Annual Report and Accounts 2017 Headquartered in Glasgow, Macfarlane Group PLC employs over 850 people at 27 sites across the UK, one site in Ireland and one site in Sweden and services more than 20,000 customers in a wide range of sectors. Contents Strategic review 02 Chairman’s statement 04 Macfarlane Group business model and strategy 06 Chief Executive’s review 10 Macfarlane Packaging Innovation Lab and The Significant Six 12 Financial review 14 Principal risks and uncertainties 16 Viability statement 17 Corporate responsibility Governance 24 Board of Directors 26 Report of the Directors 28 Remuneration report 32 Remuneration policy 34 Corporate governance 42 Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements Financial statements 43 Independent auditor’s report to the members of Macfarlane Group PLC 47 Consolidated income statement 47 Consolidated statement of comprehensive income 48 Consolidated statement of changes in equity 49 Consolidated balance sheet 50 Consolidated cash flow statement 51 Accounting policies 56 Notes to the financial statements 79 Company balance sheet 80 Company statement of changes in equity 81 Notes to the Company financial statements Shareholder information 91 Principal operating subsidiaries and related undertakings 92 Five year record 92 Financial diary Over 200m Reseal-it labels preapplied in 2017 Financial and operational highlights 2017 19% Growth in PBT 01 EBITDA£13.1m 9% Sales growth 20,000 distribution customers 1,400 bespoke designs in 2017 5.22p Fully-diluted EPS 5.1% Operating profit 02 Chairman’s statement Macfarlane Group PLC achieved another year of growth in 2017 with sales of £196.0 million, (2016: £179.8 million) 9% ahead of the previous year and profit before tax of £9.3 million (2016: £7.8 million), 19% ahead of 2016. Trading The trading performance continued the positive trends of recent years and the results were in line with market expectations. Packaging Distribution increased sales by 10% to £171.8 million (2016: £155.9 million) with 3% achieved from organic growth and the remainder from acquisitions, both those in 2017 and the full year benefit of those completed in 2016, all of which continue to perform well. Gross margin in Packaging Distribution grew to 29.4%, (2016: 29.0%) reflecting the effective management of input price increases as well as a strong contribution from the Greenwoods’ business acquired in September 2017. This resulted in Packaging Distribution achieving a 20% increase in operating profit to £9.4 million (2016: £7.8 million). Sales in our Manufacturing Operations at £24.2 million (2016: £23.9 million) were 1% up on the previous year. Gross margin reduced from 43.8% in 2016 to 40.7% in 2017, mainly due to operational pressures in Packaging Design and Manufacture and an adverse exchange rate impact in our Labels business. As a result, the overall Manufacturing Division operating profit in 2017 was £0.7 million, £0.2 million below the 2016 result. Dividend The Board is proposing a final dividend of 1.50 pence per share, amounting to a full year dividend of 2.10 pence per share, an 8% increase on the prior year’s dividend of 1.95 pence per share. Subject to the approval of shareholders at the Annual General Meeting on Tuesday 15 May 2018, this dividend will be paid on Thursday 7 June 2018 to those shareholders on the register at Friday 18 May 2018. After charging interest of £0.8 million (2016: £0.9 million), Group profit before tax totalled £9.3 million (2016: £7.8 million) an increase of 19%. Following the share issue in September 2017 to support the Greenwoods’ acquisition, diluted earnings per share for 2017 increased by 13% from 4.64p to 5.22p per share. Net bank debt and pension scheme The Group’s net bank borrowing at 31 December 2017 decreased by £1.0 million to £14.3 million from £15.3 million at the prior year-end. The Group’s existing bank facility with Lloyds Banking Group of £25.0 million is available until June Macfarlane Group business structure Macfarlane Packaging Distribution is the UK market leader in the distribution of protective packaging products and contributes 88% of Group Revenue. Third party logistics (3PL) Market sectors served • Internet retail • • 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 5% 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 7% of Group Revenue. Market sectors served • Health and beauty • Food • Household goods • Pharmaceutical Macfarlane Group PLC Annual Report and Accounts 2017 03 2019 and accommodates normal working capital requirements as well as supporting acquisition funding. As part of the Group’s long-term financing strategy, it is anticipated that these facilities will be extended or replaced over the course of 2018. The Group’s pension deficit at 31 December 2017 reduced by £2.7 million to £11.8 million, (2016: £14.5 million) primarily due to the Group making deficit recovery contributions in the year. Despite the continued reduction in the discount rate, which increased the value of the pension liabilities, this was largely offset by increases in the value of the scheme’s holding in liability-driven investments, reflecting an appropriate prudent investment strategy for a mature pension scheme. Board changes Graeme Bissett stood down as Chairman at the end of September 2017 and the Board would like to thank Graeme for his contribution as Chairman and prior to that as a Non-executive Director. On 8 January 2018, James Baird was appointed to the Board as a Non-executive Director and Chairman of the Audit Committee and brings with him considerable financial experience both in the UK and Europe. Mike Arrowsmith has indicated his intention to step down from the Group performance Profit before tax (£m)* 2017 represents the 8th consecutive year of profit growth * There were no exceptional items in the current or preceding financial year. 9.3 7.8 6.8 4.5 3.9 3.2 3.4 5.6 5.1 2009 2010 2011 2012 2013 2014 2015 2016 2017 Board later this year, having completed six years as a Non-executive Director. A process to recruit a replacement for Mike is under way and an announcement will be made once the selection process is complete. Outlook The Board remains confident that its strategy to position the business to serve key growth markets continues to be effective. The 19% increase in pre-tax profits in 2017 represents the eighth consecutive year of profit growth for Macfarlane Group. Group profitability in the year to date is ahead of the same period in 2017. Our strategy continues to be the delivery of sustainable profit growth by focusing on added value products and services in our target market sectors, combined with efficiency improvements and the identification and completion of further value- enhancing acquisitions. This strategy, which continues to be refined, has served all stakeholders well in recent years and we remain confident that it will continue to do so. Macfarlane Group’s performance in 2017 reflects the successful implementation of this strategy and we are confident that the Group will demonstrate further progress in 2018. Stuart R Paterson Chairman 22 February 2018 196.0 196.0 196.0 179.8 179.8 179.8 169.1 169.1 153.8 153.8 169.1 153.8 9.3 9.3 9.3 7.8 7.8 7.8 6.8 6.8 6.8 5.6 5.6 5.6 2.10 1.95 1.95 2.10 2.10 1.95 1.82 1.82 1.82 1.65 1.65 1.65 2014 2014 2014 2015 2015 2015 2016 2016 2017 2016 2017 2017 2014 2014 2014 2015 2015 2015 2016 2016 2016 2017 2017 2017 2014 2014 2014 2015 2015 2015 2016 2016 2016 2017 2017 2017 Sales (£m) Profit before tax (£m) Dividend (p) Strategic reviewGovernanceFinancial statementsShareholder information 04 Macfarlane Group business model and strategy Our business model Our strategy We design, manufacture and distribute protective packaging products and labels to business users. We source, consolidate and deliver We operate a Stock and Serve model from 21 Regional Distribution Centres (RDCs) and 3 satellite sites providing a UK national network to support customers on a local, regional and national basis and three satellite sites linked to RDCs. We are the UK market leader in the distribution of protective packaging products. We leverage our purchasing scale to cost-effectively source a comprehensive range of protective packaging products and add 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. We design, manufacture and deliver We operate four manufacturing centres, two in Design and Manufacture and two in Labels as well as a Labels design centre in Sweden. 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. We generate new business 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 from existing customers and we experience a level of sales erosion each year as we optimise the protective packaging usage for customers. Therefore new business generation is key to Macfarlane Group’s overall growth and there is specific focus in this area. Strategic priority Focus Personalise Innovate Improve Accelerate Macfarlane Group PLC Annual Report and Accounts 2017 05 For many years we have followed a consistent strategy to create value for shareholders. The Group’s objective is to continue to grow sales volumes and achieve a return on sales of 7%. Our approach Progress in 2017 We seek to operate in markets giving above-average growth opportunities to develop business with existing customers and generate business with new customers. Retail Focus on key sectors with growth potential, particularly: • Internet retail • Industrial customers, seeking national coverage • 3PL customers Industrial Our new business performance in 2017 increased by 16% over 2016. We work with customers to ensure they receive a bespoke product and service to meet their needs. Storage costs Transport costs Damages & returns Administration costs Productivity costs Customer experience Customers use our Significant Six approach to understand the true cost of their packaging requirements. Our Customer Service Centre enhances support of smaller local customers. Customers look to Macfarlane to provide truly innovative solutions in their businesses. We seek to improve the performance of the business by more effective sourcing and increasing the efficiency of our logistics and property portfolio. We supplement organic growth with good quality acquisitions. Our Innovation Lab continues to prove an effective tool to demonstrate our capability to customers. Design and Manufacture teams produces highly bespoke solutions to protect high-value items in storage and transit. The labels business develops new applications of Reseal-it to improve ease of opening and reduction in food waste for consumers. Strategic and tactical purchasing programmes remain in place to improve our sourcing capability. Logistics costs remained at 2.7% of sales through use of the Paragon planning tool and driver training. Property costs remained at 4.0% of sales despite additional costs from acquisitions in our property network. We have completed seven acquisitions in Packaging Distribution since 2014. Our latest acquisition of the packaging business of Greenwoods Stock Boxes and Nottingham Recycling Limited concluded in September 2017. Our strategy Strategic priority Focus Personalise Innovate Improve Accelerate Strategic reviewGovernanceFinancial statementsShareholder information 06 Chief Executive’s review – Packaging Distribution Macfarlane Packaging Distribution is the leading UK specialist distributor of protective packaging materials. Macfarlane operates a Stock and Serve supply model from 21 Regional Distribution Centres (RDCs) and 3 satellite sites supplying customers with a comprehensive range of protective packaging materials on a local, regional and national basis. Competition in the packaging distribution market is from local and regional protective packaging specialist companies and national/ international distribution generalists who supply a range of products, including protective packaging materials. In a fragmented market, 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 high quality 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 Distribution Revenue Cost of sales Gross margin Net operating expenses Operating profit Base business £000 Acquisition impact £000 2017 £000 2016 £000 160,236 (113,519) 11,535 (7,804) 171,771 (121,323) 155,900 (110,641) 46,717 (38,648) 8,069 3,731 (2,364) 1,367 50,448 (41,012) 45,259 (37,423) 9,436 7,836 product range, single source Stock and Serve supply, Just In Time delivery, tailored stock management programmes, electronic trading and independent advice on both packaging materials and packing processes. customers with over 22% of sales relating to internet retailers. During 2017 our Innovation Lab contributed to a number of new business wins and will continue to play a key role in our sales growth plans for 2018 and beyond. Gross margin in Packaging Distribution was 29.4%, (2016: 29.0%) with effective management of input price increases as well as a strong contribution from the Greenwoods’ acquisition. Overheads increased as a result of the impact of acquisitions, but cost control remained strong with an improving overhead to sales ratio of 23.9% compared with 24.0% in 2016. Operating profit in the Packaging Distribution business at £9.4 million grew by 20% versus 2016. 2017 trading Macfarlane Packaging Distribution grew sales by 10% in 2017 comprising 3% organic growth in the base business and 7% from the contribution of the 2017 acquisitions of Greenwoods Stock Boxes and Nottingham Recycling Limited as well as the incremental full year contribution from the 2016 acquisitions of Nelsons for Cartons & Packaging Limited, Colton Packaging Teesside and the packaging business of Edward McNeil Limited. The business achieved growth in the supply of protective packaging to internet retailers both directly and through our partnerships with major Third Party Logistics (‘3PL’) 21 nationwide strategically located Distribution Centres Multi-channel approach to market Experience in a wide range of industries Internet retail, 3PL specialism and National Accounts Macfarlane Packaging Key competitive advantages Breadth of product range Strategic supplier relationships Flexibility of supply and service Independent expertise in packaging and the packing process Macfarlane Group PLC Annual Report and Accounts 2017 07 Future plans 2018 plans are focused on growing sales and improving profitability through the following actions: Sales growth • Maintaining our focus on the growth potential for protective packaging in our key market segments – the e-commerce sector, National Accounts and 3PL operators; • Accelerating the growth in new business through effective use of our Innovation Lab; • Demonstrating our ability to support customers to reduce ‘The Significant Six’ packaging costs to optimise their Total Cost of Packaging solutions; • Developing our web-based Efficiency improvements • Improving our sourcing capabilities and our partnerships with key strategic suppliers; • Implementing further operational savings in logistics by expanding the use of the Paragon vehicle management system and extending our warehouse best practice programme; • Reducing operating costs by evaluating opportunities to consolidate fragmented parts of the existing property footprint; • Integrating recent acquisitions following the completion of the respective earn-out periods; and • Maintaining our focus on working capital management to reduce borrowing levels. offerings through www.macfarlanepackaging.com and Customer Connect to enable customers to further improve access to our full range of products and services; Acquisition growth • Supplementing organic growth through the identification and completion of further suitable high-quality acquisition opportunities. Images above Macfarlane operates a Stock and Serve model from 21 RDCs and 3 satellite sites. • Growing sales of new products brought to the Group through recent acquisitions; and • Offering a service for UK based customers requiring European coverage. Distribution performance 171.8 171.8 171.8 155.9 155.9 155.9 143.0 143.0 143.0 126.9 126.9 126.9 9.4 9.4 9.4 7.8 7.8 7.8 4.5 4.5 4.7 4.5 5.0 4.7 4.7 5.5 5.5 5.5 5.0 5.0 6.8 6.8 6.8 5.8 5.8 5.8 2014 2014 2014 2015 2015 2015 2016 2016 2017 2016 2017 2017 2014 2014 2014 2015 2015 2015 2016 2016 2017 2016 2017 2017 2014 2014 2014 2015 2015 2015 2016 2016 2016 2017 2017 2017 Sales (£m) Operating profit (£m) Return on sales (%) Strategic reviewGovernanceFinancial statementsShareholder information 08 Chief Executive’s review – Manufacturing Operations Manufacturing Operations comprise our Packaging Design and Manufacture business and our Labels business. 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. 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 our market offering through technical expertise, design capability, industry accreditations and national coverage through Macfarlane Packaging Distribution. Manufacturing Operations Revenue Cost of sales Gross margin Overheads Operating profit 2017 £000 24,220 (14,364) 9,856 (9,203) 653 2016 £000 23,872 (13,418) 10,454 (9,578) 876 2017 trading 2017 sales for Packaging Design and Manufacture were 1% above those in 2016 despite volatile demand in certain market sectors. This volatility created operational pressures and as a result profitability in 2017 was below that in 2016. However actions implemented in the second half of 2017 showed improved profitability and the sales team has a strong pipeline of new customer relationships, which should benefit the business in 2018. Future plans 2018 plans for Packaging Design and Manufacture are: • Accelerating sales growth, particularly in target market sectors e.g. Defence, Aerospace and Medical; • Prioritising sales activity on the higher added-value bespoke composite pack product range; • Improving operational performance; and • Continuing to strengthen the relationship between our Packaging Design & Manufacture operations and our Packaging Distribution business to create both sales and cost synergies. 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 Manufacturing Operations performance 26.9 26.9 26.9 26.1 26.1 26.1 23.9 23.9 24.2 23.9 24.2 24.2 0.9 0.9 0.9 0.9 0.9 0.9 1.0 1.0 1.0 3.6 3.3 3.3 3.3 3.6 3.7 3.6 3.7 3.7 0.7 0.7 0.7 2.7 2.7 2.7 2014 2014 2014 2015 2015 2015 2016 2016 2016 2017 2017 2017 2014 2014 2014 2015 2015 2016 2015 2016 2017 2016 2017 2017 2014 2014 2015 2014 2015 2016 2015 2016 2017 2016 2017 2017 Sales (£m) Operating profit (£m) Return on sales (%) Macfarlane Group PLC Annual Report and Accounts 2017 customers to ensure high levels of service and to introduce product and service development initiatives to achieve competitive differentiation. 2017 trading Although sales in 2017 were at similar levels to 2016, this was in line with our plans as we proactively exited relationships with lower margin customers, mainly in the lower added value and increasingly competitive self-adhesive labels market. As the general public’s focus on the issues of food waste and easy to open packs increases, the demand for resealable packaging is creating growth opportunities for the Macfarlane Labels’ Reseal-it range. Profit levels in 2017 were similar to those achieved in 2016 despite the unfavourable impact of exchange rates. Future plans 2018 plans for Labels are: • Maintaining the strategic focus on higher added value products and services to rebalance sales between our resealable and self-adhesive label ranges; • Continuing improvement in operational efficiency to mitigate sales price pressure; and • Developing the Reseal-it product in the US through the Printpack partnership, in Europe through new business wins and in the UK through penetration with key retailers. 09 2018 Group outlook Our sales efforts will focus on those segments of the retail market, such as e-commerce, which are forecast to show continued above average growth rates and those industrial markets where customers recognise the added value of a specialist protective packaging distributor. During 2018 we will continue to look to acquire good quality protective packaging businesses, improve our geographic coverage, expand across the Macfarlane network the new products introduced by recent acquisitions, improve our operational efficiency by leveraging our property footprint and working more closely with strategic suppliers. Macfarlane businesses all have strong market positions with differentiated product and service offerings. We have a flexible business model and a clear strategic plan incorporating a range of actions, which are being effectively implemented and are reflected in our consistent, profitable growth in recent years. Our future performance is largely dependent on successful execution of actions to grow sales, increase efficiencies and bring high-quality acquisitions into the Group. With a focus on the most attractive UK market sectors for our products and services, combined with our successful track record of growth and acquisitions, we expect 2018 to be another year of progress for Macfarlane Group. Peter D. Atkinson Chief Executive 22 February 2018 Images above Our Manufacturing Operations design and manufacture a high-quality range of bespoke packaging and labelling solutions for the customer. Strategic reviewGovernanceFinancial statementsShareholder information 10 Macfarlane Packaging Innovation Lab and The Significant Six Located in Milton Keynes, the Macfarlane Packaging Innovation Lab is a purpose built space to create solutions for the most demanding packaging challenges. Innovation starts with the people who work for Macfarlane and the Innovation Lab has been designed to ensure that there are no bounds to their imagination when seeking out smart solutions for customers. The Innovation Lab has been designed to problem-solve from start to finish in one location. It provides creative solutions that customers can see, touch and take away, saving them time and money in the packaging development process. The Significant Six Our customers’ products must arrive in perfect condition, on time and within managed costs. At Macfarlane Packaging, we have spent decades innovating and perfecting packaging solutions for a wide range of markets that are strong, efficient and sustainable. In doing so, we have isolated six hidden costs that have the biggest impact on most packaging operations… we call these costs “The Significant Six” and they can account for 90% of all costs in a packaging operation. By using our Significant Six approach, we help our customers find these hidden costs, bring them down or eliminate them completely. Storage costs With over 700,000 sq ft of warehouse space and a fleet of 100 vehicles, our nationwide RDCs mean that customers’ packaging stock levels can be minimised. Transport costs By re-thinking the pack design, significant reductions in storage, postal and courier charges can be achieved, whilst improving product protection at the same time. Damages & returns By challenging areas in the customer supply chain where there are damages and returns, we can find the right packaging solution to protect the product and the brand too. Administration costs As the UK’s biggest packaging supplier we can provide insight to enable our customers to reduce the costs associated with managing multiple suppliers. Productivity costs We can review the end-to-end customer pack operation to identify space, time and process efficiencies to aid productivity at all stages. Customer experience Macfarlane Packaging can help enhance the consumer experience of packaging form and brand but at the same time be mindful of cost implications. Macfarlane Group PLC Annual Report and Accounts 2017 11 Case study: Peak Scientific Peak Scientific is a leading innovator in the design, manufacture and ongoing support of high performance, on-site gas generators for the life sciences sector. Prior to engaging with Macfarlane, the company was experiencing high freight and productivity costs, and was looking for a lightweight, high-performance packaging solution to reflect the value of its brand. Using 3D modelling software, Macfarlane designed new packaging produced from lightweight, high-performing packaging materials to help reduce product damage in transit. The solution has helped Peak Scientific reduce pack weights by 50%, generating significant cost savings. The company has also benefited from enhanced brand experience and improved product protection. Case study: Blaze Wear Blaze Wear, an online retailer of high end and cutting edge heated wear, was looking for an eCommerce packaging range suitable for shipping its products in the UK and overseas. The company was interested in new solutions to reflect the value of its products and improve customer experience with its brand. Blaze Wear approached Macfarlane to discuss its requirements and visited the Innovation Lab. During the visit, Macfarlane proposed ideas and provided samples on the same day, significantly accelerating the design and production process, from approving concept to ensuring stock availability. Blaze Wear’s new eCommerce box range was ready for their website launch in September 2017 and the customer is delighted with the outcome as the new pack enhances the customer unboxing experience. “ Macfarlane is a valued partner to Peak Scientific, a key enabler to transformation of our supply chain with innovative, cost effective solutions and services.” David Williamson, Global Supply Chain and Logistics Manager at Peak Scientific Strategic reviewGovernanceFinancial statementsShareholder information 12 Financial review Trading The Group saw growth in sales of 9% during 2017, driven by Packaging Distribution and enhanced by strong contributions from recent acquisitions. Group sales rose to £196.0 million, an increase of £16.2 million from 2016. Profit before tax for 2017 increased to £9.3 million, an increase of £1.5 million from that achieved in 2016. Taxation The tax charge for the year from continuing operations was £1.8 million on profit before tax of £9.3 million, a rate of 19.84%, above the prevailing rate of 19.25% mainly due to acquisition costs incurred in 2017 not being deductible against corporation tax liabilities. This compared with a tax charge of £1.8 million on the profit before tax of £7.8 million in 2016 and a tax rate of 22.5%, higher than the statutory rate due to changes in prior year estimates. Earnings per share Diluted earnings per share totalled 5.22p (2016: 4.64p) an increase of 12.5%, corresponding to the 19% growth in profitability, offset by the increased number of shares in issue, following the issue of 21,212,121 ordinary shares on the acquisition of Greenwoods in September 2017. Dividends A dividend of 0.60p per share was paid on 12 October 2017. A further dividend of 1.50p per share is subject to approval by shareholders at the AGM in May 2018 and is not included as a liability in these financial statements. Dividend cover has been maintained at 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 make pension contributions, finance acquisitions and capital expenditure. Cash flow and net bank debt The Group’s debt facility with Lloyds Banking Group PLC comprises a three-year committed borrowing facility of up to £25.0 million for the period to June 2019, secured over part of Macfarlane Group’s trade receivables. The facility bears interest at normal commercial rates and carries standard financial covenants in relation to interest cover and levels of headroom over trade receivables. There is an option to increase the facility further to £30.0 million. The Group has been in compliance with the covenants in relation to the facility throughout 2017. The facility accommodates increased working capital requirements from our organic growth as well as finance for pension scheme contributions and an ability to fund acquisitions. Our financing requirements are met by maintaining committed borrowing facilities. The Group had net bank borrowings of £14.3 million at 31 December 2017, a reduction of £1.0 million from the previous year. The Group spent £8.3 million on acquisitions in 2017 (2016: £8.7 million) and £1.7 million on capital expenditure in 2017 (2016: £1.1 million). On 21 September 2017, the Group concluded a placing of shares which raised net proceeds of £7.6 million towards the acquisition of Greenwoods. We will continue to invest where there are needs or opportunities to meet future growth plans. The Group will strive to ensure that in 2018, 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 2017 Macfarlane Group PLC acquired Greenwoods at a maximum potential cost of up to £17.2 million. The Company completed a placing to part fund the acquisition, raising £7.6 million, issued shares to the Vendor totalling £6.0 million and has retained contingent consideration of £3.25 million. During 2016 the Company acquired Nelsons, Colton Teesside and McNeils. All three acquisitions were subject to earnout mechanisms and all amounts due to the vendors of these companies were paid in 2017. Nelsons has a maximum payment due of £0.8 million in respect of the second period of twelve months trading to 31 July 2018. Recent acquisitions in Packaging Distribution Lane Packaging Date: May 2014 Location: Reading Sales: £3 million Network Packaging Date: September 2014 Location: Wolverhampton Sales: £10 million One Packaging Date: August 2015 Location: Bingham Sales: £5 million Nelsons for Cartons Date: July 2016 Location: Leicester Sales: £9 million Colton Teesside & Edward McNeil Date: H1 2016 Location: Teesside and Glasgow Sales: £6.5 million combined Greenwoods Stock Boxes Date: September 2017 Location: Nottingham Sales: £14 million Macfarlane Group PLC Annual Report and Accounts 2017 13 Market capitalisation and share price movements The number of shares in issue at 31 December 2017 was 157,547,618, following the issue of 21,212,121 ordinary shares in September 2017. At the year-end the Company’s market capitalisation was £122.5 million, compared with £83.2 million last year. The share price at 31 December 2017 was 77.75p, compared with 61.00p at 31 December 2016. The range of transaction prices for Macfarlane Group shares during 2017 was 57.50p to 79.50p 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 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 2017 and these are set out in note 14 to the financial statements. Pension scheme deficit 2017 £000 2016 £000 2015 £000 Fair value of scheme investments Present value of scheme liabilities 80,960 (92,783) 77,808 (92,345) 67,793 (79,311) Deficit at 31 December (11,823) (14,537) (11,518) 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 23 to the financial statements. The deficit reduced by £2.7 million in the year, primarily due to deficit reduction contributions made in 2017. The Board continues to take steps to reduce 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. The next triennial actuarial valuation being carried out at 1 May 2017 is in progress and likely to be concluded in the first half of 2018. International Financial Reporting Standards and accounting policies As detailed in the 2016 Annual Report, the new International Financial Reporting Standards adopted during 2017 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 the Directors’ past experience and their assessment of the current market outlook for the business. 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 the Strategic Report on pages 2 to 23. 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 22 February 2018 Strategic reviewGovernanceFinancial statementsShareholder information 14 Principal risks and uncertainties The principal risks and uncertainties faced by the Group and the factors mitigating these risks are detailed on the following pages. These risks 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. 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 including the uncertainty caused by Brexit, the competitive environment, compliance with legislation and risks associated with business continuity, including cyber-security. These are mitigated in ways common to all businesses and not specific to Macfarlane Group. Risk description Mitigating factors 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 including currency fluctuations. 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. 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 2017 estimated the scheme deficit to be £11.8 million, a reduction of £2.7 million during 2017. 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 32 leased sites of which 3 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 facility comprises a committed facility of up to £25.0 million. This includes 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 the decentralised management control is less effective and local decisions do not meet 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. Acquisitions The Group’s growth strategy includes acquisitions as demonstrated in recent years. There is a risk that such acquisitions will not be available to the Group on acceptable terms in the future. There is also a risk that the acquisitions will not be successful due to the loss of key people or customers following the acquisition or the acquired business not performing at the level expected which could potentially lead to an impairment in the carrying value of the related intangible assets. There are also execution risks around the failure to successfully integrate the acquired business into the Group. • 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. • 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 regularly reviewed to ensure continued matching of investments with the liability profile of the scheme. • 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 bank 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 facility, which is only partly utilised, is in place until June 2019. • As part of the Group’s long-term financing strategy, this facility will be extended/replaced during 2018. • The Group ensures that our staff have the right working environment, information and sales tools to enable them to meet corporate objectives. • A comprehensive management information system is also 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. • The Group carefully reviews potential acquisition targets, ensuring that the focus is on businesses which complement the existing Group profile and provide opportunity for growth. • Having made a number of acquisitions in recent years, the Group has established due diligence and integration processes and procedures. • The use of earn-out mechanisms mitigates risk in the post-acquisition period. • The Group has a comprehensive management information system in place to monitor • Goodwill and other intangible assets are tested for impairment on an annual basis and the post-acquisition performance. results are set out in note 9. Macfarlane Group PLC Annual Report and Accounts 2017 15 Risk description 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 including currency fluctuations. 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. 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 2017 estimated the scheme deficit to be £11.8 million, a reduction of £2.7 million during 2017. 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 32 leased sites of which 3 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 facility comprises a committed facility of up to £25.0 million. This includes 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 the decentralised management control is less effective and local decisions do not meet 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 Acquisitions The Group’s growth strategy includes acquisitions as demonstrated in recent years. There is a risk that such acquisitions will not be available to the Group on acceptable terms in the future. There is also a risk that the acquisitions will not be successful due to the loss of key people or customers following the acquisition or the acquired business not performing at the level expected which could potentially lead to an impairment in the carrying value of the related intangible assets. There are also execution risks around the failure to successfully integrate the acquired business into the Group. 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. • 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 regularly reviewed to ensure continued matching of investments with the liability profile of the scheme. • 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 bank 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 facility, which is only partly utilised, is in place until June 2019. • As part of the Group’s long-term financing strategy, this facility will be extended/replaced during 2018. • The Group ensures that our staff have the right working environment, information and sales tools to enable them to meet corporate objectives. • A comprehensive management information system is also 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. • The Group carefully reviews potential acquisition targets, ensuring that the focus is on businesses which complement the existing Group profile and provide opportunity for growth. • Having made a number of acquisitions in recent years, the Group has established due diligence and integration processes and procedures. • The use of earn-out mechanisms mitigates risk in the post-acquisition period. • The Group has a comprehensive management information system in place to monitor post-acquisition performance. • Goodwill and other intangible assets are tested for impairment on an annual basis and the results are set out in note 9. Strategic reviewGovernanceFinancial statementsShareholder information 16 Viability statement The Board has considered the Group’s viability as part of its ongoing programme to manage risk. Each year the Board reviews the Group’s strategic plan for the forthcoming three-year period and challenges the Executive team on the plan’s risks. The plan reflects the Group’s businesses, which have 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 strategy, including assumptions regarding future growth rates for existing businesses and acceptable levels of performance in the period. A robust financial model covering the three year period is maintained and regularly updated. The model is subject to sensitivity analysis which includes flexing a number of the main assumptions, namely – future revenue growth, gross margins, operating costs, finance 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 results indicated that no additional facilities would be required and assumed that the existing facilities, due for renewal in June 2019 would be renewed on the current terms. The Board has carried out a robust assessment of the principal risks facing the Group and how these risks affect the prospects of the Group and the strategic plan. The review and analysis also considers the principal risks facing the Group as described on pages 14 and 15, which could prevent the Group from achieving its strategic objectives and the potential impact these risks could have on the Group’s business model, future performance, solvency and liquidity over the assessment period. 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. Based on the assessment of these risks and the sensitivity analysis undertaken, the Board of Directors 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 2020. Macfarlane Group PLC Annual Report and Accounts 2017 17 Acquisitions made during 2017 have been included in GHG reporting and 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 Group. This factor was chosen because it provides the greatest degree of accuracy and is the metric best aligned to business growth. Corporate responsibility 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 Director of Group Risk. The key objectives of the CR Committee are: • To improve the awareness of CR across the Group; • To develop and implement action plans that support the CR strategy; • To ensure that CR is an integral part of daily operational activities; and • To monitor and report on CR performance using agreed key performance indicators (KPIs). Environmental care Mandatory Greenhouse Gas Reporting 2017 Macfarlane Group is committed to reducing its greenhouse gas (‘GHG’) emissions. This report outlines Macfarlane’s GHG emissions for the year ended 31 December 2017. 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. Table 1: Type of emissions Type of emissions Activity 2017 Units 2016 Units 2017 Tonnes of CO2e 2016 Tonnes of CO2e Direct (Scope 1) Natural gas (kWh) Vehicle fuel (litres) Other Subtotal 2,476,943 1,823,523 31,688 2,276,232 1,670,170 48,750 Indirect (Scope 2) Purchased electricity (kWh) 5,241,655 5,072,629 Total gross emissions (tCO2e) Subtotal Table 2: Intensity ratio Type of emissions Total gross GHG emissions (tCO2e) Total sales (£000) Carbon intensity (tCO2e/£000) 456 4,822 61 5,339 1,843 1,843 7,182 419 4,361 76 4,856 2,090 2,090 6,946 2017 2016 7,182 195,991 0.037 6,946 179,772 0.039 Strategic reviewGovernanceFinancial statementsShareholder information 18 Corporate responsibility (continued) The results in table 1 show that total gross GHG emissions in the period were 7,182 tonnes of CO2e, (2016: 6,946 tonnes) comprised of the following; • Direct Emissions (Scope 1) 5,339 tonnes of CO2e – 74% (2016: 4,856 tonnes – 70%) • Indirect Emissions (Scope 2) 1,843 tonnes of CO2e – 26% (2016: 2,090 tonnes – 30%) 67% of emissions came from diesel, 26% from electricity, and 7% from natural gas. Broken down by business unit the results in table 3 were as follows; • Distribution 4,146 tonnes of CO2e – 58% (2016: 4,493 tonnes – 65%) • Manufacturing Operations 3,036 tonnes of CO2e – 42% (2016: 2,453 tonnes – 35%) 2017 emissions have increased by 236 tonnes, an increase of 3.4%, partly due to the acquisition of Greenwoods in September 2017. The increase in 2017 emissions is primarily due to an increase in vehicle fuel consumption. There have been noteworthy reductions elsewhere within the business, including an 11.8% decrease in emissions from electricity. Macfarlane Group has seen a small increase in overall emissions during 2017, with programmes being completed to ensure the effective management and reduction in emissions where possible. The 2017 acquisitions have increased emissions in areas such as fuel usage, in line with a larger fleet. The intensity calculation for 2017, reflects the work completed with a reduction in emissions based on sales turnover from 0.039 to 0.037. During 2018, a programme will be developed with the key objective of reviewing transport efficiency to ensure effective and efficient use of the Company’s fleet including recent acquisitions. The target in 2018 will be to see a reduction in fuel consumption, year on year. This will be aided by a programme to upgrade our fleet (approx. 40% of vehicles are being replaced in 2018) with new vehicles having cleaner, more fuel efficient, engine technology. These trucks will also yield a significant reduction in our NOx emissions. Given the growth of the business, continued reductions in the overall Gross tCO2e/Sales result will be a challenging target, however the Group is committed to see a further year on year reduction in 2018. Images above 40% of our commercial vehicles are being replaced in 2018 with the new vehicles having cleaner, more fuel-efficient engine technology. Table 3: Business segment Business segment Packaging Distribution Manufacturing Operations Total 2017 Tonnes of CO2e 4,146 3,036 7,182 2016 Tonnes of CO2e 4,493 2,453 6,946 2017 Sales £000 2016 Sales £000 2017 tCO2e/£000 2016 tCO2e/£000 171,771 24,220 195,991 155,900 23,872 179,772 0.024 0.125 0.037 0.029 0.102 0.039 Macfarlane Group PLC Annual Report and Accounts 2017 19 Our key environmental objectives for 2018 include; • Continuous review and appraisals of all sites every 3 months with a view to making efficiencies; • Explore potential benefits through the waste management division of our most recent acquisition, Nottingham Recycling Limited, who provide the recovery of sorted materials; • Look at the feasibility of capex expenditure in roll packers for wood waste, the latest compactors for corrugated waste and options for sawdust waste; • Review options on plastic strapping, now classed as a general waste item; • Provide further training on portal reports to reduce invoice queries and improve site waste management; and • Deliver savings through the Manufacturing Waste Reduction Programme. Waste management The recycling and recovery (landfill diversion) rate for 2017 across all sites showed a marginal increase compared to 2016. This has been achieved with the support from Reconomy, our waste provider, through more site audits at our Distribution and Manufacturing facilities, local toolbox talks and utilising our waste recording portal which provides reports to help manage waste streams and costs. Our goal to achieve a zero to landfill status in 2017 was close with all businesses across the Group achieving over 99% of waste diverted from landfill. The levels of waste segregated on site also increased to 68%. Our Labels division, through recycling 70 tonnes of paper-based backing product as part of their waste reduction programme, achieved the best result in the Group with 99.9% waste diverted from landfill. As the chart in table 4 shows there have been significant improvements in the recycling and recovery rate figures since 2009 and the current rates are considered exceptional for the packaging industry. Recycling and recovery Diversion from landfill Table 4: Recycling and recovery rate 100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% 2009 2010 2011 2012 2013 2014 2015 2016 2017 Strategic reviewGovernanceFinancial statementsShareholder information 20 Corporate responsibility (continued) 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. 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. These objectives are monitored by an internal, independent audit process, which provides visibility of a site’s operational activities, and its adherence to legislative or Company requirements. 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 2018, the CR Committee will continue to review environmental performance, actively supporting methods or practices that contribute to the continued development of a culture driven by environmental responsibility. Registration to ISO 14001 With the exception of certain 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 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. 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 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 in table 5 below. In 2017, we experienced a decrease in AFR vs. 2016. This represented 6 reportable incidents compared to 9 in 2016. All reportable incidents are investigated thoroughly by our Health & Safety team and changes to working practices implemented if required. We also ensure that training in a particular area where incidents have arisen is reinforced. Table 5: Accident Frequency Rate (AFR) Business segment Packaging Distribution Manufacturing Operations Group 2017 0.53 0.22 0.43 2016 0.42 1.11 0.64 2015 0.34 0.46 0.38 2014 0.24 0.22 0.23 Macfarlane Group PLC Annual Report and Accounts 2017 21 Customer experience Customer feedback To continually improve the 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 the Packaging Distribution business in 2017, the value of sales transacted online has decreased from 12.3% to 12.2%. In Packaging Distribution in 2017, orders transacted online decreased to 23% vs. 24% in 2016. Electronic documentation In 2017, 86% (2016: 78%) 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 Our family of websites highlighted in table 7 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. Table 6: Annual customer satisfaction scores Packaging Distribution Packaging Design and Manufacture Labels Table 7: Macfarlane Group websites 2017 89% 82% 95% 2016 89% 89% 93% Business Website domain Target market/audience Packaging Distribution www.macfarlanepackaging.com Network Packaging www.networkpack.co.uk Nelsons for Cartons & Packaging www.nelsonsforcartons.co.uk Greenwoods Stock Boxes www.boxesdirect.co.uk Packaging Distribution Ireland www.macfarlanepackaging.ie Packaging Design and Manufacture www.macfarlanemanufacturing.com Labels www.macfarlanelabels.com Macfarlane Group www.macfarlanegroup.com Wide range of businesses using packaging that need to protect their products during transit and storage. Manufacturers of high value products in the 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 information 22 Corporate responsibility (continued) Employees 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 2017 each employee was engaged in 11.5 hours of formal training. This figure has shown a slight increase from recent years, due to Macfarlane Group engaging with Apprenticeship Schemes during 2017. 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 functional forums and feedback workshops, both role specific and business specific. These forums provide an opportunity for our employees, to engage in an open two-way dialogue on topics that are important to everyone, including business performance, strategic targets and the overall wellbeing of our employees. 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 2017 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 2017 this was LGS Foundation UK. Images above Macfarlane provides interactive tools and regular training for staff to support our aims of enhancing the customer experience. Macfarlane Group PLC Annual Report and Accounts 2017 23 • 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. • Anti-Bribery & 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. • Modern Slavery Act – Macfarlane Group has now made a statement under the Modern Slavery Act which is supported by internal procedures to ensure that the principles of the act are adhered to. The statement is available on the website (www.macfarlanegroup.com). Diversity The gender breakdown of Directors, Senior Managers and other Group employees at 31 December 2017 is shown in table 8 below. Gender pay gap Macfarlane Group will present its Gender Pay Gap information on the corporate website from April 2018. 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. Table 8: Diversity Directors Senior Managers All other employees 2017 2016 Female 0 4 308 Male 6 12 530 Female 0 4 277 Male 6 12 456 Strategic reviewGovernanceFinancial statementsShareholder information 24 Board of Directors 1 2 3 4 5 6 1 Stuart Paterson Chairman 3 John Love Finance Director Stuart Paterson joined the Board on 1 January 2013 as a Non-executive Director becoming Chairman on 29 September 2017. He is a Chartered Accountant and was Chief Financial Officer at Forth Ports Limited until he retired in January 2018. He joined Forth Ports in March 2011 when it was listed on the London Stock Exchange and the company was subsequently acquired by Arcus Infrastructure Partners in 2011. Prior to this role, Stuart was Chief Financial Officer of Johnston Press PLC from 2001 to 2010 and previously worked in senior financial management roles at Motorola Corporation, and as Group Finance Director and then Managing Director Europe for Aggreko PLC. 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 Committees. He was Chairman of the Audit Committee until 8 January 2018 and is also a member of the Remuneration and Nominations Committees. 2 Peter Atkinson Chief Executive Peter joined Macfarlane Group as Chief Executive in 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. A member of The Institute of Chartered Accountants of Scotland, John has been with the Group for twenty-one 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. 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. Macfarlane Group PLC Annual Report and Accounts 2017 25 Corporate advisers Registration number No. SC 004221 Registered in Scotland Company Secretary Derek L.H. Quirk 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 Nabarro Olswang 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 Independent auditor KPMG LLP 319 St. Vincent Street Glasgow G2 5AS Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA 6 James Baird Non-executive Director James joined the Board on 8 January 2018. James previously led the Scotland and Northern Ireland business of Deloitte, the global accountancy firm, before becoming Managing Partner of its Audit & Risk Advisory division and Chief Operating Officer, both in Switzerland. An experienced auditor and advisor who has worked with companies in the UK and Europe across a range of industries, he previously worked for PwC and Rutherford Manson Dowds. James is currently an Honorary Professor at Glasgow University’s Adam Smith Business School and a member of the Strategy and Research Advisory Committee of the Institute of Chartered Accountants of Scotland. Derek Quirk Company Secretary Derek Quirk joined Macfarlane Group in December 2015 as Director of Group Risk. He was appointed Company Secretary on 1 March 2016 and is a member of the Group’s Executive Committee. He provides legal support and leads the Group’s Internal Audit function. Prior to his current role, Derek was with BBA Aviation PLC for seven years, serving as Head of Group Internal Audit and latterly as Financial Controller for one of the company’s divisions. He is a member of The Institute of Chartered Accountants of Scotland. Strategic reviewGovernanceFinancial statementsShareholder information 26 Report of the Directors The Directors present their annual report and the audited financial statements of the Group for the year ended 31 December 2017. Pages 2 to 41 inclusive comprise the Directors’ report, which in turn includes the Strategic Report on pages 2 to 23. 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 41 (and is incorporated into this report by reference) with the exception of the information referred to in the Financial Conduct 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 2 and 3 and the Strategic Report on pages 4 to 23 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. Results and dividends The Group’s profit before tax from continuing activities was £9,261,000 (2016: £7,811,000). This resulted in a profit for the year of £7,424,000 (2016: £6,050,000). The Directors declared an interim dividend of 0.60p per share, which was paid on 12 October 2017 (2016: 0.55p per share). The proposed final dividend of 1.50p per share (2016: 1.40p per share) is subject to approval by shareholders at the Annual General Meeting (‘AGM’) in May 2018 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. 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. 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. No person has any special rights of control over the Company’s share capital and all issued shares are fully paid. Details of the issued share capital are shown in note 18. The Company issued 21,212,121 ordinary shares during 2017. The Company’s banking facilities may, at the discretion of the lender, be repayable on a change of control. 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 41. The Directors will propose an ordinary resolution at the 2018 AGM seeking authority to allot shares in the Company under section 551 of the Companies Act 2006 up to an aggregate nominal amount of £13,128,968. At last year’s AGM on 9 May 2017, 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 £3,408,387. That authority expires at the conclusion of the forthcoming AGM. A special resolution will again be put to shareholders to renew for a further year the authority over the existing unissued and uncommitted ordinary share capital of £3,938,690, representing 10% of the current share capital. No authority will be sought at the 2018 AGM to enable the Company to purchase its own shares. Employee share schemes Details of the option awards under the Macfarlane Group PLC Long Term Incentive Plan are set out in the Report on Directors’ Remuneration on page 30. The remaining option awards outstanding under the Company’s Long Term Incentive Plan at 31 December 2017 are set out in note 24 and lapse on 22 February 2018. Macfarlane Group PLC Annual Report and Accounts 2017 27 Number of shares held 17,250,000 15,477,511 15,280,983 9,171,289 9,090,909 Percentage 10.95% 9.82% 9.70% 5.82% 5.77% 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. This confirmation is given and should be interpreted in accordance with the provisions of Section 418 of the Companies Act 2006. Independent auditor A resolution to re-appoint of KPMG LLP as the Company’s auditor will be proposed at the AGM in 2018. Company information The Company is registered in Scotland (SC 004221) and its registered office is at 21 Newton Place, Glasgow, G3 7PY. Approval The Strategic Report on pages 2 to 23 and the Directors’ Report on pages 26 to 41 were both approved by the Board on 22 February 2018. Derek L.H. Quirk Company Secretary 22 February 2018 Substantial holdings Funds managed or advised by Rights & Issues Investment Trust plc Funds managed or advised by Miton Group PLC Funds managed by Canaccord Genuity Group Inc. Funds managed or advised by Otus Capital Management Almadon Limited The Remuneration Committee supervises the grant of share incentives and specifies 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. Further detail is given in the Report on Directors’ Remuneration on pages 28 to 33. Substantial holdings of shares in the Company The Company has received notification prior to 22 February 2018 in accordance with Chapter 5 of the Disclosure and Transparency Rules of the voting rights as a shareholder of the Company in the table set out above. Directors The names of the Directors in office at 31 December 2017, who served throughout the year together with short biographical details, are set out on pages 24 and 25. The Board considers its three Non-executive Directors to be independent. Stuart Paterson was appointed Chairman of the Company on 29 September 2017. Stuart succeeded Graeme Bissett as Chairman and Graeme stepped down from the Board on 29 September 2017. Stuart Paterson retires by rotation at the AGM in May 2018 and offers himself for re-election. He has a letter of appointment with the Company dated 29 September 2017 with a notice period of six months. James Baird was appointed as a Non-executive Director of the Company on 8 January 2018 and will retire and offer himself for election as a Director at the AGM in 2018. 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 30. 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 change of control. Directors’ and officers’ liability insurance The Company has maintained Directors’ and officers’ liability insurance cover throughout the financial year. The Company has made qualifying third party indemnity provisions for the benefit of Directors which remain in force. 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 £3,938,690. Strategic reviewGovernanceFinancial statementsShareholder information 28 Remuneration report Remuneration Committee Chairman’s summary statement This Remuneration Report has been drawn up under the provisions of the Enterprise and Regulatory Reform Act 2016. In addition to this statement the report includes two further sections detailing the Annual Report on Remuneration on pages 29 to 31 and key excerpts from Remuneration Policy, which was approved at the 2016 AGM, on pages 32 and 33. The Macfarlane Group PLC Long Term Incentive Plan was also approved at the 2016 AGM following an appropriate consultation process. Details are set out in the annual report on remuneration on page 31. 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, Stuart Paterson. The Committee determines the remuneration for the Executive Directors and also oversees the remuneration of the Chief Executive’s direct reports. The key components of executive remuneration are: • Basic salary and benefits – the increase applied for 2018 is 2.0%, consistent with all eligible employees. • Annual Bonus – there is a maximum payment of 50% of salary with 40% of salary based on Profit before tax (‘PBT’) performance and 10% of salary based on personal objectives. Bonuses for 2017 of £81,000 and £43,000, were awarded to Peter Atkinson and John Love respectively. The basis for this is detailed in the Remuneration report on page 29. These bonuses are paid in cash, following Board approval of the 2017 Annual Report and Accounts. Our policy allows for a bonus of up to 100% of salary, although the maximum for 2018 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. These awards lapsed on 22 February 2018. Total Directors’ remuneration is £909,000 in 2017 compared to £910,000 in 2016. The Group has made substantial progress in 2017 with profit before tax increasing by 19% and the share price increasing by 27% to 77.75p at 31 December 2017. The Remuneration Committee recommends this report and I hope that you will feel able to support the resolution to approve the Report on Directors’ Remuneration which will be proposed for approval at the Annual General Meeting on 15 May 2018. Bob McLellan Chairman of the Remuneration Committee 22 February 2018 Macfarlane Group PLC Annual Report and Accounts 2017 29 Annual report on remuneration Single total figure of remuneration for each Director The details set out on pages 29 and 30 of this report, up to and including the Statement of Directors’ shareholdings and share interests, have been audited by KPMG LLP. 2017 Chairman S.R. Paterson (Chairman from 29 September 2017) G. Bissett (Chairman until 29 September 2017) Executive Directors P.D. Atkinson J. Love Non-executive Directors M. Arrowsmith R. McLellan Total 2016 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 Pension costs £000 41 49 341 169 33 33 666 – – 16 7 – – 23 – – 81 43 – – 124 – – 76 20 – – 96 Salary and fees £000 Taxable benefits* £000 Bonus £000 Pension costs £000 64 334 166 32 32 32 660 – 16 6 – – – 22 – 92 42 – – – 134 – 74 20 – – – 94 Total £000 41 49 514 239 33 33 909 Total £000 64 516 234 32 32 32 910 * Taxable benefits relate to the provision of a Company car or equivalent allowance and provision of private medical insurance. Annual bonus for the year ended 31 December 2017 The annual bonus is based on performance against financial targets and personal objectives as set out in the policy report. The minimum financial target for 2017 was PBT of £9.0 million, which was achieved and so a total bonus of £95,000 was awarded for this component. The Remuneration Committee also assessed performance against personal objectives and awarded bonuses of 5% and 7% of salary, equating to £17,000 and £12,000 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) and his accrued pension at 31 December 2017 was £43,200 (2016: £41,000). The associated transfer value was £864,000 (2016: £826,000) calculated using HMRC guidelines. The scheme’s normal retirement date is 65 with no automatic entitlement to early retirement. Payments to past Directors There were no payments made to former Directors in the year or payments made for loss of office. Strategic reviewGovernanceFinancial statementsShareholder information 30 Remuneration report (continued) Scheme interest awards in 2017 On 8 May 2015, Peter Atkinson and John Love were granted option awards over 775,254 and 360,026 ordinary shares under the Macfarlane Group PLC Long Term Incentive Plan. These awards lapsed on 22 February 2018. Statement of Directors’ shareholdings and share interests S.R. Paterson P.D. Atkinson J. Love M. Arrowsmith R. McLellan 2017 Beneficial 2017 Option 2016 Beneficial 120,000 854,172 800,000 100,000 102,819 – 775,254 360,026 – – 120,000 854,172 800,000 100,000 102,819 2016 Option – 775,254 360,026 – – 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 to the FTSE All Share Support Services Group for this purpose. 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 780 680 580 480 380 280 180 80 2009 2010 2011 2012 2013 2014 2015 2016 2017 FTSE All Share Support Services Macfarlane Group 780 CEO single figure 2017 2016 2015 2014 2013 2012 2011 2010 2009 P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson P.D. Atkinson Single figure of total remuneration £000 514 516 508 586 416 462 390 411 410 Long term incentive vesting against maximum opportunity n/a n/a n/a n/a n/a n/a n/a n/a n/a 580 Annual variable 680 element award vs. 0 maximum opportunity 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 48% 55% 56% 46% 10% 45% 10% 10% 16% 480 380 l l a t o T 280 180 80 2009 2010 2011 2012 2013 2014 2015 2016 2017 Macfarlane Group PLC Annual Report and Accounts 2017 31 Percentage change in remuneration of CEO and employees The following table shows the percentage change in remuneration between 2017 and 2016 for the CEO and for all employees in the Group. % change in Base salary Benefits Bonus Average for all eligible employees 2% 0% (4%) CEO 2% 0% (12%) Relative importance of spend on pay The difference in expenditure between 2016 and 2017 on remuneration for all employees in comparison to the distribution to shareholders by way of dividend is set out below: Total employee pay Dividend 2017 £000 25,064 2,854 2016 £000 24,299 2,358 % change +3% +21% Statement of implementation of remuneration policy in the current financial year The salaries of the Chief Executive and the Finance Director were increased by 2% with effect from 1 January 2018. The fees paid to the Chairman and Non-executive Directors also increased by 2% from 1 January 2018. There are no changes proposed to the operation of benefits and pensions from the bases operated in 2017. The Remuneration Committee operates 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. No awards were made in 2017. 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 24. The Remuneration Committee used the services of FIT Remuneration Consultants LLP to advise on certain aspects of remuneration during 2017 and fees of £848 were charged for the year for Remuneration Committee advice. 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 9 May 2017, the Directors’ Remuneration Report received the following votes from shareholders. For Against Total votes cast (for or against) Votes withheld Total Total number of votes % votes cast 55,535,621 321,989 99.42% 0.58% 55,857,610 100.00% 21,972 55,879,582 Strategic reviewGovernanceFinancial statementsShareholder information 32 Remuneration policy The following pages summarise the main elements of the remuneration packages of Executive Directors from the Company’s Remuneration Policy. The full policy, which was approved at the 2016 AGM, is available under the Corporate Governance section of the Company website (www.macfarlanegroup.com). The material on these pages is not subject to the vote on the Directors’ Remuneration Report being proposed at the 2018 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 and permanent health insurance. 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 scheme 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 base salary but remains at 50% for 2018. 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 Group PLC Annual Report and Accounts 2017 33 Long term incentive (variable pay) Link to strategy To incentivise delivery of strategic targets and sustained performance over the long-term. Operation 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 base 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 base salary in normal circumstances (200% in exceptional circumstances). Performance measure Conditional awards will vest based on three-year performance against challenging financial and other targets set and assessed by the Committee in its discretion. Strategic reviewGovernanceFinancial statementsShareholder information 34 Corporate governance The Company is committed to the principles of corporate governance contained in the UK Corporate Governance Code issued in April 2016 (‘the Code’) by the Financial Reporting Council (‘FRC’). The Company’s compliance is set out in the narrative statement on pages 34 to 41 and for Directors’ remuneration in the Report on Directors’ Remuneration on pages 28 to 33. Stuart R Paterson Chairman Compliance The Company did not fully comply with all Code provisions during 2017. Following the appointment of Stuart Paterson as Chairman on 29 September 2017, a process was undertaken to recruit a new Non-executive Director. During this process from 29 September 2017 to 8 January 2018 the Audit Committee continued to be chaired by Stuart Paterson, the new Company Chairman. As a result, the Company did not comply with provision C.3.1 which states that the Company Chairman may be a member of, but not chair, the Audit Committee. The appointment of James Baird on 8 January 2018 brought the Company into compliance with C.3.1 as he was immediately appointed as the Chairman of the Audit Committee given his recent and relevant financial experience. The Company’s auditor, KPMG LLP, is required to review whether the above statement (in addition to its wider remit under the Listing Rules) reflects the Company’s compliance with the provisions of the 2016 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 24 and 25. 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. 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 2017 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. The Chairman’s other commitments are included in his biography on page 24. The Board is satisfied that these do not interfere with the performance of his Group duties, which is based on a commitment of approximately 45 days per annum. The Board considers its Non-executive Directors, Mike Arrowsmith, and Bob McLellan to be independent both in character and judgement. Macfarlane Group PLC Annual Report and Accounts 2017 35 Neither of these 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 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 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. The Chief Executive’s responsibilities focus on managing the business and implementing the Group’s strategy. 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. 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 2018 AGM, James Baird and Stuart Paterson fall due to retire and, being eligible, offer themselves for election and re-election respectively. Their letters of appointment will be available for shareholder review prior to the AGM on 15 May 2018. 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 Director’s first appointment, the Chairman will discuss with the Director whether it is appropriate for a further three-year term to be served. Company Secretary Derek Quirk, 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 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. 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 executive 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 2017 and individual attendance at those and the Board Committee meetings is set out in the table on the following page. In 2017, 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. Strategic reviewGovernanceFinancial statementsShareholder information 36 Corporate governance (continued) At each meeting, the Directors receive management information 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 51, 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 from the date of this report. 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 42. Board and Committee meetings The number of regular Board and Committee meetings attended by each member during 2017 is shown in the table below. Where a Director cannot attend a Board or Committee meeting, his comments on the papers to be considered at that meeting are relayed in advance to the relevant Chairman. 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. 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 by the Company Secretary 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 Attendance by Directors at Board and Committee meetings during 2017 Stuart Paterson – Chairman from 29 September 2017 Graeme Bissett – Chairman until 29 September 2017 Peter Atkinson – Chief Executive John Love – Finance Director Mike Arrowsmith – Senior Independent Director Bob McLellan – Non-executive Director Board Audit Committee Remuneration Committee Nominations Committee 7 (7) 5 (5) 7 (6) 7 (7) 7 (7) 7 (7) 3 (3) 2 (2)* – – 3 (3) 3 (3) 2 (2) 1 (1) – – 2 (2) 2 (2) 6 (3)** 4 (2)** – – 6 (6) 6 (6) 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. ** During the process to recruit and appoint a new Chairman, which was led by the Group’s Senior Independent Director, Graeme Bissett and Stuart Paterson excused themselves from meetings when deemed appropriate. Macfarlane Group PLC Annual Report and Accounts 2017 37 Following a Nominations Committee held on 21 February 2017 the Committee proposed Bob McLellan and John Love for re-election at the AGM on 9 May 2017. No Director is involved in any decisions regarding his own appointment or re-appointment. in the Strategic Report on pages 2 to 23 of this report. The Board uses this together with the Chairman’s Statement on pages 2 and 3, and the remainder of the Report of the Directors on pages 26 and 27 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. 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. Nominations Committee The Nominations Committee membership during 2017 was as follows: Stuart Paterson (Chairman from 29 September 2017 and member for the period up to 28 September 2017) Graeme Bissett (Chairman until 29 September 2017) Mike Arrowsmith Bob McLellan The Nominations Committee met six times during 2017 and its terms of reference are available on the Group website (www.macfarlanegroup.com). The principal work undertaken by the Nominations Committee in 2017 was to consider and recommend that the Company propose for re-election any Directors falling due for re-appointment at the AGM; to recruit and recommend the appointment of a new Chairman to succeed Graeme Bissett, a process led by the Group’s Senior Independent Director; and to recruit and recommend the appointment of a successor to Stuart Paterson as Chairman of the Audit Committee upon his appointment as Chairman. This process was led by the Group’s newly-appointed Chairman. The Committee’s ongoing 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. Strategic reviewGovernanceFinancial statementsShareholder information 38 Corporate governance (continued) Remuneration Committee The Remuneration Committee membership during 2017 was as follows: Bob McLellan (Chairman) Mike Arrowsmith Stuart Paterson Graeme Bissett (until 29 September 2017) None of the members of the Remuneration Committee during 2017 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 twice during 2017 and its terms of reference are available on the Group website (www.macfarlanegroup.com). The principal work undertaken by the Remuneration Committee in 2017 was: (a) To review performance against 2016 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 2017 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 28 to 33. Audit Committee Throughout 2017 the Audit Committee comprised: 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. He became Company Chairman on 29 September 2017 but the Board agreed to maintain his chairmanship of the Audit Committee until a successor was recruited. James Baird was appointed as a Non-executive Director on 8 January 2018 and immediately appointed as Chairman of the Audit Committee. The remaining Committee members, Mike Arrowsmith and Bob McLellan have a wide range of commercial experience, as evidenced in their biographical details on page 24. The Company Chairman attends meetings to give the Committee the benefit of his relevant experience but he is no longer a member of the Committee with effect from 8 January 2018. The Committee’s terms of reference are displayed on the Group website (www.macfarlanegroup.com) and its principal oversight responsibilities cover the following five 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 annually 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. • Viability statement 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 16 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 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 formal consideration of the independence of the auditor as well as considering the framework used for the supply of non-audit services by the auditor and reviewing non-audit services and fees. Macfarlane Group PLC Annual Report and Accounts 2017 39 • 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 2017 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 2017 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 taking into account identified risks; • 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. 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 Macfarlane Group’s defined benefit pension scheme. 2017 Financial statements Certain accounting policies require key accounting judgements or involve 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. The Committee then makes a recommendation to the Board on the suitability of the policies and judgements supporting the reported results. For the 2017 financial statements, the Committee considers the two most significant areas of judgement to be: 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 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 23. Investments are valued at bid price and confirmed by the pension scheme’s Investment adviser. The level of deficit calculated by the pension scheme actuary and the related disclosures are based on these assumptions and the components of the movement in the pension scheme 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 23. Accordingly the Committee is comfortable with the reporting of the pension scheme deficit. 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 2017, the Group retained an allowance for doubtful trade receivables of £361,000, compared to £326,000 in 2016. Further details are set out in note 13. 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 2018 to date, paying particular attention to receivables outwith terms, comparing this with Strategic reviewGovernanceFinancial statementsShareholder information 40 Corporate governance (continued) Audit Committee (continued) similar analyses produced at previous reporting dates. 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 is appropriate. 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 above. For the 2017 financial statements, other areas included: • The acquisition of subsidiaries is accounted for under the purchase method. The acquired businesses are measured at the date of acquisition as the aggregate fair value of assets, liabilities and contingent liabilities. The excess of the cost of acquisition over the fair value of the identifiable assets is represented as goodwill. The Committee reviews this process for each acquisition undertaken and discusses the methodology and assumptions used with management. The Committee concluded that it was satisfied with the basis of accounting in this area and the resulting measurements; • Goodwill is allocated to cash generating units (CGUs) expected to benefit from the synergies of the business combination, for the purpose of impairment testing. Carrying values of goodwill for each CGU are considered annually. The Committee reviews and discusses management’s approach, including not only the impairment testing but also the related sensitivity analysis. The Committee was satisfied with the assumptions and judgements applied and concluded that there was no impairment of goodwill; • The level of and basis for inventory provisions at 31 December 2017; and • A review of the viability statement including 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, the audit partner from the external auditor rotates off the audit engagement every 5 years. The Audit Committee monitors non-audit services provided to the Group by the external auditor. The Committee recognises that there will be certain non-audit work which the external auditor is best placed to undertake. There will also 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 value to be undertaken by the external auditor has to be approved by the Audit Committee. Details of amounts paid to KPMG LLP during 2017 for audit and other services are set out in note 2 to the financial statements. The Committee Chairman will be available to answer questions on any aspect of the Committee’s work at the AGM. Macfarlane Group PLC Annual Report and Accounts 2017 41 • 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. The Committee continued to request progress reports on the ongoing work on cyber security matters to emphasise the importance of having robust cyber security measures in place as part of the corporate governance framework, but also to ensure that employees, customers and suppliers are protected from the impact of cyber security breaches. During 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. Risk management and internal control The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. It is management’s role 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 was 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 reports on all internal audit issues raised and an update from the Head of Internal Audit on a six-monthly basis; Strategic reviewGovernanceFinancial statementsShareholder information 42 Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the Group and parent company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and parent company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law and 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, relevant, reliable and prudent; • For the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • For the parent company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the parent company financial statements; • Assess the Group and parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and • Use the going concern basis of accounting unless they either intend to liquidate the Group or the parent company or to cease operations or have no realistic alternative but to do so. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose with reasonable accuracy at any time the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, 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. Responsibility statement of the Directors in respect of the annual financial report We confirm that to the best of our knowledge: • 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 Report, 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. On behalf of the Board Peter D. Atkinson Chief Executive John Love Finance Director 22 February 2018 22 February 2018 Macfarlane Group PLC Annual Report and Accounts 2017 43 Independent auditor’s report to the members of Macfarlane Group PLC 1. Our opinion is unmodified We have audited the financial statements of Macfarlane Group PLC (‘the Company’) for the year ended 31 December 2017 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated balance sheet, the consolidated cash flow statement, the Company balance sheet and the Company statement of changes in equity and the related notes, including the accounting policies set out on pages 51 to 55. 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 2017 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. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee. We were appointed as auditor by the Directors on 9 May 2012. The period of total uninterrupted engagement is for the 6 financial years ended 31 December 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that standard were provided. 2. Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters (unchanged from 2016), in decreasing order of audit Overview Materiality: Group financial statements as a whole £0.45 million (2016: £0.45 million) 4.8% (2016: 5.8%) of Group profit before tax Coverage 96% (2016: 88%) of Group profit before tax Risks of material misstatement vs 2016 Recurring risks Valuation of pension obligation Recoverability of trade receivables significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. Valuation of pension obligation Group (£92.8 million; 2016: £92.3 million) Refer to page 39 (Audit Committee Report), page 54 (accounting policy) and page 74 to 77 (financial disclosures). Parent Company (£37.1 million; 2016: £36.9 million) Refer to page 39 (Audit Committee Report), page 83 (accounting policy) and page 87 to 90 (financial disclosures). • The risk – Subjective valuation Small changes in the assumptions and estimates used to value the Group’s and the Company’s pension obligation (before deducting scheme assets) would have a significant effect on the Group’s and the Company’s net pension deficit. • Our response Our procedures included, benchmarking assumptions: challenging, with the support of our own actuarial specialists, the key assumptions applied, being the discount rate, inflation rate and mortality/life expectancy against externally derived data; and assessing transparency: Considering the adequacy of the Group’s and the Company’s disclosures in respect of the sensitivity of the deficit to these assumptions. • Our results We found the valuation of the pension obligation to be acceptable. Strategic reviewGovernanceFinancial statementsShareholder information 44 Independent auditor’s report to the members of Macfarlane Group PLC (continued) Recoverability of trade receivables (Gross £46.8 million; 2016: £42.5 million, provision £0.4 million; 2016: £0.3 million) Refer to pages 39 to 40 (Audit Committee Report), page 55 (accounting policy) and page 64 (financial disclosures). • The risk – Subjective estimate There are significant trade receivables with customers, comprised of a high volume of individual balances, of which a number are individually material to the Group. At year end, £14.67 million are past due, representing 31.3% of the balance (2016: 27.9%). These factors result in a risk over the recoverability of the Group’s trade receivables. • Our response Our procedures included, Control design and observation: Evaluating 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. Tests of effectiveness were performed by reperforming a sample selected on the basis of the frequency of control operation and were designed to verify that appropriate procedures were followed in each instance. • Tests of details: Our audit testing concentrated on those receivables perceived to be at a higher risk of non-recoverability based on the value and age of the receivable, or other factors such as the financial position of the customers. For a sample of these receivables we obtained a detailed understanding of the payment status of the receivable balance and the customer’s likelihood of payment. We assessed the methodology used to calculate the provision recorded against trade receivables, challenged the appropriateness of these provisions, and analysed the level of cash receipts received post year end; and • Assessing transparency: Assessing the adequacy of the Group’s disclosures about the nature of the estimation involved in arriving at the provision. 99%2016: 96% • Our results 96 We found the provision for trade 99 receivables to be acceptable. 3. Our application of materiality and an overview of the scope of our audit Materiality for the Group financial statements as a whole was set at £450,000 (2016: £450,000), determined with reference to a benchmark of Group profit before tax of £9.3 million, of which it represents 4.8% (2016: 5.8%). Materiality for the parent company financial statements as a whole was set at £300,000 (2016: £300,000), determined with reference to a benchmark of Company total assets, of which it represents 0.4% (2016: 0.5%). We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £25,000, in addition to other identified misstatements that warranted reporting on qualitative grounds. 96%2016: 88% Of the Group’s 8 (2016: 8) reporting components, we subjected 6 (2016: 6) to full 88 scope audits for Group purposes. 96 98%2016: 98% 98 98 Group revenue Group profit before tax Profit before tax £9.3m (2016: £7.8m) Group materiality £0.45m (2016: £0.45m) 99%2016: 96% 99%2016: 96% 96 96 99 99 96%2016: 88% 96%2016: 88% 88 88 96 96 98%2016: 98% 98%2016: 98% 98 98 98 98 Group total assets 99%2016: 96% 96 99 96%2016: 88% 88 96 98%2016: 98% 98 98 Full scope for Group audit purposes 2017 Full scope for Group audit purposes 2016 Residual components Profit before tax Group materiality £0.45m Whole financial statements materiality (2016: £0.45m) £0.4m Range of materiality at 6 components (0.04m to £0.4m) (2016: £0.04m to £0.4m) £25,000 Misstatements reported to the audit committee (2016: £25,000) Macfarlane Group PLC Annual Report and Accounts 2017 45 The components within the scope of our work accounted for the percentages illustrated opposite. For the residual components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these. The Group team performed all of the audit work in support of our opinion, including the audit of the parent company. 4. We have nothing to report on going concern We are required to report to you if: • we have anything material to add or draw attention to in relation to the Directors’ statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or • if the related statement under the Listing Rules set out on page 34 is materially inconsistent with our audit knowledge. We have nothing to report in these respects. 5. We have nothing to report on the other information in the Annual Report The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified material misstatements in the other information. Strategic report and Directors’ report Based solely on our work on the other information: • we have not identified material misstatements in the strategic report and the Directors’ report; • in our opinion the information given in those reports for the financial year is consistent with the financial statements; and • in our opinion those reports have been prepared in accordance with the Companies Act 2006. Directors’ remuneration report In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to: • the Directors’ confirmation within the viability statement on page 16 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; • the Principal risks and uncertainties disclosures describing these risks and explaining how they are being managed and mitigated; and • the Directors’ explanation in the viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. • Under the Listing Rules we are required to review the viability statement. We have nothing to report in this respect. Corporate governance disclosures We are required to report to you if: • we have identified material inconsistencies between the knowledge we acquired during our financial statements 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 position and performance, business model and strategy; or • the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specified by the Listing Rules for our review. We have nothing to report in these respects. 6. We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in Strategic reviewGovernanceFinancial statementsShareholder information 46 Independent auditor’s report to the members of Macfarlane Group PLC (continued) 8. The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Hugh Harvie (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 319 St Vincent Street Glasgow G2 5AS 22 February 2018 A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/ auditorsresponsibilities Irregularities – ability to detect Our audit aimed to detect non-compliance with relevant laws and regulations (irregularities) that could have a material effect on the financial statements. In planning and performing our audit we considered the impact of laws and regulations in core areas such as financial reporting, and company and taxation legislation. We considered the extent of compliance with those laws and regulations that directly affect the financial statements, being applicable financial reporting standards, company law and taxation legislation as part of our procedures on the related financial statement items. For the remaining laws and regulations, we made enquiries of Directors (as required by auditing standards). We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. 7. Respective responsibilities Directors’ responsibilities As explained more fully in their statement set out on page 42, the Directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Macfarlane Group PLC Annual Report and Accounts 2017 Consolidated income statement For the year ended 31 December 2017 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 47 Note 2017 £000 2016 £000 1 195,991 (135,687) 179,772 (124,059) 60,304 (8,208) (42,007) 1, 2 10,089 55,713 (7,622) (39,379) 8,712 4 5 (828) (901) 9,261 (1,837) 7,811 (1,761) 6, 19 7,424 6,050 8 5.22p 4.67p 5.22p 4.64p The accompanying notes are an integral part of this consolidated income statement. Consolidated statement of comprehensive income For the year ended 31 December 2017 Items that may be 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 The accompanying notes are an integral part of this statement of comprehensive income. Note 2017 £000 2016 £000 19 23 17 17 45 195 (223) (5,552) 38 – (140) 7,424 1,000 (146) (4,503) 6,050 7,284 1,547 Strategic reviewGovernanceFinancial statementsShareholder information 48 Consolidated statement of changes in equity For the year ended 31 December 2017 Share capital £000 Share premium £000 Revaluation reserve £000 Translation reserve £000 Retained earnings £000 Total £000 Note At 1 January 2016 31,153 1,018 70 59 1,172 33,472 Comprehensive income Profit for the year Foreign currency translation differences – foreign operations Remeasurement of pension scheme liability Tax on remeasurement of pension scheme liability Long-term corporation tax rate change Total comprehensive income 19 23 17 17 – – – – – – – – – – – – Transactions with shareholders Dividends Share-based payments Issue of share capital Total transactions with shareholders 7 24 18,19 – – 2,931 2,931 – – 3,623 3,623 – – – – – – – – – – – 6,050 6,050 195 – – – 195 – (5,552) 195 (5,552) 1,000 (146) 1,352 1,000 (146) 1,547 – – – – (2,358) 108 – (2,250) (2,358) 108 6,554 4,304 At 31 December 2016 34,084 4,641 70 254 274 39,323 Comprehensive income Profit for the year Foreign currency translation differences – foreign operations Remeasurement of pension scheme liability Tax on remeasurement of pension scheme liability Total comprehensive income 19 23 17 – – – – – – – – – – Transactions with shareholders Dividends Share-based payments Issue of share capital Total transactions with shareholders 7 24 18,19 – – 5,303 5,303 – – 8,334 8,334 – – – – – – – – – – 45 – – 45 – – – – 7,424 7,424 – (223) 45 (223) 38 38 7,239 7,284 (2,854) (180) – (2,854) (180) 13,637 (3,034) 10,603 At 31 December 2017 39,387 12,975 70 299 4,479 57,210 The accompanying notes are an integral part of this consolidated statement of changes in equity. Macfarlane Group PLC Annual Report and Accounts 2017 Consolidated balance sheet At 31 December 2017 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 payable Finance lease liabilities Bank borrowings Total current liabilities Net current 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 49 Note 2017 £000 2016 £000 9 10 13 17 12 13 14 57,234 8,630 296 2,407 68,567 15,465 52,578 2,013 70,056 44,002 7,770 425 2,878 55,075 12,986 48,572 1,930 63,488 1 138,623 118,563 15 16 14 23 17 15 16 1 1 18 19 19 19 19 49,100 741 245 16,346 66,432 43,202 1,020 395 17,206 61,823 3,624 1,665 11,823 3,048 13 97 14,537 1,697 781 402 14,981 17,417 81,413 79,240 57,210 39,323 39,387 12,975 70 299 4,479 57,210 34,084 4,641 70 254 274 39,323 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 22 February 2018 and signed on its behalf by Peter D. Atkinson Chief Executive John Love Finance Director Strategic reviewGovernanceFinancial statementsShareholder information 50 Consolidated cash flow statement For the year ended 31 December 2017 Net cash inflow from operating activities Investing activities Acquisitions 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) (Repayment)/drawdown of bank borrowing facility Repayment of finance lease liabilities Net cash 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 Note 20 21 7 20 2017 £000 2016 £000 6,482 3,294 (8,337) 210 (1,740) (9,867) (2,854) 7,637 (860) (455) (8,718) 57 (1,144) (9,805) (2,358) 5,554 4,167 (329) 3,468 7,034 83 1,930 2,013 523 1,407 1,930 There is no material impact of foreign exchange rate differences on the cash and cash equivalents balance at the end of the current or preceding financial year. The accompanying notes are an integral part of this consolidated cash flow statement. Macfarlane Group PLC Annual Report and Accounts 2017 51 Accounting policies For the year ended 31 December 2017 Summary of accounting policies Basis of preparation Macfarlane Group PLC is a public company listed on the London Stock Exchange, incorporated and domiciled in the United Kingdom. Judgements, assumptions and estimation uncertainties In preparing these financial statements, the Directors are required to make judgements, estimates and assumptions, all of which affect the application of the Group’s accounting policies and therefore impact the reported 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, which are reviewed on an ongoing basis, with the impact of any subsequent revisions considered necessary being recognised on a prospective basis. In preparing the consolidated financial statements, the judgements, assumptions and estimation uncertainties made in applying accounting policies with the most significant effect on the amounts recognised in these financial statements and therefore having the most significant risk of resulting in a material change is included in the following notes: Subject Retirement benefit obligations Trade and other receivables 13 Note Area of assumptions and estimation uncertainties 23 The valuation of the pension deficit is affected by small movements in key actuarial assumptions The provision for doubtful receivables is based on judgemental estimates over the recoverable amounts The Directors believe that the judgements, estimates, and assumptions applied in the preparation of these consolidated financial statements are appropriate. (a) Basis of accounting The 2017 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. These consolidated financial statements are presented in Sterling, which is the Company’s functional currency. All amounts have been rounded to the nearest thousand, unless otherwise indicated. The financial statements have been prepared on the historical cost basis. The revaluation reserve relates to a period before transition to IFRS. (b) 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 Report on pages 2 to 23. 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, despite any economic uncertainty. The Group has a committed borrowing facility of £25 million with Lloyds Banking Group PLC, in place until June 2019, with an additional option to increase it further to £30 million. The facility bears interest at normal commercial rates and carries 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 a 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 facility 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. Strategic reviewGovernanceFinancial statementsShareholder information 52 Accounting policies (continued) For the year ended 31 December 2017 The following accounting policies have been applied consistently for items which are considered to be material in relation to the financial statements. (c) New accounting standards and interpretations The Group is currently assessing the potential impact of new and revised standards and interpretations issued by the IASB that will be effective from 1 January 2018 and beyond with earlier transition dates. None of these have been adopted early. A summary of the Group’s views with respect to application of three of the new standards is set out below. IFRS 15 ‘Revenue from Contracts with Customers’ will be effective in the 2018 financial statements and will be applied prospectively. Revenues are currently recognised in the income statement at the point at which the significant risks and rewards of ownership of the goods are transferred. IFRS 15 requires the Group to apportion revenues from customer contracts to separate performance obligations and recognise revenues as each performance obligation is satisfied. The Group has reviewed its arrangements with customers and concluded that for substantially all of its customer contracts and trading arrangements, the performance obligation is the delivery of goods. It is therefore appropriate to recognise revenue at the point of transfer of goods to the customer. In the majority of cases, this will be on delivery of the goods and is consistent with our current accounting policies. Accordingly based on this assessment, the application of IFRS 15 is unlikely to have a material impact on the timing of revenue recognition and consequently will have no material impact on the Group’s operating profit or balance sheet. IFRS 9 ‘Financial Instruments’ will be effective for the 2018 financial statements, and will be applied prospectively. The Group has reviewed the differences between IFRS 9 and the current accounting policies, particularly for the calculation of impairment losses for doubtful trade receivables. Based on this assessment, the application of IFRS 9 is unlikely to have a material impact on the Group’s operating profit or balance sheet. IFRS 16 ‘Leases’ will be effective in the 2019 financial statements, and is likely to be applied prospectively. To prepare for the transition, data has been collected on all the Group’s leases which are primarily for operating properties and vehicles. Based on the Group’s assessment, which is ongoing, the application of IFRS 16 will have a material impact on the consolidated financial statements. IFRS 16 requires that for all material leases with terms over 12 months, the Group’s leased assets will be recorded within land and buildings and within plant and equipment as ‘right of use’ assets with a corresponding lease liability based on the discounted value of the future cash payments required under each lease. Existing operating lease expenses, currently charged in arriving at operating profit, will be replaced with a depreciation charge, which will be lower than the current operating lease expense and a separate financing cost, which will be recorded in net finance expense. Adoption of this standard is likely to result in an increase in gross assets and gross liabilities on the balance sheet and reclassifications of expenditure between operating costs and finance costs in the income statement. There will be no net cash flow impact arising from the new accounting standard and the Group does not currently intend to alter its approach as to whether assets should be leased or acquired outright going forward. The Group does not anticipate that any other new or revised standards and interpretations issued by the IASB that will be effective in the 2018 financial statements and beyond will have a material impact on its reported results or its balance sheet. (d) 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. The Group does not have any associates or other joint arrangements as defined by IFRS 10. Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are allocated to the non-controlling interests even if doing so causes the non-controlling interests to have a deficit balance. 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. 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. Macfarlane Group PLC Annual Report and Accounts 2017 53 (d) Basis of consolidation (continued) 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. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. (e) Goodwill and other intangible assets Goodwill Goodwill arising on 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 business or 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 Other intangible assets comprise separately identifiable intangible assets recognised on the acquisitions of businesses or 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. Impairment The carrying values of the Group’s assets are reviewed annually to determine if there is any indication of impairment. If any such indication exists, the assets’ recoverable values are calculated as the present value of the estimated future cash flows, discounted at appropriate pre-tax discount rates. Impairment losses are recognised when the carrying value of an asset or CGU exceeds recoverable value. Impairment losses are recognised in the consolidated income statement. (f) Revenue recognition The Group is engaged in the delivery of packaging materials, packing machinery, labels and labels machinery to customers. Revenue is recognised when the Group has transferred the significant risks and rewards of ownership of the goods 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. Revenue is not recognised if there is significant uncertainty regarding the recovery of the revenue consideration. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods provided to third parties in the normal course of business, net of discounts, VAT and other sales related taxes. (g) 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 consolidated 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. (h) 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 exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the consolidated income statement. Non-monetary assets and liabilities, measured at historical cost in a foreign currency, are translated using the exchange rates at the date of the transaction. Non-monetary assets and liabilities, stated at fair value in a foreign currency, are retranslated to the functional currency at the exchange rates ruling at the dates the fair value was determined. 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 the exchange rates ruling at the balance sheet date. Revenues and expenses of foreign operations are translated at an average rate for the year where this rate approximates to the exchange rates ruling at the dates of the transactions. Exchange differences arising from the translation of foreign operations are reported as an item of other comprehensive income and accumulated in the translation reserve. Strategic reviewGovernanceFinancial statementsShareholder information 54 Accounting policies (continued) For the year ended 31 December 2017 (i) Retirement benefits Defined contribution schemes A defined contribution scheme is a post-employment benefit scheme under which the Company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension schemes are recognised as an expense in the consolidated income statement in the periods during which services are rendered by employees. Defined benefit schemes A defined benefit scheme is a post-employment benefit scheme other than a defined contribution scheme. The Group’s net retirement benefit obligation in respect of its defined benefit pension scheme is calculated by estimating the amount of future benefits that employees have earned in return for their service in the current and prior periods. These benefits are then discounted to determine the present value, and the fair value of any scheme investments, at bid price, are deducted. The Group determines the net interest on the net retirement benefit obligation for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the year. The discount rate is the yield at the reporting date on bonds that have a credit rating of at least AA that have maturity dates approximating to the average duration of the Group’s retirement benefit obligations and that are denominated in the currency in which the benefits are expected to be paid. Remeasurements arising from defined benefit plans comprise actuarial gains and losses, returns on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). Remeasurements are recognised in the statement of other comprehensive income and all other expenses related to defined benefit schemes charged in staff costs in the consolidated income statement. When the benefits of a scheme are changed, or when a scheme is curtailed, the portion of the changed benefit related to past service by employees, or the gain or loss on curtailment, is recognised immediately in the consolidated income statement when the scheme amendment or curtailment occurs. The calculation of the retirement benefit obligations is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the present value of benefits available in the form of any future refunds from the plan or reductions in future contributions and takes into account the adverse effect of the present value of any minimum funding requirements. The Group’s defined benefit pension scheme covers the Group companies at December 2002. The net defined benefit cost of the scheme is apportioned to these participating entities based on the employment history of scheme members, who are then allocated to the relevant subsidiary. Any remaining members are allocated to the parent company. (j) Taxation The tax expense represents the sum of the current tax payable and deferred tax. Current tax is payable 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 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 and any adjustments in respect of prior years. Deferred tax is accounted for using the balance sheet liability method and represents 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. 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 assets and liabilities are not discounted. 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 recognised for all taxable temporary differences. 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. (k) Property, plant and equipment Property, plant and equipment are stated at cost, with assets revalued before the date of transition to IFRS recorded at deemed cost. No depreciation is provided on land. Depreciation is recognised so as to write off the cost of the property, plant and equipment, 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 to ensure they remain appropriate once in each calendar year. Macfarlane Group PLC Annual Report and Accounts 2017 55 (l) Inventories Inventories are consistently stated at the lower of cost and net realisable value. Cost represents purchase price. 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. Inventories are stated less provisions required for slow-moving and obsolete items, where appropriate. (m) 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, comprise investments in debt and equity securities and are initially recognised at fair value with any subsequent gains or losses recognised in the consolidated income statement. 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 IAS 39. Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. They 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. (n) 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. 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. (o) Share-based payments The grant date fair value of share-based payments awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the awards. The fair value of the awards granted is measured using an option valuation model, taking into account the terms and conditions upon which the awards were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Details of the determination of the fair value of equity-settled share-based transactions are set out in note 24. Strategic reviewGovernanceFinancial statementsShareholder information 56 Notes to the financial statements For the year ended 31 December 2017 1. Business and geographical segments (a) Business segments 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 comprises over 80% of the revenue and income of Group operations. The Group’s Manufacturing Operations segment comprises 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. 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 2017 £000 171,771 9,621 7,848 6,751 195,991 2016 £000 155,900 9,298 8,079 6,495 179,772 (b) Segmental information Packaging Distribution £000 Manufacturing Operations £000 2017 Total £000 Packaging Distribution £000 Manufacturing Operations £000 2016 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 171,771 – 171,771 (121,323) 50,448 (41,012) 9,436 28,191 (3,971) 24,220 (14,364) 9,856 (9,203) 199,962 (3,971) 195,991 (135,687) 60,304 (50,215) 653 10,089 156,187 (287) 155,900 (110,641) 45,259 (37,423) 7,836 28,031 (4,159) 23,872 (13,418) 10,454 (9,578) 876 (828) 9,261 (1,837) 7,424 Profit for the year from continuing operations Inter-segment revenues are charged at prevailing market prices. Capital additions Depreciation/amortisation Segment assets Segment liabilities Net assets 16,548 2,501 124,069 (74,324) 49,745 Packaging Distribution £000 Manufacturing Operations £000 2017 Total £000 Packaging Distribution £000 Manufacturing Operations £000 716 470 17,264 2,971 9,714 1,873 368 511 14,554 (7,089) 138,623 (81,413) 105,034 (72,503) 7,465 57,210 32,531 13,529 (6,737) 6,792 118,563 (79,240) 39,323 184,218 (4,446) 179,772 (124,059) 55,713 (47,001) 8,712 (901) 7,811 (1,761) 6,050 2016 Total £000 10,082 2,384 Macfarlane Group PLC Annual Report and Accounts 2017 57 (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 Packaging Design and Manufacture business operates primarily in the UK and the Labels businesses operate in the UK, Europe and through distributors in the USA. Revenue Total revenue Result Operating result Non-current assets Capital additions Continuing operations Europe £000 UK £000 2017 Total £000 Continuing operations Europe £000 UK £000 2016 Total £000 191,895 4,096 195,991 176,112 3,660 179,772 9,819 66,828 17,178 270 1,739 86 10,089 68,567 17,264 8,618 53,389 10,058 94 1,686 24 8,712 55,075 10,082 (d) Information about major customers No single customer accounts for more than 5% of the Group’s external revenues and customer dependencies are regularly monitored. 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) Acquisition related fees Staff costs (see note 3) A detailed analysis of auditor’s remuneration is provided below: Audit services Fees payable to Company’s auditor for the audit of these financial statements Fees payable to Company’s auditor for the audit of the financial statements of the Company’s subsidiaries Total audit fees Non-audit services Audit related assurance services for review of half-year statement Other assurance services for the audit of Macfarlane Group PLC pension scheme All other services Total non-audit fees Total fees paid to auditor 2017 £000 1,391 1,580 105 29,070 2016 £000 1,267 1,117 97 27,770 32 100 132 10 8 – 18 150 32 90 122 10 9 87 106 228 The Audit Committee reviews and approves the level and type of non-audit work which the auditor performs, including the fees paid for such work, to ensure that the auditor’s objectivity and independence is not compromised. In January 2016, our auditors KPMG LLP 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 £Nil in 2017 (2016: £85,000), which are classified within ‘All other services’ above. Strategic reviewGovernanceFinancial statementsShareholder information 58 Notes to the financial statements (continued) For the year ended 31 December 2017 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 Share-based payments (see note 24) 4. Net finance costs Interest on bank borrowings Interest on obligations under finance leases Net interest expense on retirement benefit obligation (see note 23) Net finance costs 5. Tax Current tax United Kingdom corporation tax Foreign tax Prior period adjustments Current tax charge Deferred tax Current period Prior period adjustments Deferred tax charge (see note 17) Total tax charge 2017 No. 167 448 206 821 2017 £000 2016 No. 170 416 209 795 2016 £000 25,244 2,569 1,437 (180) 29,070 24,191 2,296 1,175 108 27,770 2017 £000 (462) (18) (348) (828) 2016 £000 (480) (48) (373) (901) 2017 £000 2016 £000 (1,551) (62) 49 (1,564) (273) – (273) (1,409) (79) 83 (1,405) (196) (160) (356) (1,837) (1,761) The standard rate of tax based on the UK average rate of corporation tax, is 19.25% (2016: 20.00%). Taxation for other jurisdictions is calculated at the rates prevailing in these jurisdictions. The actual tax charge varies from of the standard rate of tax on the results in the consolidated income statement for the reasons set out on the following page. Macfarlane Group PLC Annual Report and Accounts 2017 59 2017 £000 2016 £000 9,261 7,811 (1,783) (1,562) (95) (8) 49 (122) – (77) (1,837) (1,761) 19.8% 22.5% Profit before tax Tax on profit at 19.25% (2016: 20.00%) 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 Effective tax rate for the year A reduction in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) and to 18% (effective 1 April 2020) were substantively enacted on 26 October 2016, and an additional reduction to 17% (effective 1 April 2020) was substantively enacted on 6 September 2017. This will reduce the Company’s future current tax charge accordingly. The deferred tax asset at 31 December 2017 has been calculated based on these rates. 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 34 to these financial statements. 7. Dividends Amounts recognised as distributions to equity holders in the year: Final dividend for 2016 of 1.40p per share (2015: 1.29p per share) Interim dividend for 2017 of 0.60p per share (2016: 0.55p per share) 2017 £000 2016 £000 1,909 945 2,854 1,608 750 2,358 In addition to the amounts shown above, a proposed dividend of 1.50p per share will be paid on 7 June 2018 to those shareholders on the register at 18 May 2018. This is subject to approval by shareholders at the Annual General Meeting on 15 May 2018 and therefore 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 shares in issue for the purposes of calculating basic earnings per share Effect of Long-Term Incentive Plan awards in issue Weighted average number of shares in issue for the purposes of calculating diluted earnings per share Basic earnings per share Diluted earnings per share 2017 £000 2016 £000 7,424 6,050 2017 Number of shares ‘000 2016 Number of shares ‘000 142,228 – 129,496 859 142,228 130,355 5.22p 5.22p 4.67p 4.64p Strategic reviewGovernanceFinancial statementsShareholder information 60 Notes to the financial statements (continued) For the year ended 31 December 2017 9. Goodwill and other intangible assets Goodwill Other intangible assets Goodwill and other intangible assets Goodwill Fair value on acquisition At 1 January Additions (see note 21) At 31 December Amortisation At 1 January and 31 December Carrying amount At 31 December 2017 At 31 December 2016 Packaging Distribution £000 Manufacturing Operations £000 39,305 16,570 55,875 1,359 – 1,359 2017 Total £000 40,664 16,570 57,234 2016 Total £000 35,037 8,965 44,002 Packaging Distribution £000 Manufacturing Operations £000 2017 Total £000 2016 Total £000 33,678 5,627 39,305 1,359 – 1,359 35,037 5,627 40,664 30,651 4,386 35,037 – – – – 39,305 1,359 40,664 33,678 1,359 35,037 On 21 September 2017 the Group’s subsidiary, Macfarlane Group UK Limited, acquired the packaging business of Greenwoods Stock Boxes Limited and acquired the whole issued share capital of Nottingham Recycling Limited, giving rise to goodwill on acquisition, which was added to the Packaging Distribution CGU. During 2016 Macfarlane Group UK Limited, acquired the business of Colton Packaging Teesside and the packaging business of Edward McNeil Limited. On 29 July 2016 the parent company, Macfarlane Group PLC acquired Nelsons for Cartons & Packaging Limited. For all three acquisitions goodwill arising on acquisition was added to the Packaging Distribution CGU. At 31 December 2017, Macfarlane 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 8.0% (2016: 8.0%) 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. The Group believes the risk profiles across the markets in which it operates are not significantly different and has therefore deemed it appropriate to apply the same discount rate to both CGUs. The pre-tax discount rate is 9.9% (2016: 9.9%) 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 2018 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 that exceeds its carrying value. Therefore at 31 December 2017 no impairment charge is required against the carrying value of goodwill. Macfarlane Group PLC Annual Report and Accounts 2017 61 Brand values £000 Customer relationships £000 2017 Total £000 2016 Total £000 596 131 727 288 109 397 330 308 12,447 9,054 21,501 3,790 1,471 5,261 13,043 9,185 22,228 4,078 1,580 5,658 16,240 16,570 8,491 4,552 13,043 2,961 1,117 4,078 8,657 8,965 Other intangible assets Fair value on acquisition At 1 January Additions (see note 21) At 31 December Amortisation At 1 January Charge for year At 31 December Carrying amount At 31 December 2017 At 31 December 2016 Other intangible assets comprise separately identifiable intangible assets recognised on the acquisitions of businesses and subsidiary companies in Packaging Distribution between 2008 and 2017. 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 over ten years respectively. On 21 September 2017 the Group’s subsidiary, Macfarlane Group UK Limited, acquired the packaging business of Greenwoods Stock Boxes Limited and acquired the whole issued share capital of Nottingham Recycling Limited. For the combined business, values for Brand values and Customer relationships within Packaging Distribution were recognised. At 31 December 2017, Macfarlane Group retained Brand values in respect of: • The packaging business of Greenwoods Stock Boxes Limited and Nottingham Recycling Limited, acquired in 2017; • Nelsons for Cartons & Packaging Limited, acquired in 2016; • The packaging business of Edward McNeil Limited, acquired in 2016; • The business of Colton Packaging Teesside, acquired in 2016; • One Packaging Limited, acquired in 2015; and • Network Packaging Limited, acquired in 2014. At 31 December 2017, Macfarlane Group retained values of Customer relationships in respect of: • Allpoint Packaging Limited, acquired in 2008; • Lane Packaging Limited, acquired in 2014; • Network Packaging Limited, also acquired in 2014; • One Packaging Limited, acquired in 2015; • The business of Colton Packaging Teesside, acquired in 2016; • The packaging business of Edward McNeil Limited, acquired in 2016; • Nelsons for Cartons & Packaging Limited, acquired in 2016; and • The packaging business of Greenwoods Stock Boxes Limited and Nottingham Recycling Limited, acquired in 2017. Strategic reviewGovernanceFinancial statementsShareholder information 62 Notes to the financial statements (continued) For the year ended 31 December 2017 10. Property, plant and equipment Cost At 1 January 2016 Acquisitions Additions Exchange movements Disposals At 1 January 2017 Acquisitions Additions Exchange movements Disposals At 31 December 2017 Accumulated depreciation At 1 January 2016 Acquisitions Charge for year Exchange movements Disposals At 1 January 2017 Acquisitions Charge for year Exchange movements Disposals At 31 December 2017 Carrying amount At 31 December 2017 At 31 December 2016 At 31 December 2015 Land and buildings £000 Plant and equipment £000 5,909 31 350 – (12) 6,278 – 830 – (1) 7,107 2,918 21 221 – (6) 3,154 – 299 – – 3,453 3,654 3,124 2,991 23,546 375 794 283 (446) 24,552 2,215 910 85 (1,218) 26,544 18,846 190 1,046 237 (413) 19,906 1,503 1,092 71 (1,004) 21,568 4,976 4,646 4,700 Total £000 29,455 406 1,144 283 (458) 30,830 2,215 1,740 85 (1,219) 33,651 21,764 211 1,267 237 (419) 23,060 1,503 1,391 71 (1,004) 25,021 8,630 7,770 7,691 The main components of property, plant and equipment are: (i) (ii) 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. 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 our IT hardware 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 £8,630,000 (2016: £7,770,000) includes £1,061,000 (2016: £1,342,000) of assets held under finance leases. Depreciation charged in respect of these assets is £217,000 (2016: £228,000). Land and buildings at net book value comprise: Freeholds Long leaseholds Short leaseholds 2017 £000 1,722 1,121 811 3,654 2016 £000 1,637 1,243 244 3,124 Macfarlane Group PLC Annual Report and Accounts 2017 63 11. Subsidiary companies A list of principal operating subsidiaries, including names, countries of incorporation and registered offices, is given on page 91. 12. Inventories Raw materials and consumables Work in progress Finished goods and goods for resale 2017 £000 496 205 14,764 15,465 2016 £000 434 138 12,414 12,986 Inventories represent raw materials, work in progress and finished goods held at the year-end in each of the Group’s businesses to respond to customers’ requirements for product. 2017 £000 2016 £000 Cost of inventories recognised as an expense in the consolidated income statement 132,248 120,685 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 Additional provisions recognised in the consolidated income statement Inventory written off during the year At 31 December 2017 £000 693 22 530 (554) 691 2016 £000 709 – 606 (622) 693 Strategic reviewGovernanceFinancial statementsShareholder information 64 Notes to the financial statements (continued) For the year ended 31 December 2017 13. Trade and other receivables Current Trade receivables Allowance for doubtful receivables Other receivables Prepayments and accrued income Non-current Other receivables 2017 £000 2016 £000 46,810 (361) 46,449 3,907 2,222 52,578 42,492 (326) 42,166 4,210 2,196 48,572 296 425 Trade receivables represent amounts owed by customers in respect of goods or services provided in 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 remains at 60 days (2016: 60 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 2017 or 31 December 2016. Included in the Group’s trade receivables balance are debtors with a carrying amount of £14,667,000, (2016: £11,835,000) 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 19 days (2016: 17 days). Ageing of past due but not impaired receivables 30-60 days 60-90 days Over 90 days 2017 £000 7,619 5,690 1,358 2016 £000 6,577 4,263 995 14,667 11,835 Amounts presented in the balance sheet are net of allowances for doubtful trade receivables of £361,000 (2016: £326,000), 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 consolidated income statement Amounts written off as uncollectible At 31 December 2017 £000 326 28 231 (224) 361 2016 £000 386 – 172 (232) 326 The Directors consider that the carrying amount of the trade and other receivables approximate to their fair value. Macfarlane Group PLC Annual Report and Accounts 2017 65 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. 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 2017. 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 2017. 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 reviewed on a regular basis. The Group bank borrowing facility with Lloyds Banking Group PLC is £25 million, available until June 2019, with an option to increase it further to £30 million. The facility bears interest at normal commercial rates and carries 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 2017 is set out in note 16 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 shown net of allowances for doubtful receivables, estimated by the Group’s management with details set out in note 13. 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 2017. 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 £97,000 (2016: £82,000). 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 2017 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 2017 £000 1,854 496 2,350 Assets 2016 £000 1,505 647 2,152 The sterling value of the Group’s foreign currency denominated profit/(loss) before tax is as follows: Euros Swedish Krone Liabilities 2017 £000 Liabilities 2016 £000 1,029 113 1,142 2017 £000 (63) 284 221 651 221 872 2016 £000 (230) 340 110 Strategic reviewGovernanceFinancial statementsShareholder information 66 Notes to the financial statements (continued) For the year ended 31 December 2017 14. Financial instruments (continued) 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 Currency – Sterling Bank borrowings and loans Net debt Result 2017 £000 (3) 14 11 Result 2016 £000 Other equity 2017 £000 Other equity 2016 £000 (12) 17 5 41 19 60 2017 £000 1,654 347 12 2,013 43 21 64 2016 £000 1,646 259 25 1,930 16,346 16,346 17,206 17,206 14,333 15,276 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. The Group bank borrowing arrangement with Lloyds Banking Group PLC comprises a three-year committed borrowing facility of up to £25 million with an option to increase it further to £30 million. The facility is available until June 2019 and bears interest at normal commercial rates and carries standard financial covenants in relation to interest cover and levels of headroom over the trade receivables 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 2.4% per annum (2016: 2.9%). 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 2017 all materially equate to book values. Borrowing facilities The Group has various committed borrowing facilities available at 31 December 2017, 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 2017 £000 16,346 9,104 25,450 16,346 245 16,591 97 16,688 2016 £000 17,206 8,994 26,200 17,206 395 17,601 402 18,003 Macfarlane Group PLC Annual Report and Accounts 2017 67 The principal Group borrowing facilities of £25.0 million at 31 December 2017 (2016: £25.0 million) are with Lloyds Banking Group PLC and there are two (2016: three) smaller facilities totalling £0.45 million (2016: £1.20 million), inherited as part of the acquisitions between 2014 and 2016. The Group is currently in compliance with all conditions in relation to each of these borrowing facilities. Gearing ratio Total borrowings (as defined above) Equity Net debt to equity ratio 2017 £000 2016 £000 16,688 18,003 57,210 39,323 29% 46% 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). 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 2017 £000 Fair value 2017 £000 Level 1 2017 £000 Level 2 2017 £000 Level 3 2017 £000 Carrying amount 2016 £000 Fair value 2016 £000 Level 1 2016 £000 Level 2 2016 £000 Level 3 2016 £000 Contingent consideration 4,000 4,000 – – 4,000 1,700 1,700 – – 1,700 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 outflows under possible earn out scenarios and is not discounted Trading performance of acquired businesses or subsidiary companies The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the effect of netting agreements. Non-derivative financial instruments Secured bank borrowings Finance lease liabilities Trade creditors Non-derivative financial instruments Secured bank borrowings Finance lease liabilities Trade creditors 2017 Contractual cash flows Total £000 Due < 1 year or less £000 Due 1 to 2 years £000 16,346 342 36,339 53,027 16,346 245 36,339 52,930 – 97 – 97 2016 Contractual cash flows Total £000 Due < 1 year or less £000 Due 1 to 2 years £000 Due 2 to 5 years £000 17,206 797 34,500 52,503 17,206 395 34,500 52,101 – 303 – 303 – 99 – 99 Strategic reviewGovernanceFinancial statementsShareholder information 68 Notes to the financial statements (continued) For the year ended 31 December 2017 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 2017 £000 2016 £000 36,339 3,254 4,000 447 5,060 49,100 – 13 13 34,500 2,678 950 551 4,523 43,202 750 31 781 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. 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) 2017 £000 245 97 – 342 (245) 97 2016 £000 395 303 99 797 (395) 402 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 (2016: 2.50%). 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. Macfarlane Group PLC Annual Report and Accounts 2017 69 Total £000 1,511 (828) (196) (160) 1,000 (146) 1,181 (1,587) (273) 38 (641) Tax losses and accelerated capital allowances £000 Other intangible assets £000 Retirement benefit obligations £000 433 – (26) (160) – – 247 (25) (56) – 166 397 (231) 166 407 (160) 247 (995) (828) 286 – – – (1,537) (1,562) 282 – (2,817) 2,073 – (456) – 1,000 (146) 2,471 – (499) 38 2,010 – 2,010 2,407 (2,817) (2,817) – 2,010 (3,048) (641) – (1,537) (1,537) 2,471 – 2,471 2,878 (1,697) 1,181 17. Deferred tax At 1 January 2016 Acquisition (see note 21) (Charged)/credited in income statement Current period Prior period adjustments Credited/(charged) in other comprehensive income Deferred tax on remeasurement of pension scheme liability Long-term corporation tax rate change At 1 January 2017 Acquisition (see note 21) (Charged)/credited in income statement Credited in other comprehensive income Deferred tax on remeasurement of pension scheme liability At 31 December 2017 2017 Deferred tax assets Due outwith one year Deferred tax liabilities Due outwith one year 2016 Deferred tax assets Due outwith one year Deferred tax liabilities Due outwith one year 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. A reduction in the UK corporation tax rate to 17%, effective from 1 April 2020, was substantively enacted on 6 September 2017. This will reduce the Company’s future current tax charge accordingly. The deferred tax assets and liabilities at 31 December 2017 have been calculated based on these rates. Recovery of the deferred tax assets is anticipated against future trading profits. Strategic reviewGovernanceFinancial statementsShareholder information 70 Notes to the financial statements (continued) For the year ended 31 December 2017 18. Share capital Allotted, issued and fully paid: At 1 January Issued during the year At 31 December Number of 25p shares 2017 £000 2016 £000 136,335,497 21,212,121 157,547,618 34,084 5,303 39,387 31,153 2,931 34,084 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. On 18 September 2017, the Company announced a placing of 12,121,212 ordinary shares of 25p each at a price of 66p per share for a total value of £8,000,000. These shares were admitted to the official List of the London Stock Exchange on 21 September 2017. On 21 September 2017, the Company’s subsidiary Macfarlane Group UK Limited acquired the trade, goodwill and selected assets of the packaging business of Greenwoods Stock Boxes Limited and the whole of the issued share capital of Nottingham Recycling Limited. As part of the initial consideration, the Company issued 9,090,909 ordinary shares of 25p each at a value of 66p per share as non-cash consideration to the Vendors, an effective value of £6,000,000. These shares were also admitted to the official List of the London Stock Exchange on 21 September 2017. 19. Reserves Share premium £000 Revaluation reserve £000 Translation reserve £000 Retained earnings £000 Balance at 1 January 2016 Profit for the year Dividends paid (see note 7) Issue of new shares Expenses of share issue Foreign currency translation differences – foreign operations 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 Balance at 1 January 2017 Profit for the year Dividends paid (see note 7) Issue of new shares Expenses of share issue Foreign currency translation differences – foreign operations Share-based payments Remeasurement of pension scheme liability taken direct to equity Deferred tax taken direct to equity Tax on remeasurement Balance at 31 December 2017 1,018 – – 3,869 (246) – – – – – 4,641 – – 8,697 (363) – – – – 12,975 70 – – – – – – – – – 70 – – – – – – – – 70 59 – – – – 195 – – – – 254 – – – – 45 – – – 299 1,172 6,050 (2,358) – – – 108 (5,552) 1,000 (146) 274 7,424 (2,854) – – – (180) (223) 38 4,479 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 2017 relates wholly to continuing operations. Macfarlane Group PLC Annual Report and Accounts 2017 20. Notes to the cash flow statement Operating profit 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 Pension scheme contributions 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 Decrease/(increase) in bank borrowings Cash flows from payment of finance lease liabilities Movement in net debt in the year (* see below) 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 71 2017 £000 2016 £000 10,089 8,712 1,580 1,391 5 1,117 1,267 (18) 13,065 11,078 (1,370) (1,163) 1,570 (3,285) 8,817 (1,855) (480) 6,482 2017 £000 83 860 455 1,398 (16,073) (14,675) 2,013 (16,346) (14,333) (245) (97) (885) (3,450) 1,280 (2,906) 5,117 (1,295) (528) 3,294 2016 £000 523 (4,167) 329 (3,315) (12,758) (16,073) 1,930 (17,206) (15,276) (395) (402) (14,675) (16,073) * The movement in net debt is inclusive of the net cash outflow in respect of acquisitions set out in note 21. 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. Strategic reviewGovernanceFinancial statementsShareholder information 72 Notes to the financial statements (continued) For the year ended 31 December 2017 21. Acquisitions On 21 September 2017, the Group’s subsidiary, Macfarlane Group UK Limited acquired the packaging business and selected assets of Greenwoods Stock Boxes Limited and 100% of the issued share capital of Nottingham Recycling Limited, for a consideration of approximately £17.2 million. £7.97 million was paid in cash on acquisition, and £6.0 million was settled by the issue of shares. The deferred consideration of £3.25 million, is payable in the final quarter of 2018, subject to certain trading targets being met in the twelve month period ending on 20 September 2018. The contingent consideration is recognised as a liability in creditors and is remeasured to fair value at the balance sheet date on a range of outcomes between £Nil and £3.25 million. In 2016, the Group’s subsidiary, Macfarlane Group UK Limited, acquired the business of Colton Packaging Teesside and the packaging business of Edward McNeil Limited, for a combined consideration of approximately £3.0 million. £2.7 million was paid in cash on acquisition, with deferred consideration of £0.3 million payable in 2017, provided certain targets were achieved. £0.25 million was paid in 2017. In 2016 the parent company, Macfarlane Group PLC acquired 100% of Nelsons for Cartons & Packaging Limited for a consideration of £7.2 million. £4.7 million was paid in cash on acquisition, £1.0 million was settled by the issue of shares, with the deferred consideration of £1.5 million payable in two equal instalments in the final quarter of 2017 and 2018, subject to certain trading targets being met in the two twelve month periods ending on 29 July 2017 and 29 July 2018 respectively. £0.75 million of this was paid in 2017 with the remainder payable in 2018. The impact of the acquisitions on the 2017 results is set out in the Strategic Report on page 6. All of these businesses are accounted for in the Packaging Distribution segment. Goodwill arising on these acquisitions is attributable to the anticipated future profitability of the distribution of Group product ranges in the UK and anticipated operating synergies from future combinations of activities within the Packaging Distribution network. Fair values assigned to net assets acquired and consideration paid and payable are set out below: Net assets acquired Other intangible assets (note 9) Property, plant and equipment Inventories Trade and other receivables Cash and bank balances Trade and other payables Current tax liabilities Finance lease liabilities Deferred tax liabilities Net assets acquired Goodwill arising on acquisition (note 9) Total consideration Contingent consideration on acquisitions Current year Prior years Shares Total cash consideration Net cash outflow arising on acquisition Cash consideration Cash and bank balances acquired Net cash outflow Greenwoods Stock Boxes/ Nottingham Recycling £000 Colton Teesside & Edward McNeil £000 Nelsons for Cartons & Packaging £000 2017 Total £000 2016 Total £000 9,185 712 1,109 2,736 625 (1,179) (12) – (1,587) 11,589 5,627 17,216 (3,250) – (6,000) 7,966 (7,966) 625 (7,341) – – – – – – – – – – – – – 246 – 246 (246) – (246) – – – – – – – – – – – – – 750 – 750 (750) – (750) 9,185 712 1,109 2,736 625 (1,179) (12) – (1,587) 11,589 5,627 17,216 (3,250) 996 (6,000) 8,962 (8,962) 625 (8,337) 4,552 195 1,542 1,728 696 (1,837) (256) (7) (828) 5,785 4,386 10,171 (1,820) 2,063 (1,000) 9,414 (9,414) 696 (8,718) Macfarlane Group PLC Annual Report and Accounts 2017 73 22. 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 2017 £000 5,120 (478) 4,642 Other 2017 £000 3,259 – 3,259 Land and buildings 2016 £000 4,546 (478) 4,068 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 2017 £000 5,108 13,887 5,979 24,974 Other 2017 £000 3,244 7,119 1,103 11,466 Land and buildings 2016 £000 4,613 12,784 5,264 22,661 Other 2016 £000 2,347 – 2,347 Other 2016 £000 2,326 3,867 106 6,299 The majority of the 32 (2016: 29) leases of land and buildings summarised above are subject to rent reviews. 3 (2016: 3) 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 Land and buildings 2017 £000 478 738 1,216 Land and buildings 2016 £000 478 1,216 1,694 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 £1.3 million, (2016: £1.8 million) being the difference between head lease and sub-lease payments from 1 January 2018 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 £452,000 (2016: £Nil). Strategic reviewGovernanceFinancial statementsShareholder information 74 Notes to the financial statements (continued) For the year ended 31 December 2017 23. 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 of the trading subsidiaries, Macfarlane Group UK Limited and Macfarlane Labels Limited are also sponsoring employers of the Scheme. The Scheme is currently in deficit and disclosure of the respective proportions of the Group deficit are included and disclosed in the financial statements of each of the three participating employers. The Scheme is administered by a Board of Trustees composed of employer-nominated representatives and member-nominated Trustees which is legally separate from the Group. The Scheme’s investments 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 administration of benefits. 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. The Scheme was closed to new entrants during 2002. On leaving 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 Price 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 Scheme by offering a Pension Increase Exchange (‘PIE’) option to pensioner members and a PIE option to all deferred and active members after 1 May 2012. The Group will consider continued actions to manage and control the deficit in 2018. Balance sheet disclosures at 31 December 2017 The 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 2017, the provisional results of this valuation showed that the market value of the relevant investments of the Scheme was £82,100,000 and the actuarial value of these investments represented 81% of the value of benefits that had accrued to members. The investments classes held by the Scheme and the deficit of the scheme have been based on the provisional results of the actuarial valuation as at 1 May 2017, updated to the year-end as shown below: Investment class Equities UK equity funds Overseas equity funds Multi-asset diversified funds Bonds Liability-driven investment funds Corporate bond fund Other European loan fund Secured property income fund Cash Fair value of Scheme investments Valuation 2017 £000 Asset allocation Valuation 2016 £000 Asset allocation Valuation 2015 £000 Asset allocation 7,034 10,660 21,533 8.7% 13.2% 26.6% 6,604 10,508 21,509 8.5% 13.5% 27.7% 6,030 10,758 25,476 8.9% 15.9% 37.6% 28,534 – 35.2% – 26,532 – 34.1% – 14,107 11,119 20.8% 16.4% 6,562 6,606 31 8.1% 8.2% – 6,334 – 6,321 8.1% – 8.1% – – 303 – – 0.4% 80,960 100.0% 77,808 100.0% 67,793 100.0% Present value of Scheme liabilities (92,783) Scheme deficit (11,823) (92,345) (14,537) (79,311) (11,518) Macfarlane Group PLC Annual Report and Accounts 2017 75 The Trustees review the Scheme’s investments on a regular basis and consult with the Company regarding any proposed changes to the investment profile. During 2017, the short-term cash holding at 31 December 2016 was invested in a Secured property income fund. The ability to realise the Scheme’s investments at, or close to, fair value was considered when setting the investment strategy. 84% of the Scheme’s investments can be realised at fair value on a daily or weekly basis. The remaining investments have monthly or quarterly liquidity, however, whilst the income from these helps to meet the Scheme’s cash flow needs, they are not expected to be realised at short notice. The present value of the Scheme liabilities is derived from cash flow projections over a long period and is thus inherently uncertain. Assumptions The Scheme’s liabilities at 31 December 2017 were calculated on the following bases as required under IAS19: Discount rate Rate of increase in salaries Rate of increase in pensions in payment 2017 2016 2015 2.50% 0.00% 3% or 5% for fixed increases or 3.20% for LPI. 2.25% post 5 April 2006 2.70% 0.00% 3% or 5% for fixed increases or 3.20% for LPI. 2.25% post 5 April 2006 3.70% 0.00% 3% or 5% for fixed increases or 2.90% for LPI. 2.10% post 5 April 2006 Inflation assumption (RPI) Inflation assumption (CPI) Life expectancy beyond normal retirement age of 65 Male Female 3.30% 2.30% 23.7 25.7 3.30% 2.30% 22.8 25.3 3.10% 2.10% 22.7 25.3 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 Scheme deficit. Assuming all other assumptions are held static then a movement in the following key assumptions would affect the level of the Scheme 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 2017 £000 1,485 (473) 278 2016 £000 1,478 (471) 277 2015 £000 1,142 (404) 214 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 movements in life expectancy tables. All of the sensitivity information assumes that the average duration of the Scheme’s liabilities is seventeen years. Strategic reviewGovernanceFinancial statementsShareholder information 76 Notes to the financial statements (continued) For the year ended 31 December 2017 23. Retirement benefit obligations (continued) 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 £2,900,000 per annum, which along with investment returns from return-seeking assets is expected to make good the actuarial shortfall by April 2024. The estimated deficit reduction contributions in 2018 will be £2,950,000. 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. 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 At 31 December 2017 £000 (14,537) (105) 3,390 (348) (223) (11,823) 2016 £000 (11,518) (95) 3,001 (373) (5,552) (14,537) (105) (348) (453) (95) (373) (468) 3,730 (3,953) 9,610 (15,162) (223) (5,552) 77,808 2,065 3,730 3,390 72 (6,105) 80,960 (92,345) (105) (2,413) (72) (3,953) 6,105 (92,783) 67,793 2,470 9,610 3,001 72 (5,138) 77,808 (79,311) (95) (2,843) (72) (15,162) 5,138 (92,345) The total of £3,953,000, (2016: £15,162,000) 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 £21,871,000 (2016: £21,648,000). Macfarlane Group PLC Annual Report and Accounts 2017 77 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 investments Scheme deficit Actual return on scheme investments Amount Percentage of scheme investments Experience adjustment on scheme liabilities Amount Percentage of scheme liabilities Experience adjustment on scheme investments Amount Percentage of scheme investments 2017 £000 (92,783) 80,960 (11,823) 2016 £000 (92,345) 77,808 (14,537) 2015 £000 (79,311) 67,793 (11,518) 5,795 7.2% 12,080 15.5% (3,953) (4.2%) (15,162) (16.4%) 706 1.0% 1,769 2.2% 2014 £000 (81,863) 67,990 (13,873) 11,672 17.2% (11,921) (14.6%) 3,730 4.6% 9,610 12.4% (1,658) (2.4%) 9,184 13.5% 2013 £000 (70,134) 54,238 (15,896) 3,710 6.8% (292) (0.4%) 1,469 2.7% 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 £1,332,000 (2016: £1,080,000). Contributions amounting to £139,000 (2016: £109,000) were payable to the plans and are included in creditors at the balance sheet date. 24. Share-based payments Equity-settled long-term incentive plans The Macfarlane Group PLC Long Term Incentive Plan. Long Term Incentive Plan Awards Movements during the year: Outstanding at 1 January Granted during the year Outstanding at 31 December Number of shares 2017 Number of shares 2016 1,135,280 – 1,135,280 – 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 2017. Awards are forfeited if the employee leaves the Group before they vest. The Group recognised a credit of £180,000 (2016: expense of £108,000) in 2017 relating to equity-settled long-term incentive plan awards. The fair value at 31 December 2017 was £Nil (2016: £180,000). The awards will lapse on approval of these accounts on 22 February 2018. Strategic reviewGovernanceFinancial statementsShareholder information 78 Notes to the financial statements (continued) For the year ended 31 December 2017 25. Related party transactions The Group has related party relationships with its subsidiaries (see page 91), its Directors who comprise the Group Board; and (i) (ii) (iii) the Macfarlane Group PLC sponsored pension schemes (see note 23). 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 2017 £000 909 125 2016 £000 910 126 1,034 1,036 Further details of Directors’ individual and collective remuneration are set out in the Report on Directors’ Remuneration on page 29. The details provided in the Report on Directors’ Remuneration address the Companies Act disclosure requirements relating to Directors’ remuneration. Details of Directors’ shareholdings in the Company are shown on page 30 and total dividends of £47,000 were paid in respect of these shareholdings in 2017 (2016: £43,000). Disclosures in relation to the pension schemes are set out in note 23. 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. Macfarlane Group PLC Annual Report and Accounts 2017 Company balance sheet At 31 December 2017 Fixed assets Tangible 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 79 Note 2017 £000 2016 £000 27 28 29 30 30 31 32 37 33 34 34 35 38 39,544 804 23,376 63,762 2,959 3 2,962 (1,703) 1,259 39 39,544 989 9,493 50,065 2,660 3 2,663 (1,476) 1,187 65,021 51,252 (940) 64,081 (4,730) 59,351 39,387 12,975 6,989 59,351 (1,690) 49,562 (5,815) 43,747 34,084 4,641 5,022 43,747 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 22 February 2018 and signed on its behalf by Peter D. Atkinson Chief Executive John Love Finance Director Strategic reviewGovernanceFinancial statementsShareholder information 80 Company statement of changes in equity For the year ended 31 December 2017 At 1 January 2016 Comprehensive income Profit for the year Remeasurement of pension scheme liability Tax on remeasurement of pension scheme liability Long-term corporation tax rate change Total comprehensive income Transactions with shareholders Dividends Share-based payments Issue of share capital Total transactions with shareholders Note 37 Share capital £000 Share premium £000 Retained earnings £000 Total £000 31,153 1,018 5,004 37,175 – – – – – – – – – – 7 24 33,34 – – 2,931 2,931 – – 3,623 3,623 3,553 (1,497) 269 (57) 2,268 (2,358) 108 – (2,250) 3,553 (1,497) 269 (57) 2,268 (2,358) 108 6,554 4,304 At 31 December 2016 34,084 4,641 5,022 43,747 Comprehensive income Profit for the year Remeasurement of pension scheme liability Tax on remeasurement of pension scheme liability Total comprehensive income Transactions with shareholders Dividends Share-based payments Issue of share capital Total transactions with shareholders 37 7 24 33,34 – – – – – – – – – – 5,303 5,303 – – 8,334 8,334 4,259 895 (153) 5,001 (2,854) (180) – (3,034) 4,259 895 (153) 5,001 (2,854) (180) 13,637 10,603 At 31 December 2017 39,387 12,975 6,989 59,351 The accompanying notes are an integral part of this statement of changes in equity. Macfarlane Group PLC Annual Report and Accounts 2017 81 Notes to the Company financial statements For the year ended 31 December 2017 26. Significant accounting policies Macfarlane Group PLC is a public company listed on the London Stock Exchange, incorporated and domiciled in the United Kingdom. These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (‘FRS 101’). In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’), but makes amendments where necessary in order to comply with the Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken. 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 assets; (iii) Disclosures in respect of transactions with wholly owned subsidiaries; (iv) The effects of new but not yet effective IFRSs; (v) Disclosures in respect of the compensation of Key Management Personnel; and (vi) Disclosures in respect of capital management. As the consolidated financial statements for Macfarlane Group PLC include the equivalent disclosures, the Company has also applied the exemptions available under FRS 101 in respect of certain disclosures required by; (i) (ii) IFRS 2 Share Based Payments in relation to Group-settled share-based payments; and IFRS 3 Business Combinations relating to business combinations undertaken by the Company. 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 51. 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. 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 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 28 at cost less any provision for 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 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 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 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. Strategic reviewGovernanceFinancial statementsShareholder information 82 Notes to the Company financial statements (continued) For the year ended 31 December 2017 26. 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 management services provided to Group undertakings, net of VAT. Revenue is recognised as the related costs are incurred. 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 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. Contingent consideration classified as a liability will be subsequently re-measured through the income statement under the requirements of the revised IFRS 3. Share-based payments The grant date fair value of share-based payments awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the awards. The fair value of the awards granted is measured using an option valuation model, taking into account the terms and conditions upon which the awards were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Details of the determination of the fair value of equity-settled share-based transactions are set out in note 24. Macfarlane Group PLC Annual Report and Accounts 2017 83 Taxation The tax expense represents the sum of the current tax payable and deferred tax. Current tax is payable 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. Deferred tax assets and liabilities are not discounted. 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 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 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. Retirement benefit costs Defined contribution schemes A defined contribution plan is a post-employment benefit plan under which the Company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the profit and loss account in the periods during which services are rendered by employees. Defined benefit schemes A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Group’s net retirement benefit obligation in respect of its defined benefit pension plan is calculated by estimating the amount of future benefits that employees have earned in return for their service in the current and prior periods. These benefits are then discounted to determine the present value, and the fair value of any plan investments, at bid price, are deducted. The Group determines the net interest on the net retirement benefit obligation for the year by applying the discount rate used to measure the defined benefit obligation at the beginning of the year. The discount rate is set in consultation with the Company’s pension advisers, representing the yield at the reporting date on bonds that have a credit rating of at least AA that have maturity dates approximating to the average duration of the Group’s retirement benefit obligations and that are denominated in the currency in which the benefits are expected to be paid. Remeasurements arising from defined benefit plans comprise actuarial gains and losses, returns on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest). Remeasurements are recognised in the statement of other comprehensive income and all other expenses related to defined benefit plans charged in staff costs in the profit and loss account. When the benefits of a plan are changed, or when a plan is curtailed, the portion of the changed benefit related to past service by employees, or the gain or loss on curtailment, is recognised immediately in the profit and loss account when the plan amendment or curtailment occurs. The calculation of the retirement benefit obligations is performed by a qualified actuary using the projected unit credit method. When the calculation results in a benefit to the Group, the recognised asset is limited to the present value of benefits available in the form of any future refunds from the plan or reductions in future contributions and takes into account the adverse effect of the present value of any minimum funding requirements. The net defined benefit cost of the plan is apportioned to participating entities on the basis of the employment history of scheme members, who are allocated to the relevant subsidiary company, with any remaining unallocated members being charged to the parent company. Strategic reviewGovernanceFinancial statementsShareholder information 84 Notes to the Company financial statements (continued) For the year ended 31 December 2017 27. Tangible assets Cost At 1 January 2017 and 31 December 2017 Depreciation At 1 January 2017 Charge for year At 31 December 2017 Net book value At 31 December 2017 At 31 December 2016 The parent company does not hold any assets under finance leases. 28. Investments Investment in subsidiaries at cost At 1 January Additions At 31 December Land and buildings £000 Plant and equipment £000 Total £000 15 13 1 14 1 2 305 320 268 – 268 37 37 281 1 282 38 39 2017 £000 2016 £000 39,544 – 39,544 32,394 7,150 39,544 Details of the principal operating subsidiaries are set out on page 91. On 29 July 2016, the Company acquired 100% of the issued share capital of Nelsons for Cartons & Packaging Limited for a consideration of £7,150,000. 29. Deferred tax asset Deferred tax on pension scheme deficit At 1 January (Charged)/credited to reserves Charged to profit and loss account At 31 December Recovery of the deferred tax asset is anticipated against future taxable profits. 2017 £000 989 (153) (32) 804 2016 £000 829 212 (52) 989 Macfarlane Group PLC Annual Report and Accounts 2017 30. 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 to profit and loss account At 31 December 85 2017 £000 1,500 666 483 310 2,959 2016 £000 1,150 683 507 320 2,660 320 (10) 310 333 (13) 320 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 31. Creditors – amounts falling due within one year Bank borrowings Trade creditors Other taxation and social security Contingent consideration Corporation tax Accruals and deferred income 2017 £000 2016 £000 23,376 9,493 2017 £000 54 330 41 750 128 400 2016 £000 17 259 41 750 78 331 1,703 1,476 The Company is a party to the Group bank borrowing facility with Lloyds Banking Group PLC, which comprises a three-year committed borrowing facility of up to £25 million, available until June 2019, with an additional option to increase it further to £30 million. The facility bears interest at normal commercial rates and carries standard financial covenants in relation to interest cover and levels of headroom over the trade debtors of Macfarlane Group UK Limited. The Company and certain subsidiaries have given inter-company guarantees to secure the drawdown on this facility. The drawdown at 31 December 2017 by the subsidiary company, Macfarlane Group UK Limited amounted to £17.0 million. 32. Creditors – amounts falling due after more than one year Contingent consideration Amounts owed to subsidiary undertakings 2017 £000 – 940 940 2016 £000 750 940 1,690 Strategic reviewGovernanceFinancial statementsShareholder information 86 Notes to the Company financial statements (continued) For the year ended 31 December 2017 33. Share capital Called up, allotted and fully paid: At 1 January Issued during the year At 31 December Number of 25p shares 2017 £000 2016 £000 136,335,497 21,212,121 157,547,618 34,084 5,303 39,387 31,153 2,931 34,084 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. On 18 September 2017, the Company announced a placing of 12,121,212 ordinary shares of 25p each at a price of 66p per share for a total value of £8,000,000. These shares were admitted to the official List of the London Stock Exchange on 21 September 2017. On 21 September 2017, the Company’s subsidiary Macfarlane Group UK Limited acquired the trade, goodwill and selected assets of the packaging business of Greenwoods Stock Boxes Limited and the whole of the issued share capital of Nottingham Recycling Limited. As part of the initial consideration, the Company issued 9,090,909 ordinary shares of 25p each at a value of 66p per share as non-cash consideration to the Vendors, an effective value of £6,000,000. These shares were also admitted to the official List of the London Stock Exchange on 21 September 2017. 34. Reserves Balance at 1 January 2016 Profit for the year Dividends paid (see note 7) Share-based payments (see note 24) Issue of new shares Expenses of share issue Post tax actuarial loss in pension scheme taken direct to reserves Balance at 1 January 2017 Profit for the year Dividends paid (see note 7) Share-based payments (see note 24) Issue of new shares Expenses of share issue Post tax actuarial gain in pension scheme taken direct to reserves Balance at 31 December 2017 35. Reconciliation of movements in shareholders’ funds Profit for the year Dividends to equity holders in the year Post tax actuarial gain/(loss) in pension scheme taken direct to equity Share-based payments Issue of new shares (net of issue expenses) Movements in shareholders’ funds in the year Opening shareholders’ funds Closing shareholders’ funds Share premium £000 Profit and loss account £000 1,018 – – – 3,869 (246) – 4,641 – – – 8,697 (363) – 12,975 Total £000 6,022 3,553 (2,358) 108 3,869 (246) (1,285) 9,663 4,259 (2,854) (180) 8,697 (363) 742 19,964 2016 £000 3,553 (2,358) (1,285) 108 6,554 6,572 37,175 43,747 5,004 3,553 (2,358) 108 – – (1,285) 5,022 4,259 (2,854) (180) – – 742 6,989 2017 £000 4,259 (2,854) 742 (180) 13,637 15,604 43,747 59,351 Macfarlane Group PLC Annual Report and Accounts 2017 36. 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 Share-based payments (see note 24) 87 2016 £000 19 12 2016 No. 11 2016 £000 1,041 131 24 108 1,304 2017 £000 6 18 2017 No. 11 2017 £000 1,007 165 25 (180) 1,017 37. Pensions 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 of the trading subsidiaries, Macfarlane Group UK Limited and Macfarlane Labels Limited are also sponsoring employers of the Scheme. The Scheme is currently in deficit and disclosure of the respective proportions of the Group deficit are included and disclosed in the financial statements of each of the three participating employers. The Scheme is administered by a Board of Trustees composed of employer-nominated representatives and member-nominated Trustees which is legally separate from the Group. The Scheme’s investments 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 administration of benefits. 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. The Scheme was closed to new entrants during 2002. On leaving 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 Price 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 Scheme by offering a Pension Increase Exchange (‘PIE’) option to pensioner members and a PIE option to all deferred and active members after 1 May 2012. Strategic reviewGovernanceFinancial statementsShareholder information 88 Notes to the Company financial statements (continued) For the year ended 31 December 2017 37. Pensions (continued) Balance sheet disclosures at 31 December 2017 The 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 2017, the provisional results of this valuation showed that the market value of the relevant investments of the Scheme was £82,100,000 and the actuarial value of these investments represented 81% 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 provisional results of the actuarial valuation as at 1 May 2017, updated to the year-end to reflect amounts attributable to Macfarlane Group PLC, the parent company as shown below: Investment class Equities Multi-asset diversified funds Liability-driven investment funds European loan fund Secured property income fund Cash Fair value of scheme assets Present value of scheme liabilities Deficit in the scheme Valuation 2017 £000 Valuation 2016 £000 Valuation 2015 £000 7,078 8,613 11,414 2,624 2,642 12 32,383 (37,113) (4,730) 6,845 8,603 10,613 2,534 – 2,528 31,123 (36,938) (5,815) 6,716 10,190 5,642 4,448 – 122 27,118 (31,725) (4,607) The Trustees review the Scheme’s investments on a regular basis and consult with the Company regarding any proposed changes to the investment profile. During 2017, the short-term cash holding was invested in a Secured property income fund. The ability to realise the Scheme’s investments at, or close to, fair value was considered when setting the investment strategy. 84% of the Scheme’s investments can be realised at fair value on a daily or weekly basis. The remaining investments have monthly or quarterly liquidity, however, whilst the income from these helps to meet the Scheme’s cash flow needs, they are not expected to be realised at short notice. The present value of the Scheme liabilities is derived from cash flow projections over a long period and is thus inherently uncertain. The Scheme’s liabilities at 31 December 2017 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 2017 2016 2015 2.50% 0.00% 3% or 5% for fixed increases or 3.20% for LPI. 2.25% post 5 April 2006 2.70% 0.00% 3% or 5% for fixed increases or 3.20% for LPI. 2.25% post 5 April 2006 3.70% 0.00% 3% or 5% for fixed increases or 2.90% for LPI. 2.10% post 5 April 2006 Inflation assumption (RPI) Inflation assumption (CPI) Life expectancy beyond normal retirement age of 65 Male Female 3.30% 2.30% 23.7 25.7 3.30% 2.10% 22.8 25.3 3.10% 2.10% 22.7 25.3 Macfarlane Group PLC Annual Report and Accounts 2017 Movement in 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 other financial charges 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 scheme liabilities At 1 January Service costs Interest costs Contribution from scheme members Actuarial loss in the year Benefits paid At 31 December 89 2017 £000 (5,815) (11) 340 (139) 895 (4,730) 2016 £000 (4,607) (13) 450 (148) (1,497) (5,815) (11) (13) 826 (965) (139) 2,529 (1,634) 895 31,123 826 2,529 340 8 (2,443) 32,383 (36,938) (11) (965) (8) (1,634) 2,443 (37,113) 989 (1,137) (148) 4,610 (6,107) (1,497) 27,118 989 4,610 450 8 (2,052) 31,123 (31,725) (13) (1,137) (8) (6,107) 2,052 (36,938) Strategic reviewGovernanceFinancial statementsShareholder information 90 Notes to the Company financial statements (continued) For the year ended 31 December 2017 37. Pensions (continued) The cumulative remeasurement of the pension liability applied against reserves since the transition to IAS 19 on 1 January 2004 is a loss of £2,926,000 (2016: £3,821,000). 2017 £000 2016 £000 2015 £000 2014 £000 2013 £000 Present value of defined benefit obligations Fair value of scheme investments Scheme deficit (37,113) 32,383 (4,730) (36,938) 31,123 (5,815) (31,725) 27,118 (4,607) (33,564) 27,876 (5,688) (28,755) 22,238 (6,517) Return on scheme investments 3,355 5,599 361 6,341 2,340 Percentage of scheme investments 10.4% 18.0% 1.3% 22.7% 10.5% Experience adjustment to scheme investments 2,529 4,610 (585) 5,320 1,176 Percentage of scheme investments 7.8% 14.8% (2.2%) 19.0% 5.3% Experience adjustment on scheme liabilities (1,634) (6,107) 1,464 (4,946) (184) Percentage of scheme liabilities (4.4%) (16.5%) 4.6% (14.7%) (0.6%) 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 £14,000 (2016: £11,000) with no contributions payable to the plan at the balance sheet date. 38. 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 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. Macfarlane Group PLC Annual Report and Accounts 2017 91 Country of registration England England England England Scotland Ireland Principal operating subsidiaries and related undertakings Company name Principal activities Tel: 02476 511511 Tel: 01476 574747 Tel: 01373 858555 Macfarlane Group UK Limited 1 Coventry Grantham Westbury Network Packaging Limited 2 Wolverhampton Tel: 01902 496666 Nelsons for Cartons & Packaging Limited 1 Leicester Nottingham Recycling Limited 3 Nottingham Macfarlane Labels Limited 4 Kilmarnock Tel: 0115 986 7181 Tel: 01563 525151 Tel: 0116 2641050 Macfarlane Group Ireland (Labels & Packaging) Limited 5 Wicklow Tel: 00 353 1281 0234 Macfarlane Group Sweden AB 6 Helsingborg Tel: 00 46 42 13 75 55 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. Recovery of waste paper and corrugated board for recycling. 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 packaging materials and equipment. 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 subsidiary. 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 1 National Packaging Group Limited 1 Adhesive Labels Limited 1 One Packaging Limited 1 Owned by Macfarlane Group UK Limited Online Packaging Limited 1 Allpoint Packaging Limited 1 Bloomfield Supplies Limited 1 Macfarlane Packaging Limited 7 Abbott’s Packaging Limited 1 Mitchell Packaging Limited 1 Greenwoods Stock Boxes Limited 7 Owned by Network Packaging Limited Networkpack Limited 2 Owned by Macfarlane Group Sweden AB ReSeal-it Scandinavia 6 Regath HB 6 02355761 01355867 00723320 09647045 02903657 03930806 02253938 SC041678 00372831 00535311 SC576825 07076439 556480-9845 969610-8753 Registered offices 1 Siskin Parkway East, Middlemarch Business Park, Coventry, CV3 4PE 2 Unit 5, Lanesfield Drive, Spring Road Industrial Estate, Ettingshall, Wolverhamption, WV4 6UA 3 Abbeyfield Road, Nottingham, NG7 2SX 4 Bentinck Street, Kilmarnock, KA1 4AS 5 Kilmacullagh, Newtownmountkennedy, Co. Wicklow, Ireland 6 Kapplöpningsgatan 14, 252 30 Helsingborg, Sweden 7 21 Newton Place, Glasgow, G3 7PY Country of registration England England England England England England England Scotland England England Scotland England Sweden Sweden Strategic reviewGovernanceFinancial statementsShareholder information 92 Five year record Turnover – all operations Operating profit 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 paid per ordinary share Dividend cover 2017 £000 2016 £000 2015 £000 2014 £000 2013 £000 195,991 179,772 169,132 153,767 143,871 10,089 (828) 9,261 – 9,261 (1,837) 7,424 5.22p 2,854 2.00p 2.6 8,712 (901) 7,811 – 7,811 (1,761) 6,050 4.64p 2,358 1.84p 2.6 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 This table reflects the five-year record for continuing operations as classified at 31 December 2017. Financial diary Financial results Interim: Announced – August Final: Announced – February Accounts and Annual General Meeting Report and financial statements – Posted to shareholders on 4 April 2018 Annual General Meeting – Held in Glasgow on 15 May 2018 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: 0371 384 2439 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 Group PLC Annual Report and Accounts 2017 Transacting with Macfarlane Our new product catalogue is now available. Our trading website www.macfarlanepackaging.com enables customers to place orders at their convenience 24 hours each day. Designed and produced by Thunderbolt Projects Head Office Macfarlane Group PLC 21 Newton Place Glasgow G3 7PY t. 0141 333 9666 f. 0141 333 1988 e. investorinfo@macfarlanegroup.com www.macfarlanegroup.com Sweden Packaging Distribution United Kingdom: Bingham t. 01949 837666 Bristol t. 0117 317 2660 Coventry t. 02476 217000 Enfield t. 0208 344 3800 Exeter t. 01392 825300 Fareham t. 01329 854300 Glasgow t. 0141 840 2000 Gloucester t. 0145 255 5550 Grantham t. 01476 513602 Horsham t. 01403 825600 Leicester t. 0116 2641050 Manchester t. 0161 873 5200 Milton Keynes t. 01908 512900 Newcastle t. 0191 229 5550 Nottingham t. 0115 985 1851 Reading t. 0118 944 2425 Stockton-on-Tees t. 01642 877177 Sudbury t. 01787 315000 Wakefield t. 01924 874700 Wigan t. 01942 612550 Wolverhampton t. 01902 496666 Ireland: Wicklow t. 00 353 818 300 068 Packaging Design and Manufacture United Kingdom: Grantham t. 0844 770 1417 Westbury t. 0844 770 1435 Labels United Kingdom: Kilmarnock t. 01563 525151 Ireland: Wicklow t. 00 353 (1) 281 0234 Sweden: Helsingborg t. 00 46 (0) 4213 7555