors). Standards, not yet effective, which are not expected to be relevant to the Group Amendments to IAS 28 (effective for accounting periods beginning on or after 1 January 2014). Level 2 Fair values using inputs, other than quoted prices including within Level 1, that are observable for assets or liability either directly or indirectly. The Group does not hold such items at year end, Amendments to IAS 27 (effective for accounting periods beginning on or after 1 January 2014). * These standards have not yet been endorsed by the EU. 88 Company balance sheet At 31 December Fixed assets Investments Current assets Cash at bank Debtors – due within one year – due after one year Creditors falling due within one year Net current liabilities Total assets less current liabilities Creditors falling due after more than one year Total assets Capital and reserves Share capital Share premium Merger reserve Treasury reserve Profit and loss account Shareholders’ funds Note 2013 £000 2012 £000 36 81,942 81,537 15,008 – 37 37 38 39 41 41 41 41 41 17,898 2,473 35,379 (26,007) 9,372 91,314 – 91,314 690 16,402 48,817 (792) 26,197 91,314 8,155 2,657 10,812 (15,726) (4,914) 76,623 (3,910) 72,713 641 14,625 48,817 (792) 9,422 72,713 These financial statements were approved and authorised for issue by the Board on 19 March 2014 and signed on its behalf by: Jamie Hewitt Finance Director M&C Saatchi plc Company Number 05114893 As permitted by section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account. Included within the consolidated income statement for the year ended 31 December 2013 is a profit after tax of £20,457k (2012: £184k). The notes on pages 90 to 92 form part of these financial statements. 89 Notes 35. Accounting policies The financial statements have been prepared under the historical cost convention in accordance with applicable UK accounting standards. The following principal accounting policies have been applied: (a) Valuation of investments Investments held as fixed assets are stated at cost, less any provision for impairment. (b) Pensions Contributions to personal pension plans are charged to the profit and loss account in the period in which they are due. (c) Deferred taxation Deferred tax balances are recognised for all timing differences that have originated but that have not reversed by the balance sheet date. The recognition of deferred tax assets is limited to the extent that the Company anticipates making sufficient taxable profits in the future to absorb the reversal of the underlying timing differences. Deferred tax balances are not discounted. (d) Share based payments Certain employees receive remuneration in the form of share based payments, including shares or rights over shares. The cost of equity settled transactions with employees is measured by reference to the fair value at the date at which they are granted, excluding the impact of any non market vesting conditions (for example, profitability and sales growth targets). The non market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date the entity revises its estimates of the number of the options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the profit and loss account, and a corresponding adjustment to equity over the remaining vesting period. Where awards depend on future events we assess the likelihood of these conditions being met and make an appropriate charge at the end of each reporting period. The credit for equity settled transactions is taken to the share option reserve. The charge for equity settled share based payments is recognised, together with a corresponding increase in equity, over the vesting period of the related share options. The cumulative expense recognised for equity settled share based payments at each reporting date reflects the extent to which the Directors consider, as at the balance sheet date, that the awards will ultimately vest. For cash settled share based payments, a liability is recognised for the amount payable at the balance sheet date with a corresponding charge being made to the profit and loss account. Where payments depend on future events an assessment is made of the likelihood 90 of these conditions being met in determining the amounts to be recorded. Where cash settled share options are only part of the way through their vesting period, the liability and profit and loss account charge are adjusted to reflect the proportion of the vesting period that has been covered up to the balance sheet date. Share based payments include options issued to employees and other long term equity linked bonuses. Payments may be in the form of cash or equity. When options are exercised, the cash received for the issued shares is taken to share capital and share premium and the related balance in the share option reserve is taken to the profit and loss reserve. Where equity settled share options are issued to employees of subsidiary companies, the Company charges the employer (subsidiary) with its employees’ share of cumulative expense. This is paid within 30 days. (e) Dividends Interim dividends are recorded when they are paid and the final dividends are recorded when they become legally payable. (f) Treasury shares When the Company reacquires its own equity instruments, those instruments (treasury shares) are deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s treasury shares. Such treasury shares may be acquired and held by the Company or by other members of the Group. Consideration paid or received is recognised directly in equity. 36. Investments in subsidiary undertakings At 1 January Disposal of subsidiaries Increased investment in subsidiary At 31 December 2013 £000 81,537 – 405 81,942 2012 £000 81,537 (81,537) 81,537 81,537 The significant subsidiary undertakings are listed in note 17 to the consolidated financial statements. In 2012 the Company sold its direct interest in M&C Saatchi Worldwide Ltd in return for equity in M&C Saatchi Network Ltd. In 2013 the Company increased its investment in M&C Saatchi Worldwide Ltd. 37. Current assets 39. Creditors falling due after more than one year Amounts due less than one year Amounts from subsidiary undertakings Prepayments and accrued income Corporation tax debtor Other debtors Total trade debtors and other receivables Amount due after more than one year Deferred tax asset Loans to employees* Total debtors due after more than one year 2013 £000 16,914 91 839 54 2012 £000 7,754 72 327 2 17,898 8,155 80 2,393 47 2,610 2,473 2,657 * This relates to the £1.2m (2012: £1.2m) and the AUD2.0m (2012: AUD 2.0m) loans that the Company lent local management of M&C Saatchi Agency Pty Ltd to enable them to acquire 20% of that business. The loan is repayable if the purchasers no longer have a beneficial interest in the shares of the Australian Group. The loan is unsecured and is at the Bank of England’s base rate of interest; interest on the loan compounds annually and is payable on repayment. 38. Creditors falling due within one year Overdrafts Trade creditors Amounts due to subsidiaries Accruals and deferred income Other payables 2013 £000 – (243) (25,200) (207) (357) 2012 £000 (11,083) (87) (4,210) (151) (195) (26,007) (15,726) Bank loans 40. Directors’ remuneration Total for eight Directors: Directors’ salaries and benefits Contribution to money purchase pension schemes Total remuneration before accounting charges Share option charges Highest paid Director: Directors’ salaries and benefits Contribution to money purchase pension schemes Total remuneration before accounting charges Share option charges 2013 £000 2012 £000 – (3,910) 2013 £000 2012 £000 2,069 2,077 65 62 2,134 354 2,488 2013 £000 427 1 428 38 466 2,139 762 2,901 2012 £000 428 1 429 163 592 Unaudited detail on Directors’ remuneration is disclosed in the Remuneration Report on pages 36 and 37. These numbers include accounting charges for the LTIP schemes which the Remuneration Report excludes. During the year, 3,546,932 (2012: nil) M&C Saatchi plc shares were issued to four directors, in return for Directors’ interest in M&C Saatchi Worldwide Ltd A ordinary shares. Further details including the resulting gains can be found in note 30. The number of Directors with a money purchase pension scheme was 5 (2010: 5). 91 Notes Continued 41. Capital and reserves Year of grant At 1 January 2012 Issue of shares Options exercised Reclassification of share to cash based options Equity settled share based payments Dividends paid Profit for the year AT 31 DECEMBER 2012 Options exercised Equity settled share based payments Put options exercised Dividends paid Profit for the year AT 31 DECEMBER 2013 42. Related parties Share capital £000 Share premium £000 Merger reserve £000 Treasury reserve £000 635 1 5 – – – – 641 44 – 5 – – 13,832 115 678 – – – – 14,625 496 – 1,281 – – 48,817 – – – – – – 48,817 – – – – (792) – – – – – – (792) – – – – Profit and loss account £000 11,976 – (683) – 855 (2,910) 184 9,422 (551) 290 – (3,421) 20,457 Total £000 74,468 116 – – 855 (2,910) 184 72,713 (11) 290 1,286 (3,421) 20,457 690 16,402 48,817 (792) 26,197 91,314 During the year, the Company charged a management recharge to subsidiaries totalling £1,006k (2012: £1,191k). £46k (2012: £230k) was due in relation to this management recharge from subsidiaries as at the balance sheet date. Including these amounts the Company also provides short-term working capital loans to and borrows funds from certain subsidiaries, disclosed in Notes 37 and 38. The amounts due from subsidiary undertakings of £16,914k (2012: £7,754k) is net of £7,406k (2012: £8,553k) provisions for doubtful accounts. Further details of related parties of the Company are provided in note 33. 92 Independent auditors’ report to the members of M&C Saatchi plc We have audited the financial statements of M&C Saatchi plc for the year ended 31 December 2013 set out on pages 38 to 92. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception 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. We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified Respective responsibilities of Directors and auditors by law are not made; or • we have not received all the information and explanations we require for our audit. John Bennett (Senior statutory auditor) For and on behalf of KPMG Audit Plc, statutory auditor Chartered Accountants 15 Canada Square London, E14 5GL United Kingdom 19 March 2014 KPMG Audit Plc is a subsidiary of KPMG Europe LLP registered in England and Wales (with registered number 3110745). As explained more fully in the Directors’ responsibilities statement set out on page 33, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and the parent company’s affairs as at 31 December 2013 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company’s financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. 93 Additional information Advisors Nominated advisor and broker Numis Securities Ltd The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT www.numiscorp.com Solicitors Olswang 90 High Holborn London WC1V 6XX www.olswang.com Auditors KPMG Audit Plc 15 Canada Square Canary Wharf London E14 5GL www.kpmg.com Bankers National Westminster Bank Plc 1 Princes Street London EC2R 8BP www.natwest.com Registrars Computershare Investor Services Plc The Pavilions Bridgwater Road Bristol BS13 8AE www.computershare.com 94 Secretary and registered office Andy Blackstone M&C Saatchi plc 36 Golden Square London W1F 9EE www.mcsaatchiplc.com Country of registration England and Wales Company number 05114893 Investor relations website www.mcsaatchiplc.com Corporate events AGM 11 June 2014 Final 2013 dividend paid 4 July 2014 To those on the register on 6 June 2014 Interim 2014 statement 11 September 2014 Interim 2014 dividend paid 14 November 2014 To those on the register on 31 October 2014 Preliminary announcement of 2014 result Late March 2015 Designed and produced by Addison Group www.addison-group.net 

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