Macfarlane Group PLC Annual Report 2015

Plain-text annual report

Annual Report and Accounts 2015 Group operating and financial results 2015 • 2015 profit in line with market expectation • Continuing strong organic sales growth • Recent acquisitions performing well • Full year dividend of 1.82p per share • Bank facilities extended to June 2019 • Pension deficit reduces to £11.5m Strategic review 02 Macfarlane Group business model 04 Our business in action 06 Chairman’s statement 08 Chief Executive’s review 12 14 Principal risks and uncertainties 16 Corporate responsibility Financial review Governance 22 Board of Directors 24 Report of the Directors 26 Remuneration report 30 Remuneration policy 34 Corporate governance 41 Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements Financial statements 42 Independent Auditor’s report to the Members of Macfarlane Group PLC only Consolidated income statement 44 45 Consolidated statement of comprehensive income Consolidated statement of changes in equity 45 Consolidated balance sheet 46 47 Consolidated cash flow statement 48 Accounting policies 52 74 Company balance sheet 75 Notes to the Company financial statements Notes to the financial statements Shareholder information 87 88 88 Principal operating subsidiaries Five year record Financial diary Strategic review 01 GovernanceFinancial statementsShareholder information02 Macfarlane Group business model Headquartered in Glasgow, Macfarlane Group PLC employs over 750 people at 27 sites across the UK, 1 site in Ireland and 1 site in Sweden and services more than 20,000 customers in a wide range of sectors. How our business generates value Macfarlane is the UK market leader in the distribution of protective packaging products. Macfarlane leverages its purchasing scale to cost-effectively source a comprehensive range of protective packaging products and adds value for the customer by providing independent advice on the most cost-effective choice of product and packing processes, and operating as a single-source supplier for these products on a Just In Time basis with tailored stock management programmes and electronic trading capability. The manufacturing businesses utilise design, intellectual property and know-how to provide a bespoke service to support major manufacturing customers to cost-effectively protect their high-value products in storage and distribution and for FMCG customers to attractively display and accurately identify their products at the point of sale. Macfarlane aims to grow its business by increasing the penetration of existing customers and winning new customers. There will be a natural churn of packaging requirements with our existing customers and we experience a level of sales erosion each year as we optimise the protective packaging usage of our customers. Therefore new business is key to Macfarlane Group’s overall growth and there is specific measurement and focus on this area. Macfarlane Packaging Distribution is the UK market leader in the distribution of protective packaging products and contributes 82% of Group Revenue. Market sectors served • Internet retail • Third party logistics (3PL) • Electronics • Aerospace • Automotive Macfarlane Packaging Design and Manufacture provides a bespoke service to support major manufacturing customers to cost-effectively protect their high-value products in storage and transit and contributes 7% of Group Revenue. Market sectors served • Electronics • Aerospace • Automotive Macfarlane Labels enables FMCG customers to attractively display and accurately identify their products at the point of purchase or sale and contributes 11% of Group Revenue. Market sectors served • Health and beauty • Food • Household goods • Pharmaceuticals Macfarlane Annual Report and Accounts 201503 Our strategy The overall Group objective is to grow sales volumes and achieve a return on sales of at least 5%. Strategic priorities 2015 progress 1 Implementation of a segmental sales strategy to improve customer retention levels, increase product penetration and accelerate new business. 2 Focus on key sectors with growth potential, particularly National Accounts and internet retail. 3 Enhance gross margins through focus on higher added value products and services and more effective sourcing. 4 Ensure operational effectiveness is maximised through efficiencies in logistics and optimising the costs associated with the physical infrastructure. 5 Continuing with our segmented approach has provided increased customer focus within Packaging Distribution. New Customer Service Centre established to enhance support of smaller local customers. Segmentation introduced in Packaging Design and Manufacture in 2015. Segmentation by product type in place within Labels. Overall sales growth of 10% in 2015 reflects the success of our strategy. 2015 sales growth in National Accounts was 15% and in internet retail was 13%. Gross margins within Manufacturing Operations have improved due to the focus on sales of resealable labels. Strategic and tactical purchasing programmes are in place to improve our sourcing capability. Logistics costs reduced to 2.9% (2014 – 3.1%) of sales through use of the Paragon planning tool and driver training. Property costs reduced to 3.9% (2014 – 4.0%) of sales through constant focus on cost reduction opportunities in our property network. Supplement organic growth with suitable acquisitions. We completed the acquisition of One Packaging Limited in August 2015 and have a pipeline of potential acquisition opportunities for 2016. Strategic reviewGovernanceFinancial statementsShareholder information04 Our business in action 15 million metres2 of labels produced in 2015 Macfarlane Annual Report and Accounts 201505 1,200 bespoke designs in 2015 20,000 distribution customers Strategic reviewGovernanceFinancial statementsShareholder information06 Chairman’s statement Macfarlane Group PLC delivered strong growth in 2015 with sales of £169.1m (2014: £153.8m) up 10% on the previous year and profit before tax of £6.8m (2014: £5.6m), 21% up on the previous year. The strong trading performance, which maintained the positive trends achieved in recent years, was achieved through good organic sales growth, the contribution from recent acquisitions, an improved gross margin and effective control of costs. Graeme Bissett Chairman Peter D. Atkinson Chief Executive Macfarlane Annual Report and Accounts 201507 Trading The Packaging Distribution business increased sales by 13% to £143.0m (2014: £126.9m). This was achieved through organic growth of 6%, with particular success in the expanding internet retail sector and increased penetration of National Accounts. The good organic sales growth was enhanced by the contributions from One Packaging, acquired in August 2015, and the full year contribution from the acquisitions of Lane Packaging and Network Packaging, concluded in 2014. The growth in sales, combined with an improved gross margin, translated into Packaging Distribution achieving a 17% increase in operating profit to £6.8m (2014: £5.8m). Sales in our Manufacturing Operations at £26.1m (2014: £26.9m) were 3% down on the previous year. This was partly due to management actions to rebalance the mix of products in our Labels business and the impact of exchange rates and demand weakness, particularly in export markets, in our Packaging Design and Manufacture business. Despite the lower sales, the Division increased operating profit to £1.0m (2014: £0.9m) through the benefits of the better balanced product portfolio and improvements in operational efficiency. The Group profit before tax amounted to £6.8m (2014: £5.6m). Dividend The Board remains committed to providing shareholders with an appropriate return on investment and is proposing a final dividend of 1.29 pence per share, making a full year dividend of 1.82 pence per share, a 10% increase on the prior year’s dividend of 1.65 pence per share. Subject to the approval of shareholders at the Annual General Meeting on 10 May 2016, this dividend will be paid on 9 June 2016 to those shareholders on the register at 13 May 2016. Net Debt and Pension Scheme As a consequence of the acquisition undertaken during 2015, the Group’s net bank debt at 31 December 2015 increased to £11.6m from £10.1m at the prior year-end. The Group’s existing bank facilities with Lloyds Banking Group have been extended until June 2019 and have been increased to £25.0m which will accommodate normal working capital requirements and support acquisition funding. A further option is available to extend the facilities to £30.0m in the period to June 2019. The Group’s pension deficit reduced broadly in line with the deficit reduction contributions made in the year. At 31 December 2015, the deficit was £11.5m, a reduction of £2.4m from the previous year (2014: £13.9m). Outlook The Board is confident that our strategy to position the business to serve key growth markets continues to be effective. The 21% increase in pre-tax profits represents the sixth consecutive year of profit growth for Macfarlane Group. We will continue to focus on opportunities in sectors with strong growth prospects, including internet retail, third party logistics and National Accounts and deliver high standards of service to all customers. We will also maintain our programme of acquiring good quality businesses to augment organic growth. This strategy has served all stakeholders in our business well in recent years and will continue to do so. The positive trends seen in 2015 have been sustained in the early part of 2016 and Macfarlane Group has started the year well. Graeme Bissett Chairman Group performance Revenue (£m) Profit before tax (£m) Dividend (p) 169.1 169.1 169.1 6.8 153.8 153.8 153.8 143.9 143.9 143.9 5.1 5.6 5.1 5.6 6.8 1.55 5.1 6.8 1.82 1.65 1.65 5.6 1.55 1.82 1.55 1.65 1.82 2013 2014 2013 2015 2014 2013 2015 2013 2014 2014 2015 2013 2015 2014 2013 2015 2013 2014 2014 2015 2013 2015 2014 2013 2015 2014 2015 Strategic reviewGovernanceFinancial statementsShareholder information08 Chief Executive’s review – Packaging Distribution Macfarlane Packaging Distribution is the leading UK specialist distributor of protective packaging materials and, in what is a highly fragmented market, Macfarlane is the market leader. The business operates from 18 Regional Distribution Centres (RDCs) supplying customers with a comprehensive range of protective packaging materials and services on a local, regional and national basis. Competition in the distribution market is from local and regional protective packaging specialist companies and national distribution generalists who supply a range of products, including protective packaging materials. Macfarlane competes effectively on a local basis through its strong focus on and regular monitoring of customer service, its breadth and depth of product offer and through the recruitment and retention of staff with good local market knowledge. On a national basis Macfarlane Packaging has focus, expertise and a breadth of product and service knowledge all of which enables it to compete effectively against non-specialist packaging distributors. Macfarlane Packaging benefits its customers by enabling them to ensure their products are cost-effectively protected in transit and storage through the supply of a comprehensive product range, single source supply, Just In Time delivery, tailored stock management programmes, electronic trading and independent advice on both packaging materials and packing processes. 2015 trading Macfarlane Packaging Distribution achieved a sales increase of 13% over 2014 comprising 6% organic growth in the base business and 7% from the full year contribution of the 2014 acquisitions as well as the part year contribution from the acquisition of One Packaging. The business achieved particularly strong growth in the supply of protective packaging to internet retailers both directly and through our partnerships with major Third Party Logistics (3PL) customers. Against the backdrop of a competitive environment, gross margin increased to 29.5% compared to 28.8% in 2014 through more effective sourcing and customer mix changes. Overheads increased as a result of the full year impact of the two 2014 acquisitions, but cost control remained strong with the overhead to sales ratio at 24.8% compared with 24.2% in 2014. Operating profit in the Packaging Distribution business at £6.8 million grew by 17% versus 2014. RDC performance The 18 RDCs currently in our network are managed and measured as profit centres. In 2015 we had 15 of our 18 RDCs performing above the target return on sales level of 5%. The three remaining RDCs continue to demonstrate improvements that confirm their ability to achieve the target return on sales in the medium term. Future plans We expect general demand levels to remain stable in 2016. Therefore our plans continue to be focused on those markets showing growth, building market share and improving profitability through the following actions: • Building competitive differentiation to increase our sales penetration of the growing internet retail sector both directly and through our partnerships with key 3PL organisations; Distribution performance Sales (£m) 143.0 143.0 Operating profit (£m) 6.8 6.8 6.8 143.0 4.5 4.7 4.3 116.3 126.9 116.3 126.9 126.9 5.8 116.3 5.0 5.8 4.3 5.8 5.0 5.0 2013 2014 2013 2015 2014 2013 2015 2013 2014 2014 2015 2013 2015 2014 2013 2015 2013 2014 2014 2015 2013 2015 Return on sales (%) 4.5 4.7 4.3 4.5 4.7 2014 2013 2015 2014 2015 Macfarlane Annual Report and Accounts 201509 • Expanding our focus in industry sectors which will clearly benefit from Macfarlane’s national coverage through our specialist National Account sales team; • Continuing to develop our • Improving the awareness of our membership of NovuPak, for UK based customers requiring our capabilities on a wider European basis; • Reducing operating costs web-based presence through macfarlanepackaging.com to improve online visibility and provide customers with access to our full range of products and services; • Commencing programmes to integrate our recently acquired companies following the completion of the respective earn-out periods; • Supplementing organic growth through the identification and execution of further suitable acquisition opportunities; by evaluating alternatives to the existing property footprint, including the delivery of anticipated benefits from the recently announced closure of our Hayes RDC; • Implementing further operational savings in logistics through expanded use of the Paragon vehicle management system and implementation of our warehouse best practice programme; and • Maintaining the focus on working capital management to reduce borrowing levels. Distribution Sales Cost of sales Gross margin Overheads Operating profit Base business £000 Acquisition impact £000 2015 £000 2014 £000 133,907 (94,468) 39,439 (33,077) 6,362 9,128 (6,349) 2,779 (2,390) 143,035 (100,817) 42,218 (35,467) 126,907 (90,382) 36,525 (30,767) 389 6,751 5,758 Images from top Macfarlane Group acquired One Packaging in 2015. Macfarlane operates from 18 RDCs nationwide. Paragon software usage will help reduce our logistic costs. Key competitive advantages • 18 nationwide strategically located distribution centres • Independent expertise in packaging and the packing process • Strategic supplier relationships • Breadth of product range • Flexibility of supply and service • Internet retail, 3PL specialism and national accounts • Experience in a wide range of industries • Multi-channel approach to market Strategic reviewGovernanceFinancial statementsShareholder information10 Chief Executive’s review – Manufacturing Operations Manufacturing Operations Sales Cost of sales Gross margin Overheads Operating profit 2015 trading 2015 external sales were 3% below those in 2014 caused by a number of key customers experiencing a slowdown in their levels of export activity and the impact of weak demand in certain market sectors. Management continued to change the mix of products and services towards those with higher added value but the lower level of sales in 2015 resulted in profitability below that achieved in 2014. The sales slowdown in the existing customer base required us to increase our focus on new business in 2015 and as a result, the business has maintained its investment in sales to create a strong pipeline of new customer relationships, which should benefit the business in 2016. Macfarlane’s Manufacturing Operations comprise our Packaging Design and Manufacture business and our Labels business, which includes self-adhesive and resealable labels. Design and Manufacture The principal activity of the Packaging Design and Manufacture business is the design, manufacture and assembly of custom-designed packaging solutions for customers requiring cost-effective methods of protecting high value products in storage and transit. The primary raw materials are corrugate, timber and foam. The business operates from two manufacturing sites in Grantham and Westbury, supplying both directly to customers and also through the RDC network of the Packaging Distribution business. Its key market sectors are defence, aerospace, medical equipment, electronics and automotive. The markets in which we operate are highly fragmented with a range of locally based competitors. We differentiate ourselves through our technical expertise, design capability, industry accreditations and national coverage through the partnership with Macfarlane Packaging Distribution. Manufacturing Operations performance Sales (£m) 27.6 26.9 27.6 26.1 26.9 27.6 1.3 26.1 26.9 Operating profit (£m) 1.3 4.7 4.7 1.3 26.1 2015 £000 26,097 (15,094) 11,003 (10,052) 2014 £000 26,860 (15,922) 10,938 (10,050) 951 888 Future plans The priorities for 2016 are: • Accelerate sales growth, particularly in certain key sectors e.g. Defence, Aerospace and Medical; • Identify and execute suitable acquisition opportunities; • Prioritise sales activity on the higher added-value bespoke composite pack product range; and • Continue to strengthen the relationship between our Packaging Design and Manufacture operations and our Packaging Distribution business to create both sales and cost synergies. Return on sales (%) 4.7 1.0 1.0 0.9 0.9 1.0 3.6 0.9 3.3 3.6 3.6 3.3 3.3 2013 2014 2013 2015 2014 2013 2015 2013 2014 2014 2015 2013 2015 2014 2013 2015 2013 2014 2014 2015 2013 2015 2014 2013 2015 2014 2015 Macfarlane Annual Report and Accounts 201511 Labels Our Labels business designs and prints self-adhesive labels for major FMCG customers in the UK and Europe and resealable labels for major customers in the UK, Europe and the USA. The business operates from production sites in Kilmarnock and Wicklow and a sales and design office in Sweden, which focuses on the development and growth of our resealable labels business, Reseal-it. The Labels business has a high level of dependency on a small number of major customers. Management works closely with these key customers to ensure high levels of service and to introduce product and service development initiatives to achieve competitive differentiation. Although sales in 2015 were 2% down on 2014, this was in line with our plans as we continued to rebalance sales between our resealable and self- adhesive label ranges. As the issues of food waste and easy to open packs become higher profile, the demand for resealable packaging is growing and is creating growth opportunities for the Macfarlane Labels’ Reseal-it range. The focus on Reseal-it helps offset the highly competitive nature of the self-adhesive label market in the UK, which is being impacted by downward pricing pressure from both manufacturers and retailers. The benefit of the improved contribution from our resealable labels range and the impact of improved production efficiencies resulted in Labels’ profitability showing an encouraging improvement over 2014. Future plans The priorities for 2016 are: • Maintenance of the strategic focus on higher added value products and services; • Changing our commercial offering in the self-adhesive label market to counterbalance customer order patterns and volatility; • Continued improvement in operational efficiency to mitigate sales price pressure; and • Further development of the Reseal-it product in the US through the Printpack partnership, in Europe through new business wins and in the UK through improved penetration with key retailers. 2016 Outlook Despite the wider macroeconomic concerns, we expect general market demand in 2016 to remain stable. There are specific market sectors such as internet retail which are forecast to show good growth and Macfarlane Group will focus on ensuring that we continue to be well positioned to benefit from growth in these sectors. During 2016 we will look at further opportunities for sales growth through the acquisition of good quality protective packaging businesses that can leverage our current infrastructure or improve our geographic penetration. Macfarlane Group’s businesses all have good market positions with strong differentiated product and service offerings. Our business model is flexible and we have a clear strategic plan, which is being effectively implemented as reflected in our track record of consistent, profitable growth. Whilst the economic environment is showing stability, our future performance will again be largely dependent on our own efforts to grow sales and increase efficiencies. We operate a flexible business model and our ability to focus on the most attractive UK market sectors for our products and services gives us confidence that 2016 will be another year of progress for Macfarlane Group. Peter D. Atkinson Chief Executive Images from top Design, manufacture and assembly of custom-designed packaging solutions. Greene Farm Foods has seen the benefits of using Reseal-it. Self-adhesive labels for major FMCG customers. Strategic reviewGovernanceFinancial statementsShareholder information12 Financial review Profit before exceptional items 6,767 5,606 5,052 4,485 3,874 3,351 2015 £000 2014 £000 2013 £000 2012 £000 2011 £000 2010 £000 2015 represents the Group’s sixth consecutive year of profit growth. Trading The Group saw organic growth in sales of 10% during 2015, driven by our Packaging Distribution business. The sales line was further enhanced by strong contributions from our acquisition of One Packaging in its post-acquisition trading period within the Group. Group sales rose to £169.1 million an increase of £15.3 million from 2014. Profit before tax for 2015 increased to £6.8 million, an increase of £1.2 million from that achieved in 2014. Taxation The tax charge for the year from continuing operations was £1.3 million on profit before tax of £6.8 million, a rate of 19.50%, slightly below the prevailing rate of 20.25% mainly due to the recognition of overprovisions from previous years. This compared with a tax charge of £1.2 million on the profit before tax of £5.6 million in 2014 and a tax rate of 20.74%. Earnings per share Diluted earnings per share totalled 4.35p (2014 – 3.78p) an increase of 15%, reflecting the growth in profitability and the benefit from the long-term reductions in corporation tax rates in recent years. Dividends A dividend of 0.53p per share was paid on 15 October 2015. A further dividend of 1.29p per share is subject to approval by shareholders at the AGM in May 2016 and is not included as a liability in these financial statements. Dividend cover has increased significantly in the year to 2.6 times. The Group continues to balance the aim to pay an attractive level of dividend against the need to retain funds in the business to finance acquisitions and capital expenditure. Cash flow and net debt The Group’s debt facilities with Lloyds Banking Group PLC agreed in 2015, comprise three-year committed borrowing facilities of up to £20.0 million for the period to February 2017, secured over part of Macfarlane Group’s trade receivables. The facilities bear interest at normal commercial rates and carry standard financial covenants in relation to interest cover and levels of headroom over trade receivables. These facilities were increased to £25.0 million in February 2016 with an additional option to increase them further to £30.0 million. The facilities are now available until June 2019 and will accommodate increased working capital requirements from our organic growth as well as finance for acquisitions. The Group’s financing requirements are met by maintaining committed borrowing facilities. The Group had net debt of £12.8 million at 31 December 2015, an increase of £2.1 million from the previous year. The Group spent £3.9 million on acquisitions in 2015 (2014 – £5.1 million) and £1.6 million on capital expenditure in 2015 (2014 – £1.2 million). We will continue to invest where there are needs or opportunities to meet future growth plans. The Group will strive to ensure that in 2016, profit generation is, at the very minimum, matched by cash generation. The Group will remain prudent in its assessment of the likely returns from capital expenditure and potential acquisitions. Acquisitions During 2015 Macfarlane Group PLC acquired One Packaging Limited as set out in note 22. An element of the consideration was deferred, subject to meeting earnout targets in the trading period immediately after acquisition. In June 2015, the maximum earnout value was paid to the former shareholders of Lane Packaging Limited, following the conclusion of the earnout period twelve months after the acquisition in 2014. The maximum earnout value was also paid to the former shareholders of Network Packaging Limited in September 2015, following the conclusion of their first earnout year after the acquisition in 2014. Our current expectation is to pay the maximum earnout value for the second earnout period which concludes in September 2016. Market capitalisation and share price movements At the year-end the Company’s market capitalisation was £70.7 million, compared with £45.5 million last year. The share price at 31 December 2015 was 56.75p, compared with 36.50p at 31 December 2014. The range of transaction prices for Macfarlane Group shares during 2015 was 35.50p to 57.50p for each ordinary share of 25p. Financial instruments The Group’s principal financial instruments comprise bank borrowings, cash balances and other items, such as trade receivables and trade payables that arise directly from its operations as well as shareholders’ equity and contingent consideration arising from acquisitions. The main purpose of any financial instruments Macfarlane Annual Report and Accounts 201513 Pension scheme deficit 2015 £000 2014 £000 2013 £000 Fair value of scheme investments Present value of scheme liabilities 67,793 (79,311) 67,990 (81,863) 54,238 (70,134) Deficit at 31 December (11,518) (13,873) (15,896) is to provide finance for the Group’s operations. It is the Group’s policy that no speculative trading in financial instruments is undertaken. The main risks arising are liquidity risk and credit risk and the secondary risks are interest rate risk and currency risk. The Board reviews and agrees policies for managing these risks, which have remained unchanged since the beginning of 2015 and are set out in note 14 to the financial statements. Pension scheme deficit The Group’s pension scheme deficit is sensitive to movements in bond yields, inflation, longevity assumptions and investment returns. The impact of these sensitivities is set out in note 24 to the financial statements. The Board continues to take steps to cut Macfarlane Group’s pension deficit including regular deficit reduction contributions each year. This, combined with careful stewardship of the investment portfolio by the Trustees, in conjunction with the Company, has helped better match the investments with the scheme’s liability profile. Following the triennial actuarial valuation of the scheme at 1 May 2014, the Company agreed a new schedule of contributions with the Pension Scheme Trustees, which assumed a recovery plan period of 10 years. International Financial Reporting Standards and Accounting Policies As detailed in the 2014 Annual Report, the new International Financial Reporting Standards adopted during 2015 had no major impact on the disclosures and accounting policies in these financial statements. The Group continues to comply with all International Financial Reporting Standards adopted by the European Union. Going concern The Directors, in their consideration of going concern, have reviewed the Group’s cash flow forecasts and profit projections, which are based on past experience and what they consider to be a prudent assessment of the market. The Group’s business activities together with the factors likely to affect its future development, performance and financial position are set out in the Chairman’s Statement and Chief Executive’s review on pages 6 to 15. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next twelve months. For this reason they continue to adopt the going concern basis in preparing the financial statements. John Love Finance Director 25 February 2016 All images Our Innovation Lab in Milton Keynes demonstrates the range of our capabilities to customers. Strategic reviewGovernanceFinancial statementsShareholder information14 Principal risks and uncertainties The principal risks and uncertainties faced by the Group and the factors mitigating these risks are detailed on this page and the following page. There are a number of other risks that we manage which are not considered to be key risks. In addition the Group is subject to the impact of general economic conditions, the competitive environment and risks associated with business continuity. These are all mitigated in ways that are common to all businesses and not specific to Macfarlane Group. The risks set out on pages 14 and 15 are complemented by an overall governance framework including clear and delegated authorities, business performance monitoring and appropriate insurance cover for a wide range of potential risks. There is a dependence on good quality local management, which is supported by an investment in training and development and ongoing performance evaluation. Risk Raw material prices The Group’s businesses are impacted by commodity-based raw material prices and manufacturer energy costs, with profitability sensitive to supplier price changes. The principal components are corrugated paper, polythene films, timber and foam, with changes to paper and oil prices having a direct impact on the price we pay to our suppliers. Funding defined benefit pension scheme The Group’s defined benefit pension scheme is sensitive to a number of key factors; investment returns, discount rates used to calculate scheme liabilities and mortality assumptions. The IAS 19 valuation of the Group’s defined benefit pension scheme as at 31 December 2015 estimated the scheme deficit to be £11.5m, a reduction of £2.4m during 2015. Small changes in these assumptions could mean that the deficit increases. Property Given the multi-site nature of its business, the Group has a property portfolio comprising 3 owned sites and 28 leased sites of which 4 are sublet. This portfolio gives rise to risks in relation to ongoing lease costs, dilapidations and fluctuations in value. Financial liquidity, debt covenants and interest rates The Group needs continuous access to funding to meet its trading obligations and to support organic growth and acquisitions. There is a risk that the Group may be unable to obtain funds or that such funds will only be available on unfavourable terms. The Group’s borrowing facilities now comprise a committed facility of up to £25.0 million, with an option to increase these further to £30.0 million, including requirements to comply with specified covenants, with a breach potentially resulting in Group borrowings being subject to more onerous conditions. Decentralised structure The Packaging Distribution business model reflects a decentralised approach with a high dependency on effective local decision-making. There is a risk that management control is less effective and local decisions do not meet overall corporate objectives. Working capital The Group has a significant investment in working capital in the form of trade receivables and inventories. There is a risk that this investment is not fully recovered. Mitigating factors • The Group works closely with its supplier base to manage the scale and timing of price increases to end-users effectively. Our IT systems monitor and measure our effectiveness in recovering supplier price changes. Where possible, alternative supplier relationships are maintained to minimise supplier dependency. We work with customers to redesign packs and reduce packing cost to mitigate the impact of cost increases. • The scheme was closed to new members in 2002. • Benefits for active members were amended by freezing pensionable salaries at 30 April 2009 levels. • Revaluation of deferred members’ benefits has reflected Consumer Prices Index as the inflation measure since 2010. • A Pension Increase Exchange option is available to offer flexibility to pensioners in the current level of pension benefits and the rate of future increases. • The investment profile is constantly reviewed to ensure a more accurate matching of investments and the liability profile of the scheme. As a result, in 2014 the scheme’s fixed interest bonds were switched into Liability-Driven Investments. • Where a site is non-operational the Group seeks to assign, sell or sub-lease the building to mitigate the financial impact. If this is not possible, rental voids are provided on vacant properties taking into consideration the likely period of vacancy and incentives to re-let. • The Group seeks to maintain an appropriate level of committed bank facilities that provides sufficient headroom above peak projected borrowing requirements. The Group continually monitors net debt and forecast cash flows to ensure that it will be able to meet its financial obligations as they fall due. Compliance with debt covenants is monitored on a monthly basis and sensitivity analysis is applied to forecasts to assess the impact on covenant compliance. • The existing facilities have been extended to June 2019. • A comprehensive management information system is maintained with key performance indicators monitored consistently and regularly with actions taken when required. • Credit risk is controlled by applying rigour to the management of trade receivables by our credit control team, managed by a Credit Manager and subject to additional scrutiny from the Group Finance Director. • Inventory levels and order patterns are regularly reviewed and risks arising from holding bespoke stocks are managed by obtaining order cover from customers. Macfarlane Annual Report and Accounts 2015Risk Raw material prices The Group’s businesses are impacted by commodity-based raw material prices and manufacturer energy costs, with profitability sensitive to supplier price changes. The principal components are corrugated paper, polythene films, timber and foam, with changes to paper and oil prices having a direct impact on the price we pay to our suppliers. Funding defined benefit pension scheme The Group’s defined benefit pension scheme is sensitive to a number of key factors; investment returns, discount rates used to calculate scheme liabilities and mortality assumptions. The IAS 19 valuation of the Group’s defined benefit pension scheme as at 31 December 2015 estimated the scheme deficit to be £11.5m, a reduction of £2.4m during 2015. Small changes in these assumptions could mean that the deficit increases. Property Given the multi-site nature of its business, the Group has a property portfolio comprising 3 owned sites and 28 leased sites of which 4 are sublet. This portfolio gives rise to risks in relation to ongoing lease costs, dilapidations and fluctuations in value. Financial liquidity, debt covenants and interest rates The Group needs continuous access to funding to meet its trading obligations and to support organic growth and acquisitions. There is a risk that the Group may be unable to obtain funds or that such funds will only be available on unfavourable terms. The Group’s borrowing facilities now comprise a committed facility of up to £25.0 million, with an option to increase these further to £30.0 million, including requirements to comply with specified covenants, with a breach potentially resulting in Group borrowings being subject to more onerous conditions. Decentralised structure The Packaging Distribution business model reflects a decentralised approach with a high dependency on effective local decision-making. There is a risk that management control is less effective and local decisions do not meet overall corporate objectives. Working capital is not fully recovered. The Group has a significant investment in working capital in the form of trade receivables and inventories. There is a risk that this investment 15 Viability statement The Directors confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the next three years to December 2018. The Directors’ assessment has been made with reference to the resilience of the Group and the strength of its financial position, the Group’s current strategy, the Board’s risk appetite and the Group’s principal risks and how these are managed as set out on the current and previous page. The Group has a broad spread of customers across a range of different sectors, with some longer term contracts in place. The assessment period of three years has been chosen as it is consistent with the Board’s review of the Group’s strategy, at which the prospects of each business for the forthcoming three year period are discussed, assumptions are made regarding future growth rates for existing businesses and acceptable levels of performance in that period. A robust financial model of the Group is built for each business covering the three year period. The model is subject to sensitivity analysis which includes flexing a number of the main assumptions, namely: future revenue growth, gross margins, operating costs and working capital management. The results of flexing these assumptions, both individually and in aggregate, are used to determine whether additional bank facilities will be required during the three year period. The review and analysis also considers the principal risks facing the Group as described here and the potential impact these risks could have on the Group’s business model, future performance, solvency and liquidity. Mitigating factors • The Group works closely with its supplier base to manage the scale and timing of price increases to end-users effectively. Our IT systems monitor and measure our effectiveness in recovering supplier price changes. Where possible, alternative supplier relationships are maintained to minimise supplier dependency. We work with customers to redesign packs and reduce packing cost to mitigate the impact of cost increases. • The scheme was closed to new members in 2002. • Benefits for active members were amended by freezing pensionable salaries at 30 April 2009 levels. • Revaluation of deferred members’ benefits has reflected Consumer Prices Index as the inflation measure since 2010. • A Pension Increase Exchange option is available to offer flexibility to pensioners in the current level of pension benefits and the rate of future increases. • The investment profile is constantly reviewed to ensure a more accurate matching of investments and the liability profile of the scheme. As a result, in 2014 the scheme’s fixed interest bonds were switched into Liability-Driven Investments. • Where a site is non-operational the Group seeks to assign, sell or sub-lease the building to mitigate the financial impact. If this is not possible, rental voids are provided on vacant properties taking into consideration the likely period of vacancy and incentives to re-let. • The Group seeks to maintain an appropriate level of committed bank facilities that provides sufficient headroom above peak projected borrowing requirements. The Group continually monitors net debt and forecast cash flows to ensure that it will be able to meet its financial obligations as they fall due. Compliance with debt covenants is monitored on a monthly basis and sensitivity analysis is applied to forecasts to assess the impact on covenant compliance. • The existing facilities have been extended to June 2019. • A comprehensive management information system is maintained with key performance indicators monitored consistently and regularly with actions taken when required. • Credit risk is controlled by applying rigour to the management of trade receivables by our credit control team, managed by a Credit Manager and subject to additional scrutiny from the Group Finance Director. • Inventory levels and order patterns are regularly reviewed and risks arising from holding bespoke stocks are managed by obtaining order cover from customers. Strategic reviewGovernanceFinancial statementsShareholder information16 Corporate responsibility Using an operational approach, Macfarlane Group identified its boundaries to ensure all of the activities and facilities for which it is responsible were being recorded and reported in line with Scope 1 and 2 of the Mandatory Greenhouse Gas Reporting regulation. Relevant data was provided to an independent consultant, Carbon Clear. The validity, accuracy and completeness of the data was audited by Carbon Clear and then used to calculate the GHG for Macfarlane Group. The calculations were completed in accordance with the main requirements of ISO-14064-1:2006 standard and deliver both absolute values and an intensity ratio for Macfarlane’s emissions. Acquisitions made during 2015 have been included in GHG reporting, an assumption has been made regarding usage based on equivalent sites within the Group. Macfarlane Group uses total turnover (£000) in the reporting period to calculate the intensity ratio, as this allows emissions to be monitored over time taking into account changes in the size of the company. This factor was chosen because it provides the greatest degree of accuracy and is the metric best aligned to business growth. The results show that total gross GHG emissions in the period were 6,848 tonnes of CO2e, (2014 – 6,763 tonnes) comprised of the following; • Direct Emissions (Scope 1) 4,315 tonnes of CO2e – 63% (2014 – 4,099 tonnes – 61%) • Indirect Emissions (Scope 2) 2,533 tonnes of CO2e – 37% (2014 – 2,664 tonnes – 39%) Broken down by business unit the results were as follows; • Distribution 4,707 tonnes of CO2e – 69% (2014 – 4,400 tonnes – 65%) • Manufacturing Operations 2,141 tonnes of CO2e – 31% (2014 – 2,363 tonnes – 35%) These results are shown in tables 1 and 2 and comparing year on year emissions data for the two years 2014 and 2015, overall emissions have increased by 85 tonnes which equates to an increase of 1.3%. The increase in emissions in 2015 has arisen primarily from the increase in Vehicle Fuel and Natural Gas consumption. Macfarlane Group has a responsibility to ensure that through its business operations it impacts positively on society. In order to achieve this we have a series of three programmes focused on environmental care, improving the customer experience and increasing employee engagement. Corporate Responsibility (CR) leadership comes from an internal committee consisting of members from a cross section of the Group led by the Chief Executive. The key objectives of the CR Committee are: • To improve the awareness of CR across the Group; • To develop and implement CR action plans that support the CR strategy; • To ensure that CR becomes an integral part of daily operational activities; and • To monitor and report on CR performance using agreed key performance indicators (KPI’s). The environment Mandatory Greenhouse Gas Reporting 2015 Macfarlane Group is committed to reducing its greenhouse gas (GHG) emissions. This report outlines Macfarlane’s GHG emissions for the year ended 31 December 2015. Table 1: emissions data Type of emissions Activity 2015 Units 2014 Units 2015 Tonnes of CO2e 2014 Tonnes of CO2e Direct (scope 1) Indirect (scope 2) Total gross emissions (tCO2e) Natural gas (kWh) Vehicle fuel (litres) Other Subtotal Purchased electricity (kWh) 2,365,340 1,482,963 30,263 2,241,526 1,396,409 26,398 5,480,258 5,390,508 436 3,832 47 4,315 2,533 6,848 415 3,634 50 4,099 2,664 6,763 Macfarlane Annual Report and Accounts 201517 Table 2: intensity ratio Intensity metric Total gross GHG emissions (tCO2e) Total Sales (£000) Carbon Intensity tCO2e/£000 2015 2014 6,848 169,132 0.040 6,763 153,767 0.044 Table 3: emissions data – business units Business unit Packaging Distribution Manufacturing Operations Total 2015 Tonnes of CO2e 4,707 2,141 6,848 2014 Tonnes of CO2e 4,400 2,363 6,763 2015 Sales £000 2014 Sales £000 2015 tCO2e/£000 2014 tCO2e/£000 143,035 26,097 126,907 26,860 169,132 153,767 0.033 0.082 0.040 0.035 0.088 0.040 References The following source of the carbon emissions factors was used: “2015 Guidelines to Defra/DECC’s GHG Conversion Factors for Company Reporting”, Department for Environment, Food and Rural Affairs (DEFRA) and Department for Energy and Climate Change (DECC)” Waste management Landfill avoidance is our key waste objective and further improved across all sites during 2015 with the biggest improvement being across our Distribution business. Recycling rates on site were in line with our waste strategy and comparable to last year. Costs were marginally higher in 2015 due to additional services being added and increased volumes however a proportion of these costs are offset by revenues generated by baled corrugated waste through collections. As a business we baled more corrugated waste compared to previous years and this now accounts for 40% of our overall total waste tonnage the value of which is linked to waste paper and raw material indices which remained stable throughout 2015. Our goals for 2016 are as follows: • Work towards achieving a zero to landfill status; • Continue to work towards reducing wood costs by further segregation of grades, finding economical solutions to specific waste streams identified through the ESOS audit; • Increase the recycling rates in the Distribution business by introducing an increased upstream approach to removing recyclable materials; • Introduce a programme of new site audits to explore and drive through these objectives; and • Audit our waste provider, Cory Environmental. Environmental care Macfarlane Group works in partnership with its customers and suppliers to ensure, at every opportunity, we provide an expert, independent and tailored approach, so that the products and services we provide take into consideration the impact on the environment. One approach we take in order to achieve this is through an Environmental Product Matrix, produced in conjunction with our suppliers, which is consistent with the underlying need to ensure products are effectively protected in storage and transit. This Matrix enables our customers to choose packaging, which is fit for purpose; whilst ensuring they still embrace the Reduce, Re-use, and Recycle ethos. Strategic reviewGovernanceFinancial statementsShareholder information18 Corporate responsibility (continued) Environmental care (continued) To support our ongoing commitment to improve our environmental performance, we pursue the following objectives: • To ensure compliance with all applicable environmental legislation and regulations; • To reduce emissions’ pollution; • To improve waste management practices; • To reduce the consumption of natural resources; • To minimise noise and other nuisances; and • To continuously assess our environmental performance. Environmental information is recorded, reviewed and analysed, by an identified team of individuals to ensure compliance with the Company’s legal obligations and achievement of internal objectives and targets. The Group continues to make progress in its performance against the identified CR objectives. During 2016 we will maintain the focus on our CR programmes implementing new initiatives to ensure our performance improvement is sustained. 2015 0.34 0.46 0.38 2014 0.24 0.22 0.23 2013 0.00 0.40 0.08 To ensure constant and consistent focus regarding Health and Safety throughout the Group, it is a main agenda item at all formal monthly review meetings and operating sites in the Group are internally assessed and graded on their Health and Safety performance. The Group Board plays a pivotal role in overseeing the operation of all Health and Safety. The Group Board reviews a monthly report on Health and Safety at each meeting. This report covers incidents, near misses, reportable and non-reportable incidents. The Accident Frequency Rate (AFR) representing the number of reportable incidents per 100,000 man-hours worked is shown above. In 2015, we experienced an increase in AFR vs. 2014. This represented five reportable incidents compared to three in 2014. All reportable incidents are investigated thoroughly by our Health & Safety team and changes to working practices implemented if required. Accident frequency rate Business unit Packaging Distribution Manufacturing Operations Group Registration to ISO 14001 With the exception of recent acquisitions, all our UK packaging sites are registered to BSI ISO 14001 Environmental Management Standard. As an internationally recognised standard on environmental management, registration involves a process of continual assessment of our environmental standards and processes. Health and safety The health, safety and welfare of our people, including colleagues, customers and suppliers, forms a critical part of Macfarlane Group’s business objectives. We aim to achieve a positive health and safety culture through the creation of a safe and healthy work environment, preventing and minimising risks. Our vision and goals for Health and Safety and how we commit to achieve them are based upon the best practice guidelines, issued by the Health and Safety Executive (HSE). To ensure we adhere to and abide by best health and safety practices we have dedicated Health and Safety Managers in the business, who work with local Health and Safety teams to ensure knowledge and standards are effectively applied to the business on a consistent basis throughout all the health and safety disciplines. Macfarlane Annual Report and Accounts 201519 Macfarlane group websites Our family of websites enables existing and potential customers to research and evaluate our products and services and is a major contributor in generating new leads for the business. We will continue to invest in our websites to improve the experience for our customers and visitors and strengthen our value proposition. Annual customer satisfaction scores Business unit Packaging Distribution Packaging Design and Manufacture Labels 2015 87% 94% 90% 2014 87% 94% 82% The customer experience Customer feedback To continually improve our service to our customers, we use a range of metrics to evaluate our performance on an annual basis. In Packaging Distribution, we gain regular feedback from our customers throughout the year through Net Promoter Score (NPS) Surveys, Mystery Shopper and online Trust Pilot reviews. This insight is then used to improve products, processes and systems that interact with our customers. In addition, we continue to survey our customers in all of our businesses, on an annual basis, to evaluate our performance against a range of key service metrics. Sales order management Our online customer order management system, Customer Connect, and www.macfarlanepackaging.com is contributing to improvements in productivity as well as meeting the needs of our customers requiring more visibility of their packaging management. In Packaging Distribution in 2015, orders transacted online increased to 26% vs. 25% in 2014. Electronic documentation In 2015, 75% (2014 – 70%) of invoices to our customers were delivered electronically, further reducing our paper usage. The Group is continuing to encourage customers to receive documentation electronically. Macfarlane Group websites Business Website domain Target market/audience Packaging Distribution www.macfarlanepackaging.com Network Packaging www.networkpack.co.uk One Packaging www.onepack.co.uk Wide range of businesses using packaging that need to protect their products during shipping and storage. Wide range of businesses using packaging that need to protect their products during shipping and storage. Businesses local to One Packaging using packaging that need to protect their products during shipping and storage. Packaging Distribution Ireland Packaging Design and Manufacture www.macfarlanepackaging.ie Wide range of businesses in Ireland that need to protect their products during shipping and storage. www.macfarlanemanufacturing.com Manufacturers of high value products in the Labels www.macfarlanelabels.com Macfarlane Group www.macfarlanegroup.com Aerospace, Defence, Electronics, Medical and General Industrial sectors. FMCG manufacturers and retailers in the food, health and beauty, household products, beverages and pharmaceutical industries. Individuals seeking information on Group operations, Board procedures and financial performance for existing and potential investors. Strategic reviewGovernanceFinancial statementsShareholder information20 Corporate responsibility (continued) The employee experience Macfarlane Group recognises the importance of recruiting, developing, rewarding and retaining the very best people to ensure our business continues to run successfully. Maintaining a working environment that promotes good employee relations, safety and employee engagement at all levels is critical to every Macfarlane operation. Employee development Macfarlane Group strives to make our workplace one in which individuals feel challenged, fulfilled and able to achieve their full potential. The Group invests in training in order to best equip individuals with the skills and knowledge required to provide an outstanding tailored service to our customers and fulfil their personal potential. On average, in 2015 each employee was engaged in 13 hours of formal training. Macfarlane Group offers a wide range of training opportunities, ranging from external training and coaching to on-the-job training. This allows individuals to be stretched and challenged to achieve career objectives. The Company also provides Sponsored Further Education programmes, to support employee engagement in long- term education. Employee engagement Employee engagement is an ongoing feature of our business. Through performance appraisals, business update sessions and informal review meetings a platform is provided for employee participation and involvement. Employee Surveys are conducted throughout the business providing a constructive method of feedback. In addition, and to support consistent employee engagement we run a number of forums, both role-specific and, business specific. These forums have worked to provide a voice for our employees, to engage in an open two-way dialogue and have their views/ideas heard. Macfarlane Group provides interactive tools and resources to employees via mechanisms such as iPads providing employees with the ability to gain information, advise and provide feedback instantly, supporting the continued aim of enhancing the customer experience. Macfarlane Group encourages employees to engage with their local communities, supporting charities and activities that are having a positive impact in their region. During 2015 a number of Macfarlane teams engaged in events, providing support from both a resource and financial perspective. Each year Macfarlane Group makes a one off donation to a charity chosen by the workforce; for 2015 this was Alzheimer’s Society. Macfarlane Annual Report and Accounts 201521 Diversity Directors Senior Managers Total employees 2015 2014 Female 0 4 278 Male 6 13 463 Female 0 4 260 Male 6 13 467 • Engagement – Macfarlane Group recognises the importance of meaningful communication and consultation in maintaining good employee relations. This is achieved through formal and informal meetings across all business units as referred to earlier. • Anti-bribery and corruption – Macfarlane Group has an anti- bribery and corruption policy, which is supplemented by a gift register and an associated policy on accepting gifts. • Whistleblowing policy – there is provision for employees to use an independent service if they are not comfortable speaking to anyone within Macfarlane Group with regard to any matters which give them concern. This service is promoted throughout the Group. Diversity A breakdown by gender of the Directors, Senior Managers and all employees of the Group at 31 December 2015 is summarised above. Human Rights Macfarlane Group does not have a specific Human Rights policy at present but it does have other policies, which reflect established human rights principles. These are: • Equality – Macfarlane Group is committed to providing equal opportunities in employment and to avoiding unlawful discrimination in recruitment, employment or to its customers and suppliers. Striving to ensure that the work environment is free of harassment and bullying and that everyone is treated with dignity and respect is an important aspect of ensuring equal opportunities in employment and there is a specific dignity at work policy, which deals with these issues. Where an employee becomes disabled every effort is made to ensure that their employment with the Group continues and that appropriate adjustments are made. Disabled employees receive equal opportunities regarding selection for training, career development and promotion. Strategic reviewGovernanceFinancial statementsShareholder information22 Board of Directors 1 2 3 4 5 6 3 John Love Finance Director and Company Secretary A member of The Institute of Chartered Accountants of Scotland, John has been with the Group for nineteen years and was appointed Finance Director on 12 July 1999. He was with Deloitte and its predecessor firms for sixteen years before joining Macfarlane Group in 1996. 4 Mike Arrowsmith Non-executive Director (Senior Independent Director) Mike joined the Board on 26 September 2012. He was Group Chief Executive of Linpac Group Ltd, a market-leading international food and consumer packaging company with annual sales of £1.1 billion, from 2005 to 2010. Prior to this he worked for Tibbett & Britten Group Plc, the £1.5 billion third party logistics group, from 1999 to 2005, joining the board in a senior commercial role before leading the transformation of the group as Chief Executive from 2001 to 2004 prior to its sale to Exel Plc. Mike served as a non-executive director of Enodis Plc from 2004 to 2008. He is currently a non- executive director of Tullis Russell Group Ltd and Chairman of Jas. Bowman & Sons Limited. Mike is a member of the Audit, Remuneration and Nominations Committees. 1 Graeme Bissett Chairman Graeme Bissett joined the Board on 11 May 2004 as a non-executive director, becoming Chairman on 8 May 2012. He is Chairman of the Nominations Committee and a member of the Remuneration Committee. Graeme has previously served as finance director of international groups and as a partner with Arthur Andersen. His other board appointments comprise Interbulk Group plc, Anderson Strathern, Curo Compensation Ltd and The Scottish Futures Trust Ltd. He also has pro-bono appointments including Chairman of Children 1st, the children’s welfare charity and as a member of the Court of the University of Glasgow. 2 Peter Atkinson Chief Executive Peter joined Macfarlane Group as Chief Executive on 6 October 2003. He has a strong sales and marketing background through his career at Procter & Gamble and S.C. Johnson. Peter also has significant general management experience gained during his time at GKN PLC and its joint venture partners where he worked from 1988 to 2001 in a number of senior executive roles in their business-to-business operations. He has a successful track record of both business turnarounds and business development with extensive exposure to international business, having worked in the UK, Continental Europe and the USA. From 2000 to 2003, he was responsible for the US automotive and materials handling businesses of Brambles Industries PLC. Macfarlane Annual Report and Accounts 2015 23 Corporate advisers Registration number No. SC 004221 Registered in Scotland Company secretary John Love Registered office 21 Newton Place Glasgow G3 7PY Telephone: 0141 333 9666 Fax: 0141 333 1988 Principal bankers Lloyds Banking Group PLC 110 St. Vincent Street Glasgow G2 5ER Solicitors CMS Cameron McKenna LLP Saltire Court 20 Castle Terrace Edinburgh EH1 2EG Wright Johnston & Mackenzie LLP 302 St. Vincent Street Glasgow G2 5RZ Stockbrokers Arden Partners plc 125 Old Broad Street London EC2 1AR Speirs & Jeffrey Limited George House 50 George Square Glasgow G2 1EH Independent auditor KPMG LLP 191 West George Street Glasgow G2 2LJ Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA 5 Bob McLellan Non-executive Director Bob McLellan joined the Board on 5 March 2013. Bob was Chief Executive of DS Smith Packaging UK until 2011, latterly as Deputy CEO Packaging (UK and Continental Europe). He has spent many years working in the packaging sector and holds leading roles in both the UK and Continental European industry employer associations. He is currently Chairman of the Logson Group and a non-executive director of Swanline Print Limited. Bob chairs the Remuneration Committee and is also a member of the Nominations and Audit Committees. 6 Stuart Paterson Non-executive Director Stuart Paterson joined the Board on 1 January 2013 as a non-executive director. He is a Chartered Accountant and is currently Chief Financial Officer at Forth Ports Limited, joining in March 2011 when it was listed on the London Stock Exchange. The company was acquired by Arcus Infrastructure Partners in June 2011. Prior to his current role, Stuart was Chief Financial Officer of Johnston Press PLC from 2001 to 2010 and previously worked in senior financial management roles at the electronics group Motorola Corporation, and then as Group Finance Director and then Managing Director Europe for Aggreko PLC, the global power hire group. He served as a non-executive director with Devro plc from 2006 to 2012, where he chaired the Audit Committee. Stuart is also a trustee of the Royal Yacht Britannia and a member of their Audit, Risk and Remuneration Committee. He succeeded Graeme Bissett as Chairman of the Audit Committee on 1 January 2013 and is also a member of the Remuneration and Nominations Committees. Strategic reviewGovernanceFinancial statementsShareholder information 24 Report of the Directors The Directors present their annual report and the audited financial statements of the Group for the year ended 31 December 2015. Pages 1 to 40 inclusive comprise the Directors’ report. Results and dividends The Group’s profit before tax from continuing activities was £6,767,000 (2014 – £5,606,000). This resulted in a profit for the year of £5,450,000 (2014 – £4,442,000). Corporate governance The information that fulfils the requirement of the Corporate Governance Statement can be found in the Corporate Governance Section on pages 34 to 40 (and is incorporated into this report by reference) with the exception of the information referred to in the Financial Services Authority Disclosure and Transparency Rules 7.2.6, which is located within this report. Report on greenhouse gas emissions Details of the Group’s emissions are contained within the Corporate Responsibility Report. Cautionary statement The Chairman’s Statement on pages 6 and 7 and the Strategic Review on pages 8 to 21 have been prepared to provide additional information to members of the Company to assess the Group’s strategy and the potential for the strategy to succeed. It should not be relied on by any other party or for any other purpose. This report and the financial statements contain certain forward-looking statements relating to operations, performance and financial status. By their nature, such statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors, including both economic and business risk factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report. The Directors declared an interim dividend of 0.53p per share, which was paid on 15 October 2015 (2014 – 0.50p per share). The proposed final dividend of 1.29p per share (2014 – 1.15p per share) is subject to approval by shareholders at the Annual General Meeting (AGM) in May 2016 and has not been included as a liability in these financial statements. Shareholder information Capital structure The Group funds its operations from a number of sources of cash, namely operating cash flow, bank borrowings, finance lease borrowings and shareholders’ equity, comprising share capital, reserves and retained earnings, where appropriate. The Group’s objective is to achieve a capital structure that results in an appropriate cost of capital whilst providing flexibility in immediate and medium-term funding so as to accommodate any material investment requirements. Details of the issued share capital are shown in note 19. The Company has one class of ordinary share, which carries no right to fixed income. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the Articles of Association and prevailing legislation. The Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. The Company’s banking facilities may, at the discretion of the lender, be repayable on a change of control. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. The Company is governed by its Articles of Association, the UK Corporate Governance Code and the Companies Act 2006 with regard to the appointment and replacement of Directors. The Articles may be amended by special resolution of the shareholders. The powers of the Directors are detailed in the Corporate Governance report on pages 34 to 40. The Directors will propose an ordinary resolution at the 2016 AGM seeking authority to allot shares in the Company under section 551 of the Companies Act 2006 up to an aggregate nominal amount of £10,384,280. At last year’s AGM on 6 May 2015, the Directors were given authority to allot further ordinary shares, disapplying any pre-emption rights, beyond those committed to the share option schemes or long term incentive plans up to an aggregate nominal value of £1,557,642. That authority expires at the conclusion of the forthcoming AGM. A special resolution will be put to shareholders to renew for a further year the authority over the existing unissued and uncommitted ordinary share capital. The resolution will increase the maximum nominal amount to be renewed to £3,115,284, representing 10% of the current share capital. No authority will be sought at the 2016 AGM to enable the Company to purchase its own shares. Macfarlane Annual Report and Accounts 201525 Substantial holdings Business unit Funds managed or advised by Discretionary Unit Fund Managers Limited Funds managed or advised by Miton Group PLC Funds managed by Hargreave Hale Limited Funds managed or advised by Unicorn Asset Management Employee share schemes On 8 May 2015, Peter Atkinson and John Love were granted option awards over 775,254 and 360,026 ordinary shares respectively under the Macfarlane Group PLC Long Term Incentive Plan. Details are set out in the Report on Directors’ Remuneration on page 27. The remaining option awards outstanding under the Company’s Long Term Incentive Plan at 31 December 2015 are set out in note 25. The Remuneration Committee supervises the grant of share incentives, which are only capable of being exercised if the performance conditions to which they are subject have been satisfied. The Remuneration Committee will specify the performance conditions at the time of the grant of the share incentive, having regard to the objectives of the Company and to market practice at the relevant time. The existing Macfarlane Group PLC Long Term Incentive Plan expires in 2016. As a result, a new Long Term Incentive Plan will be presented for shareholder approval at the 2016 AGM. Further detail is given in the Report on Directors’ Remuneration on pages 26 to 33. Substantial holdings of shares in the company The Company has received notification prior to 25 February 2016 in accordance with Chapter 5 of the Disclosure and Transparency Rules of the following voting rights as a shareholder of the Company set out above. Directors The names of the Directors in office at 31 December 2015, who served throughout the year together with short biographical details, are set out on pages 22 and 23. The Board considers its three Non-executive Directors to be independent. Bob McLellan and John Love retire by rotation at the AGM in May 2016 and offer themselves for re-election. Bob McLellan has a letter of appointment with the Company dated 5 March 2013 with a notice period of three months. John Love has a service contract with the Company dated 11 October 1999 with a notice period of twelve months. No Director, either during or at the end of the financial year, had an interest in any contract relating to the business of the Company or any of its subsidiaries. The statement of Directors’ interests in the ordinary share capital of Macfarlane Group PLC is contained in the Report on Directors’ Remuneration on page 28. There are no agreements between the Company and its Directors or employees that provide for compensation for loss of office or employment that occurs because of a takeover bid. Directors’ and officers’ liability insurance The Company has maintained Directors’ and officers’ liability insurance cover throughout the financial year. The Company made qualifying third party indemnity provisions for the benefit of Directors in 2009, which remain in force. Number of shares held 20,825,851 16,342,637 10,005,608 7,662,362 Percentage 16.71% 13.12% 8.03% 6.15% Political contributions It is the Group’s policy not to make donations for political purposes. Special business A special resolution will be put to shareholders to renew for a further year the authority in relation to the disapplication of pre-emption rights over the existing unissued and uncommitted ordinary share capital. This authority is limited to a maximum nominal amount of £3,115,284. Disclosure of information to auditor The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. Independent auditor There will be a resolution proposing the re-appointment of KPMG LLP as the Company’s auditor at the forthcoming Annual General Meeting. Company information The Company is registered in Scotland (SC 004221) and its registered office is at 21 Newton Place, Glasgow, G3 7PY. John Love Company Secretary 25 February 2016 Strategic reviewGovernanceFinancial statementsShareholder information26 Remuneration report The key components of executive remuneration are: Remuneration Committee Chairman’s summary statement This Remuneration report has been drawn up under the provisions of the Enterprise and Regulatory Reform Act 2015. In addition to this statement the report includes two further sections detailing the Annual Report on Remuneration on pages 27 to 29 and the proposed Remuneration Policy, which will be presented at the forthcoming AGM (pages 30 to 33). • Basic salary and benefits – the increase applied for 2016 is 2%, consistent with all eligible employees, with the exception of the Finance Director, who has been awarded an increase of 9% to align his basic salary with market rates established in a benchmarking exercise. The current Macfarlane Group PLC Long Term Incentive Plan expires in 2016 and the Board will propose a new long-term incentive plan (“the new Plan”) for approval at the 2016 AGM following an appropriate consultation process. The new Plan is intended to be similar in construct to the expiring current LTIP and details are set out in the annual report on remuneration on page 29. The Company has a Remuneration Committee constituted in accordance with the UK Corporate Governance Code. The Committee comprises three independent Non-executive Directors plus the Company Chairman, Graeme Bissett. The Committee determines the remuneration for the Executive Directors and also oversees the remuneration of the Chief Executive’s direct reports. • Annual bonus – there is a maximum payment of 50% of salary with 40% based on Profit before tax (PBT) performance and 10% based on personal objectives. Bonuses for 2015 of £92,000 and £38,000, were awarded to Peter Atkinson and John Love respectively. The basis for this is detailed in the annual report on remuneration on page 27. These bonuses are paid in cash, following Board approval of the 2015 Annual Report and Accounts. The new policy will allow a bonus of up to 100% of salary, although the maximum for 2016 will remain at 50%. • Pension – the Chief Executive receives a cash payment in lieu of pension contribution and the Finance Director is a member of the legacy defined benefit pension scheme for which pensionable salary was frozen in 2010. • Long term incentives – there is a Performance Share Plan available which permits grants of shares up to 100% of salary with a three year performance period using EPS, TSR and sales performance conditions. On 8 May 2015, Peter Atkinson and John Love were granted option awards over 775,254 and 360,026 ordinary shares respectively under the Macfarlane Group PLC Long Term Incentive Plan. The performance conditions attached to these awards are set out in the annual report on remuneration on page 27. • Excluding the option exercise in 2014, total Directors’ remuneration increased in 2015 by 5%. The Group has made substantial progress in 2015 with profit before tax increasing by 21% and the share price increasing by 55% to 56.75p at 31 December 2015. The Remuneration Committee recommends this report and I hope that you will feel able to support the remuneration resolutions, which will be proposed for approval at the Annual General Meeting on 10 May 2016, including a resolution to establish the new Plan and revisions to our policy to allow the new Plan to be operated. Bob McLellan Chairman of the Remuneration Committee 25 February 2016 Macfarlane Annual Report and Accounts 201527 Annual report on remuneration Single total figure of remuneration for each Director The details set out on pages 27 and 28 of this report, up to and including the Statement of Directors’ shareholdings and share interests, have been audited by KPMG LLP. 2015 Chairman G. Bissett Executive Directors P.D. Atkinson J. Love Non-executive Directors M. Arrowsmith S.R. Paterson R. McLellan Total 2014 Chairman G. Bissett Executive Directors P.D. Atkinson J. Love Non-executive Directors M. Arrowsmith S.R. Paterson R. McLellan Total Salary and fees £000 Taxable benefits £000 Bonus £000 Option awards exercise £000 Pension costs £000 62 328 152 31 31 31 635 – 16 6 – – – 22 – 92 38 – – – 130 – – – – – – – – 72 20 – – – 92 Salary and fees £000 Taxable benefits £000 Bonus £000 Option awards exercise £000 Pension costs £000 61 321 149 31 31 31 624 – 16 5 – – – 21 – 73 32 – – – – 105 – – – – 105 105 – 71 19 – – – 90 Total £000 62 508 216 31 31 31 879 Total £000 61 586 205 31 31 31 945 Annual bonus for the year ended 31 December 2015 The bonus is based on performance against financial targets and personal objectives as outlined in the policy report. The minimum financial target for 2015 was PBT of £6.5 million, which was achieved so a total bonus of £97,000 has been awarded for this component. The Remuneration Committee has also assessed performance against personal objectives and overall, has awarded bonuses of 8% and 5% of salary, equating to £26,000 and £7,000 to Peter Atkinson and John Love respectively. These bonuses are paid in cash following Board approval of the Group Accounts each year. Directors’ pension entitlements Peter Atkinson receives a cash allowance, which including the related employer’s national insurance contributions, equates to 25% of basic salary. John Love is a member of Macfarlane Group PLC Pension & Life Assurance Scheme (1974). The accrued pension at 31 December 2015 was £39,000 (2014 – £37,000). The associated transfer value was £788,000 (2014 – £749,000) calculated using HMRC guidelines. The scheme’s normal retirement date is 65 with no automatic entitlement to early retirement. Scheme interest awards in 2015 On 8 May 2015, Peter Atkinson and John Love were granted option awards over 775,254 and 360,026 ordinary shares respectively under the Macfarlane Group PLC Long Term Incentive Plan. These awards are based on targets as follows: Total Shareholder Return, which is positive in the three years ending 7 May 2018; (i) (ii) Sales for calendar year 2017 of at least £154 million; and (iii) Earnings per share of between 5.75p and 6.53p in calendar year 2017 for vesting of between 25% and 100% of the award, calculated on a sliding scale. Strategic reviewGovernanceFinancial statementsShareholder information28 Remuneration report (continued) Statement of Directors’ shareholding and share interests G. Bissett P.D. Atkinson J. Love M. Arrowsmith S.R. Paterson R. McLellan 2015 Beneficial 343,750 854,172 775,000 100,000 100,000 78,791 2015 Option 2014 Beneficial 2014 Option – 775,254 360,026 – – – 343,750 854,172 775,000 100,000 79,550 78,791 – – – – – – The remainder of the annual report on remuneration is not subject to audit. Performance graph and table The following graph shows Macfarlane Group’s performance, measured by Total Shareholder Return, compared with the performance of the FTSE All-Share Index for Support Services, also measured by Total Shareholder Return for the period since 1 January 2009. The Index for Support Services has been selected because it includes a range of companies, which the Remuneration Committee considers to be the best available comparison for the Group for this purpose. FTSE All Share Support Services Macfarlane Group 0 0 1 o t d e s a b e r n r u t e r r e d o h e r a h s l l a t o T 540 520 500 480 460 440 420 400 380 360 340 320 300 280 260 240 220 200 180 160 140 120 100 80 2009 2010 2011 2012 2013 2014 2015 CEO single figure 2015 2014 2013 2012 2011 P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson Single figure of total remuneration Annual variable element award vs. maximum opportunity Long term incentive vesting against maximum opportunity 508 586 416 462 390 56% 46% 10% 45% 10% n/a n/a n/a n/a n/a Macfarlane Annual Report and Accounts 2015 29 Percentage change in remuneration of CEO and employees The following table shows the percentage change in remuneration between 2015 and 2014 for the CEO and for all employees in the Group. % change in Base salary Benefits Bonus Average for all eligible employees 2.0% 0.0% 72.0% CEO 2.0% 0.0% 26.0% Relative importance of spend on pay The difference in expenditure between 2014 and 2015 on remuneration for all employees in comparison to the distribution to shareholders by way of dividend is set out below: Total employee pay Dividend 2015 £000 23,994 2,094 2014 £000 21,584 1,888 % change +11.2% +10.9% Statement of implementation of remuneration policy in the current financial year The salary of the Chief Executive was increased by 2% with effect from 1 January 2016 and the salary of the Finance Director was increased by 9% to align his basic salary with market rates established in a benchmarking exercise. The fees paid to the Chairman and Non-executive Directors also increased by 2% from 1 January 2016. The Remuneration Committee granted a final award under the Performance Share Plan as detailed on page 27. As this plan expires in 2016 a new long term incentive plan is being proposed for approval at the AGM in 2016 following appropriate shareholder consultation. The recommended plan is a Performance Share Plan (PSP) based on the following principles: • A normal maximum award of 100% of salary each year; • A fixed 3 year performance period (with no re-setting); and • A performance condition based on Earnings per share, Total Shareholder Return and sales levels. The intention is for the new PSP to replace the Company’s existing Performance Share Plan. Further details will be set out in the documentation accompanying the notice of the 2016 Annual General Meeting. Details of the Remuneration Committee, advisers to the Committee and their fees The Remuneration Committee currently comprises three independent Non-executive Directors and the Company Chairman. Details of the Directors who were members of the Committee during the year are disclosed on page 37. The Remuneration Committee used the services of FIT Remuneration Consultants LLP to advise on certain aspects of remuneration during 2015. The total fees charged for the year for Remuneration Committee advice was £3,000 and the Directors consider FIT Remuneration Consultants LLP to be independent of the Group and objective in their advice. Statement of voting at the Annual General Meeting At the AGM held on 5 May 2015, the Directors’ Remuneration Report received the following votes from shareholders. For Against Total number of votes 59,794,732 74,379 % votes cast 99.88% 0.12% Total votes cast (for or against) 59,869,111 100.00% Votes withheld Total 353,401 60,222,512 Strategic reviewGovernanceFinancial statementsShareholder information30 Remuneration policy The tables below summarise the main elements of the remuneration packages of Executive Directors. The full policy is available under the Corporate Governance section of the Company website (www.macfarlanegroup.com). The policy will take effect from the date of the AGM on 10 May 2016 and will therefore replace the existing policy that has been in place since the 2014 AGM. Base salary (fixed pay) Link to strategy Operation Opportunity Benefits (fixed pay) Link to strategy Operation Opportunity Pension (fixed pay) Link to strategy Operation Opportunity To pay a fair salary commensurate with the individual’s role, responsibilities and experience and having regard to market rates for similar roles in comparable companies. The Remuneration Committee reviews basic salaries annually with changes effective from 1 January. This review takes into account practices elsewhere in the Group. There is no prescribed maximum salary or maximum rate of increase. The Committee will take into consideration the general increase for the broader employee population but on occasion may need to recognise changes in responsibility, development in the role or specific retention issues. To provide cost effective benefits to aid recruitment and retention of senior executives and to support the wellbeing of employees. Benefits comprise, car allowance or company car, private medical insurance, permanent health insurance and other benefits. The benefits are not subject to a specific cap but represent a small element of total remuneration. Costs to provide these benefits are closely monitored. To provide market competitive pension arrangements to aid recruitment and retention of senior executives. The Group will pay a pension allowance or contribute to a pension scheme for all Executive Directors. The Group’s legacy defined benefit plan has been closed to new members and the pensionable salary frozen in 2010. Company contribution of up to 25% of base salary or equivalent cash allowance in lieu (inclusive of employer’s national insurance contribution). Annual incentives (variable pay) Link to strategy Operation To incentivise performance over a 12 month period based on financial targets and individual performance objectives agreed by the Remuneration Committee. The bonus is paid in cash based on the audited financial results and the Remuneration Committee’s assessment of delivery against personal objectives. Any bonus award in respect of periods from 2015 is subject to penalty and clawback provisions covering material misstatement of Group results and is in force for 2 years following the award. Opportunity Maximum bonus potential capped at 100% of basic salary but will remain at 50% for 2016. Performance measure The performance measures applied may be financial or non-financial and corporate, divisional or individual and in such proportions as the Committee considers appropriate. The annual bonus plan remains a discretionary arrangement and the Committee retains a standard power to apply its judgement to adjust the outcome of the annual bonus plan for any performance measure (from zero to any cap) should it consider that to be appropriate. Macfarlane Annual Report and Accounts 201531 Long term incentive (variable pay) Link to strategy Operation To incentivise delivery of strategic targets and sustained performance over the long-term. Each year conditional awards over shares may be granted which can be earned subject to the delivery of performance goals. The Committee may set such performance conditions on PSP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual). Performance conditions are for a fixed three-year period and there is no re-setting. Executive Directors are expected to build up a prescribed level of shareholding equivalent to 100% of basic salary. If the prescribed shareholding has not been reached, Executive Directors will be expected to retain a proportion of the shares vesting under the Company’s PSP until the guideline is met. Opportunity Any award is capped at 100% of basic salary in normal circumstances (200% in exceptional circumstances). Performance measure Conditional awards will vest based on three-year performance against challenging financial and/or other targets set and assessed by the Committee in its discretion. All Employee Share Plans Link to strategy Operation To encourage share ownership by employees, thereby allowing them to share in the long-term success of the Group and align their interests with those of the shareholders. Company may in the future operate a Sharesave scheme and/or Share Incentive Plan. These are all-employee share plans established under HMRC tax-advantaged regimes and follow the usual form for such plans. Executive Directors would be able to participate in all-employee share plans on the same terms as other Group employees. Opportunity The maximum participation levels for all-employee share plans will be the limits for such plans set by HMRC from time to time. Performance Consistent with normal practice, such awards would not subject to performance conditions. Clawback/malus in both the new LTIP and bonus Provisions are in place in both the annual bonus and new LTIP to operate malus and/or clawback in certain exceptional circumstances. Consideration of employment conditions elsewhere in the Group The Remuneration Committee has not conducted a specific employee consultation exercise on the Directors’ remuneration policy. However, there is a periodic employee survey and the Board receives a regular presentation from the Director of Human Resources, which includes consideration of the Group’s remuneration policies. Consideration of shareholder views The Remuneration Committee considers shareholder feedback received as part of any dialogue with shareholders via the Chairman, executive management or the Company’s brokers. Where necessary the Remuneration Committee Chairman will engage pro-actively with shareholders such as during the ongoing proposed renewal of the Performance Share Plan. Differences between the policy on remuneration for Directors from the policy on remuneration of other employees While the appropriate benchmarks vary by role, the Company seeks to apply the philosophy behind this policy across the Company as a whole. Where the Company’s pay policy for Directors differs from its pay policies for groups of employees, this reflects the appropriate market rate position and/or typical practice for the relevant roles. The Company takes into account pay levels, bonus opportunity and share awards applied across the Group as a whole when setting the Executive Directors’ Remuneration Policy. Strategic reviewGovernanceFinancial statementsShareholder information32 Remuneration policy (continued) Approach to recruitment remuneration The Remuneration Committee will follow the above policy when setting the remuneration for a new Executive Director. Basic salary will be set at a competitive level appropriate for the role and experience of the Director being appointed. Where there is an external appointment, the Committee may consider it appropriate to recognise awards or benefits that will or may be forfeited on resignation from a previous appointment. This may take the form of cash and/or share awards. The policy is that the maximum payment under such arrangements will be no more than the Committee considers is required to provide reasonable compensation. If the Director is required to relocate then the policy is to provide reasonable relocation, travel and subsistence payments at the discretion of the Committee. Service contracts and letters of appointment Executive service contracts have a standard notice period of 12 months. The Committee reserves flexibility to alter these principles if necessary to secure the appointment of an appropriate candidate and if appropriate introduce a longer initial notice period (of up to two years) reducing over time. Executive Directors are entitled to accept appointments outside the Company provided the Board’s permission is obtained. The Board may require the fees from such appointments to be accounted for to the Company. Neither P.D. Atkinson nor J. Love held any external appointments during the year. Chairman and Non-executive Director appointments are through letters of appointment for periods not exceeding three years subject to re-election at the AGM and contain notice periods of six months and three months respectively. Directors’ contracts are available for inspection at the Company’s registered office by prior arrangement or immediately prior to the AGM. Executive Directors Contract commencement date P.D. Atkinson J. Love 6 October 2003 11 October 1999 Notice period 12 months 12 months Non-executive Directors Letter of appointment commencement date Notice period G. Bissett M. Arrowsmith S.R. Paterson R. McLellan 4 May 2015 10 December 2015 10 December 2015 5 March 2013 6 months 3 months 3 months 3 months Illustration of the application of the remuneration policy Peter Atkinson (£000) John Love (£000) Maximum In line with expectations Minimum 72% 87% 100% 28% 601 13% 501 70% 85% 30% 272 Fixed Variable 15% 223 434 100% 190 0 100 200 300 400 500 600 0 100 200 300 The fixed component includes basic salary, pension contributions and benefits in kind and the variable component includes annual bonus. The performance in line with expectations is based on the current 2016 market expectation of PBT of £7.4 million and full achievement of personal objectives. The PBT target for maximum award has not been disclosed due to commercial sensitivity. Payment for loss of office The Remuneration Committee’s policy for an Executive Director whose employment is to be terminated is to agree a termination payment based on the value of the base salary and contractual pension amounts and benefits that would have accrued during the contractual notice period unless there has been a breach of the service agreement by the Director. Macfarlane Annual Report and Accounts 201533 The policy is that the departing Director may work or be placed on garden leave for all or part of their notice period or receive payment in lieu of notice in accordance with the service agreement. The Committee supports the principle of mitigation and phased payments relative to any settlement and will take legal advice in relation to any settlements to be proposed. Any share-based entitlements granted to an Executive Director will be determined based on the relevant rule plans as previously approved by shareholders. Chairman Link to strategy Operation Opportunity To attract and retain a high calibre Board Chairman by offering a market competitive fee level. The Board Chairman is paid a single fee for all his responsibilities. The level of fee is reviewed periodically by the Remuneration Committee with reference to other comparable companies. The current fee is £63,678 subject to periodic change under this policy. There is no maximum fee level. Non-executive Directors Link to strategy Operation To attract and retain high calibre Non-executive Directors by offering a market competitive fee level. Non-executive Directors are paid a basic fee. The Committee Chairmen may be paid a supplement to reflect their additional responsibilities. The fee levels are reviewed periodically by the Chairman and Executive Directors with reference to other comparable companies. Opportunity The current basic fee is £31,839 subject to periodic change under this policy. There are currently no supplementary fees and there is no maximum fee level. Committee discretions The Committee will operate the annual bonus plan and PSP according to their respective rules and the policy tables set out earlier. The Committee retains discretion, consistent with market practice, in a number of respects, in relation to the operation and administration of these plans. These discretions include, but are not limited to, the following: • The selection of participants; • The timing of grant of an award/bonus opportunity; • The size of an award/bonus opportunity subject to the maximum limits set out in the policy table; • The determination of performance against targets and resultant vesting/bonus pay-outs; • Discretion required when dealing with a change of control or restructuring of the group; • Determination of the treatment of leavers based on the rules of the plan and the appropriate treatment chosen; • Adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends); and • The annual review of performance measures, weightings and targets from year to year. In addition, while performance measures and targets used in the annual bonus plan and PSP will generally remain unaltered, if events occur which, in the Committee’s opinion, would make a different or amended target a fairer measure of performance, such amended or different target can be set provided that it is not materially more or less difficult to satisfy (having regard to the event in question). Any use of these discretions would, where relevant, be explained in the Directors’ Remuneration Report and may, where appropriate and practicable, be the subject of consultation with the Company’s major shareholders. In addition, for the avoidance of doubt, in approving this policy report, authority is given to the Company to honour any commitments entered into with current or former Directors prior to the adoption of this policy. The Committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation) without obtaining shareholder approval for that amendment. Strategic reviewGovernanceFinancial statementsShareholder information34 Corporate governance Non-executive Directors contribute towards and challenge Group strategy as well as scrutinising performance in meeting agreed objectives and monitoring the reporting of performance. They satisfy themselves as to the integrity of the financial information and that the financial controls and systems of risk management are robust and defensible. Non-executive Directors are given access to independent professional advice at the Group’s expense, subject to certain limits and procedures, when it is deemed necessary in order for them to carry out their responsibilities. No such advice was sought during the year. The Company has maintained Directors’ and officers’ liability insurance cover throughout the financial year. The Company made qualifying third party indemnity provisions for the benefit of Directors in 2009, and these remained in force throughout 2015 and to the time of this report. The Board confirms that it has considered and authorised any conflicts or potential conflicts of interest in accordance with the Group’s existing procedures. Details of the Chairman’s other commitments are included in his biography on page 22. The Board is satisfied that these do not interfere with the performance of his duties for the Group, which is based on a commitment of approximately 45 days per annum. Introduction The Company is committed to the principles of corporate governance contained in the UK Corporate Governance Code issued in September 2014 (“the Code”) by the Financial Reporting Council (FRC). The Company’s compliance is set out in the narrative statement on pages 34 to 40 and for Directors’ remuneration in the Report on Directors’ Remuneration on pages 26 to 33. Compliance The Company complied with all Code provisions during 2015. The Company’s auditor, KPMG LLP, is required to review whether the above statement reflects the Company’s compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for its review by the Listing Rules and to report if it does not reflect such compliance. The Board The Board comprises the Chairman, three independent Non-executive Directors and two Executive Directors. The names of the Directors, together with their biographical details, illustrating their range of experience, are set out on pages 22 and 23. Details of Executive Directors’ service contracts are given in the Remuneration policy statement on the Company’s website www.macfarlanegroup.com and both service contracts have notice periods of one year. The current Board structure is in compliance with the Code, requiring companies outside the FTSE 350 to have at least two independent Non-executive Directors. The Directors believe that the Board has an appropriate independent Non-executive Director complement with recent and relevant experience, which brings strong, independent judgement to the Board’s deliberations. The Board considers its Non- executive Directors, Mike Arrowsmith, Stuart Paterson and Bob McLellan to be independent both in character and judgement. None of these three Directors: • Has been an employee of the Group within the last five years; • Has, or has had within the last three years, a material business relationship with the Group; • Receives remuneration other than a Director’s fee; • Has close family ties with any of the Group’s advisers, Directors or senior employees; • Holds cross-directorships or has significant links with other Directors through involvement in other companies or bodies; • Represents a significant shareholder; or • Has served on the Board for more than nine years from the date of their first election. The balance of the Board’s skills and experience will be kept under review. The Roles of the Chairman and Chief Executive The division of responsibilities between the Chairman and the Chief Executive is clearly defined and has been approved by the Board. The Chairman, Graeme Bissett, is responsible for running the Board, ensuring that all Directors receive sufficient and relevant information on financial, business and corporate issues prior to meetings to allow the Directors to bring independent judgement to bear on all issues. The Chairman facilitates the effective contribution of Non-executive Directors and ensures effective communication with shareholders. As Chief Executive, Peter Atkinson’s responsibilities focus on managing the business and implementing the Group’s strategy. Macfarlane Annual Report and Accounts 201535 Senior Independent Director The Board appointed Mike Arrowsmith as Senior Independent Director on 7 May 2013. Mike is the Director whom shareholders may contact if they feel their concerns are not being addressed and resolved through the existing mechanisms for investor communication. professional development for the Board. All Directors have access to the advice and services of the Company Secretary. The Articles of Association and the schedule of matters reserved for the Board provide that the appointment and removal of the Company Secretary is a matter for the Board as a whole. Re-election of Directors All Directors submit themselves for re-election by shareholders at least once in every three-year period. The Company is not a member of the FTSE 350 index of companies and is therefore not required to comply with provision B.7.1 of the Code, which requires all Directors of companies in that index to be subject to annual re-election. At the 2016 AGM, Bob McLellan and John Love fall due to retire by rotation and, being eligible, offer themselves for re-election. Bob McLellan’s letter of appointment and John Love’s service contract will be available for shareholder review prior to the AGM on 10 May 2016. Subject to the Company’s Articles of Association, the Companies Act and satisfactory performance evaluation, Non-executive Directors are appointed for an initial period of three years. Before the third and sixth anniversary of the Non-executive Directors’ first appointment, the Chairman will discuss with the Director whether it is appropriate for a further three-year term to be served. Company Secretary John Love, the Company Secretary, is responsible for advising the Board through the Chairman on all matters relating to corporate governance. Under the direction of the Chairman, the Company Secretary’s responsibilities include ensuring good information flows within the Board, its committees and between executive management and Non-executive Directors. The Company Secretary also facilitates induction and assists with Board procedures The Group is controlled through its Board of Directors. The Board’s main roles are to set the Group’s strategic objectives, guide and support management in achieving these objectives, create value and safeguard the interests of shareholders within the appropriate legal and regulatory framework. The Board met seven times during 2015 and individual attendance at those and the Board Committee meetings is set out in the table on the following page. In 2015, three Board meetings were held at operational locations to allow the Board to meet management teams and further develop their understanding of the Group. The Board has a formal schedule of matters reserved for its approval. The specific matters reserved to the Board include setting the Group’s strategy and approving an annual budget, reviewing management performance, approving acquisitions, divestments and major capital expenditure, monitoring returns on investment, reviewing the Group’s systems of internal control and risk management and consideration of significant financing matters. The Board has delegated to executive management responsibility for the development and recommendation of strategic plans for consideration by the Board, the implementation of the strategy and policies of the Group as determined by the Board, the delivery of the operating and financial plan, the approval of capital expenditure below Board authority levels and the development and implementation of risk management systems. Regular reports and papers are circulated to the Directors in a timely manner in preparation for Board and Committee meetings. These papers are supplemented by information specifically requested by the Directors from time to time. At each meeting, the Directors receive management accounts and reports from the Chief Executive and the Finance Director, which together with other papers enables them to scrutinise the Group and management performance against agreed objectives. Accountability The Board is responsible for presenting a fair, balanced and understandable assessment of the Group’s position and prospects. The Board considers that the Annual Report provides the information necessary for shareholders to assess the Group’s performance, business model and strategy. After making the enquiries set out on page 48, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next twelve months. For this reason they continue to adopt the going concern basis in preparing the financial statements. The Directors’ Responsibilities Statement is set out on page 41. Professional development On appointment, Directors complete an induction programme designed to give them a thorough understanding of the Group and its activities. They receive information about the Group, the matters reserved for the Board, the terms of reference and membership of the Board Committees, and the latest financial information. This is supplemented with visits to key locations and meetings with and presentations from senior management. Strategic reviewGovernanceFinancial statementsShareholder information36 Corporate governance (continued) Board and Committee Meetings Attendance by Directors at Board and Committee Meetings Graeme Bissett – Chairman Peter Atkinson – Chief Executive John Love – Finance Director Mike Arrowsmith – Senior Independent Director Stuart Paterson – Non-executive Director Bob Mclellan – Non-executive Director Board Audit Committee Remuneration Committee Nominations Committee 7 (7) 7 (7) 7 (7) 7 (7) 7 (7) 7 (7) 3 (3)* – – 3 (3) 3 (3) 3 (3) 3 (3) – – 3 (3) 3 (3) 3 (3) 1 (1) – – 1 (1) 1 (1) 1 (1) Figures in brackets indicate the maximum number of meetings in the period in which the individual was a Board or Committee member. * indicates that a Director is attending but is not a member of the relevant Committee. The Senior Independent Director is available to meet with shareholders if they have concerns with contact through the normal channels of Chairman, Chief Executive or Finance Director. All Directors attend the AGM and shareholders are invited to ask questions during the meeting and to meet Directors after the formal proceedings have ended. All shareholders have an opportunity to raise questions with members of the Board on matters relating to the Group’s operations and performance at the meeting. Details of the resolutions to be proposed at the AGM can be found in the Notice of Meeting accompanying the Annual Report and Accounts. In line with the requirements of the Code, the results of proxy votes are disclosed at the AGM and made available on the Group website and the Notice of Meeting is sent out more than 20 days in advance of the meeting. Board performance evaluation The Board has established a formal process, led by the Chairman, for the annual performance evaluation of the Board, its Committees and individual Directors. All Directors are made aware on appointment that their performance will be subject to regular evaluation. The Board has completed a self-assessment questionnaire developed to take account of the areas identified in the FRC “Guidance on Board Effectiveness”. This includes specific reference to the strategic objectives and performance of the Board and performance and processes for all Board Committees. The results have been collated and reviewed by the Board to identify any areas for improvement and to confirm objectives for the year ahead. The Chairman then holds individual meetings with each Director to review performance and set individual objectives. The Chairman meets periodically with the Non-executive Directors without the Executive Directors present. Led by the Senior Independent Director, the three Non-executive Directors meet annually to conduct a performance evaluation of the Chairman. Relationships with shareholders The Group maintains a corporate website (www.macfarlanegroup.com) containing a wide range of information of interest to institutional and private investors. Detailed reviews of the performance and financial position are included in the Strategic Review on pages 8 to 21 of this report. The Board uses this together with the Chairman’s Statement on pages 6 and 7, and the remainder of the Report of the Directors on pages 24 to 25 to present its assessment of the Company’s position and prospects. The Chairman seeks to maintain a regular dialogue with shareholders and gives feedback to the Board on issues raised. The Group has frequent discussions with institutional shareholders, including meetings led by the Chief Executive and the Finance Director, following the preliminary announcement of the annual financial results in February and the announcement of interim results in August. The Group also responds to individual requests for discussions from shareholders. The Board receives feedback on shareholder meetings including broker feedback for the meetings scheduled around the preliminary announcement and interim results. Macfarlane Annual Report and Accounts 2015 37 Nominations Committee The Nominations Committee membership was as follows: Remuneration Committee The Remuneration Committee membership was as follows: Audit Committee Throughout 2015 the Audit Committee comprised: Graeme Bissett (Chairman) Mike Arrowsmith Stuart Paterson Bob McLellan Bob McLellan (Chairman) Graeme Bissett Mike Arrowsmith Stuart Paterson The Nominations Committee met once during 2015 and its terms of reference are available on the Group website (www.macfarlanegroup.com). The principal work undertaken by the Nominations Committee in 2015 was to consider and recommend that the Company propose for re-election any Directors falling due for re-appointment at the AGM. The Committee’s responsibilities include reviewing the structure, size and composition of the Board and giving full consideration to succession planning for Directors and other senior executives. The Nominations Committee will continue to consider the mix of skills and experience that the Board requires and seek the appointment of Directors to meet its assessment of what is required to ensure that the Board is effective in discharging its responsibilities. In addition the Committee met during 2015 to consider proposing Michael Arrowsmith and Stuart R. Paterson for election at the AGM on 5 May 2015. Both were recommended for election and this was approved by shareholders at the 2015 AGM. No Director is involved in any decisions regarding his own appointment or re-appointment. Following a Nominations Committee held on 24 February 2016 the Committee proposed Bob McLellan and John Love for re-election at the AGM on 10 May 2016. None of the members of the Remuneration Committee during 2015 has any personal financial interests, other than as a shareholder, in the matters to be decided, conflicts of interests arising from cross- directorships or any day-to-day involvement in running the business. The Remuneration Committee met three times during 2015 and its terms of reference are available on the Group website (www.macfarlanegroup.com). The principal work undertaken by the Remuneration Committee in 2015 was: (a) To review performance against 2015 financial and personal objectives and to conclude on the appropriate performance related reward for senior executives including the Executive Directors; (b) To approve the financial and personal objectives for 2016 in relation to the performance related bonus; (c) To consider the use of share- based incentives, either using the Long Term Incentive Plan or within a SAYE scheme; and (d) To approve the Report on Directors’ Remuneration. The work carried out by the Remuneration Committee is described within the Report on Directors’ Remuneration, which is set out on pages 26 to 29. Stuart Paterson (Chairman) Mike Arrowsmith Bob McLellan Stuart Paterson was appointed as Chairman of the Audit Committee on 1 January 2013 and has both recent and relevant financial experience. The remaining Committee members, Mike Arrowsmith and Bob McLellan have a wide range of commercial experience, as evidenced in their biographical details on pages 22 and 23. The Company Chairman attends meetings to give the Committee the benefit of his relevant experience but he is no longer a member of that Committee with effect from 1 January 2013. The Committee’s terms of reference are displayed on the Group website, (www.macfarlanegroup.com) and its principal oversight responsibilities cover the following four areas: • Internal control and risk management The Committee reviews annually the Group’s system of risk management and internal control and processes for evaluating and monitoring the risks facing the Group. • Internal audit The Committee reviews the effectiveness of the internal audit function and its terms of reference on an annual basis and recommends to the Board any changes required as a result of the review. Reports from internal audit are considered at each meeting and as part of its deliberations, the Committee will actively engage in selecting areas to be audited. Strategic reviewGovernanceFinancial statementsShareholder information38 Corporate governance (continued) Audit Committee (continued) • Viability statement The Board has carried out a robust assessment of the principal risks facing the Company and how these risks affect the prospects of the Company. Pages 14 and 15 give information on these risks and uncertainties and the mitigating actions being taken to address them. The viability statement set out on page 15 includes scenario testing of the key risks in order to determine their potential impact on the prospects of the Company. The overall responsibility for the systems of internal control and for reviewing their effectiveness rests with the Board. The review of the effectiveness of the systems of internal control is carried out by the Audit Committee as set out above. • External audit (including auditor independence) The Committee is responsible for monitoring the effectiveness of the external audit process and making recommendations to the Board in relation to the appointment, re-appointment and remuneration of the external auditor. It is responsible for ensuring that an appropriate relationship between the Group and the external auditor is maintained, including reviewing non-audit services and fees. • Financial reporting Under its terms of reference, the Audit Committee monitors the integrity of the Group’s financial statements and any formal announcements relating to the Group’s performance. Further details are set out on the following pages. The Audit Committee met three times during 2015 and its agenda is linked to events in the Group’s financial calendar. The Committee meets privately with the external auditor, with the internal auditors and Executive Directors invited to attend meetings as required. In 2015 the Audit Committee discharged its responsibilities by: • Reviewing the Group’s draft financial statements and interim results statement prior to Board approval and reviewing the external auditor’s reports thereon; • Debating the continuing appropriateness of the Group’s accounting policies; • Monitoring compliance with International Financial Reporting Standards; • Challenging the output from the group-wide process used to identify, evaluate and mitigate risks; • Reviewing the effectiveness of the group’s internal controls and disclosures made in the annual report and financial statements on this matter; • Agreeing a programme of work for the Company’s internal audit function; • Discussing reports from the Head of Internal Audit on the work undertaken by Internal Audit and management responses to proposals made in the audit reports issued by the function during the year, ensuring that these responses are actioned and completed on a timely basis; • Agreeing the external auditor’s plan for the audit of the Group accounts which included confirmations of auditor independence and approval of the engagement letter; and • Reviewing and approving the audit fee and keeping the level of non-audit fees paid to the Group’s external auditor under review. 2015 Financial statements Certain accounting policies have been identified as requiring key accounting judgements or involving particularly complex or subjective estimates or assumptions, which in turn have a significant effect on the amounts recognised in the financial statements. The Audit Committee receives a report from the Finance Director, in respect of each reported set of results, summarising the principal judgements taken by executive management. The Committee discusses and challenges these judgements and considers the report in conjunction with the results of the external audit process. For the 2015 financial statements, the Committee considers the two most significant areas of judgement to be: Valuation of trade receivables Trade receivables recorded in the Group’s balance sheet comprise a large number of individual balances. The Group reviews all trade receivables and provides against potentially irrecoverable items throughout the year. The Group’s executive management then reviews local judgements. Whilst every attempt is made to ensure that the allowance for doubtful trade receivables is as accurate as possible, there remains a risk that the allowance may not match the level of debt, which ultimately proves to be uncollectible. At 31 December 2015, the Group retained an allowance for doubtful trade receivables of £386,000, compared to £357,000 in 2014. Further details are set out in note 13. Macfarlane Annual Report and Accounts 201539 The Audit Committee has access to details of individual receivables in excess of £50,000 during the year. The Committee reviews the analysis of the extent to which year-end balances have been settled in 2016 to date, paying particular attention to receivables outwith terms. This is then considered against the level of allowance for doubtful trade receivables and based on this analysis, the Committee is of the view that the level of provision and the disclosures of items beyond terms was appropriate. Pension scheme deficit A net liability is recorded at each reporting date equivalent to the deficit on the Group’s defined benefit pension scheme. This liability is determined in conjunction with advice from the Pension Scheme actuary and the Group’s actuarial advisers and can fluctuate significantly based on a number of assumptions, some of which are linked to market-related factors outwith the control of management. The main actuarial assumptions that can impact the deficit are set out in note 24 to the financial statements. The Audit Committee debated the assumptions being used to determine the liabilities in accordance with guidance from a number of actuarial firms and has satisfied itself that the assumptions used fall within an acceptable range taking into account the duration of liabilities in the Macfarlane Group defined benefit pension scheme. The level of deficit calculated by the Scheme actuary and the related disclosures are based on these assumptions and the components of the movement in the deficit in the year have all been explained to the Committee’s satisfaction. In addition the sensitivities of movements in the underlying assumptions are clearly set out in note 24. Accordingly the Committee is comfortable with the reporting of the pension scheme deficit. Consideration of other matters The Committee debates a number of other areas as a matter of normal practice at each reporting period, but does not consider these matters to be of such significance as those referred to above. For the 2015 financial statements, those other areas included: • The basis of the accounting for the acquisition in 2015 including the amounts ascribed to other intangible assets and goodwill respectively; • The review of the underlying assumptions and the sensitivity analysis used to confirm that no impairment charge was required against the goodwill balances in the current year; • The level of and basis for inventory provisions at 31 December 2015; • A review of the viability statement; and • The disclosure of the principal terms of the Group’s banking facilities. For all of these other matters the Audit Committee is satisfied with the approach taken. The Audit Committee has reviewed the contents of this year’s annual report and accounts and has advised the Board that, in its view, the report is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy. The Audit Committee also monitors the Group’s arrangements by which staff may in confidence raise concerns about possible improprieties in matters of financial reporting and other areas including an external whistle-blowing service to take calls from employees. Details are included on the Group website (www.macfarlanegroup.com). All concerns will continue to be investigated at the earliest opportunity and the employee’s anonymity is preserved wherever possible. Relationship with external audit The Audit Committee is responsible for the development, implementation and monitoring of the Group’s position on external audit. The Committee’s terms of reference assign oversight responsibility for monitoring the independence, objectivity and compliance with ethical and regulatory requirements to the Audit Committee, and day-to-day responsibility to the Finance Director. The Audit Committee has ensured that the Board and external auditor have safeguards in place to prevent auditor’s independence and objectivity being compromised. The external auditor also reports to the Committee on the actions that it has taken to comply with professional and regulatory requirements and current best practice in order to maintain independence. The Committee has considered the likelihood of a withdrawal of the auditor from the market and noted that there are no contractual obligations to restrict the choice of external auditor. In accordance with best practice guidelines the audit partner from the firm of the external auditor is required to rotate off the audit engagement every 5 years. Strategic reviewGovernanceFinancial statementsShareholder informationDuring the course of its review of the system of internal control, the Board has not identified nor been advised of any failings or weaknesses which it has determined to be significant. No significant corrective actions are outstanding. Each business’s risk register is kept under review during regular review meetings in each business. The Board considers the risk register every six months to maintain an overview of risks facing the Group and ensure that management have identified and implemented appropriate controls to address these risks, which are acceptable to the Board. The risk register is taken into account in setting the internal audit programme each year. The Directors have continued to review the effectiveness of the Group’s system of financial and non-financial controls. 40 Corporate governance (continued) The Audit Committee monitors non-audit services provided to the Group by its external auditor. The Committee recognises that there will be certain non-audit work which the external auditor is best placed to undertake. Similarly there will be non-audit work in relation to the design of controls and systems that the external auditor should not undertake. The Committee’s policy is to keep all services provided by the external auditor under review to ensure the independence and objectivity of the external auditor, taking account of relevant professional and regulatory requirements. All non-audit work over a certain level to be undertaken by the external auditor has to be approved by the Audit Committee. Details of amounts paid to the external auditor during 2015 for audit and other services are set out in note 2 to the financial statements. The Audit Committee Chairman will be available to answer questions on any aspect of the Committee’s work at the AGM. Risk management and internal control The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. It is the role of management to implement the Board’s policies on risk and control through the design and operation of appropriate internal control systems. Such systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against material mis-statement or loss. The Board confirms that an ongoing process for identifying, evaluating and managing the significant risks faced by the Group was in place in compliance with the guidance of the Turnbull Review Group. The process has been in place throughout the year under review and has continued to the date of approval of the annual report and financial statements. The Board regularly reviews the Group’s system of internal control. The Board’s monitoring covers all controls including financial, operational and compliance controls and risk management. The key elements of the internal control process are: • Formal Board reporting on a monthly basis by the Chief Executive and the Finance Director; • Formal Board approval of the annual budget; • Since 2009, the internal audit function has been sourced in-house. Certain parts of the internal audit plan may be outsourced when it is considered that specific expertise is required. The Committee challenges and agrees the annual plan proposed by Group management, receives copies of all reports and an update from the Head of Internal Audit on a six-monthly basis; • Monthly and annual financial control checklists submitted by each business unit; • Discussion by the Committee of the external auditor’s conclusions in its annual audit and interim review; and • A robust risk assessment process as set out below. Macfarlane Annual Report and Accounts 2015 41 Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the group and parent company financial statements in accordance with applicable law and regulations. • Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business. Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our knowledge: 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. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Company law requires the Directors to prepare group and parent company financial statements for each financial year. Under that law 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, including FRS 101 Reduced Disclosure Framework. 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 EU; • For the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; and • The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and • The Strategic Review, which is incorporated into the Directors’ Report, includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group’s position and performance, business model and strategy. By order of the Board Peter D. Atkinson Chief Executive John Love Finance Director 25 February 2016 25 February 2016 Strategic reviewGovernanceFinancial statementsShareholder information42 Independent Auditor’s report to the Members of Macfarlane Group PLC only Opinions and conclusions arising from our audit factors, together with the potential for customer insolvency, result in a risk over the recoverability of the Group’s trade receivables. • Our response – Our audit procedures included testing the design and operating effectiveness of a selection of the Group’s controls over the receivables collection processes, including the Group’s credit control processes over aged receivables and customer credit approvals. For a sample of customer balances, we compared the amount of cash received after the year-end against the year-end ledger balances. We tested the adequacy of the Group’s provisions against trade receivables by critically assessing the assumptions made by the Group in determining the level of provision for each category of aged debt, with reference to the profile of aged debts at the balance sheet date compared with equivalent data observed subsequent to and at prior year ends along with an assessment of the level of post balance sheet cash receipts. We have also considered the adequacy of the Group’s disclosures about the degree of estimation involved in arriving at the provisions for the impairment of receivables. Valuation of retirement benefit deficit £11,518,000 Refer to page 39 (Audit Committee statement), page 48 (accounting policy) and note 24 (financial disclosures) • The risk – Significant assumptions and estimates are made in valuing the Group’s post-retirement defined benefit scheme and small changes in assumptions and estimates used to value the Group’s net pension deficit would have a significant effect on the results and financial position of the Group. • Our response – Our audit procedures included, with support of our own internal actuarial specialists, challenging the appropriateness of key assumptions used in deriving the value of the scheme’s liabilities, being the discount rate, life expectancy and inflation, by comparing these both with internal actuarial indicators which have been benchmarked against current market practice and assumptions used by other groups with similar defined benefit pension schemes. We performed an assessment of the independence and competence of the external actuaries engaged by the Group to produce the actuarial valuation of the scheme liabilities. We also considered the adequacy of the Group’s disclosures in respect of the sensitivity of the deficit to these assumptions. 3. Our application of materiality and an overview of the scope of our audit The materiality for the Group financial statements as a whole was set at £450,000, determined with reference to a benchmark of Group profit before taxation of £6,767,000, of which it represents 6.6%. We report to the Audit Committee any corrected and uncorrected identified misstatements exceeding £20,000, in addition to other identified misstatements that warranted reporting on qualitative grounds. The Group audit team performed the audit of the Group as if it was a single aggregated set of financial information, with the exception of an insignificant component in Sweden. The audit was performed using the materiality levels set out above and covered 99% of total Group revenue, 97% of Group profit before taxation, and 99% of total Group assets. 1. Our opinion on the financial statements is unmodified We have audited the financial statements of Macfarlane Group PLC for the year ended 31 December 2015 set out on pages 44 to 86. In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2015 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with UK Accounting Standards including FRS 101 Reduced Disclosure Framework; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. 2. Our assessment of risks of material misstatement In arriving at our audit opinion above on the financial statements the risks of material misstatement that had the greatest effect on our audit were as follows. Carrying value of trade receivables £37,135,000 Refer to page 38 (Audit Committee statement), page 48 (accounting policy) and note 13 (financial disclosures) • The risk – The Group has significant trade receivables, comprised of a high volume of individual balances, of which a number are material to the financial statements. These Macfarlane Annual Report and Accounts 201543 In particular, we are required to report to you if: We have nothing to report in respect of the above responsibilities. • we have identified material inconsistencies between the knowledge we acquired during our audit and the directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy; or • the section of the Corporate Governance Statement describing the work of the Group Audit Committee does not appropriately address matters communicated by us to the Audit Committee. Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial Scope and responsibilities As explained more fully in the Directors’ Responsibilities Statement set out on page 41, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. 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. This report is made solely to the Company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/ auditscopeukco2015a, which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions. Craig Anderson (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 191 West George Street Glasgow G2 2LJ statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: • the directors’ statement, set out on page 15, in relation to going concern and longer-term viability; • the part of the Corporate Governance Statement on pages 34 to 40 relating to the company’s compliance with the eleven provisions of the 2012 UK Corporate Governance Code specified for our review. 4. Our opinion on other matters prescribed by the Companies Act 2006 is unmodified In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and • 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. 5. We have nothing to report on the disclosures of principal risks Based on the knowledge we acquired during out audit, we have nothing material to add or draw attention to in relation to: • the directors’ Strategic Review on pages 14 to 15, concerning the principal risks, their management, and, based on that, the directors’ assessment and expectations of the group’s continuing in operation over the 3 years to 2018; or; • the disclosures in note (a) of the Summary of Accounting Policies set out on page 48 concerning the use of the going concern basis of accounting. 6. We have nothing to report in respect of the matters on which we are required to report by exception Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge we acquired during our audit, we have identified other information in the annual report that contains a material inconsistency with either that knowledge or the financial statements, a material misstatement of fact, or that is otherwise misleading. Financial statementsStrategic reviewGovernanceShareholder information44 Consolidated income statement For the year ended 31 December 2015 Continuing Operations Revenue Cost of sales Gross profit Distribution costs Administrative expenses Operating profit Net finance costs Profit before tax Tax Profit for the year Earnings per share Basic Diluted The accompanying notes are an integral part of this consolidated income statement. Note 2015 £000 2014 £000 1 169,132 (115,911) 153,767 (106,304) 53,221 (7,587) (37,932) 7,702 47,463 (7,432) (33,385) 6,646 (935) (1,040) 6,767 (1,317) 5,606 (1,164) 1, 2 4 5 6, 20 5,450 4,442 8 4.37p 3.78p 4.35p 3.78p Macfarlane Annual Report and Accounts 201545 Consolidated statement of comprehensive income For the year ended 31 December 2015 Items that will be or have been reclassified to profit or loss Foreign currency translation differences – foreign operations Items that will not be reclassified to profit or loss Remeasurement of pension scheme liability Tax recognised in other comprehensive income Tax on remeasurement of pension scheme liability Long-term corporation tax rate change Other comprehensive expense for the year, net of tax Profit for the year Total comprehensive income for the year Note 20 24 18 18 2015 £000 (62) 111 (22) (229) 2014 £000 (102) (2,737) 548 – (202) 5,450 (2,291) 4,442 5,248 2,151 The accompanying notes are an integral part of this consolidated statement of comprehensive income. Consolidated statement of changes in equity For the year ended 31 December 2015 Share Capital £000 Share Premium £000 Revaluation Reserve £000 Own Shares £000 Translation Reserve £000 Retained Earnings £000 Note 28,755 – – 2,398 – 7 19, 20 20 At 1 January 2014 Profit for the year Dividends Issue of share capital Exercise of share options Foreign currency translation difference – foreign operations Remeasurement of pension scheme liability Tax on remeasurement of pension scheme liability At 31 December 2014 Profit for the year Dividends Foreign currency translation difference – foreign operations Remeasurement of pension scheme liability Tax on remeasurement of pension scheme liability Long-term corporation tax rate change Credit for share-based payments 20 24 18 7 20 24 18 18 25 – – – 1,018 – – – – 70 – – – – – – – – – – 31,153 1,018 70 – – – – – – – – – – – – – – – – – – – – – At 31 December 2015 31,153 1,018 70 (311) – – – 311 223 – – – – (2,313) 4,442 (1,888) – (168) Total £000 26,424 4,442 (1,888) 3,416 143 – – – – – – – – – – – – (102) – (102) – – (2,737) (2,737) 548 548 121 (2,116) 30,246 – – 5,450 (2,094) 5,450 (2,094) (62) – – – – – 111 (22) (229) 72 (62) 111 (22) (229) 72 59 1,172 33,472 The accompanying notes are an integral part of this consolidated statement of changes in equity. Financial statementsShareholder informationStrategic reviewGovernance46 Consolidated balance sheet At 31 December 2015 Assets Non-current assets Goodwill and other intangible assets Property, plant and equipment Trade and other receivables Deferred tax assets Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Trade and other payables Current tax liabilities Provisions Finance lease liabilities Bank borrowings Total current liabilities Net current (liabilities)/assets Non-current liabilities Retirement benefit obligations Deferred tax liabilities Trade and other payables Finance lease liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium Revaluation reserve Translation reserve Retained earnings Total equity Note 2015 £000 2014 £000 9 10 13 18 12 13 14 36,181 7,691 559 2,499 46,930 10,559 43,238 1,407 55,204 34,125 7,445 659 3,245 45,474 9,663 39,998 1,250 50,911 1 102,134 96,385 15 16 17 14 24 18 15 17 1 1 19 20 20 20 20 41,297 654 – 388 13,039 55,378 37,566 279 52 155 11,349 49,401 (174) 1,510 11,518 988 40 738 13,873 1,019 1,368 478 13,284 16,738 68,662 66,139 33,472 30,246 31,153 1,018 70 59 1,172 33,472 31,153 1,018 70 121 (2,116) 30,246 The accompanying notes are an integral part of this consolidated balance sheet. The financial statements of Macfarlane Group PLC, company registration number SC004221, were approved by the Board of Directors on 25 February 2016 and signed on its behalf by Peter D. Atkinson Chief Executive John Love Finance Director Macfarlane Annual Report and Accounts 2015 Consolidated cash flow statement For the year ended 31 December 2015 Net cash inflow from operating activities Investing activities Acquisition of subsidiary undertakings Proceeds from disposal of property, plant and equipment Acquisition of property, plant and equipment Net cash used in investing activities Financing activities Dividends paid Proceeds from issue of share capital (net of issue expenses) Proceeds from sale of own shares to satisfy share options Repayment of bank loan Additional payment to pension scheme Drawdown on bank borrowing facility Repayment of finance lease liabilities Net cash (used in)/generated by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The accompanying notes are an integral part of this consolidated cash flow statement. 47 Note 21 22 7 21 2015 £000 2014 £000 5,368 2,843 (3,941) 263 (809) (4,487) (2,094) – – – – 1,690 (320) (5,051) 152 (624) (5,523) (1,888) 2,791 143 (6,000) (2,500) 11,349 (83) (724) 3,812 157 1,250 1,407 1,132 118 1,250 Financial statementsShareholder informationStrategic reviewGovernance48 Accounting policies For the year ended 31 December 2015 Summary of accounting policies In preparing the Group financial statements in conformity with IFRSs, the Directors are required to make judgements, estimates and assumptions that impact the carrying amounts of revenues, expenses, assets and liabilities that are not readily apparent from other sources. The judgements, estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. Judgements, assumptions and estimation uncertainties In preparing these consolidated financial statements, management has made judgements, estimates and assumptions, which affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from the amounts estimated. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. Information about judgements, assumptions and estimation uncertainties made in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements and therefore have the most significant risk of resulting in a material change is included in the following notes: Subject Trade and Other Receivables Note 13 Retirement Benefit Obligations 24 Area of assumptions and estimation uncertainties The provision for doubtful receivables is based on judgemental estimates over the recoverable amounts The valuation of the pension deficit is affected by small movements in key actuarial assumptions The following accounting policies have been applied consistently for items which are considered to be material in relation to the financial statements. (a) Basis of accounting The 2015 financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS Regulation. The following adopted IFRSs have been issued but have not been applied by the Group in these financial statements: IFRS 9 IFRS 15 IFRS 16 Financial Instruments Revenue from Contracts with Customers Leases The Directors do not expect that the adoption of the standards listed above will have a significant impact on the financial statements of the Group in 2016. The financial statements have been prepared on the historical cost basis. The revaluation reserve relates to a period before transition to IFRS. Going concern The Directors, in their consideration of going concern, have reviewed the Group’s future cash flow forecasts and profit projections, which they believe are based on a prudent assessment of the market and past experience. The Group’s business activities, together with the factors likely to affect its future development, performance and financial position are set out in the Strategic Review on pages 8 to 21. The Group’s principal financial risks in the medium term relate to liquidity and credit risk. Liquidity risk is managed by ensuring that the Group’s day-to-day working capital requirements are met by having access to banking facilities with suitable terms and conditions to accommodate the requirements of the Group’s operations. Credit risk is managed by applying considerable rigour in managing the Group’s trade receivables. The Directors believe that the Group is adequately placed to manage its financial risks effectively. The Group entered into a three-year committed borrowing facility of up to £20 million with Lloyds Banking Group PLC, in place until February 2017. These facilities have now been increased to £25.0 million with an additional option to increase them further to £30.0 million. The facilities are now available until June 2019. The facilities bear interest at normal commercial rates and carry standard financial covenants in relation to interest cover and levels of headroom over trade receivables. The Directors are of the opinion that the Group’s cash flow forecasts and profit projections, which they believe are based on prudent assessment of the market and past experience taking account of reasonably possible changes in trading performance given current market and economic conditions, show that the Group should be able to operate within its current facilities and comply with its banking covenants. After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least the next twelve months. For this reason they continue to adopt the going concern basis in preparing the financial statements. Macfarlane Annual Report and Accounts 2015 49 (b) Basis of consolidation The consolidated income statement and the consolidated balance sheet include the financial statements of the parent company and its subsidiaries, all of which are wholly-owned, to the end of the financial year. Transactions between group companies are eliminated on consolidation. On acquisition, the assets and liabilities of a subsidiary are measured at their fair values at the effective date of acquisition, defined as the date control is acquired. Any excess of the cost of acquisition over the fair values of the separately identifiable net assets is recognised as goodwill. The results of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal. The consolidated gain or loss on disposal of a subsidiary is the difference between the net proceeds of sale and the Group’s share of the subsidiary’s net assets together with the carrying value of any related goodwill at the effective date of disposal. (c) Goodwill and other intangible assets Goodwill arising in a business combination is recognised as an asset and represents the excess of the cost of acquisition over the net fair values of the identifiable assets and liabilities of the acquired subsidiary at the effective date of acquisition. Goodwill is allocated to cash generating units (CGUs) expected to benefit from the synergies of the combination, for the purpose of impairment testing. The carrying value of goodwill for each CGU is considered annually and also reviewed where management has reason to believe that a change in circumstances may give rise to any impairment. Other intangible assets comprise separately identifiable intangible assets recognised on the acquisitions of subsidiary companies. They are recorded at fair value on acquisition less any amortisation and subsequent impairment. These are primarily brand values, which are calculated on the Relief from Royalty method, and customer relationship values, which are calculated on the excess earnings method based on the net anticipated earnings stream. Brand values are amortised on a straight-line basis over up to five years and customer relationships are amortised on a straight-line basis over ten years. (d) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided to third parties in the normal course of business, net of discounts, VAT and other sales related taxes. Revenue from the sale of goods and services is recognised when the Group has transferred the significant risks and rewards of ownership of the goods and services to the customer, the amount of revenue and the costs related thereto can be measured reliably and it is probable that the economic benefits of the transaction will flow to the Group. (e) Leasing 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 leases are recognised as tangible assets of the Group at their fair value as determined at the inception of the lease. Depreciation is provided in accordance with the Group’s accounting policy for the class of tangible asset concerned. Interest costs are charged over the lease term and future obligations, comprising the corresponding liability to the lessor, are included in the balance sheet as finance lease liabilities. Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Incentives to enter into an operating lease are initially recorded as a liability and then treated as a reduction in the rental expense on a straight-line basis over the lease term. (f) Foreign currencies Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the consolidated income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are retranslated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to the Group’s presentational currency, Sterling, at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated at an average rate for the year where this rate approximates to the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from this translation of foreign operations are reported as an item of other comprehensive income and accumulated in the translation reserve. Financial statementsShareholder informationStrategic reviewGovernance50 Accounting policies (continued) For the year ended 31 December 2015 (g) Retirement benefit costs For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out triennially and updated at each balance sheet date. Actuarial gains and losses are recognised in full in the period in which they occur in the consolidated statement of comprehensive income. Settlement gains represent the excess of the current value of the retirement obligation extinguished over the transfer value paid to extinguish the liability. Curtailment gains, which are recognised in the consolidated income statement, represent the reduction in value of the retirement obligations achieved following a change in benefits put forward by the Company but only after Trustee approval to any necessary rule changes has been effected. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost and as reduced by the fair value of the scheme assets. The obligations are measured on an actuarial basis and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme’s liabilities. Payments made to defined contribution schemes are charged as an expense in the consolidated income statement as they fall due. (h) Taxation The tax expense represents the sum of the current tax payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit before tax as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The current tax liability is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax balances represent the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. The carrying value of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been substantively enacted at the balance sheet date. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also recorded in the consolidated statement of comprehensive income. Deferred tax assets and liabilities are not discounted. (i) Property, plant and equipment Property, plant and equipment are stated at cost. Assets revalued before the date of transition to IFRS have been recorded at deemed cost. No depreciation is provided on land. Depreciation is recognised so as to write off the cost of the tangible assets, less their estimated residual values, by equal annual instalments over their estimated useful lives. The rates of depreciation use the straight-line method and vary between 2% and 5% per annum on buildings and 7% and 33% per annum on plant and equipment. Rates of depreciation are reviewed annually to ensure they remain relevant and residual values are reviewed once in each calendar year. The gain or loss arising on the disposal or scrapping of an asset is determined as the difference between the sales proceeds and the carrying value of the asset and is recognised in the consolidated income statement. (j) Inventories Inventories are consistently stated at the lower of cost and net realisable value. Cost represents average cost and is stated less provisions required for obsolescence. In the case of work in progress and finished goods, cost comprises direct materials, direct labour costs and attributable overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value is based on the estimated selling price, less any further costs expected to be incurred to completion and disposal. Macfarlane Annual Report and Accounts 201551 (k) Financial instruments Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets, categorised as investments, are recognised and derecognised on the effective date where the purchase or sale of an investment is under a contract whose terms require the delivery of the investment within the timeframe established. They are initially measured at fair value, net of transactions costs except for those financial assets classified at fair value through the consolidated income statement, which are initially measured at fair value. Other financial assets comprise trade and other receivables that have fixed or determinable recoveries and are classified as trade and other receivables. The classification takes account of the nature and purpose of the financial assets and is determined on initial recognition. Trade and other receivables are measured at amortised cost less impairment. Indicators are assessed for the impairment of financial assets at each balance sheet date. Financial assets are impaired when there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows have been impacted. For trade receivables the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying value of the allowance account are recognised in the consolidated income statement. Cash and cash equivalents comprise cash on hand and on demand deposits, readily convertible to a known amount of cash and are subject to insignificant risk of changes in value. Financial liabilities and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements. Financial liabilities comprise solely other financial liabilities under the terms of IFRS 7. Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost, with interest expense measured on an effective yield basis. Equity instruments are any contracts evidencing a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Derivative financial instruments were not used in the current or preceding financial year. (l) Provisions The Group has a small number of surplus properties, held under operating leases, where it seeks to obtain rental income from a sub-lease to cover its ongoing liabilities under the head lease. In the event that a property held under one of these leases becomes vacant due to the expiry of a sub-lease, every effort is made to attract a new tenant. The Company reassesses the provision made for residual lease commitments together with other outgoings for dilapidations, after taking into account existing sub-tenant arrangements and assumptions relating to later periods of vacancy. If there is likely to be a rental void for a period of time, then a provision is made at each balance sheet date to cover management’s best estimate of the future cost of the likely void period. (m) Share-based payments The Group grants equity-settled share-based payments to certain employees. Equity settled share-based payments are measured at fair value of the equity instruments at the date of the grant and are expensed as an employee benefits expense on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in note 25. (n) Business combinations The acquisition of subsidiaries is accounted for under the purchase method. The acquired business is measured at the date of acquisition as the aggregate fair value of assets, liabilities and contingent liabilities as required under IFRS 3 Business Combinations. The excess of the cost of acquisition over the fair value of the acquired business is represented as goodwill. Contingent consideration classified as a liability will be subsequently re-measured through the consolidated income statement under the requirements of the revised IFRS 3. Financial statementsShareholder informationStrategic reviewGovernance52 Notes to the financial statements For the year ended 31 December 2015 1. Business and geographical segments (a) Business segments The Group adopted IFRS 8 “Operating Segments” with effect from 1 January 2009. The Group’s principal business segment is Packaging Distribution, comprising the distribution of packaging materials and supply of storage and warehousing services in the UK. This constitutes over 80% of the revenue and income of Group operations. The Group has combined the remaining operations for the design, manufacture and assembly of timber, corrugated and foam-based packaging materials in the UK, the design, manufacture and supply of self-adhesive labels to a variety of FMCG customers in the UK & Europe and the design, manufacture and supply of resealable labels to a variety of FMCG customers in the UK, Europe and the USA into one segment headed Manufacturing Operations. None of the individual business segments within Manufacturing Operations represent more than 10% of Group revenue or income. External revenues from major products and services Packaging Distribution Design, manufacture and assembly of timber, corrugated and foam-based packaging materials Manufacture and supply of self-adhesive labels Manufacture and supply of resealable labels and related machinery External revenues from continuing operations 2015 £000 143,035 8,953 10,861 6,283 169,132 2014 £000 126,907 9,531 10,586 6,743 153,767 (b) Segmental information Packaging Distribution £000 Manufacturing Operations £000 2015 Total £000 Packaging Distribution £000 Manufacturing Operations £000 2014 Total £000 Revenue Total revenue Inter-segment revenue External revenue Cost of sales Gross profit Net operating expenses Operating profit Net finance costs Profit before tax Tax 143,265 (230) 143,035 (100,817) 42,218 (35,467) 6,751 31,017 (4,920) 26,097 (15,094) 11,003 (10,052) 951 Profit for the year from continuing operations Inter-segment revenues are charged at prevailing market prices. 126,907 – 126,907 (90,382) 36,525 (30,767) 5,758 32,358 (5,498) 26,860 (15,922) 10,938 (10,050) 888 174,282 (5,150) 169,132 (115,911) 53,221 (45,519) 7,702 (935) 6,767 (1,317) 5,450 Capital additions Depreciation/amortisation Segment assets Segment liabilities Net assets 4,045 1,496 87,590 (61,625) 25,965 400 481 4,445 1,977 14,544 (7,037) 102,134 (68,662) 7,507 33,472 9,360 1,001 80,365 (58,189) 22,176 944 447 16,020 (7,950) 8,070 159,265 (5,498) 153,767 (106,304) 47,463 (40,817) 6,646 (1,040) 5,606 (1,164) 4,442 10,304 1,448 96,385 (66,139) 30,246 Macfarlane Annual Report and Accounts 201553 (c) Geographical segments The Group’s operations are primarily located in the UK and Europe. Packaging Distribution’s activities are primarily in the UK. Within the Manufacturing Operations, the Labels businesses operate in the UK, Europe and the USA and the Packaging Design and Manufacture business operates primarily in the UK. Revenue Total revenue Result Operating result Non-current assets Capital additions Continuing Operations Europe £000 UK £000 2015 Total £000 Continuing Operations Europe £000 UK £000 2014 Total £000 164,427 4,705 169,132 148,829 4,938 153,767 7,308 45,265 4,302 394 1,665 143 7,702 46,930 4,445 6,202 43,603 10,254 444 1,871 50 6,646 45,474 10,304 (d) Information about major customers No single customer accounts for more than 5% of the Group’s external revenues. 2. Operating profit Operating profit has been arrived at after charging: Depreciation of property, plant and equipment (see note 10) Amortisation of other intangible assets (see note 9) Staff costs (see note 3) Cost of inventories recognised as an expense A detailed analysis of auditor’s remuneration is provided below: Audit services Fees payable to company’s auditor for the audit of the company’s annual accounts Fees payable to company’s auditor for the audit of the company’s subsidiaries Total audit fees Non audit services Audit related assurance services for review of half-year statements Other assurance services for the audit of Macfarlane Group PLC pension scheme Taxation advisory services IT advisory services Other non-audit services for pension related advice All other services Total non-audit fees Total fees paid to auditor 2015 £000 1,151 826 27,239 112,067 2014 £000 1,020 428 24,435 103,048 30 79 109 16 9 6 9 – 95 135 244 30 79 109 16 9 1 – 7 – 33 142 In January 2015, our auditors KPMG acquired Crimsonwing, a business providing IT services to the Group. Macfarlane Group first entered into a contractual relationship with Crimsonwing in 2010 and paid fees totalling £95,000 for services in the period from January 2015 to December 2015, which are classified as all other services above. Financial statementsShareholder informationStrategic reviewGovernance54 Notes to the financial statements (continued) For the year ended 31 December 2015 3. Staff costs The average monthly number of employees was: Production Sales and distribution Administration The costs incurred in respect of these employees were: Wages and salaries Social security costs Other pension costs 4. Net finance costs Interest on bank borrowings Interest on obligations under finance leases Net interest expense on retirement benefit obligation (see note 24) Net finance costs 5. Tax Current tax United Kingdom corporation tax Foreign tax Prior period adjustments Current tax charge Deferred tax Current year charge (see note 18) Total tax charge 2015 No. 172 389 187 748 2015 £000 2014 No. 173 377 177 727 2014 £000 23,994 2,173 1,072 27,239 21,584 1,931 920 24,435 2015 £000 (460) (37) (438) (935) 2015 £000 (1,134) (48) 80 (1,102) (215) (1,317) 2014 £000 (438) (8) (594) (1,040) 2014 £000 (273) (95) 43 (325) (839) (1,164) The standard rate of tax based on the UK average rate of corporation tax, is 20.25% (2014 – 21.50%). Taxation for other jurisdictions is calculated at the rates prevailing in these jurisdictions. The actual tax charge for the current and previous year varies from 20.25% (2014 – 21.50%) of the results as set out in the consolidated income statement for the reasons set out in the following reconciliation: Profit before tax Tax on profit at 20.25% (2014 – 21.50%) Factors affecting tax charge for the year: Non deductible expenses Difference on overseas tax rates Changes in estimates related to prior years Tax charge for the year 2015 £000 2014 £000 6,767 5,606 (1,370) (1,205) (37) 10 80 (1) (1) 43 (1,317) (1,164) Macfarlane Annual Report and Accounts 201555 6. Profit for the year The Company has taken advantage of Section 408 of the Companies Act 2006 and consequently a separate profit and loss account for the parent company is not presented as part of these financial statements. The Company’s profit for the year is disclosed in note 35 to these financial statements. 7. Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for 2014 of 1.15p per share (2013 – 1.10p per share) Interim dividend for 2015 of 0.53p per share (2014 – 0.50p per share) 2015 £000 2014 £000 1,433 661 2,094 1,265 623 1,888 In addition to the amounts shown above, a proposed dividend of 1.29p per share will be paid on 9 June 2016 to those shareholders on the register at 13 May 2016. This is subject to approval by shareholders at the Annual General Meeting on 10 May 2016. This has not been included as a liability in these financial statements. 8. Earnings per share Earnings for the purposes of calculating earnings per share Profit for the year from continuing operations Number of shares in issue for the purposes of calculating basic and diluted earnings per share Weighted average number of ordinary shares in issue for the year Weighted average number of Own Shares in Employee Share Ownership Trust Weighted average number of shares in issue for the purposes of calculating basic earnings per share Effect of dilutive potential ordinary shares due to share options Weighted average number of shares in issue for the purposes of calculating diluted earnings per share Basic earnings per share Diluted earnings per share 2015 £000 2014 £000 5,450 4,442 2015 Number of Shares ‘000 2014 Number of Shares ‘000 124,611 – 117,550 (184) 124,611 576 117,366 – 125,187 117,366 4.37p 4.35p 3.78p 3.78p Financial statementsShareholder informationStrategic reviewGovernance56 Notes to the financial statements (continued) For the year ended 31 December 2015 9. Goodwill and other intangible assets Goodwill Other intangible assets Goodwill and other intangible assets Goodwill Cost at fair value on acquisition At 1 January Additions (see note 22) At 31 December Amortisation At 1 January and 31 December Carrying amount At 31 December 2015 At 31 December 2014 Packaging Distribution £000 Manufacturing Operations £000 29,292 5,530 34,822 27,648 1,644 29,292 1,359 – 1,359 1,359 – 1,359 2015 Total £000 30,651 5,530 36,181 2014 Total £000 29,007 5,118 34,125 29,007 1,644 30,651 24,149 4,858 29,007 – – – – 29,292 1,359 30,651 27,648 1,359 29,007 Goodwill comprises the value arising in a business combination representing the excess of the cost of acquisition over the net fair values of the identifiable assets and liabilities of the acquired subsidiary at the effective date of acquisition. Goodwill is allocated to CGUs expected to benefit from the synergies of the combination, for the purpose of impairment testing. During 2015 the Group acquired One Packaging Limited, giving rise to goodwill on acquisition, which was added to the Packaging Distribution CGU. During 2014 the Group acquired Lane Packaging Limited and Network Packaging Limited, both of which gave rise to goodwill on acquisition. In both cases the goodwill was added to the Packaging Distribution CGU. At 31 December 2015, the Group had two CGUs to which goodwill had been ascribed namely: (i) Packaging Distribution, comprising goodwill arising on all acquisitions in this segment since 2001; and (ii) Manufacturing Operations, comprising the goodwill arising on Labels acquisitions primarily in the Reseal-it business in 2000. The recoverable amount of each CGU is determined using “value in use” calculations with key assumptions relating to discount rates, growth rates and projected gross margin and overhead costs. A post tax discount rate of 7.0% (2014 – 7.4%) is used for both CGU’s reflecting the Group’s weighted average cost of capital adjusted for appropriate market risk, which is considered to be the most definitive basis for arriving at a discount rate and the Group believes the risk profiles across the markets in which it operates are not significantly different. The pre-tax discount rate is 8.8% (2014 – 9.8%) for each CGU. Growth rates of 1%, changes in gross margin and overhead costs are based on our expectation of future performance in the markets in which we operate. These are consistent with our budgets for 2016 and strategic plans for future years, and extrapolate cash flows for five years after which a terminal value is calculated assuming no inherent growth. The Directors believe the assumptions used are appropriate, but in addition have conducted sensitivity analysis to determine the changes in assumptions that would result in an impairment of the carrying value of goodwill. Based on this analysis the Directors believe that any reasonable changes in the key assumptions would maintain a recoverable amount for each CGU, which exceeds its carrying value. Therefore at 31 December 2015 no impairment charge is required against the carrying value of goodwill. Macfarlane Annual Report and Accounts 2015 57 Brand Values £000 Customer Relationships £000 2015 Total £000 2014 Total £000 338 89 427 150 57 207 220 188 6,915 1,149 8,064 1,985 769 2,754 7,253 1,238 8,491 2,135 826 2,961 2,973 4,280 7,253 1,707 428 2,135 5,310 5,530 4,930 5,118 Other intangible assets Cost at fair value on acquisition At 1 January Additions (see note 22) At 31 December Amortisation At 1 January Charge for year At 31 December Carrying amount At 31 December 2015 At 31 December 2014 Other intangible assets comprise separately identifiable intangible assets recognised on the acquisitions of subsidiary companies in Packaging Distribution between 2008 and 2015. They are recorded at fair value on acquisition less subsequent amortisation. These are primarily Brand values, which are calculated on acquisition on the Relief from Royalty method and a valuation of Customer Relationships, which is calculated on acquisition on the excess earnings method, based on the net anticipated earnings stream. Brand values are calculated on royalty rates of 0.5%, consistent with an assessment of what would be charged in a typical franchise agreement. The valuation of Customer Relationships is calculated using our best estimates of customer attrition rates, and returns, based on assessments of performance levels in the markets in which we operate. Brand values and Customer Relationships are amortised on a straight-line basis over up to five years and ten years respectively. During 2015 the Group acquired One Packaging Limited which gave rise to values for Brand Values and Customer Relationships within Packaging Distribution. During 2014 the Group acquired Lane Packaging Limited and Network Packaging Limited, both of which gave rise to values for Brand Values and Customer Relationships within Packaging Distribution. At 31 December 2015, the Group retained Brand Values in respect of: (i) One Packaging Limited, acquired in 2015; (ii) Lane Packaging Limited, acquired in 2014; and (iii) Network Packaging Limited, also acquired in 2014. At 31 December 2015, the Group retained values of Customer Relationships in respect of: (i) Online Packaging Limited, acquired in 2008 and now trading as our Gloucester and Wakefield RDCs; (ii) Allpoint Packaging Limited, acquired in 2008; (iii) Lane Packaging Limited, acquired in 2014, and now trading as our Reading RDC; (iv) Network Packaging Limited, also acquired in 2014; and (v) One Packaging Limited, acquired in 2015. Financial statementsShareholder informationStrategic reviewGovernance 58 Notes to the financial statements (continued) For the year ended 31 December 2015 10. Property, plant and equipment Land and Buildings £000 Plant and Equipment £000 Cost At 1 January 2014 Acquisitions Additions Exchange movements Disposals At 1 January 2015 Acquisitions Additions Exchange movements Disposals At 31 December 2015 Accumulated depreciation At 1 January 2014 Acquisitions Charge for year Exchange movements Disposals At 1 January 2015 Acquisitions Charge for year Exchange movements Disposals At 31 December 2015 Carrying amount At 31 December 2015 At 31 December 2014 5,891 8 108 (21) – 5,986 35 183 – (295) 5,909 2,601 6 144 – – 2,751 3 164 – – 2,918 2,991 3,235 Total £000 28,154 716 1,166 (97) (2,015) 27,924 417 1,563 (72) (377) 29,455 20,873 521 1,020 (64) (1,871) 20,479 249 1,151 (35) (80) 21,764 22,263 708 1,058 (76) (2,015) 21,938 382 1,380 (72) (82) 23,546 18,272 515 876 (64) (1,871) 17,728 246 987 (35) (80) 18,846 4,700 4,210 7,691 7,445 The main components of property, plant and equipment are: (i) Three properties owned by the Group in our Manufacturing Operations and tenant’s improvements at a number of short and medium-term operating leases in Packaging Distribution, categorised as land and buildings. (ii) A significant investment in plant and machinery in our Manufacturing Operations, typically printing presses in our Labels’ businesses and corrugated case-making machinery in our Packaging Design and Manufacture business as well as investments in an extensive IT system in the Packaging Distribution and Packaging Design and Manufacture businesses, which are all categorised under the combined heading of plant and equipment. The carrying value of £7,691,000 (2014 – £7,445,000) includes £1,410,000 (2014 – £726,000) of assets held under finance leases. Depreciation charged in respect of these assets is £123,000 (2014 – £81,000). Land and buildings at net book value comprise: Freeholds Long leaseholds Short leaseholds 2015 £000 2014 £000 1,664 1,219 108 2,991 1,686 1,470 79 3,235 Macfarlane Annual Report and Accounts 201559 11. Subsidiary companies A list of principal operating subsidiaries, including names and countries of incorporation is given on page 87. 12. Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 2015 £000 399 181 9,979 10,559 2014 £000 527 284 8,852 9,663 Inventories represent raw materials, work in progress and finished goods held in each of the Group’s businesses to respond to customers’ requirements for product. Inventories recorded in the Group’s balance sheet comprise large numbers of comparatively small balances. The local teams review inventory levels, older and obsolete inventories and provide against any exposures throughout the year. The Group’s executive management then reviews these local judgements to ensure they properly reflect movements in absolute levels, ageing of holdings and known obsolescence. Movement in the provisions for slow-moving and obsolete inventories At 1 January Acquisitions Inventory write offs recognised in the income statement Amounts written off during the year At 31 December 13. Trade and other receivables Current Trade receivables Allowance for doubtful receivables Other receivables Prepayments and accrued income Non-current Other receivables 2015 £000 718 2 56 (67) 709 2014 £000 650 5 373 (310) 718 2015 £000 2014 £000 37,521 (386) 37,135 3,921 2,182 43,238 34,624 (357) 34,267 3,673 2,058 39,998 559 659 Trade receivables represent amounts owed by customers in respect of goods or services provided in each of the Group’s businesses prior to the year-end. Trade receivables are measured at amortised cost. The Group’s credit risk is primarily attributable to its trade receivables. The average credit period taken on sales of goods is 59 days (2014 – 59 days). No interest is charged on overdue receivables. The Group uses external credit scoring systems to assess new customers’ credit quality and uses this to help define credit limits by customer. Limits and scoring are attributed to major customers, with receivables over £50,000 reviewed twice per year. There are no customers with a balance in excess of 5% of the total trade receivables balance at 31 December 2015 or 31 December 2014. Financial statementsShareholder informationStrategic reviewGovernance60 Notes to the financial statements (continued) For the year ended 31 December 2015 13. Trade and other receivables (continued) Included in the Group’s trade receivables balance are debtors with a carrying amount of £11,153,000, (2014 – £9,688,000) which are past due at the reporting date. The Group has not provided for these amounts as there has not been a significant change in the customers’ credit quality and the Group believes that the amounts are still recoverable. The weighted average overdue age of these trade receivables is 18 days (2014 – 17 days). Ageing of past due but not impaired receivables 30 – 60 days 60 – 90 days Over 90 days 2015 £000 6,058 3,936 1,159 11,153 2014 £000 5,046 3,605 1,037 9,688 Amounts presented in the balance sheet are net of allowances for doubtful trade receivables of £386,000 (2014 – £357,000), estimated by the Group’s executive management based on prior experience and their assessment of the current economic environment. In determining the recoverability of trade receivables, the Group’s executive management considers any change in the credit quality of the trade receivables from the date credit was originally granted up to the reporting date. Movement in the allowance for doubtful trade receivables At 1 January Acquisitions Impairment losses recognised in the income statement Amounts written off as uncollectible At 31 December 2015 £000 357 15 155 (141) 386 2014 £000 340 8 85 (76) 357 The Directors consider that the carrying amount of the trade and other receivables approximate to their fair value. 14. Financial instruments The Group funds its operations from a number of sources of cash, namely operating cash flow, bank borrowings, finance lease borrowings and shareholders’ equity, comprising share capital, reserves and retained earnings, where appropriate. The objective is to achieve a capital structure with an appropriate cost of capital whilst providing flexibility in immediate and medium-term funding to accommodate any material investment requirements. The Group’s principal financial instruments comprise borrowings, cash and short-term deposits, and other items, such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to provide finance for the Group’s operations. It is, and has been throughout the period under review, the Group’s policy that no trading in financial instruments is undertaken for speculative purposes. There has been no significant change to the Group’s exposure to market risks during 2015. The principal risks arising are liquidity risk and credit risk, with the secondary risks being interest rate risk and currency risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the beginning of 2015. Liquidity risk The Group’s liquidity requirements are met by ensuring adequate access to funds by maintaining appropriate levels of committed banking facilities, which are then reviewed on a regular basis. The Group bank borrowing facilities with Lloyds Banking Group PLC have now been increased to £25.0 million with an additional option to increase them further to £30.0 million. The facilities are now available until June 2019. The facilities bear interest at normal commercial rates and carry standard financial covenants in relation to interest cover and levels of headroom over the trade receivables of the Company. The maturity profile of debt outstanding at 31 December 2015 is set out in note 17 and in this note to the financial statements. Credit risk The Group’s exposure to credit risk is managed by dealing only with banks and financial institutions with good credit ratings and by applying considerable rigour in managing trade receivables. The Group’s principal credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management with further details set out in note 13. Macfarlane Annual Report and Accounts 201561 Interest rate risk The Group finances its business through a mixture of equity and bank borrowings. The Group borrows in the desired currencies at floating rates of interest. It was not considered necessary to cover current interest rate exposures by the use of financial instruments during 2015. A sensitivity analysis has been determined based on the exposure to interest rates at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. If the interest rates had been 50 basis points higher and all other variables held constant, the Group’s profit before tax would have decreased by £70,000 (2014 – £65,000). Currency risk The Group has two overseas subsidiaries, one operating in Ireland and the other operating in Sweden. Revenues and expenses are denominated exclusively in Euros and Swedish Krone respectively. As a result, movements in the Euro and Swedish Krone to sterling exchange rates could affect the Group’s sterling balance sheet. The Group’s policy during 2015 has been to review the need to hedge exposures on a regular basis and it was not considered necessary to cover the existing currency exposures by the use of financial instruments. The Group continues to review the need to hedge exposures on a regular basis. The Sterling value of foreign currency denominated assets and liabilities at the reporting date is as follows: Euros Swedish Krone Assets 2015 £000 1,439 615 2,054 Assets 2014 £000 1,393 818 2,211 The sterling value of the Group’s foreign currency denominated profits before tax are as follows: Euros Swedish Krone Liabilities 2015 £000 Liabilities 2014 £000 505 227 732 2015 £000 173 225 398 592 355 947 2014 £000 15 430 445 The following table details the Group’s sensitivity to a 5% change in Sterling against the respective foreign currencies. The sensitivity of the Group’s exposure to foreign currency risk is determined based on the change taking place at the beginning of the financial year and held constant throughout the reporting period. Euros Swedish Krone Cash and cash equivalents Currency Sterling Euros Swedish Krone Cash and cash equivalents Bank borrowings and loans Borrowings – Sterling Bank borrowings and loans Net bank indebtedness Result 2015 £000 9 11 20 Result 2014 £000 Other Equity 2015 £000 Other Equity 2014 £000 1 21 22 47 19 66 2015 £000 955 444 8 40 23 63 2014 £000 943 185 122 1,407 1,250 13,039 13,039 11,349 11,349 11,632 10,099 Financial statementsShareholder informationStrategic reviewGovernance62 Notes to the financial statements (continued) For the year ended 31 December 2015 14. Financial instruments (continued) Cash and cash equivalents as set out above comprise cash at bank and other short-term highly liquid investments with maturity of three months or less. In February 2014, the Group bank borrowing arrangement with Lloyds Banking Group PLC, which comprises a three-year committed borrowing facility of up to £20 million, was put in place until February 2017. These facilities have now been increased to £25.0 million with an additional option to increase them further to £30.0 million. The facilities are now available until June 2019. The facilities bear interest at normal commercial rates and carry standard financial covenants in relation to interest cover and levels of headroom over the trade debtors of the Company. Interest rates All Group deposits and borrowings are held at floating rates of interest. The average effective interest rate on bank borrowings approximates to 3.3% per annum (2014 – 3.4%). Fair value of financial instruments Current assets and liabilities are all held at floating rates. The fair values of cash and cash equivalents and bank borrowings at 31 December 2015 all materially equate to book values. Borrowing facilities The Group has various committed undrawn borrowing facilities available at 31 December 2015, in respect of which all conditions precedent had been met, as follows: Drawn down Undrawn The Group’s borrowing profile is as follows: At Amortised cost Bank borrowings – secured Finance lease liabilities – secured Current borrowings Non-current – finance lease liabilities – secured Total borrowings 2015 £000 13,039 7,861 20,900 2014 £000 11,349 9,151 20,500 2015 £000 2014 £000 13,039 388 13,427 738 14,165 11,349 155 11,504 478 11,982 The principal Group borrowing facilities of £20.0 million at 31 December 2015 are with Lloyds Banking Group PLC and there are two smaller facilities totalling £0.9 million, inherited as part of the acquisitions completed in 2014 and 2015. The Group is currently in compliance with all conditions in relation to all of these borrowing facilities. Gearing ratio Total borrowings (as defined above) Equity Net debt to equity ratio 2015 £000 2014 £000 14,165 11,982 33,472 30,246 42% 40% Financial instruments carried at fair value IFRS 7 requires that all financial instruments carried at fair value be analysed under certain levels. The table below analyses financial instruments, into a fair value hierarchy based on the valuation technique used to determine fair value. • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Macfarlane Annual Report and Accounts 201563 The fair values of all financial assets and financial liabilities by class together with their carrying amounts shown in the balance sheet are as follows: Financial assets designated as fair value through profit or loss (note 15) Carrying Amount 2015 £000 Fair Value 2015 £000 Level 1 2015 £000 Level 2 2015 £000 Level 3 2015 £000 Carrying Amount 2014 £000 Fair Value 2014 £000 Level 1 2014 £000 Level 2 2014 £000 Level 3 2014 £000 Contingent consideration 2,063 2,063 – – 2,063 2,812 2,812 – – 2,812 The following table shows the valuation techniques used for Level 3 fair values, as well as the significant unobservable inputs used for Level 3 items: Financial instruments measured at fair value Valuation technique Significant unobservable inputs (Level 3 only) Contingent consideration The expected payment reflects the calculated cash out flows under possible earn out scenarios and is not discounted Trading performance of acquired businesses 15. Trade and other payables Due within one year Trade payables Other taxation and social security Contingent consideration Other creditors Accruals and deferred income Due after more than one year Contingent consideration Other creditors 2015 £000 2014 £000 30,690 2,845 2,063 226 5,473 41,297 – 40 40 29,473 2,473 1,487 37 4,096 37,566 1,325 43 1,368 Trade and other payables principally comprise amounts outstanding for trade purchases and ongoing distribution costs and administrative expenses in all the Group’s businesses. No interest is charged on trade payables. The Directors consider that the carrying amounts for trade and other payables approximate to their fair value. 16. Provisions Due within one year At 1 January Credited to consolidated income statement Paid in the year At 31 December 2015 £000 2014 £000 52 (20) (32) – 82 (30) – 52 The Company reassesses the provision made for residual lease commitments together with other outgoings for dilapidations, after taking into account existing sub-tenant arrangements and assumptions relating to potential later periods of vacancy. Further information on lease commitments is set out in note 23. Financial statementsShareholder informationStrategic reviewGovernance64 Notes to the financial statements (continued) For the year ended 31 December 2015 17. Finance lease liabilities Amounts payable under finance leases Due within one year Due between one and two years Due from the third to fifth years inclusive Present value of finance lease liabilities Due for settlement within 12 months (shown within current liabilities) Due for settlement after more than 12 months (shown as non-current liabilities) 2015 £000 388 432 306 1,126 (388) 738 2014 £000 155 150 328 633 (155) 478 The Group determines the need to use external arrangements to finance tangible assets, depending on the cost, availability and balance of its other funding arrangements. The Group typically uses such arrangements to finance major capital projects, but often inherits financing arrangements on acquisition of subsidiary companies. The average lease term is three years and the average effective borrowing rate is 2.50% per annum (2014 – 3.25%). Interest rates are fixed at the contract date. All liabilities are on a fixed repayment basis. Finance lease liabilities are denominated in Sterling. The Directors consider that the carrying amounts for finance lease liabilities approximate to their fair value. The finance lease liabilities are secured over the assets to which the leases relate as disclosed in note 10. 18. Deferred tax At 1 January 2014 Acquisition (see note 22) (Charged)/credited in income statement Credited in other comprehensive income Deferred tax on remeasurement of pension scheme liability At 1 January 2015 Acquisition (see note 22) Credited/(charged) in income statement (Charged) in other comprehensive income Deferred tax on remeasurement of pension scheme liability Long-term corporation tax rate change At 31 December 2015 2015 Deferred tax asset Due outwith one year Deferred tax liabilities Due outwith one year 2014 Deferred tax asset Due outwith one year Deferred tax liabilities Due outwith one year Tax Losses £000 Other Intangible Assets £000 Retirement Benefit Obligations £000 (253) (856) 86 – (1,023) (249) 277 – – 3,179 – (952) 548 2,775 – (451) (22) (229) (995) 2,073 Total £000 3,375 (858) (839) 548 2,226 (249) (215) (22) (229) 1,511 – 2,073 2,499 (995) (995) – 2,073 (988) 1,511 – (1,023) (1,023) 2,775 – 2,775 3,245 (1,019) 2,226 449 (2) 27 – 474 – (41) – – 433 426 7 433 470 4 474 Macfarlane Annual Report and Accounts 201565 Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and 18% (effective from 1 April 2020) were substantively enacted on 26 October 2015. This will reduce the Company’s future current tax charge accordingly. The deferred tax asset at 31 December 2015 has been calculated based on these rates. Recovery of the deferred tax assets is anticipated against future trading profits. 19. Share capital Allotted, issued and fully paid: At 1 January Issued during the year At 31 December Number of 25p Shares 2015 £000 2014 £000 124,611,360 – 124,611,360 31,153 – 31,153 28,755 2,398 31,153 On 5 September 2014, the Company acquired the whole issued share capital of Network Packaging Limited. As part of the initial consideration, the Company issued 1,592,360 ordinary shares of 25p each at a value of 39.25p per share, which were admitted to the official List of the London Stock Exchange on 12 September 2014. On 8 September 2014, the Company announced a placing of 8,000,000 ordinary shares of 25p each at a price of 37.50p per share. The placing was approved at a General Meeting of the Company on 1 October 2014 and the shares were admitted to the official List of the London Stock Exchange on 2 October 2014. The Company has one class of ordinary shares, which carry no right to fixed income. Each ordinary share carries one vote in any General Meeting of the Company. 20. Reserves Balance at 1 January 2014 Profit for the year Dividends paid (see note 7) Foreign currency translation differences – foreign operations Issue of new shares Expenses of share issue Exercise of share options Remeasurement of pension scheme liability taken direct to equity Deferred tax taken direct to equity Tax on remeasurement Balance at 1 January 2015 Profit for the year Dividends paid (see note 7) Foreign currency translation differences – foreign operations Credit for share-based payments Remeasurement of pension scheme liability taken direct to equity Deferred tax taken direct to equity Tax on remeasurement Long-term Corporation tax rate change Share Premium £000 Revaluation Reserve £000 Own Shares £000 Translation Reserve £000 Retained Earnings £000 – – – – 1,227 (209) – – – 1,018 – – – – – – – 70 – – – – – – – – 70 – – – – – – – (311) – – – – – 311 – – – – – – – – – – – 223 – – (102) – – – – – 121 – – (62) – – – – 59 (2,313) 4,442 (1,888) – – – (168) (2,737) 548 (2,116) 5,450 (2,094) – 72 111 (22) (229) 1,172 Balance at 31 December 2015 1,018 70 Exchange differences arising in the consolidated accounts on the retranslation at closing rates of the Group’s net investments in foreign subsidiary companies are recorded as movements on the Group’s translation reserve. The translation reserve at 31 December 2015 relates wholly to continuing operations. Financial statementsShareholder informationStrategic reviewGovernance66 Notes to the financial statements (continued) For the year ended 31 December 2015 21. Notes to the cash flow statement Operating profit before exceptional items Adjustments for: Amortisation of intangible assets Depreciation of property, plant and equipment Loss/(gain) on disposal of property, plant and equipment Operating cash flows before movements in working capital Increase in inventories Increase in receivables Increase in payables Decrease in provisions Pension scheme contributions (excluding additional contribution in 2014) Cash generated by operations Income taxes paid Interest paid Net cash inflow from operating activities Movement in net debt Increase in cash and cash equivalents in the year Decrease in bank loans Increase in bank borrowings New finance lease facilities Cash flows from payment of finance lease liabilities Movement in net debt in the year Opening net debt Closing net debt Net debt comprises: Cash and cash equivalents in statement of cash flows Bank borrowings Net bank debt Finance lease liabilities Due within one year Due outwith one year Closing net debt 2015 £000 7,702 826 1,151 34 9,713 (546) (2,042) 2,178 (32) (2,682) 6,589 (724) (497) 5,368 2015 £000 157 – (1,690) (813) 320 (2,026) (10,732) (12,758) 1,407 (13,039) (11,632) (388) (738) 2014 £000 6,646 428 1,020 (8) 8,086 (1,194) (4,119) 4,163 – (2,854) 4,082 (793) (446) 2,843 2014 £000 1,132 6,000 (11,349) (683) 83 (4,817) (5,915) (10,732) 1,250 (11,349) (10,099) (155) (478) (12,758) (10,732) Cash and cash equivalents (which are presented as a single class of asset on the face of the balance sheet) comprise cash at bank and other short-term highly liquid investments with maturity of three months or less. Macfarlane Annual Report and Accounts 2015 67 22. Acquisition of subsidiary companies On 5 August 2015, the Group acquired 100% of the issued share capital of One Packaging Limited, a packaging distributor, for a consideration of approximately £2,730k. £1,980k was paid in cash on acquisition, with contingent consideration payable in the final quarter of 2016, subject to certain trading targets being met in the year to 31 July 2016. The contingent consideration is recognised as a liability at the balance sheet date and is remeasured to fair value at the balance sheet date on a range of outcomes between £Nil and £750k. During 2014 the Group acquired 100% of the issued share capital of PSD Industrial Holdings Limited, the immediate parent company of Lane Packaging Limited and 100% of the issued share capital of Network Packaging Limited. The final earnout payment of £246k for Lane Packaging was made in the first half of 2015, with an additional £83k of goodwill paid. The full earnout of £1,312k for the first of the two earnout years for Network Packaging was paid in the final quarter of 2015. All three businesses are packaging distributors and are accounted for in the Packaging Distribution segment. Goodwill arising on these acquisitions is attributable to the anticipated future profitability of the distribution of the Group’s product ranges in new geographical markets in the UK and anticipated operating synergies from the future combination of activities with the existing Packaging Distribution network. The fair values assigned to the net assets acquired and the consideration paid and payable are set out below: 2014 Total £000 Lane Packaging £000 Network Packaging £000 Net assets acquired Other intangible assets (note 9) Property, plant and equipment Inventories Trade and other receivables Cash and bank balances Bank loans and overdrafts Trade and other payables Current tax liabilities Finance lease liabilities Deferred tax liabilities Net assets/(liabilities) acquired Goodwill arising on acquisition (note 9) Total consideration Satisfied by: Cash Deferred consideration 2015 acquisition Deferred consideration 2014 acquisitions Shares 2015 Total £000 1,238 168 350 1,098 – (403) (974) – (59) (249) 1,169 1,644 2,813 3,538 750 (1,475) – 4,280 195 538 2,219 432 (532) (2,315) (312) (141) (858) 3,506 4,858 8,364 4,951 – 2,788 625 Total consideration 2,813 8,364 Net cash outflow arising on acquisition Cash consideration Cash and bank balances acquired Bank loans and overdrafts assumed (3,538) – (403) (3,941) (4,951) 432 (532) (5,051) 663 76 72 453 – (532) (681) (16) (56) (133) (154) 1,001 847 684 – 163 – 847 (684) – (532) (1,216) 3,617 119 466 1,766 432 – (1,634) (296) (85) (725) 3,660 3,857 7,517 4,267 – 2,625 625 7,517 (4,267) 432 – (3,835) Financial statementsShareholder informationStrategic reviewGovernance68 Notes to the financial statements (continued) For the year ended 31 December 2015 23. Financial commitments The Group’s property portfolio in its Packaging Distribution business comprises a number of property leases for periods of between one year and ten years. In addition the Group leases most of its commercial vehicles, motor vehicles, fork lift trucks and telecoms equipment on leasing arrangements, which run for periods of up to six years. These arrangements are collectively known as operating leases. During the year the Group made minimum lease payments under non-cancellable operating leases as follows: Charge for the year Recoveries from property sub-leases Net charge for the year Land and Buildings 2015 £000 4,277 (548) 3,729 Other 2015 £000 2,755 – 2,755 Land and Buildings 2014 £000 4,340 (509) 3,831 At the balance sheet date the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases which fall due for payment as follows: Within one year Between one and five years After more than five years Land and Buildings 2015 £000 4,341 11,599 5,217 21,157 Other 2015 £000 2,750 4,663 37 7,450 Land and Buildings 2014 £000 4,429 13,014 6,417 23,860 Other 2014 £000 2,677 – 2,677 Other 2014 £000 2,675 5,396 137 8,208 The majority of the 28 (2014 – 28) leases of land and buildings summarised above are subject to rent reviews. 4 (2014 – 4) of these leases are subject to sub-let arrangements or assignations with third parties to reduce the property cost to Macfarlane Group. At the balance sheet date there were outstanding commitments for future annual minimum lease payments receivable under non-cancellable operating leases which fall due for payment to the Group as follows: Within one year Between one and five years After more than five years Land and Buildings 2015 £000 538 1,684 10 2,232 Land and Buildings 2014 £000 512 1,963 414 2,889 In the event of tenants defaulting on future payments under non-cancellable operating leases for land and buildings, this would lead to increased property costs to the Group until the leases were subsequently sub-let. Following the assignment of a property head lease at Coventry in October 2011, the Group provided guarantees for the rentals under the head lease in the event of a default by the assignee. The assignee is the UK subsidiary of a multinational business listed on the New York Stock Exchange. As a result of the assignation, there is a contingent liability of £2.3 million, (2014 – £2.7 million) being the difference between head lease and sub-lease payments from 1 January 2016 until the conclusion of the head lease in November 2020. Contractual commitments for capital expenditure for which no provision has been made in the accounts amounted to £Nil (2014 – £109,000). Macfarlane Annual Report and Accounts 201569 24. Retirement benefit obligations Introduction Macfarlane Group PLC sponsors a defined benefit pension scheme for certain active and former UK employees – the Macfarlane Group PLC Pension & Life Assurance Scheme (1974) (“the scheme). Two trading subsidiaries, Macfarlane Group UK Limited and Macfarlane Labels Limited are also sponsoring employers of the scheme. Disclosure of the respective proportions of the Group deficit are set out in the accounts of each of the three participating employers. The scheme is administered by a separate Board of Trustees composed of employer-nominated representatives and member-nominated Trustees and is legally separate from the Group. The assets of the scheme are held separately from those of the Group in managed funds under the supervision of the Trustees. The Trustees are required by law to act in the interest of all classes of beneficiary in the scheme and are responsible for investment policy and the day-to-day administration of benefits. The scheme was closed to new entrants during 2002. The scheme provides qualifying employees with an annual pension of 1/60 of pensionable salary for each completed year’s service on attainment of a normal retirement age of 65. Pensionable salaries were frozen for the remaining active members at the levels current at 30 April 2009 with the change taking effect from 30 April 2010. As a result no further salary inflation applies for active members who elected to remain in the scheme. Active members’ benefits also include life assurance cover, albeit the payment of these benefits is at the discretion of the Trustees of the scheme. On withdrawing from active service a deferred member’s pension is revalued from the time of withdrawal until the pension is drawn. Revaluation in deferment is statutory and since 2010 has been revalued on the Consumer Price Index (CPI) measure of inflation. Revaluation of pensions in payment is a blend of fixed increases and inflationary increases depending on the relevant periods of accrual of benefit. For pensions in payment, the inflationary increase is currently based on the Retail Prices Index (RPI) measure of inflation or based on Limited Price Indexation (LPI) for certain defined periods of service. During 2012, Macfarlane Group PLC agreed with the Board of Trustees to amend benefits for pensioner, deferred and active members in the defined benefit pension scheme by offering a Pension Increase Exchange (PIE) option for deferred and active members after 1 May 2012. The Group will consider a number of further actions to reduce the deficit in 2016. Balance sheet disclosures at 31 December 2015 The pension scheme’s qualified actuary from Aon Hewitt carries out triennial valuations using the Projected Unit Credit Method to determine the level of deficit. For the most recent triennial valuation at 1 May 2014, the principal assumptions adopted were that investment returns would average 0.7% per annum above the gilt yield and that no salary increases would apply for active members. The valuation showed that the market value of the relevant investments of the scheme was £58,676,000 and the actuarial value of these investments represented 71% of the value of benefits that had accrued to members. The investments held by the scheme and the deficit of the scheme have been based on the results of the actuarial valuation as at 1 May 2014, updated to the year-end as shown below: Investment class Equities UK equities and equity funds Overseas equities funds Multi-asset diversified funds Bonds Liability-driven investment funds Government gilt funds Corporate bond funds Other Cash Valuation 2015 £000 Asset Allocation Valuation 2014 £000 Asset Allocation Valuation 2013 £000 Asset Allocation 6,030 10,758 25,476 14,107 – 11,119 8.9% 15.9% 37.6% 20.8% – 16.4% 5,677 10,216 18,541 22,195 – 11,263 8.4% 15.0% 27.3% 32.6% – 16.6% 5,790 9,289 16,414 – 13,046 9,488 10.7% 17.1% 30.3% – 24.0% 17.5% 303 0.4% 98 0.1% 211 0.4% Fair value of scheme assets 67,793 100.0% 67,990 100.0% 54,238 100.0% Present value of scheme liabilities (79,311) Deficit in the scheme (11,518) (81,863) (13,873) (70,134) (15,896) Financial statementsShareholder informationStrategic reviewGovernance70 Notes to the financial statements (continued) For the year ended 31 December 2015 24. Retirement benefit obligations (continued) The Trustees review the investments of the scheme on a regular basis and consult with the Company regarding any proposed changes to the investment profile. At the start of February 2014, the investment in government gilts was transferred into a liability-driven investment fund, which concentrates solely on interest rate and inflation protection strategies, to provide a more effective hedge against the impact of both interest rates and inflation on the liabilities in the scheme. Assumptions The scheme’s liabilities at 31 December 2015 were calculated on the following bases as required under IAS 19: Discount rate Rate of increase in salaries Rate of increase in pensions in payment Inflation assumption (RPI) Inflation assumption (CPI) Life expectancy beyond normal retirement age of 65 Male Female 2015 2014 2013 3.70% 0.00% 3% or 5% for fixed increases or 3.00% for LPI. 2.10% post 5 April 2006 3.50% 0.00% 3% or 5% for fixed increases or 2.90% for LPI. 2.05% post 5 April 2006 4.50% 0.00% 3% or 5% for fixed increases or 3.30% for LPI. 2.20% post 5 April 2006 3.10% 2.10% 22.7 25.3 3.00% 2.10% 22.7 25.1 3.40% 2.50% 22.6 25.1 Sensitivity to significant assumptions The scheme exposes the Group to actuarial risks, such as interest rate risk, inflation risk, longevity risk and investment risk. The significant assumptions used for IAS 19 are discount rate, inflation and mortality. If different assumptions were used, then this could have a material effect on the results disclosed. Assuming all other assumptions are held static then a movement in the following key assumptions would affect the level of the deficit as shown below: Assumptions Discount rate movement of +0.1% Inflation rate movement of +0.1% Mortality movement of +0.1 year in age rating 2015 £000 1,142 (404) 214 2014 £000 1,285 (393) 295 2013 £000 1,192 (281) 231 Positive figures reflect a reduction in the scheme liabilities and therefore a reduction in the scheme deficit. The sensitivity information has been prepared using the same method as adopted when adjusting the results of the latest funding valuation to the balance sheet date and is consistent with the approach adopted in previous years. It is set out in this manner to enable calculations of larger movements to be undertaken relatively easily. The mortality movement of +0.1 year in age rating equates to current progressions in life expectancy tables. All of the sensitivity information assumes that the average duration of liabilities in the scheme is seventeen years. Funding UK pension legislation requires that pension schemes are funded prudently. Following the 2014 actuarial valuation, the scheme’s trustees agreed to a deficit recovery period of 10 years. Macfarlane Group PLC is currently paying deficit reduction contributions of £2,650,000 per annum, which along with investment returns from return-seeking assets is expected to make good the actuarial shortfall by 2024. The estimated deficit reduction contributions in 2016 will be £2,800,000. The employer contribution rate for active members is 18.6% of pensionable salary and the employee contribution rate is 7% of pensionable salary from 1 May 2014. The next triennial actuarial valuation of the scheme is due at 1 May 2017. Macfarlane Annual Report and Accounts 2015 Movement in the scheme deficit in the year At 1 January Current service costs Contributions from sponsoring companies Net finance cost Remeasurement of pension scheme liability in the year At 31 December Analysis of amounts charged to profit before tax Current service costs Net finance cost Pension expense charged to profit before tax Analysis of the remeasurement of pension scheme liability as included in the statement of other comprehensive income Return on scheme assets excluding amount shown in interest income Changes in assumptions underlying the present value of scheme liabilities Remeasurement of pension scheme liability recognised in the statement of other comprehensive income Movement in the fair value of scheme assets At 1 January Interest income Return on scheme assets excluding amount shown in interest income Contributions from sponsoring companies Contribution from scheme members Benefits paid At 31 December Movement in the present value of defined benefit obligations At 1 January Normal service costs Interest cost Contribution from scheme members Changes in assumptions underlying the defined benefit obligations Benefits paid 71 2015 £000 (13,873) (152) 2,834 (438) 111 (11,518) (152) (438) (590) 2015 £000 2014 £000 (15,896) (126) 5,480 (594) (2,737) (13,873) (126) (594) (720) 2014 £000 (1,658) 1,769 9,184 (11,921) 111 (2,737) 67,990 2,364 (1,658) 2,834 84 (3,821) 67,793 (81,863) (152) (2,802) (84) 1,769 3,821 54,238 2,488 9,184 5,480 79 (3,479) 67,990 (70,134) (126) (3,082) (79) (11,921) 3,479 At 31 December (79,311) (81,863) The total of £1,769,000, (2014 – £11,921,000) set out above includes changes arising from scheme experience as well as changes in the underlying assumptions of the defined benefit obligations. The cumulative amount of actuarial losses recognised in other comprehensive income since the date of transition to IAS 19 on 1 January 2004 is £16,096,000 (2014 – £16,207,000). Financial statementsShareholder informationStrategic reviewGovernance72 Notes to the financial statements (continued) For the year ended 31 December 2015 24. Retirement benefit obligations (continued) The history of experience adjustments and actual returns on scheme assets and scheme liabilities is as follows: Present value of defined benefit obligations Fair value of scheme assets Deficit in the scheme Actual return on scheme assets Amount Percentage of scheme assets Experience adjustment on scheme liabilities Amount Percentage of scheme liabilities Experience adjustment on scheme assets Amount Percentage of scheme assets 2015 £000 (79,311) 67,793 (11,518) 706 1.0% 1,769 2.2% 2014 £000 (81,863) 67,990 (13,873) 11,672 17.2% (11,921) (14.6%) (1,658) (2.4%) 9,184 13.5% 2013 £000 (70,134) 54,238 (15,896) 2012 £000 (70,247) 51,349 (18,898) 2011 £000 (67,452) 46,968 (20,484) 3,710 6.8% (292) (0.4%) 1,469 2.7% 4,307 8.4% (3,827) (5.4%) 2,051 4.0% 2,430 5.3% (5,915) (8.8%) (517) (1.1%) Defined contribution schemes The Group also operates a number of defined contribution pension schemes, set up as Group Personal Pension Plans, including an Auto-enrolment plan. The assets of these plans are held separately from those of the Group in independently administered funds. The pension cost charge represents contributions paid by the Group to these plans and amounted to £920,000 (2014 – £794,000). Contributions from the company and employees amounting to £58,000 (2014 – £61,000) were payable to the plans and are included in creditors at the balance sheet date. 25. Share-based payments Equity-settled long-term incentive plans The Group provides long-term incentive plans under The Macfarlane Group PLC Long Term Incentive Plan. Long Term Incentive Plan Awards Movements during the year: Granted during the year Outstanding at 31 December Exercise Date Number of Shares 2015 7 May 2018 1,135,280 1,135,280 A nominal-cost option award was granted under The Macfarlane Group PLC Long Term Incentive Plan on 8 May 2015 based on 100% of salary. The performance condition requires EPS in 2017 to be 5.75p – 6.53p for 25% – 100% of this part of the award to vest, working on a straight-line basis. The awards are also subject to positive Total Shareholder Return and the achievement of certain sales levels over the performance period. No re-setting of the award is allowed. The vesting period is three years and no awards were exercisable at 31 December 2015. Awards are forfeited if the employee leaves the Group before they vest. The Group recognised an expense of £72,000 (2014 – £Nil) in 2015 relating to equity-settled long-term incentive plan awards. The fair value at 31 December 2015 was £72,000 (2014 – £Nil). Macfarlane Annual Report and Accounts 201573 Number of Shares 2014 551,372 (551,372) – Inputs to the binomial model giving rise to a charge are as follows: Weighted average share price Weighted average exercise price Expected volatility Risk free rate Expected annual dividend yield 2015 29.43p Nil 23.50% 0.79% 3.86% 2014 Share options The movements on share options during the year are as follows: Outstanding at 1 January Exercised during the year Outstanding at 31 December The share option outstanding at 31 December 2013 was granted under The Macfarlane Group PLC Executive Share Option Scheme 2000 and was exercised on 8 May 2014 at a price of 26p per share. 26. Related party transactions The Group has related party relationships with its subsidiaries (see page 87); its Directors who comprise the Group Board; and (i) (ii) (iii) the Macfarlane Group PLC sponsored pension schemes (see note 24). Transactions between the Company and its subsidiaries are eliminated on consolidation and are not disclosed. Key management personnel comprise the Group Board. Their remuneration is set out below in aggregate for each of the categories specified in IAS 24 “Related Party Disclosures”. Directors’ Remuneration Employer’s national insurance contributions 2015 £000 879 121 1,000 2014 £000 945 127 1,072 Further details of Directors’ individual and collective remuneration are set out in the Report on Directors’ Remuneration on page 27. Details of Directors’ shareholdings in the Company are also shown on page 28 and total dividends of £38,000 were paid in respect of these shareholdings in 2015 (2014 £34,000). Disclosures in relation to the pension schemes are set out in note 24. The Directors have considered the implications of IAS24 “Related Party Disclosures” and are satisfied that there are no other related party transactions occurring during the year, which require disclosure other than those already disclosed in these financial statements. Financial statementsShareholder informationStrategic reviewGovernance74 Company balance sheet at 31 December 2015 Non-current assets Tangible fixed assets Investments Deferred tax asset Debtors Current assets Debtors Cash at bank and in hand Total current assets Creditors – amounts falling due within one year Net current assets Total assets less current liabilities Creditors – amounts falling due after more than one year Net assets excluding pension liability Pension liability Net assets Capital and reserves Share capital Share premium Profit and loss account Shareholders’ funds Note 2015 £000 2014 £000 28 29 30 31 31 32 33 39 34 35 35 36 39 32,394 829 8,381 41,643 4,348 3 4,351 (3,272) 1,079 40 29,942 1,138 10,674 41,794 4,567 53 4,620 (1,876) 2,744 42,722 44,538 (940) 41,782 (4,607) 37,175 31,153 1,018 5,004 37,175 (3,150) 41,388 (5,688) 35,700 31,153 1,018 3,529 35,700 The accompanying notes are an integral part of this company balance sheet. The financial statements of Macfarlane Group PLC, Company registration number SC004221, were approved by the Board of Directors on 25 February 2016 and signed on its behalf by Peter D. Atkinson Chief Executive John Love Finance Director Macfarlane Annual Report and Accounts 2015 75 Notes to the Company financial statements For the year ended 31 December 2015 27. Significant accounting policies Macfarlane Group PLC is a company incorporated and domiciled in the UK. These accounts are the first set of accounts prepared by the company in compliance with FRS 101. In the transition from UK GAAP to FRS 101, the Company has applied IFRS 1 whilst ensuring that its assets and liabilities are measured in compliance with FRS 101. An explanation of how the transition to FRS 101 has affected the reported financial position and the financial performance of the Company is provided in note 40 on pages 84 to 86. IFRS 1 grants certain exemptions from the full requirements of Adopted IFRSs in the transition period. The following exemption has been taken in these financial statements: (i) Fair value or revaluation as deemed cost – At 1 January 2014, fair value has been used as deemed cost for properties previously measured at fair value. In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: (i) Cash flow statement and related notes; (ii) Comparative period reconciliations for share capital and tangible fixed assets; (iii) Disclosures in respect of transactions with wholly owned subsidiaries; (iv) The effects of new but not yet effective IFRSs; and (v) Disclosures in respect of the compensation of Key Management Personnel. The Directors, in their consideration of going concern, have reviewed the Company and Group’s future cash flow forecasts and revenue projections, which they believe are based on a prudent assessment of the market and past experience. Additional details are set out on page 48. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least the next twelve months. For this reason they continue to adopt the going concern basis in preparing the financial statements. Application of accounting policies The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the preparation of these financial statements and in preparing an opening FRS 101 balance sheet at 1 January 2014 for the purposes of transition to FRS 101. The financial statements are prepared on the historical cost basis except that certain of the following assets and liabilities are stated at their fair value. Tangible fixed assets Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. No depreciation is provided on land. Depreciation is calculated at fixed rates on a straight-line basis to write off the cost or valuation of the assets to their estimated residual values over the period of their expected useful lives. The rates of depreciation vary between 2% – 5% per annum on property and 7% – 25% per annum on plant and equipment. Rates of depreciation are reviewed annually to ensure they remain relevant and residual values are reviewed once in each calendar year. Investments Investments held as fixed assets are stated in note 29 at cost less any provision for any impairment. Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other debtors, cash and cash equivalents, loans and borrowings, and trade and other creditors. Trade and other debtors are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses. Trade and other creditors are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost using the effective interest method. Financial statementsShareholder informationStrategic reviewGovernance76 Notes to the Company financial statements (continued) For the year ended 31 December 2015 27. Significant accounting policies (continued) Leases 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. Rentals payable under operating leases are charged to the profit and loss account on a straight-line basis over the term of the relevant lease. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided to third parties in the normal course of business, net of discounts, VAT and other sales related taxes. Revenue from the sale of goods and services is recognised when the Company has transferred the significant risks and rewards of ownership of the goods and services to the customer, the amount of revenue and the costs related thereto can be measured reliably and it is probable that the economic benefits of the transaction will flow to the Company. Financial instruments Financial assets and financial liabilities are recognised in the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets, categorised as investments, are recognised and derecognised on the effective date where the purchase or sale of an investment is under a contract whose terms require the delivery of the investment within the timeframe established. They are initially measured at fair value, net of transactions costs except for those financial assets classified at fair value through the income statement, which are initially measured at fair value. Other financial assets comprise trade and other debtors that have fixed or determinable recoveries and are classified as trade and other debtors. The classification takes account of the nature and purpose of the financial assets and is determined on initial recognition. These are measured at amortised cost less impairment. Indicators are assessed for the impairment of financial assets at each balance sheet date. Financial assets are impaired when there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows have been impacted. For trade and other debtors the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The carrying amount of the financial asset is reduced by the impairment loss. Cash and cash equivalents comprise cash on hand and on demand deposits, readily convertible to a known amount of cash and are subject to insignificant risk of changes in value. Financial liabilities and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements. Financial liabilities comprise solely other financial liabilities under the terms of IFRS 7. Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost, with interest expense measured on an effective yield basis. Equity instruments are any contracts evidencing a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Derivative financial instruments were not used in the current or preceding financial year. Taxation The tax expense represents the sum of the current tax payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from profit before tax as reported in the profit and loss account because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The current tax liability is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax balances represent the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. The carrying value of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax liabilities are generally recognised for all taxable temporary differences. Macfarlane Annual Report and Accounts 201577 Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax laws and rates that have been substantively enacted at the balance sheet date. Deferred tax is charged or credited in the profit and loss account, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also recorded in the statement of other comprehensive income. Deferred tax assets and liabilities are not discounted. Retirement benefit costs The Company is a member of the Group’s defined contribution pension plans, which are available to all staff. It also has a defined benefit scheme, which has been closed to new members since 2002. Defined contribution plan A defined contribution plan is a post-employment benefit plan under which the Company pays fixed rate contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. The amount recognised as an expense in the profit and loss account represents the contributions payable to the plans in respect of the accounting period. The assets of the plans are held separately from those of the Group in an independently administered fund. Defined benefit scheme The Company is a member of the Group’s defined benefit scheme which provides benefits based on final pensionable pay. The assets of the scheme are held separately from those of the Group. For defined benefit retirement benefit schemes, the cost of providing benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out triennially and updated at each balance sheet date. Gains and losses on remeasurement are recognised in full in the period in which they occur in the statement of comprehensive income. Past service cost is recognised immediately to the extent that benefits are already vested and otherwise is amortised on a straight-line basis over the estimated average period until the benefits become vested. IAS19 “Retirement Benefits” has been adopted in full in these financial statements. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised past service cost, and as reduced by the fair value of the scheme assets. The obligations are measured on an actuarial basis and discounted at a rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme’s liabilities. 28. Tangible fixed assets Cost At 1 January 2015 and 31 December 2015 Depreciation At 1 January 2015 Charge for year At 31 December 2015 Net book value At 31 December 2015 At 31 December 2014 The parent company had no assets held under finance leases in 2015 or in 2014. Land and Buildings £000 Plant and Equipment £000 Total £000 15 12 1 13 2 3 305 320 268 – 268 37 37 280 1 281 39 40 Financial statementsShareholder informationStrategic reviewGovernance 78 Notes to the Company financial statements (continued) For the year ended 31 December 2015 29. Investments Investment in subsidiaries at cost At 1 January Additions Disposals Group transfers At 31 December 2015 £000 2014 £000 29,942 2,732 (280) – 32,394 27,411 7,517 – (4,986) 29,942 Details of the principal operating subsidiaries are set out on page 87. On 5 August 2015, the Company acquired 100% of the issued share capital of One Packaging Limited for a consideration of £2,732,000. £1,982,000 was paid in cash on acquisition. The remainder, £750,000, comprises contingent consideration, which will become payable in the final quarter of 2016 and is shown in creditors. On 5 September 2014, the Company acquired 100% of the issued share capital of Network Packaging Limited for a consideration of £7,517,000. £4,267,000 was paid in cash on acquisition, £625,000 was settled by the issue of shares. Of the contingent consideration of £2,625,000, one half was paid in September 2015 and the remainder is payable in the final quarter of 2016 and is shown in creditors. During 2015, the Company made applications to strike off two of its long-standing, dormant subsidiary companies, which were treated as disposals in the year. In 2014, the Company transferred its investment in a subsidiary company to its main trading subsidiary company, Macfarlane Group UK Limited at cost. 30. Deferred tax asset Deferred tax on pension scheme deficit At 1 January Charged to reserves Charged to profit and loss account At 31 December Recovery of the deferred tax asset is anticipated against future taxable profits. 31. Debtors Due within one year Amounts owed by subsidiary undertakings Other receivables Prepayments and accrued income Deferred tax asset (see below) Deferred tax asset Corporation tax losses At 1 January (Charged)/credited to profit and loss account At 31 December Recovery of the deferred tax asset for corporation tax losses is anticipated against future taxable profits. Due after more than one year Amounts owed by subsidiary undertakings 2015 £000 2014 £000 1,138 (269) (40) 829 1,303 (16) (149) 1,138 2015 £000 2014 £000 3,000 577 438 333 4,348 370 (37) 333 3,000 699 498 370 4,567 331 39 370 8,381 10,674 Macfarlane Annual Report and Accounts 201532. Creditors – amounts falling due within one year Bank borrowings Trade creditors Other taxation and social security Contingent consideration Corporation tax Accruals and deferred income 79 2015 £000 445 298 37 2,063 146 283 3,272 2014 £000 – 281 35 1,312 – 248 1,876 In February 2014, the Company became a party to the Group bank borrowing facilities with Lloyds Banking Group PLC, which comprised a three-year committed borrowing facility of up to £20 million, in place until February 2017. These facilities have now been increased to £25.0 million with an additional option to increase them further to £30.0 million. The facilities are now available until June 2019, bear interest at normal commercial rates and carry standard financial covenants in relation to interest cover and levels of headroom over the trade debtors of the Company. The Company and certain subsidiaries have given inter-company guarantees to secure the drawdown on these facilities. The drawdown at 31 December 2015 by the subsidiary company, Macfarlane Group UK Limited amounted to £12.5 million. 33. Creditors – amounts falling due after more than one year Contingent consideration Amounts owed to subsidiary undertakings 34. Share capital Allotted, issued and fully paid: At 1 January Issued during the year At 31 December 2015 £000 – 940 940 2014 £000 1,313 1,837 3,150 Number of 25p Shares 2015 £000 2014 £000 124,611,360 – 124,611,360 31,153 – 31,153 28,755 2,398 31,153 On 5 September 2014, the Company acquired the whole issued share capital of Network Packaging Limited. As part of the initial consideration, the Company issued 1,592,360 ordinary shares of 25p each at a value of 39.25p per share, which were admitted to the official List of the London Stock Exchange on 12 September 2014. On 8 September 2014, the Company announced a placing of 8,000,000 ordinary shares of 25p each at a price of 37.50p per share. The placing was approved at a General Meeting of the Company on 1 October 2014 and the shares were admitted to the official List of the London Stock Exchange on 2 October 2014. The Company has one class of ordinary shares, which carry no right to fixed income. Each ordinary share carries one vote in any General Meeting of the Company. Financial statementsShareholder informationStrategic reviewGovernance80 Notes to the Company financial statements (continued) For the year ended 31 December 2015 35. Reserves Share Premium £000 Own Shares £000 Profit and Loss Account £000 Balance at 1 January 2015 Profit for the year Dividends paid (see note 7) Exercise of share under share option schemes Issue of new shares Expenses of share issue Post tax actuarial gain in pension scheme taken direct to reserves Balance at 1 January 2015 Profit for the year Dividends paid (see note 7) Credit for share-based payments (see note 38) Post tax actuarial gain in pension scheme taken direct to reserves Balance at 31 December 2015 – – – – 1,227 (209) – 1,018 – – – – 1,018 (311) – – 311 – – – – – – – – – 2,694 2,591 (1,888) (168) – – 300 3,529 2,887 (2,094) 72 610 5,004 Total £000 2,383 2,591 (1,888) 143 1,227 (209) 300 4,547 2,887 (2,094) 72 610 6,022 The Company’s Employee Share Ownership Trust (ESOT) no longer holds any ordinary shares in Macfarlane Group PLC following the exercise of the share option during 2014. 36. Reconciliation of movements in shareholders’ funds Profit for the year Dividends to equity holders in the year Post tax actuarial gain in pension scheme taken direct to equity Credit for share-based payments Exercise of share options Issue of new shares (net of issue expenses) Movements in shareholders’ funds in the year Opening shareholders’ funds Closing shareholders’ funds 37. Operating profit Operating profit for the parent company has been arrived at after charging: Auditor’s remuneration Audit services Non-audit services Staff costs The average monthly number of employees was: Administration The costs incurred in respect of these employees were: Wages and salaries Social security costs Other pension costs 2015 £000 2,887 (2,094) 610 72 – – 1,475 35,700 37,175 2015 £000 13 15 2015 No. 11 2015 £000 1,098 141 28 1,267 2014 £000 2,591 (1,888) 300 – 143 3,416 4,562 31,138 35,700 2014 £000 16 14 2014 No. 11 2014 £000 1,000 128 28 1,156 Macfarlane Annual Report and Accounts 2015 81 38. Share-based payments Equity-settled long-term incentive plans The Group provides long-term incentive plans under The Macfarlane Group PLC Long Term Incentive Plan. Long Term Incentive Plan Awards Movements during the year: Granted during the year Outstanding at 31 December Exercise Date Number of Shares 2015 7 May 2018 1,135,280 1,135,280 A nominal-cost option award was granted under The Macfarlane Group PLC Long Term Incentive Plan on 8 May 2015 based on 100% of salary. The performance condition requires EPS in 2017 to be 5.75p – 6.53p for 25% – 100% of this part of the award to vest, working on a straight-line basis. The awards are also subject to positive Total Shareholder Return and the achievement of certain sales levels over the performance period. No re-setting of the award is allowed. The vesting period is three years and no awards were exercisable at 31 December 2015. Awards are forfeited if the employee leaves the Group before they vest. The Group recognised an expense of £72,000 (2014 – £Nil) in 2015 relating to equity-settled long-term incentive plan awards. The fair value at 31 December 2015 was £72,000 (2014 – £Nil). Inputs to the binomial model giving rise to a charge are as follows: Weighted average share price Weighted average exercise price Expected volatility Risk free rate Expected annual dividend yield Equity-settled share option schemes 2014 Share options The movements on share options during the year are as follows: Outstanding at 1 January Exercised during the year Outstanding at 31 December 2015 29.43p Nil 23.50% 0.79% 3.86% Number of Shares 2014 551,372 (551,372) – The share option outstanding at 31 December 2013 was granted under The Macfarlane Group PLC Executive Share Option Scheme 2000 and was exercised on 8 May 2014 at a price of 26p per share. Financial statementsShareholder informationStrategic reviewGovernance82 Notes to the Company financial statements (continued) For the year ended 31 December 2015 39. Pension liability Introduction Macfarlane Group PLC sponsors a defined benefit pension scheme for certain active and former UK employees – the Macfarlane Group PLC Pension & Life Assurance Scheme (1974) (“the scheme”). Two trading subsidiaries, Macfarlane Group UK Limited and Macfarlane Labels Limited are also sponsoring employers of the scheme. Disclosure of the respective proportions of the Group deficit are set out in the accounts of each of the three participating employers. The scheme is administered by a separate Board of Trustees composed of employer-nominated representatives and member-nominated Trustees and is legally separate from the Group. The assets of the scheme are held separately from those of the Group in managed funds under the supervision of the Trustees. The Trustees are required by law to act in the interest of all classes of beneficiary in the scheme and are responsible for investment policy and the day-to-day administration of benefits. The scheme was closed to new entrants during 2002. The scheme provides qualifying employees with an annual pension of 1/60 of pensionable salary for each completed year’s service on attainment of a normal retirement age of 65. Pensionable salaries were frozen for the remaining active members at the levels current at 30 April 2009 with the change taking effect from 30 April 2010. As a result no further salary inflation applies for active members who elected to remain in the scheme. Active members’ benefits also include life assurance cover, albeit the payment of these benefits is at the discretion of the Trustees of the scheme. On withdrawing from active service a deferred member’s pension is revalued from the time of withdrawal until the pension is drawn. Revaluation in deferment is statutory and since 2010 has been revalued on the Consumer Price Index (CPI) measure of inflation. Revaluation of pensions in payment is a blend of fixed increases and inflationary increases depending on the relevant periods of accrual of benefit. For pensions in payment, the inflationary increase is currently based on the Retail Prices Index (RPI) measure of inflation or based on Limited Price Indexation (LPI) for certain defined periods of service. During 2012, Macfarlane Group PLC agreed with the Board of Trustees to amend benefits for pensioner, deferred and active members in the defined benefit pension scheme by offering a Pension Increase Exchange (PIE) option for deferred and active members after 1 May 2012. The Group will consider a number of further actions to reduce the deficit in 2016. Balance sheet disclosures at 31 December 2015 The pension scheme’s qualified actuary from Aon Hewitt carries out triennial valuations using the Projected Unit Credit Method to determine the level of deficit. For the most recent triennial valuation at 1 May 2014, the principal assumptions adopted were that investment returns would average 0.7% per annum above the gilt yield and that no salary increases would apply for active members. The valuation showed that the market value of the relevant investments of the scheme was £58,676,000 and the actuarial value of these investments represented 71% of the value of benefits that had accrued to members. The investments held by the scheme and the deficit of the scheme have been based on the results of the actuarial valuation as at 1 May 2014, updated to the year-end to reflect amounts attributable to Macfarlane Group PLC, the parent company as shown below: Investment class Equities Bonds Liability-driven investment funds Multi-asset diversified funds Cash Fair value of scheme assets Present value of scheme liabilities Deficit in the scheme Valuation 2015 £000 Valuation 2014 £000 Valuation 2013 £000 6,716 4,448 5,642 10,190 122 27,118 (31,725) (4,607) 6,516 4,617 9,100 7,602 41 27,876 (33,564) (5,688) 6,183 9,240 – 6,729 86 22,238 (28,755) (6,517) Macfarlane Annual Report and Accounts 201583 The scheme’s liabilities at 31 December 2015 were calculated on the following bases as required under FRS17: Assumptions Discount rate Rate of increase in salaries Rate of increase in pensions in payment Inflation assumption (RPI) Inflation assumption (CPI) Life expectancy beyond normal retirement age of 65 Male Female 2015 2014 2013 3.70% 0.00% 3% or 5% for fixed increases or 3.00% for LPI. 2.10% post 5 April 2006 3.50% 0.00% 3% or 5% for fixed increases or 2.90% for LPI. 2.05% post 5 April 2006 4.50% 0.00% 3% or 5% for fixed increases or 3.30% for LPI. 2.20% post 5 April 2006 3.10% 2.10% 22.7 25.3 3.00% 2.10% 22.7 25.1 Movement in The scheme deficit in the year At 1 January Current service cost Contributions Other financial charges Remeasurement of pension scheme liability in the year At 31 December Analysis of amounts charged to operating profit Current service cost Analysis of amounts charged to net finance costs Expected return on pension scheme assets Interest cost of pension scheme liabilities Other financial charges Analysis of the remeasurement of the pension scheme liability Actual return less expected return on scheme assets Changes in assumptions underlying the present value of the scheme’s liabilities Remeasurement of pension scheme liability Movement in the fair value of scheme assets At 1 January Expected return on scheme assets Actual return less expected return on scheme assets Contributions paid by Company Contribution from scheme members Benefits paid At 31 December Movement in the present value of defined benefit obligations At 1 January Service costs Interest costs Contribution from scheme members Actuarial gain/(loss) in the year Benefits paid 3.40% 2.50% 22.6 25.1 2014 £000 (6,517) (15) 713 (243) 374 (5,688) 2015 £000 (5,688) (20) 397 (175) 879 (4,607) (20) (15) 946 (1,121) (175) (585) 1,464 879 2015 £000 27,876 946 (585) 397 12 (1,528) 27,118 (33,564) (20) (1,121) (12) 1,464 1,528 1,021 (1,264) (243) 5,320 (4,946) 374 2014 £000 22,238 1,021 5,320 713 15 (1,431) 27,876 (28,755) (15) (1,264) (15) (4,946) 1,431 At 31 December (31,725) (33,564) Financial statementsShareholder informationStrategic reviewGovernance 84 Notes to the Company financial statements (continued) For the year ended 31 December 2015 39. Pension liability (continued) The cumulative remeasurement of the pension liability applied against reserves since the transition to IAS 19 on 1 January 2004 is £2,324,000 (2014 – £3,203,000). Present value of defined benefit obligations Fair value of scheme assets Deficit in the scheme 2015 £000 (31,725) 27,118 (4,607) 2014 £000 (33,564) 27,876 (5,688) 2013 £000 (28,755) 22,238 (6,517) 2012 £000 (28,801) 21,053 (7,748) 2011 £000 (27,654) 19,256 (8,398) Return on scheme assets 361 6,341 2,340 2,481 (1,722) Percentage of scheme assets 1.3% 22.7% 10.5% 11.8% (8.9%) Experience adjustment on scheme assets (585) 5,320 1,176 1,380 (2,930) Percentage of scheme assets (2.2%) 19.0% 5.3% 6.6% (15.2%) Experience adjustment on scheme liabilities 1,464 (4,946) (184) (1,630) 2,205 Percentage of scheme liabilities 4.6% (14.7%) (0.6%) (5.7%) 8.0% Defined contribution schemes The Company also participated in a defined contribution scheme, the Macfarlane Group Personal Pension Plan. Contributions to the plan for the year were £3,000 (2014 – £4,000) with no contributions from the company and employees payable to the plan at the balance sheet date. 40. Explanation of transition to FRS 101 This is the first year that the Group has presented the Company financial statements under FRS 101. The following disclosures are required in the year of transition. The last financial statements under UK GAAP were for the year ended 31 December 2014 and the date of transition was therefore 1 January 2014. The only major impact on the reported results is described below. The application of IAS19 (R) impacts the measurement of the various components of the movements in the pension liability and associated disclosures, but not the Company’s total pension liability. Following the replacement of expected returns on pension scheme assets with a net finance cost in the profit and loss account, the profit for the year ended 31 December 2014 reduces and accordingly other comprehensive income increases. In 2014, the effect is to increase the interest expense on retirement benefit obligations by £293,000 and reduce the related deferred tax charge recognised in the profit and loss account by £58,000 and to reduce the remeasurement of the pension scheme liability recognised in the reconciliation of changes in equity by the same net amount of £235,000 as set out in table (ii) below. The only impact on the balance sheet was to separately disclose the pension liability and the related deferred tax asset on the face of the balance sheet rather than show a net position by offsetting the deferred tax asset against the pension liability. Accordingly the retirement benefit obligations and the deferred tax asset both increase by £1,138,000 (1 January 2014 – £1,303,000). There is no change to the net asset position in the balance sheet at 31 December 2013 or 31 December 2014. Macfarlane Annual Report and Accounts 201585 FRS 101 £000 41 27,411 1,303 16,371 45,126 (i) Reconciliation of shareholders’ funds at 1 January 2014 (date of transition to FRS 101) UK GAAP £000 IAS 19 Employee Benefits £000 Non-current assets Tangible assets Investments Deferred tax asset Debtors Total non-current assets Current assets Debtors Creditors: amounts falling due within one year Net current assets 41 27,411 – 16,371 43,823 3,382 (9,312) (5,930) – – 1,303 – 1,303 – – – 3,382 (9,312) (5,930) Total assets less current liabilities 37,893 1,303 39,196 Creditors: amounts falling due after more than one year Pension liability Net assets Capital and reserves Called up share capital Own shares Profit and loss account Shareholders’ funds (ii) Reconciliation of changes in equity for the year to 31 December 2014 Profit for the financial year Dividends to equity holders in the year Remeasurement of pension scheme liability Exercise of share options Issue of new shares (net of issue expenses) Net movement in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds (1,541) (5,214) 31,138 28,755 (311) 2,694 31,138 UK GAAP £000 2,826 (1,888) 65 143 3,416 4,562 31,138 35,700 – (1,541) (1,303) – – – – – IAS 19 Employee Benefits £000 (235) – 235 – – – – – (6,517) 31,138 28,755 (311) 2,694 31,138 FRS 101 £000 2,591 (1,888) 300 143 3,416 4,562 31,138 35,700 Financial statementsShareholder informationStrategic reviewGovernance86 Notes to the Company financial statements (continued) For the year ended 31 December 2015 40. Explanation of transition to FRS 101 (continued) (iii) Reconciliation of shareholders’ funds at 31 December 2014 Non-current assets Tangible assets Investments Deferred tax asset Debtors Total non-current assets Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets UK GAAP £000 IAS 19 Employee Benefits £000 40 29,942 – 10,674 40,656 4,567 53 4,620 (1,876) 2,744 – – 1,138 – 1,138 – – – – – FRS 101 £000 40 29,942 1,138 10,674 41,794 4,567 53 4,620 (1,876) 2,744 Total assets less current liabilities 43,400 1,138 44,538 Creditors: amounts falling due after more than one year Pension liability Net assets Capital and reserves Called up share capital Share premium Profit and loss account Shareholders’ funds (3,150) (4,550) 35,700 31,153 1,018 3,529 35,700 – (3,150) (1,138) – – – – – (5,688) 35,700 31,153 1,018 3,529 35,700 41. Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed. The Directors have considered the implications of FRS 8 “Related Party Transactions” and are satisfied that there are no other related party transactions occurring during the year, which require disclosure, other than those already disclosed in these financial statements. Macfarlane Annual Report and Accounts 2015Principal operating subsidiaries Company name Principal activities Macfarlane Group UK Limited Coventry Tel: 02476 511511 Grantham Tel: 01476 574747 Tel: 01373 858555 Westbury Network Packaging Limited Wolverhampton Tel: 01902 496 666 One Packaging Limited Bingham Tel: 01949 837666 Macfarlane Labels Limited Kilmarnock Tel: 01563 525151 Macfarlane Group Ireland (Labels & Packaging) Limited Wicklow Tel: 00 353 (1) 281 0234 Supply and distribution of all forms of packaging materials and equipment. Design and manufacture of specialist packaging. Supply and distribution of all forms of packaging materials and equipment. Supply and distribution of all forms of packaging materials and equipment. Manufacture of high quality printed self-adhesive labels and resealable labelling solutions. Manufacture of high quality printed self-adhesive labels and resealable labelling solutions and supply and distribution of all forms of packaging materials and equipment. 87 Country of registration England England England Scotland Ireland Macfarlane Group Sweden AB Helsingborg Tel: 00 46 (0) 4213 7555 Provision of high quality printed self-adhesive labels and resealable labelling solutions. Sweden All the above subsidiaries are wholly owned either by Macfarlane Group PLC or one of its subsidiary companies and operate within their country of registration. The Company controls 100% of the ordinary share capital of each principal operating subsidiary. Dormant subsidiaries The Company’s other related undertakings are the dormant subsidiary undertakings disclosed below. In all cases the Company listed as owner controls 100% of the issued share capital of the subsidiary undertaking. Company name Company number Owned By Macfarlane Group Plc Centurion Packaging (Holdings) Limited National Packaging Group Limited Adhesive Labels Limited Owned by Macfarlane Group UK Limited PSD Industrial Holdings Limited Lane Packaging Limited Online Packaging Limited Allpoint Packaging Limited Bloomfield Supplies Limited Macfarlane Packaging Limited Macfarlane Merchanting Limited Abbott’s Packaging Limited Mitchell Packaging Limited Owned by Network Packaging Limited Network Display Products Limited Networkpack Limited Owned by Macfarlane Group Sweden AB ReSeal-it Scandinavia Regath HB 02355761 01355867 00723320 03936301 02014518 02903657 03930806 02253938 SC041678 00372831 01385800 00535311 07185175 07076349 Country of registration England England England England England England England England Scotland England England England England England Sweden Sweden GovernanceFinancial statementsShareholder informationStrategic report88 Five year record 2015 £000 2014 £000 2013 £000 2012 £000 2011 £000 Turnover – all operations 169,132 153,767 143,871 141,823 144,557 Profit before interest, exceptional items and tax Net interest payable Profit before exceptional items Exceptional items Profit before tax Taxation Profit for the financial year Diluted Earnings per ordinary share Dividends Dividends per ordinary share Dividend cover 7,702 (935) 6,767 – 6,767 (1,317) 5,450 4.35p 2,094 1.68p 2.6 6,646 (1,040) 5,606 – 5,606 (1,164) 4,442 3.78p 1,888 1.60p 2.4 6,251 (1,199) 5,052 (336) 4,716 (1,260) 3,456 3.03p 1,774 1.55p 1.9 5,834 (1,349) 4,485 993 5,478 (1,613) 3,865 3.40p 1,761 1.55p 2.2 4,689 (815) 3,874 – 3,874 (455) 3,419 3.01p 1,761 1.55p 1.9 This table reflects the five-year record for continuing operations as classified at 31 December 2015. Financial diary Financial results Interim: Announced – August Final: Announced – February Accounts and annual general meeting Report and financial statements – Posted to shareholders on 31 March 2016 Annual General Meeting – Held in Glasgow on 10 May 2016 Shareholder enquiries Macfarlane Group PLC’s ordinary shares are classified under the “Industrial – General” section of the Industrial Sector on the London Stock Exchange. Enquiries regarding shareholdings, dividend payments, dividend mandate instructions, lost share certificates, tax vouchers, changes of address, transfers of shares to another person and other administrative matters should be addressed to the Company’s registrars: Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0871 384 2439 Fax: 0871 384 2100 Website: www.shareview.co.uk The Company’s website, www.macfarlanegroup.com provides details of all major Stock Exchange announcements, details of the current share price and information about Macfarlane Group’s business. Macfarlane Annual Report and Accounts 2015Our new product catalogue is now available. Our trading website: www.macfarlanepackaging.com enables customers to place orders at their convenience 24 hours each day. Report designed and produced by Tayburn Head Office Macfarlane Group PLC 21 Newton Place Glasgow G3 7PY t. 0141 333 9666 f. 0141 333 1988 e. investorinfo@macfarlanegroup.net www.macfarlanegroup.net Sweden Packaging Distribution Bingham t. 01949 837666 Bristol t. 0844 770 1401 Coventry t. 0844 770 1407 Enfield t. 0844 770 1409 Exeter t. 0844 770 1411 Fareham t. 0844 770 1413 Glasgow t. 0844 770 1421 Gloucester t. 0145 255 5550 Grantham t. 0844 770 1415 Horsham t. 0844 770 1419 Manchester t. 0844 770 1423 Milton Keynes t. 0844 770 1425 Newcastle t. 0844 770 1427 Reading t. 0118 944 2425 Sudbury t. 0844 770 1429 Wakefield t. 0844 770 1433 Wigan t. 0844 770 1437 Wolverhampton t. 01902 496 666 Packaging Design and Manufacture Grantham t. 0844 770 1417 Westbury t. 0844 770 1435 Labels Wicklow t. 00 353 (1) 281 0234 Kilmarnock t. 01563 525151 Sweden t. 00 46 (0) 4213 7555

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