Annual Report and Accounts 2019
Contents
Overview
01 Financial and operational highlights
02
Macfarlane Group – serving
our customers
Celebrating 70 years
1949
Macfarlane Group founded by
Lord Macfarlane of Bearsden KT
Business model and strategy
Strategic review
04 Chairman’s statement
06
08 Chief Executive’s review
Our Innovation Lab
13
Helping our customers benefit
14
from the Significant Six
Finance review
16
18 Principal risks and uncertainties
20
Stakeholder engagement
22 Viability statement
23 Corporate responsibility
Governance
30 Board of Directors
32 Report of the Directors
34 Remuneration report
41 Remuneration policy
44 Corporate governance
Statement of Directors’
52
responsibilities
Financial statements
53
61
61
62
Independent auditor’s report to the
members of Macfarlane Group PLC
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated statement of changes
in equity
Consolidated balance sheet
Consolidated cash flow statement
Notes to the financial statements
63
64
65 Accounting policies
72
95 Company balance sheet
96
Company statement of changes
in equity
Notes to the Company financial
statements
97
Shareholder information
108 Principal operating subsidiaries
and related undertakings
IBC Financial diary
1973
Floated on the
London Stock Exchange
1980
Acquired Abbott’s Packaging
1983
Accredited ISO9001
2001
Acquired National Packaging
2005
Launched Customer Connect
and Online Ordering
2007
Accredited ISO14001
2014-19
11 acquisitions including
Network Packaging, Nelsons
for Cartons & Packaging and
Greenwoods Stock Boxes
2016
Opened Innovation Lab
View our Annual Report and
Accounts and other information
about Macfarlane Group at
macfarlanegroup.com
2019
Macfarlane Group celebrates
its 70th anniversary
Financial and operational highlights 2019
01
£225m
Sales
6.0%Operating profit
(as % of sales)
£12.0m
Profit before tax
6.5%Dividend increase
>250,000
Annual deliveries
>1,700
Bespoke designs
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 02
Macfarlane Group – serving our customers
Headquartered in Glasgow,
Macfarlane Group PLC employs
over 925 people at 33 sites in
the UK, one in Ireland and one
in Sweden and services more
than 20,000 customers in a
wide range of sectors.
North *
Sales: £73.0m
No. of employees: 239
No. of vehicles: 37
No. of sites: 10
No. of customers: 4,377
Midlands *
Sales: £67.9m
No. of employees: 286
No. of vehicles: 47
No. of sites: 9
No. of customers: 3,420
* Numbers relate to operating sites only
Macfarlane Group PLC Annual Report and Accounts 2019 03
Inverness
Helsingborg
Glasgow
Kilmarnock
Europe *
Sales: £7.1m
No. of employees: 24
No. of vehicles: 2
No. of sites: 2
No. of customers: 2,209
Newcastle
Stockton-on-Tees
Leyland
Wigan
Wakefield
Manchester
Wicklow
Nottingham
Grantham
Wolverhampton
Leicester
Coventry
Milton Keynes
Sudbury
Gloucester
Bristol
Westbury
Fareham
Exeter
Plymouth
Harlow
Aylesbury
Reading
Horsham
South east *
Sales: £54.6m
No. of employees: 152
No. of vehicles: 35
No. of sites: 7
No. of customers: 8,496
South west *
Sales: £22.8m
No. of employees: 104
No. of vehicles: 19
No. of sites: 5
No. of customers: 1,551
Head Office
Packaging Distribution
Packaging Design
and Manufacture
Labels
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
04
Chairman’s statement
Macfarlane Group PLC achieved sales of £225.4 million
in 2019, (2018: £217.3 million) a 4% increase on 2018,
with 2019 profit before tax growing to £12.0 million
(2018: £10.9 million), 10% ahead of 2018. This marks
the tenth consecutive year of profit growth.
The performance in 2019 was in line
with market expectations and was
achieved against a well-publicised
backdrop of economic uncertainty
resulting in weaker demand.
Trading
Packaging Distribution increased
sales by 4% in 2019 to £196.7 million
(2018: £189.8 million). Sales revenue
from existing customers was
impacted by both weaker demand
and sales price deflation during 2019
but this was offset by good growth
in new business and the benefit of
£5.7 million from acquisitions. The
2019 acquisitions of Ecopac (U.K.)
Limited ('Ecopac') and Leyland
Packaging Company (Lancs) Limited
('Leyland') have both performed
well since acquisition. Gross margin
in Packaging Distribution at 31.1%
showed improvement on the prior
year (2018: 29.5%) and reflected
effective management of input
price movements. The growth in
sales and gross margin, combined
with good cost control, resulted in
Packaging Distribution achieving
an 11% increase in operating profit
before exceptional items to
£12.4 million (2018: £11.2 million)
after the impact of IFRS 16 ‘Leases’.
Sales in Manufacturing Operations
at £28.7 million (2018: £27.5 million)
grew by 4% on the previous year.
Gross margin was 38.2% in 2019
compared to 38.4% in 2018.
Operating profit before exceptional
items in 2019 increased to
£1.2 million (2018: £0.8 million)
after the impact of IFRS 16 ‘Leases’.
After net finance costs of
£1.6 million (2018: £0.8 million),
Group profit before tax totalled
£12.0 million, an increase of 10%
on 2018. Basic and diluted earnings
per share for 2019 were 6.17p
(2018: 5.55p) and 6.16p (2018:
5.55p) respectively.
IFRS 16 ‘Leases’
IFRS 16 ‘Leases’ requires the Group
to recognise right‑of‑use assets and
lease liabilities on the balance sheet
and depreciation on the assets and
interest on the lease liabilities in
the income statement. Previously,
operating leases were off balance
sheet and leasing costs were
reported in overheads. IFRS 16 has
been applied from 1 January 2019,
with no requirement to restate
comparative figures. Whilst there
was no major impact on profit before
tax, net assets or cash flows from
Group performance
Sales (£m)
217.2
225.4
196.0
179.8
Profit before tax (£m)
Dividend per share (p)
12.0
10.9
2.45
2.30
2.10
1.95
9.3
7.8
2016
2017
2018
2019
2016
2017
2018
2019
2016
2017
2018
2019
Macfarlane Group PLC Annual Report and Accounts 2019 05
applying the standard, there are
changes in classifications which are
indicated throughout this document.
Dividend
The Board is proposing a final
dividend of 1.76 pence per share,
amounting to a full year dividend of
2.45 pence per share, a 7% increase
on the prior year’s dividend of
2.30 pence per share. Subject to
the approval of shareholders at the
Annual General Meeting on Tuesday
12 May 2020, this dividend will be
paid on Thursday 4 June 2020 to
those shareholders on the register
at Friday 15 May 2020.
Net bank debt
The Group’s net bank borrowing
at 31 December 2019 decreased
by £0.5 million to £12.7 million from
£13.2 million at the previous
year-end. The Group’s bank facility
of £30.0 million with Lloyds Banking
Group is available until June 2022
and accommodates normal working
capital requirements as well as
supporting acquisition funding.
Pension scheme
The Group’s pension deficit at
31 December 2019 decreased by
£3.3 million to £6.5 million (2018:
£9.8 million). Although the discount
rate decreased, which increased
the value of the pension liabilities,
this was offset by increases in the
value of the scheme’s holding in
liability-driven investments and
its other investments.
Following the High Court judgement
involving Lloyds Banking Group
Profit before tax (£m)
2019 represents the
10th consecutive year
of profit growth
2015: 6.8
2014: 5.6
2013: 5.1
2012: 4.5
2011: 3.9
2009: 3.2
2010: 3.4
2019: 12.0
2018: 10.9
2017: 9.3
2016: 7.8
pension schemes on 26 October
2018, a charge of £0.3 million was
made in 2018 as an exceptional item.
This represented past service cost
in respect of the equalisation of
Guaranteed Minimum Pensions
('GMP') benefits between 1990 and
1997. When we refer to items before
exceptional items, it excludes these
charges, which we believe provides a
more meaningful basis for measuring
our financial performance in 2018.
Outlook
Continued profit growth over a ten
year period confirms the Board’s
confidence that its consistent
strategy of positioning the
business to serve key growth
markets in the protective
packaging sector remains
appropriate and continues
to be effective.
The business will remain focused
on the delivery of continued profit
growth through the provision for
our customers of added‑value
protective packaging products
and services in target market
sectors, combined with efficiency
improvements and the
completion of value‑enhancing
acquisitions. We will also focus
on ensuring that we support our
customers in achievement of
their sustainability objectives.
Macfarlane Group’s
performance in 2019 reflects
the successful implementation
of our strategy and we are
confident that the Group will
deliver further progress in 2020.
2020 has started well and
profitability in the year to date is
ahead of the same period in 2019.
Stuart R. Paterson
Chairman
27 February 2020
Macfarlane investment case
A simple
and flexible
business
model
Strong operating
companies with
differentiated
propositions
Good market
positions
with growth
potential
Clear plans
and track
record of
performance
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 06
Business model and strategy
Our business model
We design, manufacture and distribute protective packaging products
and labels to business users. Protective packaging products are mainly
sold to customers in the UK. Labels are sold to customers in the UK,
mainland Europe and the USA. For reporting purposes, we split the
Group into two segments:
• Macfarlane Packaging Distribution; and
•
Manufacturing Operations, comprising Macfarlane Design
and Manufacture and Macfarlane Labels.
The Group operates a Stock and Serve model from 25 Regional
Distribution Centres (RDCs) providing a UK national network to support
customers on a local, regional and national basis and 3 satellite sites
linked to RDCs. In addition the Group also operates four manufacturing
centres, two in Design and Manufacture and two in Labels. There is a
central administration centre in Coventry, a Labels design centre in
Sweden and the Group head office is located in Glasgow.
Macfarlane Group has over 925 employees, mainly in the UK but also in
Sweden and Ireland. Our sites range in size from over 100 employees at
manufacturing locations to under 20 for smaller RDCs and satellite sites.
The Group operates a decentralised structure for sales and operations
supported by central functional teams covering key areas such as
procurement, logistics, HR, IT and finance.
How our business generates value
Macfarlane is the UK market leader
in the distribution of protective
packaging products. Macfarlane
leverages its purchasing scale
to cost-effectively source a
comprehensive range of protective
packaging products and adds value
for the customer by providing
independent advice on the most
cost-effective choice of product
and packing processes, and
operating as a single-source supplier
for these products on a Just In Time
basis with tailored stock
management programmes and
electronic trading capability.
The manufacturing businesses
utilise design, intellectual property
and know-how to provide a
bespoke service to support major
manufacturing customers to
cost-effectively protect their
high-value products in storage
and distribution and for FMCG
customers to attractively display
and accurately identify their
products at the point of sale.
Macfarlane aims to grow its
business by increasing the
penetration of existing customers
and winning new customers.
There will be a natural churn of
packaging requirements from
our existing customers and we
experience a level of sales erosion
each year as we optimise protective
packaging solutions for customers.
Therefore new business generation
is key to Macfarlane Group’s
overall growth and there is specific
measurement and focus on this area.
Macfarlane Group PLC Annual Report and Accounts 2019 07
Our strategy
For many years we have followed a consistent strategy to create value
for shareholders. We seek to operate in markets which give above-average
growth opportunities to develop business with existing customers and
generate business with new customers.
At the same time we seek to improve the performance of the business by more
effective sourcing and increasing the efficiency of our logistics and property portfolio.
We then supplement this growth in the existing business by acquiring quality businesses.
The Group objective is to grow sales volumes and achieve a pre-tax return on sales of
between 5% and 7%. We are now achieving returns in that target range. The following
table summarises the key strategic priorities.
Strategic priority 1
We seek to implement a segmental sales
strategy to improve customer retention levels,
increase product penetration and accelerate
new business, and focus on key sectors with
above average growth potential, particularly
National Accounts and internet retail.
2019 progress
• Continuing this approach has provided increased
customer focus.
• New business growth in Packaging Distribution
increased by 11% from 2018 to 2019.
• Our Innovation Lab continues to prove an effective tool
to demonstrate the range of our capability to customers.
• Net promoter score increased to 50 (2018: 46)
reflecting the success of our strategy.
Strategic priority 2
We work to enhance gross margins
through a focus on higher added value
products and more effective sourcing.
2019 progress
• Both strategic and tactical purchasing
programmes are in place to improve our sourcing
capability in Packaging Distribution.
• Gross margins within Manufacturing Operations
have increased during the year as we resolved
operational issues.
Strategic priority 3
We ensure operational effectiveness
is maximised through efficiencies in
our logistics operations.
2019 progress
• Logistics costs reduced to 2.5% of sales
(2018: 2.6%) through use of the Paragon
planning tool and driver training.
Strategic priority 4
We seek to optimise the costs
associated with the physical
infrastructure of our business.
Strategic priority 5
We aim to supplement organic
growth with at least two good
quality acquisitions each year.
2019 progress
• Property costs increased to 4.3% of sales
(2018: 3.9%) reflecting additional costs in 2019
in our property network. Our aim is to reduce
the levels of costs below 4.0% of sales in 2020.
2019 progress
• We completed the acquisition of Ecopac on
2 May 2019 and Leyland on 30 August 2019.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 08
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 25 Regional Distribution
Centres (RDCs) and 3 satellite sites, supplying industrial and retail
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 as well as
national/international distribution
generalists who supply a range
of products, including protective
packaging materials. Macfarlane
competes effectively on a local
basis through its strong focus on
and regular monitoring of customer
service, its breadth and depth of
product offer and through the
recruitment and retention of
high-quality staff with good local
market knowledge. On a national
basis Macfarlane 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 benefits its customers
by enabling them to ensure their
products are cost-effectively
protected in transit and storage
through the supply of a
comprehensive product range,
single source Stock and Serve
supply, Just In Time delivery, tailored
stock management programmes,
electronic trading and independent
Packaging Distribution
Base
business
£000
Impact of
2019
acquisitions
£000
190,976
5,730
2019
£000
2018
£000
2019
growth
196,706
(135,525)
189,835
(133,843)
3.6%
61,181
55,992
9.3%
(48,775)
(44,820)
8.8%
11,771
635
12,406
11,172 11.0%
–
(270)
12,406
10,902 13.8%
Revenue
Cost of sales
Gross margin
Operating expenses
(recurring)
Operating profit before
exceptional item
Operating expenses
(exceptional)
Operating profit
advice on both packaging materials
and packing processes.
2019 trading
Macfarlane Packaging Distribution
grew sales by 3.6% in 2019. Whilst
existing business was impacted
by weaker demand conditions and
sales price deflation, this was partly
compensated for by good new
business growth, 11% ahead of
levels achieved in 2018. Gross
margin in Packaging Distribution
was 31.1%, (2018: 29.5%) with the
improvement demonstrating our
ability to effectively manage input
price changes on paper-based
products with our customers.
We also continued to deliver the
benefit from acquiring high quality
packaging distribution businesses
– the acquisitions of Ecopac at the
start of May 2019 and Leyland
at the end of August 2019 both
performed well and we benefited
from a full year contribution from
the 2018 acquisitions.
Packaging Distribution performance
Sales (£m)
Operating profit (£m)
189.8
196.7
171.8
155.9
12.4
10.9
9.4
7.8
Return on sales (%)
6.3
5.9
5.5
5.0
2016
2017
2018
2019
2016
2017
2018
2019
2016
2017
2018
2019
Macfarlane Group PLC Annual Report and Accounts 2019 09
Future plans
2020 plans are focused on continuing
to grow sales and improving
profitability by the following actions:
• Prioritising our sales activity on
the growth potential for protective
packaging in key markets –
National Accounts in the industrial
sector, the e-commerce sector in
the retail space and Third Party
Logistics ('3PL') operators;
• Demonstrating our ability to add
value for customers through
further development of our
'Significant Six' sales approach
to reduce their 'Total Cost of
Packaging' and support their
sustainability objectives;
• Continuing to effectively manage
the impact of input price changes
on paper-based products;
• Rolling out our new web-based
solutions to allow customers
access to our full range of
products and services;
• Accelerating our 'Follow the
Customer' programme in Europe;
• Improving our sourcing through
strengthening our relationships
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
consolidating our property
footprint;
• Maintaining the focus on working
capital management to facilitate
future growth; and
• Supplementing organic growth
through completion of further
suitable quality acquisitions.
Macfarlane customers
During 2019 we continued to make
steady progress in extending our
service into Europe to support
a number of our pan-European
customers. We also successfully
transitioned our business in London
from a high cost site in Enfield to a new
lower cost facility in Harlow, supported
by additional space in Sudbury.
Cost control remained strong
and operating profit for Packaging
Distribution at £12.4 million grew
13.8% versus 2018, representing a
return on sales of 6.3% (2018: 5.9%).
Macfarlane operates a Stock and Serve
supply model from 25 RDCs and three
satellite sites.
UK Packaging Distribution
UK market – recent development
2009
Macfarlane 15%
International 8%
UK Regional 21%
UK Local 56%
2019
Macfarlane 22%
International 22%
UK Regional 22%
UK Local 34%
Industrial 70%
Retail 30%
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 10
Chief Executive’s review – Manufacturing Operations
Manufacturing Operations comprises our Packaging Design
and Manufacture business and our Labels business.
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 the
Packaging Distribution business.
Our Labels business designs and
prints self-adhesive labels for major
Fast-moving Consumer Goods
('FMCG') customers in the UK and
Europe and resealable labels for
major customers in the UK, Europe
Manufacturing Operations
Revenue
Cost of sales
Gross margin
Operating expenses (recurring)
Operating profit before exceptional item
Operating expenses (exceptional)
Operating profit
2019
£000
2018
£000
28,683
(17,731)
10,952
(9,728)
1,224
–
1,224
27,455
(16,906)
10,549
(9,696)
853
(60)
793
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 dependence on a small number
of major customers. Management
works closely with these key
customers to ensure high levels of
service and to introduce product and
service development initiatives to
achieve competitive differentiation.
2019 trading
2019 sales for Packaging Design
and Manufacture were 2% below
2018 due to demand weakness
particularly in the automotive
sector. However actions to improve
operational performance and
margins resulted in profitability in
2019 being well above that in 2018.
Our sales team has continued to
develop a strong pipeline of new
customer relationships, which
should benefit the business in 2020.
Labels’ sales increased by 8%
in the year as penetration of our
resealable range improved and a
number of new business wins were
achieved. Despite margin being
impacted by the increasingly
competitive conditions in the
retail sector, profits in the Labels
business were similar to 2018.
Manufacturing Operations performance
Sales (£m)
Operating profit (£m)
27.5
28.7
23.9
24.2
Return on sales (%)
1.2
4.3
0.9
0.8
0.7
3.7
2.9
2.7
2016
2017
2018
2019
2016
2017
2018
2019
2016
2017
2018
2019
Macfarlane Group PLC Annual Report and Accounts 2019 11
Future plans
Priorities for the Manufacturing
Operations in 2020 are to:
• Restore Design & Manufacture
sales growth in target sectors,
Defence, Aerospace and Medical;
• Continue to improve operational
efficiency at both Design &
Manufacture sites;
• Prioritise new sales activity on
our higher added-value bespoke
composite pack product range;
• Continue to strengthen the
relationship between our Design
& Manufacture operations and
our Packaging Distribution
business to create both sales
and cost synergies;
• Accelerate the Reseal-it growth
momentum for reasealable labels
through improved geographic
penetration, extending the product
range and introducing Reseal-it
to new product sectors; and
• Achieve efficiency benefits from
recent investments in additional
printing capacity and digital
printing capability to improve
Labels’ gross margins.
Our Manufacturing Operations design
and manufacture a high quality range
of bespoke packaging and labelling
solutions for our customers.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 12
Chief Executive’s review – 2020 Group outlook
Our sales efforts in 2020 will
focus on those segments of the
protective packaging market, such
as e-commerce, which are forecast
to show above average growth rates
and those industrial markets where
customers recognise the added
value brought to their operations
by a specialist national protective
packaging distributor.
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 reflected in
our consistent, profitable growth
over a ten-year period.
We will continue to add value
for customers through our
Significant Six sales approach
and support them in achieving
their sustainability objectives.
In 2020 we plan to acquire further
good quality protective packaging
businesses, improve our geographic
coverage, develop new products
introduced by recent acquisitions,
work more closely with strategic
suppliers and improve operational
efficiency by leveraging our
property and logistics footprint.
Our future performance is largely
dependent on the successful
execution of actions to grow sales,
increase efficiencies and bring
high-quality acquisitions into the
Group. We expect 2020 to be
another year of progress for
Macfarlane Group.
Peter D. Atkinson
Chief Executive
27 February 2020
Five year record
Turnover
225,389
217,290
195,991
179,772
169,132
2019
£000
2018
£000
2017
£000
2016
£000
2015
£000
Operating profit before exceptional item
Net interest payable
Profit before exceptional item
Exceptional item
Profit before tax
Taxation
Profit for the financial year
Basic earnings per ordinary share
Dividends
Dividends paid per ordinary share
Dividend cover
13,630
(1,606)
12,024
–
12,024
(2,293)
9,731
6.17p
3,689
2.34p
2.6
12,025
(809)
11,216
(330)
10,886
(2,145)
8,741
5.55p
3,387
2.15p
2.6
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
This table reflects the five-year record for the Group’s operations as classified at 31 December 2019.
Macfarlane Group PLC Annual Report and Accounts 2019 Our Innovation Lab
Located in Milton Keynes,
the Innovation Lab is a purpose
built space to create solutions
for the most demanding
packaging challenges.
1 Significant savings
The ultimate purpose of the
Innovation Lab is to optimise
pack design and packaging
operations and thereby reduce
cost throughout the supply chain.
13
2 Cutting edge
technology
Our state‑of‑the‑art technology
includes interactive touchscreens,
digital printers and augmented
reality solutions.
3 Features and benefits
These can range from customer
experience/operational efficiencies,
product solutions and general reduction
and optimisation outcomes.
A staged
process
The journey begins by
understanding the total
cost of the customer's
packaging process and the
business goals. Our team
can then explore alternatives
with the customer,
shortlist preferences,
produce a prototype,
refine the concept and
let the customer leave
with a solution.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 14
Helping our customers benefit from the Significant Six
Our customers’ products must arrive
in perfect condition, on time, in a cost
efficient and sustainable manner.
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.
1.
Storage
costs
With over 700,000 sq ft
of warehouse space and a
fleet of over 100 vehicles,
our nationwide RDCs
mean that customers’
packaging stock levels
can be minimised.
Industrial customer:
Exertis
“ As part of the Exertis
sustainability focus and
through our strategic
partnership with Macfarlane,
collectively we have identified
and removed 18 tonnes of
single trip plastic and
45 tonnes of CO2e from our
UK supply chain for 2020,
without compromising
quality or security.”
Alan Lynch, Global Logistics Director
2.
3.
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.
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.
Macfarlane Group PLC Annual Report and Accounts 2019 15
4.
Customer
experience
Macfarlane can help
enhance the consumer
experience of packaging
form and brand but at the
same time be mindful of
cost implications.
Retail customer:
Hobbycraft
“ With a thorough approach
using innovative ideas in their
Innovation Lab and proven
methods from their vast
experience, Macfarlane have
quickly improved the customer
journey at Hobbycraft.
Macfarlane are very much
a partner in our journey
for great customer service
as much as they are a key
stakeholder in finding
us the best solutions.”
Shabbir Yusoof, General Manager
6.
Damages
and 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.
5.
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.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 16
Finance review
2019 represents the Group’s
tenth consecutive year of
growth in its profit before tax.
Trading
The Group saw growth in sales of
3.7% during 2019, mainly driven by
Packaging Distribution, enhanced
by profitable contributions from
recent acquisitions. Group sales
are £225.4 million, an increase
of £8.1 million from 2018. Profit
before tax for 2019 increased
to £12.0 million, an increase of
£1.1 million from that achieved
in 2018.
Taxation
The tax charge for the year was
£2.3 million on profit before tax of
£12.0 million, a rate of 19.1%, above
the prevailing rate of 19.0% mainly
due to acquisition costs not being
deductible for tax purposes. This
compared with a tax charge of
£2.1 million on the profit before tax
of £10.9 million in 2018 and a tax
rate of 19.7%, above the prevailing
rate of 19.0%.
Macfarlane Group and its subsidiary
companies have no uncertain tax
treatments with HMRC in the UK or
with any tax authorities in overseas
jurisdictions.
Earnings per share
Basic and diluted earnings per share
amounted to 6.17p (2018: 5.55p)
and 6.16p (2018: 5.55p) respectively,
broadly reflective of the increase in
profitability. The 2019 calculations
take account of the issue of shares
in respect of the Leyland acquisition
and the dilution caused by the issue
of LTIP awards.
Dividends
A dividend of 0.69p per share was
paid on 10 October 2019. A further
dividend of 1.76p per share is
subject to approval by shareholders
at the AGM in May 2020 and is not
included as a liability in these
financial statements.
We will continue to invest where
there are needs or opportunities to
meet future growth plans. The Group
will strive to ensure that in 2020,
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
On 2 May 2019 the Group’s
subsidiary, Macfarlane Group UK
Limited acquired 100% of the issued
share capital of Carnweather Limited
(the immediate parent of the trading
company Ecopac) for a consideration
of approximately £3.9 million.
£3.1 million was paid in cash on
acquisition, with the deferred
consideration of £0.8 million
payable in the second quarter of
2020, subject to certain trading
targets being met in the year
ending 30 April 2020.
On 30 August 2019 the Group
acquired 100% of the issued
share capital of Leyland for a
consideration of approximately
£3.05 million. £2.00 million was paid
in cash on acquisition with a further
£0.25 million met by issuing shares
in Macfarlane Group as non-cash
consideration. The deferred
consideration of £0.8 million is
payable in the final quarter of 2020,
subject to certain trading targets
being met in the year ending
30 August 2020.
Deferred consideration of £1.2 million
was paid in 2019 in relation to the
2018 acquisitions of Tyler Packaging
(Leicester) Limited and Harrisons
Packaging Limited.
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 finance growth, make
the agreed levels of pension
fund deficit contributions, fund
acquisitions and meet capital
expenditure requirements.
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 £30.0 million for the
period to June 2022, 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. The Group has
been in compliance with these
covenants throughout 2019.
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 through cash generation from
profitable trading as well as by
maintaining committed borrowing
facilities for the medium-term.
The Group had net bank borrowings
of £12.7 million at 31 December
2019, a reduction of £0.5 million
from the previous year as set out
in note 23. The Group’s cash
generation continued to be strong
enabling us to finance growth,
make the agreed levels of pension
contributions, fund acquisitions
and meet capital expenditure
requirements. The Group spent
£6.3 million on acquisitions in 2019
(2018: £5.6 million) and £2.6 million
on capital expenditure in 2019
(2018: £1.5 million).
Macfarlane Group PLC Annual Report and Accounts 2019 17
Market capitalisation and
share price movements
The number of shares in issue at
31 December 2019 was 157,812,000,
reflecting the issue of 264,382
shares on the acquisition of
Leyland in August 2019.
At the year-end the Company's
market capitalisation was
£170.0 million, compared with
£112.7 million last year. The share
price at 31 December 2019 was
107.75p, compared with 71.50p at
31 December 2018. The range of
transaction prices for Macfarlane
Group shares during 2019 was
73.00p to 109.00p 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 deferred
consideration arising from
acquisitions. The main purpose
of these 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 policies for managing
these risks, which have remained
unchanged since the beginning
of 2019 are set out in note 16
to the financial statements.
Pension schemes
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 25
to the financial statements.
The Board continues to make regular
deficit reduction contributions each
year to reduce the deficit. This,
combined with careful stewardship
of the investment portfolio by the
Pension scheme deficit
2019
£000
2018
£000
2017
£000
Fair value of scheme investments
Present value of scheme liabilities
88,061
(94,526)
75,827
(85,592)
80,960
(92,783)
Deficit at 31 December
(6,465)
(9,765)
(11,823)
Trustees, in conjunction with the
Group, has helped match the
investments with the scheme’s
liability profile.
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 4 to 29.
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
27 February 2020
Following the triennial actuarial
valuation of the scheme at 1 May
2017, the Group agreed a new
schedule of contributions with the
Pension Scheme Trustees, which
assumed a recovery plan period of
7 years. The next triennial actuarial
valuation will be carried out at
1 May 2020.
The Group operates a number of
defined contribution arrangements
for the majority of the employee
base. Over 750 of our employees
are members of one of these
arrangements.
International Financial
Reporting Standards and
accounting policies
IFRS 16 ‘Leases’ requires the Group
to recognise right-of-use assets
and lease liabilities on the balance
sheet and charge depreciation on
the assets and interest on the lease
liabilities in the income statement.
Previously, operating leases were
off balance sheet and leasing costs
were reported in overheads in the
income statement. IFRS 16 has
been applied from 1 January 2019,
with no requirement to restate
comparative figures. This has had
an effect on the constituent part
of the Group’s cash flow for the
first time in 2019. The cash flow
highlights these changes and
details of the finance leases and
the treatment adopted are set
out in the accounting policies note
following the financial statements
and in note 18.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 18
Principal risks and uncertainties
The principal risks and
uncertainties faced by
the Group and the factors
mitigating these risks are
detailed on pages 18 and 19.
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.
For highlighted risks shown as
the risk level has remained broadly
similar between 2018 and 2019.
In respect of the pension scheme
which is marked the risk is
considered to have reduced in the
year, given the balanced structure
of the investment profile and recent
changes in mortality tables.
Macfarlane Group has carried out
an impact analysis and evaluated
the potential short to medium-term
implications of a no-deal Brexit
including reversion to World Trade
Organisation tariffs at 31 December
2020. Where practical, we would
put in place contingency measures
to try to mitigate any immediate
effects on the supply chain. As a
business with the majority of its
trade in the UK, the principal impact
on Macfarlane Group of a no-deal
Brexit would be reduced levels of
business caused by any significant
downturn in the UK economy.
There are a number of other risks that
we manage which are not considered
key risks. In addition the Group is
subject to the impact of general
economic conditions including
any economic uncertainty, 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
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.
Property
Given the multi-site nature of its business, the Group has a property portfolio
comprising 3 owned sites and 37 leased sites of which 3 are sublet. This portfolio
gives rise to risks in relation to ongoing lease costs, dilapidations and
fluctuations in value.
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.
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 £30 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 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.
Defined benefit pension scheme
The Group’s defined benefit pension scheme is sensitive to a number of key
factors; investment returns and the discount rates as well as mortality
assumptions used to calculate scheme liabilities. The IAS 19 valuation of the
Group’s defined benefit pension scheme as at 31 December 2019 estimated
the scheme deficit to be £6.5 million, a decrease of £3.3 million during 2019.
Small changes in these assumptions could mean that the deficit increases.
Acquisitions
The Group’s growth strategy includes acquisitions as demonstrated in recent
years. There is a risk that such acquisitions may not be available on acceptable
terms in the future. It is also possible that acquisitions will not succeed due
to the loss of key people or customers following acquisition or the acquired
business not performing at the level expected. This could potentially lead to
an impairment in the carrying value of the related goodwill and other intangible
assets. Execution risks around the failure to successfully integrate the
acquired business after the conclusion of the earn-out period also exist.
Mitigating factors
Change in 2019
• The Group works closely with suppliers to manage the scale and timing of price supplier price
movements to end-users effectively.
• Our IT systems monitor and measure effectiveness in these 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.
• 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.
• Credit risk is controlled by applying rigour to the management of trade receivables by our
Credit Manager and the credit control team, and is 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 seeks to maintain an appropriate level of committed bank facilities that provide
sufficient headroom above peak projected borrowing requirements.
• The existing facility is in place until June 2022.
• The Group regularly 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 covenants is monitored on a monthly basis and sensitivity analysis is applied
to forecasts to assess the impact on covenant compliance.
• 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 maintained with key performance indicators
monitored and actions taken when required.
• 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 new pensioners in the current
level of pension benefits and the rate of future increases.
• The Group makes Deficit Reduction Contributions each year.
• The investment profile is regularly reviewed to ensure continued matching of investments with
the liability profile of the scheme with details set out in note 25.
• The Group carefully reviews potential acquisition targets, ensuring that the focus is on high‑quality
businesses which complement the existing Group profile and provide opportunities for growth.
• Having completed a number of acquisitions in recent years, the Group has well-established due
diligence and integration processes and procedures.
• The Group has a comprehensive management information system to enable effective monitoring
of post‑acquisition performance.
• Earn‑out mechanisms also mitigate risk in the post‑acquisition period.
• Goodwill and other intangible assets are tested annually for impairment with the results set out
in note 10.
Macfarlane Group PLC Annual Report and Accounts 2019 19
Mitigating factors
Change in 2019
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.
• The Group works closely with suppliers to manage the scale and timing of price supplier price
movements to end-users effectively.
• Our IT systems monitor and measure effectiveness in these 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.
Given the multi-site nature of its business, the Group has a property portfolio
comprising 3 owned sites and 37 leased sites of which 3 are sublet. This portfolio
gives rise to risks in relation to ongoing lease costs, dilapidations and
• 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.
• Credit risk is controlled by applying rigour to the management of trade receivables by our
Credit Manager and the credit control team, and is 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.
no change
no change
no change
• The Group seeks to maintain an appropriate level of committed bank facilities that provide
sufficient headroom above peak projected borrowing requirements.
• The existing facility is in place until June 2022.
• The Group regularly monitors net bank debt and forecast cash flows to ensure that it will be able
no change
to meet its financial obligations as they fall due.
• Compliance with covenants is monitored on a monthly basis and sensitivity analysis is applied
to forecasts to assess the impact on covenant compliance.
• 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 maintained with key performance indicators
monitored and actions taken when required.
• 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 new pensioners in the current
level of pension benefits and the rate of future increases.
• The Group makes Deficit Reduction Contributions each year.
• The investment profile is regularly reviewed to ensure continued matching of investments with
the liability profile of the scheme with details set out in note 25.
no change
decreased
• The Group carefully reviews potential acquisition targets, ensuring that the focus is on high‑quality
businesses which complement the existing Group profile and provide opportunities for growth.
• Having completed a number of acquisitions in recent years, the Group has well-established due
diligence and integration processes and procedures.
• The Group has a comprehensive management information system to enable effective monitoring
no change
of post‑acquisition performance.
• Earn‑out mechanisms also mitigate risk in the post‑acquisition period.
• Goodwill and other intangible assets are tested annually for impairment with the results set out
in note 10.
Risk description
Raw material prices
Property
fluctuations in value.
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.
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 £30 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 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.
Defined benefit pension scheme
The Group’s defined benefit pension scheme is sensitive to a number of key
factors; investment returns and the discount rates as well as mortality
assumptions used to calculate scheme liabilities. The IAS 19 valuation of the
Group’s defined benefit pension scheme as at 31 December 2019 estimated
the scheme deficit to be £6.5 million, a decrease of £3.3 million during 2019.
Small changes in these assumptions could mean that the deficit increases.
Acquisitions
The Group’s growth strategy includes acquisitions as demonstrated in recent
years. There is a risk that such acquisitions may not be available on acceptable
terms in the future. It is also possible that acquisitions will not succeed due
to the loss of key people or customers following acquisition or the acquired
business not performing at the level expected. This could potentially lead to
an impairment in the carrying value of the related goodwill and other intangible
assets. Execution risks around the failure to successfully integrate the
acquired business after the conclusion of the earn-out period also exist.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 20
Stakeholder engagement
The Board and its individual
Directors consider that they
have acted in good faith in
the manner that is most likely
to promote the success of
Macfarlane Group for the
benefit of its members as a
whole and in doing so having
regard to the stakeholders and
matters set out in Section 172
of the Companies Act 2006.
There is a recognition by the Directors
that they are not expected to balance
the interests of Macfarlane Group
against those of other stakeholders
but rather, after considering all
relevant factors, to decide on the
actions which will best lead to success
for the Group having regard to the
long term. This can mean that
certain stakeholder groups may be
inadvertently adversely affected,
but this will not of itself call into
question the decisions made.
The Directors view the key
Company stakeholders and means
of engagement as shown in the
table below.
In all cases, the level of engagement
informs the Board, both in relation
to stakeholder concerns and the
likely impact on decision-making
throughout the year.
We expect our people to act with
the highest level of integrity in
dealing with all stakeholders. We
operate a suite of policies which are
intended to ensure that Macfarlane
employees are empowered to make
decisions locally but within a control
framework which meets the
Group’s objectives.
The Board uses its regular meetings
as a mechanism to address and
meet its obligations under Section
172 of the Companies Act 2006.
The following narrative on pages
20 and 21 covers the key decisions
made and the stakeholder group(s)
impacted by these decisions.
Stakeholder
Group
1
Shareholders
2
Employees
3
Customers
4
Suppliers
Principal methods of engagement
Members of the Board engage with shareholders
throughout the year at events such as the Annual General
Meeting, the results roadshows and Capital Markets Days.
Our Chairman also meets with major shareholders each
year. This gives shareholders a number of opportunities
to raise concerns.
The Board holds at least four of its meetings at different
Group locations and this provides the opportunity to
engage with the local teams and hear their views on
working in Macfarlane Group.
Teams at all our locations interact with all our existing
and potential customers, in the Local, Core and National
customer groups on a daily basis to understand and fulfil
the product and service requirements of our customers.
Our procurement teams and employees at all our
locations interact both with our strategic and all other
suppliers on a daily basis to ensure that the supply
chain is robust and that the trading relationships with
suppliers continue to operate well.
5
Our trading
locations and the
impact of our
activities on the
local environment
We operate from good quality facilities throughout
the UK and deliver to customers using our own fleet
of trucks, driven by our drivers. We act in a manner
intended to recognise and reduce our impact on our
local environments in terms of the types of product
supplied, usage of energy and CO2 emissions.
Strategy and performance
Strategy 1 2 3 4 5
The Board reviews the Group’s
strategic direction and growth
plans during each calendar year.
The Board approved the two
acquisitions in the Packaging
Distribution business, concluding
that both businesses had a similar
customer and business approach
to Macfarlane and would be a good
strategic fit.
Each year the Board reviews and
approves Corporate Defence
documents designed to protect
the value of Macfarlane Group in the
event of an unexpected approach.
Performance 1 2 3 4
The Board approves the annual
budget for the forthcoming year
at its December meeting.
The Board reviews the trading
performance of the business
throughout the year, monitoring
performance against the agreed
budget and the previous
financial year.
At each meeting the Board receives
reports from the Chief Executive
and the Finance Director. These
reports cover trading performance,
relationships with key customers
and suppliers as well as aspects of
operational performance and the
impact on our employees. The
reports also give the Board visibility
of the up to date trading terms with
both customers and suppliers.
During 2019, the Board met with
representatives of one of our
strategic supply partners for
paper-based products.
The activities of our competitors are
reviewed, along with any potential
impact on the Group.
Macfarlane Group PLC Annual Report and Accounts 2019 21
Culture and organisation 1 2
The Board seeks to satisfy itself
that the Group’s policies and
practices for staff are consistent
with the Company’s values and are
designed to promote the long-term
success of the Group.
Andrea Dunstan was appointed as
our nominated Employee Director
given her recent and relevant
experience in this area.
The Remuneration Committee
reviews the remuneration packages
for the Executive Directors and
the Chief Executive’s key reports
each year.
The Board reviews annual pay
increases for Executive Directors
each year, ensuring these are
consistent with the wider employee
group, ensuring that these are
appropriate and consistent.
The Board reviews and approves
the Group’s Gender Pay reports
each year.
The Board receives a report from
the HR Director each year covering
key employee matters and
developments. This report
covers the results of our annual
employee survey.
Representatives of the Board
engage with the Management
Development Group and attend
the Annual Awards Dinner.
Financing 1 2 5
The Board approves the terms and
conditions attaching to the Group’s
major banking arrangement and
receives a monthly report confirming
compliance with bank covenants.
The Board receives a Health and
Safety status report at every meeting
as well as an annual presentation from
the Group’s Health & Safety Manager,
which covers the impact on our
employees, our sites and our
local environment.
The Audit Committee confirms
to the Board that the Internal
Audit Plan has been completed
and that all internal audit reports
have been considered and action
taken where necessary.
Governance and
legal requirements 1 2
The Board conducts an annual
review of its effectiveness and
the effectiveness of the Board
Committees.
The Board considers the current
and future composition of the Board,
with a focus on diversity and Board
capabilities and reviews succession
planning for both Executive and
Non-executive Directors to ensure
orderly succession.
The Board reviews the Annual
Report, confirming that in its view
the Annual Report is fair, balanced
and understandable and provides
the information necessary for
shareholders to assess the
Group’s performance, business
model and strategy.
The Board reviews and satisfies
itself with all other trading updates,
including the AGM statement, the
half-year report and a trading update
in the final quarter of the year.
The Board accepted the Audit
Committee’s recommendation
to appoint Deloitte LLP as
external auditor.
The Board approves the annual
dividend, taking into account
distributable reserves and likely
cash flows and the level of
dividends relative to other
financing requirements.
At the conclusion of each triennial
actuarial valuation of the pension
scheme deficit, the Board
approves the contributions being
proposed under the recovery
plan for any deficit.
The Board approves all location
moves and the terms of new property
arrangements. This included the
closure of our Enfield site in
September 2019 and the move to a
smaller site in Harlow, supported by
additional space in Sudbury as well as
the closure of a small manufacturing
site in Nether Broughton and the
transfer of that trade to an existing
site in Nottingham.
The Board considers and approves
any items of capital expenditure
with a value in excess of £100k.
During 2019 the major item of
capital expenditure was for a new
printing press in our Labels business
in Ireland at a cost of c. £800k.
Major capital allocation decisions
are a matter reserved for the Board.
Risk 1 2 3 4 5
The Board reviews the Company’s
internal control framework ensuring
regular updating of the business’s
risk registers.
The Board regularly reviews the
Group’s risk register, ensuring that
where appropriate and practical,
there are monitoring procedures,
mitigating controls and actions in
respect of each major risk. This
includes a formal consideration
of emerging risks.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 22
Viability statement
The Board has considered
the Group’s viability as part
of the 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 strategic 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 is
consistent with the Board’s review
of the Group strategy, including
assumptions regarding future
growth rates for our business and
acceptable levels of performance.
A detailed 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, including 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 of the exercise
indicated that no additional facilities
should be required.
The Board has carried out a thorough
assessment of the principal risks
facing the Group and how these
risks affect the Group’s prospects
and the strategic plan. The review
also includes consideration of the
principal risks facing the Group
as described on pages 18 and 19,
which could prevent the Group from
achieving its strategic plan and the
potential impact these risks could
have on the Group’s business model,
future performance, solvency and
liquidity over the next three years.
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 including how these are
managed. The Board is confident
that the Group’s major banking
facility, which runs until 30 June
2022, would be renewed on terms
similar to those currently in place.
Macfarlane Group PLC Annual Report and Accounts 2019 23
Corporate responsibility
Macfarlane Group has
a responsibility to ensure
that through its business
operations it impacts
positively on society.
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.
Environmental care
Mandatory Greenhouse
Gas Reporting 2019
Macfarlane Group seeks to minimise
the impact of our operations on the
environment and is committed to
reducing its greenhouse gas (’GHG’)
emissions. This report outlines
Macfarlane’s GHG emissions for
2019. Using an operational
approach, the Group identified its
boundaries to ensure all 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, EcoAct. The validity,
accuracy and completeness of the
data was audited by EcoAct and
then used to calculate the GHG
for Macfarlane Group. Calculations
were completed in accordance
with the main requirements of
ISO-14064-1:2006 standard and
deliver both absolute values and
an intensity ratio for Macfarlane’s
emissions. Acquisitions made during
2019 have been included in GHG
reporting and an assumption has
been made regarding usage based
on equivalent Group sites.
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.
The results in tables 1 and 2 show
that total gross GHG emissions
in the period were 6,752 tonnes
of CO2e, (2018: 7,297 tonnes)
comprised of the following:
• Direct Emissions (Scope 1)
5,312 tonnes of CO2e – 79%
(2018: 5,646 tonnes – 77%)
• Indirect Emissions (Scope 2)
1,440 tonnes of CO2e – 21%
(2018: 1,651 tonnes – 23%)
72% of emissions came from diesel,
21% from electricity, and 7% from
natural gas.
Broken down by business unit
the results were as follows:
• Packaging Distribution
5,412 tonnes of CO2e – 80%
(2018: 5,277 tonnes – 72%)
• Manufacturing Operations
1,340 tonnes of CO2e – 20%
(2018: 2,020 tonnes – 28%)
Table 1: Type of emissions
Type of emissions
Activity
2019
Units
2018
Units
2019
Tonnes
of CO2e
2018
Tonnes
of CO2e
Direct (Scope 1)
Natural gas (kWh)
Vehicle fuel (litres)
Other
Subtotal
2,435,349
1,822,058
23,512
2,940,503
1,932,382
825
Indirect (Scope 2)
Purchased electricity (kWh)
5,360,779
5,828,517
Subtotal
Total gross emissions (tCO2e)
Table 2: Intensity ratio
Total gross GHG emissions (tCO2e)
Total sales (£000)
Carbon intensity (tCO2e/£000)
448
4,718
146
5,312
1,440
1,440
6,752
541
5,078
27
5,646
1,651
1,651
7,297
2019
2018
6,752
7,297
225,389
217,290
0.030
0.034
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
24
Corporate responsibility (continued)
As set out in Table 3 below,
Manufacturing Operations have
a proportionately higher impact
on emissions than the Distribution
business. However recent
investments in Labels are focusing
on moving from high carbon intensity
activities to lower carbon methods
such as digital printing.
Macfarlane’s overall footprint
decreased 7.5% from 7,297 tonnes
to 6,752 tonnes. The intensity
calculation for 2019 reflects the
work completed with a reduction
in emissions based on turnover
from 0.034 to 0.030.
This is predominantly due to a
switch to hybrid petrol vehicles
with reduced consumption at
some manufacturing sites. However,
decreasing electricity emission
factors caused by decarbonisation
of the national grids of the UK and
Ireland has also been significant.
Emissions from natural gas
consumption decreased by 17%
at least partly due to a warm
2018/19 winter.
Electricity consumption
decreased by 7.3% which, due
to the decarbonisation of the UK
and Ireland national grids, resulted
in emission reductions from
purchased electricity of 11.8%.
Emissions from diesel fuel
decreased by 11.3%, largely driven
by a shift to diesel reclaims, but
also to a lesser extent by a slight
material increase in usage of petrol
hybrid vehicles.
Our policy of leasing the vast
majority of our premises allows us
to vary our property footprint to
ensure the maximum efficiency of
our operations, thereby minimising
the impact on the environment.
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 2020.
Taskforce on Climate-related
Financial Disclosures (TCFD)
Macfarlane Group supports the
recommendations of the Financial
Stability Board’s TCFD and
continues to make progress in
our consideration and response
to the issue of climate change.
The Board considers climate
change risk as part of its risk
management oversight. Areas
where climate related risks could
impact the business include
increased raw material prices,
increased business interruption
and/or reduced economic activity
due to the increased frequency
of extreme weather incidents.
Climate related risks and
opportunities are an integral part
of the Macfarlane Group strategy
as we seek to provide our customers
with the information and options to
allow them to make better informed
decisions about the impact of our
products and services on the
environment. Packaging is an
essential commodity for many
businesses, but it is important to
consider ways to minimise the impact
that packaging can have on the
environment, without compromising
on product protection.
Environmental impact rating
widely
recycled
20
recyclability
category
PAP
75%
recycled
content
reusable
Packaging and labels are essential
commodities for many businesses, but it
is important to consider ways to minimise
the impact that both can have on the
environment, without compromising
on product protection.
Table 3: Business segment
Business segment
Packaging Distribution
Manufacturing Operations
Total
2019
Tonnes
of CO2e
5,412
1,340
6,752
2018
Tonnes
of CO2e
5,277
2,020
7,297
2019
Sales
£000
2018
Sales
£000
2019
tCO2e/£000
2018
tCO2e/£000
196,706
28,683
225,389
189,835
27,455
217,290
0.028
0.047
0.030
0.028
0.074
0.034
Macfarlane Group PLC Annual Report and Accounts 2019 25
Further information can be
found on our website at
www.macfarlanegroup.com/
corporate-responsibility/
environment.
The assessment of climate
related risks and opportunities
is an ongoing area of focus for
Macfarlane Group and further work
is planned to fully understand the
impact of climate change on our
business and to ensure that we
have the appropriate mitigation
in place to mitigate these risks.
Waste management
The Group’s overall waste tonnages
decreased despite additional sales
and further acquisitions, maintaining
our waste management objectives to
deliver a high recycling and recovery
rate. This has been achieved during
2019 with support from Reconomy
initially and then by Footprint
Recycling, our new waste
management service provider, during
the year. We have been able to carry
out more site audits at our facilities,
local toolbox talks, and providing
reports to help manage waste
streams and costs together with
implementing continuous
improvement programmes in
monitoring waste volumes and
increasing segregations of waste
streams. Not all of our sites were
supported by Reconomy and
Footprint Recycling in 2019 and
therefore assumptions have been
made in the collection of certain data.
Our goal to achieve a ’zero to landfill’
status in 2019 was very close with
all businesses across the Group
achieving over 98.3% of waste
diverted from landfill. The levels of
waste segregated on site increased
to 73% (2018: 67%).
Our Labels division, through recycling
50 tonnes (2018: 69 tonnes) of
paper-based backing product as part
of their waste reduction programme,
again achieved the best result in the
Group with 99.9% (2018: 99.9%)
waste diverted from landfill.
Table 4 demonstrates significant
improvements in the recycling
and recovery rate figures in the
last ten years.
Further achievements in 2019 are:
• The majority of Macfarlane sites
now purchase electricity through
renewable sources.
• Four of our sites are now
registered as FSC® accredited,
facilitating the procurement
and distribution of sustainably
sourced products.
Our key environmental objectives
for 2020 include:
• Continuous review and appraisals
of all sites every quarter with a
view to making efficiencies;
• Consider options for capital
expenditure to improve efficiency
in the Group’s recovery and
recycling activities, taking into
account the findings from our
Energy Savings Opportunity
Scheme (’ESOS’) report;
• Incorporate all new sites under the
Group waste contract therefore
ensuring compliance, regular
reviews and appraisals to support
the overall Group targets;
• Continuation of our programme
to introduce LED lighting
throughout our sites;
• Deliver savings through the
Manufacturing Waste Reduction
Programme;
• Develop a transition plan to
register recent acquisitions
to BSI ISO 14001 Environmental
Management Standard; and
• Increasing the number of sites
capable of selling products which
are FSC certified as coming from
sustainable sources.
Macfarlane Group works in
partnership with its customers
and suppliers to ensure that we
provide an expert, independent and
tailored approach, which takes into
consideration the impact which the
products and services we provide
have on the environment.
One approach we take to achieve
this is by using 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.
Table 4: Recycling and recovery rate
Percentage
recycling and
recovery
(diversion from
landfill) per year
100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
2009 2010
2011 2012 2013 2014 2015 2016 2017
2018
2019
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 26
Corporate responsibility (continued)
To support our ongoing
commitment to improve our
environmental performance, we
pursue the following objectives:
• To ensure compliance with
all applicable environmental
legislation and regulations;
• To reduce emissions’ pollution;
• To improve waste management
practices;
• To reduce the consumption
of natural resources;
• To minimise noise and other
nuisances; and
• To continuously assess our
environmental performance.
These objectives are monitored
by an internal independent audit
process providing 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 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
2020, 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. A key objective in 2020
is the development of a transition
plan to register recent acquisitions
under the standard.
Health and Safety
The health, safety and welfare
of all 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.
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.
We continue to invest in our premises
and our equipment to improve the
safety of our business operations,
particularly in relation to the operation
of our machinery and vehicles.
The Accident Frequency Rate (‘AFR’)
representing the number of reportable
incidents per 100,000 man-hours
worked is shown in Table 5.
In 2019, we experienced a decrease
in AFR vs. 2018. This represented
4 reportable incidents compared to
11 in 2018. 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. Manual
handling and slips, trips and falls are
the highest causes of reportable
incidents and we continue to review
and improve our training and
oversight of these activities as
part of our ongoing commitment
to the safety of our people.
In 2019, the business focused
on behavioural health and safety,
including incident reporting, safety
observations and providing feedback
on safety performance.
Key achievements in 2019 included
the following:
• Reduction in accident frequency
rate to lowest figure for 4 years;
• Launch of new Safe Operating
Procedures across Packaging
Design and Manufacture
Operations and Group Logistics,
as part of a rolling programme
of review and development;
• 178% increase in reporting of
Safety Observations including
Positive Safety Observations,
which were introduced in 2019
to encourage sharing of good
practice across the Group;
• Introduction of award scheme
to encourage the reporting of
safety observations; and
• New online safety awareness
training introduced.
Table 5: Accident Frequency Rate (AFR)
Business segment
2019
2018
2017
2016
2015
Packaging Distribution
Manufacturing Operations
Group
0.15
0.43
0.23
0.48
1.20
0.73
0.53
0.22
0.43
0.42
1.11
0.64
0.34
0.46
0.38
Macfarlane Group PLC Annual Report and Accounts 2019 27
In 2020, our aim is to maintain our
continuous improvement approach
to health and safety at Macfarlane
Group through:
• Encouraging and promoting
good working practices;
• Ongoing development of
Safe Operating Procedures;
• Increased identification and
reporting of leading indicators;
• Root cause analysis of all
incidents, accidents and high
potential near misses; and
• Continued increase in the number
of Senior Management Safety
Checks being conducted.
We also recognise our commitment
to the safety of our drivers and
those who share the roads with
our delivery vehicles. We now have
camera systems fitted to many
of our vehicles and the roll out of
this initiative continues as part of
our commitment to continuous
improvement in our health and
safety performance.
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 key role
in overseeing the operation of all
Health and Safety, reviewing reports
on Health and Safety at each
meeting. This report covers
incidents, near misses, reportable
and non-reportable incidents.
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
through Net Promoter Score (NPS)
Surveys, an Annual Customer
Satisfaction Survey, Mystery
Shopper and online Trust Pilot
reviews. This feedback 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 and e-trading
system, Simplicit.e, and
www.macfarlanepackaging.com
are 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 2019, the percentage of sales
transacted online has decreased
from 11.5% to 9.5% and order
lines transacted online increased
to 23% vs. 22% in 2018.
Electronic documentation
In 2019, 91% (2018: 88%) of invoices
to our customers were delivered
electronically, further reducing our
paper usage. The Group is continuing
to encourage customers to receive
documentation electronically.
Table 6: Annual customer satisfaction scores
Packaging Distribution
Packaging Design and Manufacture
Labels
2019
93%
85%
91%
2018
90%
89%
96%
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 28
Corporate responsibility (continued)
Employees
Macfarlane Group understands
the importance of connecting with,
engaging and rewarding its people
as well as recognising the importance
of meaningful communication and
consultation in maintaining good
employee relations. The ability to
attract and retain the very best
people is crucial to ensuring the
growth of the business. As such,
maintaining a working environment
that promotes employee well-being,
personal development and positive
employee relations, at every level
is paramount.
Employee development
The Group encourages an
environment which gives individuals
the opportunity to develop their
careers and reach their full potential.
Through a variety of learning
opportunities and initiatives that are
designed to help employees develop
their skills the Company provide a
platform for personal development
creating opportunities for individual
growth whilst ensuring employees
have the correct skills and knowledge
to provide an outstanding service
to our customers.
The continued engagement with
apprenticeship schemes, alongside
the investment in both internal
and external training programmes,
including the Macfarlane Leadership
Programme, aimed at supporting
the development of future leaders,
has seen an increase in training
hours for the Packaging and Labels
business in 2019 to 16 hours per
employee. The Group, including
acquisitions has provided on
average 15 hours of training per
employee during 2019.
In addition to traditional methods
of training, the provision and
encouragement of on-line training
programmes has supported all
employees to engage in their
personal development, irrelevant
of role or geographical location.
The Company also provides
Sponsored Further Education
programmes, to support employee
engagement in long-term education.
Employee engagement
Macfarlane Group use a number of
ways to engage and communicate
with employees on a regular basis.
Through business update sessions,
functional forums and informal
review meetings a platform is
provided for employee participation
and involvement. A number of tools
are also used in order to obtain
employee feedback including
targeted employee questionnaires
and workshops. These forums
along with annual appraisals,
departmental meetings and
individual one-to-one discussions
provide an opportunity for our
employees, to engage in an open
two-way dialogue covering topics
including business performance,
strategic targets and the overall
wellbeing of our employees.
Interactive tools are also provided
to employees via mechanisms such
as tablets enabling employees to
gain information, advice and provide
feedback instantly. In addition
to supporting engagement with
the employee these interactive
tools support the provision of
outstanding customer service.
Company policy is to encourage the
employment of disabled persons
where the disabilities do not hinder
these persons in the performance
of their duties. Where an employee
becomes disabled every effort is
made to re-settle that employee in
a suitable post. Registered disabled
persons, once employed, receive
equal opportunities for training,
career development and promotion.
Engagement in local communities
and supporting charities is
encouraged. During 2019, we
supported events either from a
resource or a financial perspective.
Each year Macfarlane Group makes
a one-off donation to a charity
chosen by the workforce; for 2019
this was Cancer Research UK.
Macfarlane Group provides a platform for
personal development whilst ensuring
employees have the correct skills and
knowledge to provide an outstanding
service to customers.
Macfarlane Group PLC Annual Report and Accounts 2019 29
Non-financial
reporting regulations
In considering the requirement of
Non-financial reporting regulations,
we have summarised below where
further information on each of the
key areas of disclosure is provided.
• The description of business
model is set out on pages 6 and 7.
• Main trends/factors likely to
affect the future development,
performance and position of the
business are set out in the Business
and Financial reviews in the
Strategic Report on pages 4 to 29.
• Description of principal risks and
adverse impacts are set out in
the Strategic Report on pages
18 and 19.
• Non-financial KPIs are included
throughout the report in both the
business model section and the
corporate responsibility report.
• Commentary on Environmental
matters, Employees, Social and
Community matters, Human
Rights and Anti-Bribery and
Corruption are included in the
Corporate Responsibility Report
on pages 23 to 29.
Diversity
The gender breakdown of Directors,
Senior Managers and other Group
employees at the year-end is shown
in Table 7.
Gender Pay Gap
Macfarlane Group reported its
Gender Pay Gap information in
April 2019. This showed men’s
mean hourly rate to be 12.9% higher
than women’s and women’s median
hourly rate to be 9.9% higher than
men’s. The median pay gap in
favour of women is reflective of
the fact that our sales function is
predominantly female, while the
lower earning band of employees
in production and logistics is
predominantly male. These results
do however change when reviewing
the mean pay gap information. This
is reflective of the demographics
of the Senior Executive team and
those printers (typically male)
employed within Macfarlane Labels
as skilled professionals, who receive
competitive basic pay and a full shift
system, offering a significant uplift
on standard hourly rates.
Further details can be
found on our website
(www.macfarlanegroup.com).
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
Table 7: Diversity
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.
• 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).
No material breaches of the above
policies were noted during 2019,
nor were any matters of significant
concern reported through our
whistleblowing service.
2019
2018
Female
Male
Female
Directors
Senior Managers
All other employees
1
5
320
5
12
575
1
5
306
Male
5
12
560
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 30
Board of Directors
3
6
4
Bob McLellan
Non-executive Director and
Senior Independent Director
Bob joined the Board on 5 March 2013.
He was Chief Executive of DS Smith
Packaging UK until 2011, latterly as
Deputy CEO Packaging (UK and
Continental Europe). Bob has spent many
years working in the packaging sector
and has held leading roles in both the UK
and Continental Europe for industry
employer associations. He is currently
Chairman of the Logson Group and a
non-executive director of Swanline Print
Limited. Bob chaired the Remuneration
Committee until 31 August 2018 when
he was appointed as the Group’s Senior
Independent Director. He is a member
of the Nominations, Remuneration and
Audit Committees.
1
4
1
Stuart Paterson
Chairman
2
5
2
Peter Atkinson
Chief Executive
Stuart 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. Stuart
joined Angel Trains Group Limited as a
non-executive Director in September
2018, and chairs the Audit & Risk
Committee. He is also a trustee of the
Royal Yacht Britannia and a member
of their Audit, Risk and Remuneration
Committees. He also served as a
non-executive Director with Devro PLC
from 2006 to 2012, chairing the Audit
Committee. He chairs the Nominations
Committee and is a member of the
Remuneration Committee.
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, Europe and the USA.
3
John Love
Finance Director
John is a member of The Institute of
Chartered Accountants of Scotland and
has been with the Group for twenty-four
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.
Macfarlane Group PLC Annual Report and Accounts 2019
31
Corporate
information
Registration number
No. SC 004221
Registered in Scotland
Company Secretary
Derek L.H. Quirk
Registered office
3 Park Gardens
Glasgow G3 7YE
Telephone: 0141 333 9666
Email: info@macfarlanegroup.com
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 EC2N 1AR
Independent auditor
Deloitte LLP
110 Queen Street
Glasgow G1 3BX
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Derek Quirk
Company Secretary
Derek 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.
5
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 is currently an Honorary
Professor at Glasgow University’s Adam
Smith Business School. James is a
member of both the Research Panel and
the Technology Advisory Group of the
Institute of Chartered Accountants
of Scotland. James was appointed
as chair of the Audit Committee on
his appointment on 8 January 2018
and is a member of the Remuneration
and Nominations Committees.
6
Andrea Dunstan
Non-executive Director
Andrea joined the Board on 1 September
2018 and has significant experience in
the areas of performance management,
organisational development, strategy
and change management across several
sectors notably distribution and third
party logistics. She was most recently
Chief People Officer at Premier Farnell
PLC. Andrea is a non-executive Director
of Sumo Group PLC, where she is chair
of the Remuneration Committee and a
member of the Audit and Nominations
Committees. She is also a Non-executive
Director and Chair of the Remuneration
Committee at TI Fluid Systems PLC.
Andrea is a member of the Executive
Council of The University of Salford
where she also chairs the Remuneration
Committee. Andrea was appointed as
chair of the Remuneration Committee
on her appointment on 1 September
2018 and is a member of the Audit and
Nominations Committees.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
32
Report of the Directors
The Directors present their
annual report and the audited
financial statements of the
Group for the year ended
31 December 2019. Pages
4 to 51 inclusive comprise
the Directors’ report, which
in turn includes the Strategic
Report on pages 4 to 29.
These reports have been drawn up
and presented in accordance with and
in reliance upon applicable company
law and any liability of the Directors in
connection with these reports shall
be subject to the limitations and
restrictions provided by such laws.
Corporate governance
The information that fulfils the
requirement of the Corporate
Governance Statement can be found
in the Corporate Governance Section
on pages 44 to 51 (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
and policies are contained within the
Corporate Responsibility Report.
Cautionary statement
The Chairman’s Statement and the
Strategic Report 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, which
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. Nothing in this report and
the financial statements should be
considered or construed as a profit
forecast for the Group.
Results and dividends
The Group’s profit before tax
from continuing activities was
£12,024,000 (2018: £10,886,000).
This resulted in a profit for the year
of £9,731,000 (2018: £8,741,000).
The Directors declared an interim
dividend of 0.69p per share, which
was paid on 10 October 2019 (2018:
0.65p per share). The proposed final
dividend of 1.76p per share (2018:
1.65p per share) is subject to approval
by shareholders at the AGM in May
2020 and has not been included as a
liability in these financial statements.
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 to accommodate any
material investment requirements.
The Company has one class of
ordinary share, which carries no right
to fixed income. Each ordinary share
carries the right to one vote at general
meetings of the Company. There
are no restrictions on the size of
shareholdings nor on the transfer
of shares. Both are governed by the
Articles of Association and prevailing
legislation. The Directors are not
aware of any agreements between
the Company’s shareholders 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 and movements during
2019 are shown in note 20.
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 2018 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.
The Directors will propose an
ordinary resolution at the 2020 AGM
seeking authority to allot shares in
the Company under section 551
of the Companies Act 2006 up
to an aggregate nominal amount
of £13,151,000.
At the 2019 AGM, 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 £3,938,690, which expires
at the conclusion of the 2020 AGM.
A special resolution will seek to
renew for a further year the
authority over the existing unissued
and uncommitted ordinary share
capital of £3,945,300.
Employees and employee
share schemes
The Company’s policies for
employees and employee
engagement are set out in the
Corporate Responsibility Report.
Option awards are detailed in the
Directors’ Remuneration Report
with those awards outstanding at
31 December 2019 set out in note 26.
Macfarlane Group PLC Annual Report and Accounts 2019 33
Substantial holdings
Funds managed or advised by Rights & Issues Investment Trust plc
Funds managed by Canaccord Genuity Group Inc.
Funds managed or advised by Otus Capital Management
Funds managed or advised by Charles Stanley
Almadon Limited
Employee share schemes
The Remuneration Committee
supervises the award of longer-term
share incentives and specifies the
performance conditions at the time
of the award, having regard to the
objectives of the Company and
market practice at that time. Further
detail is given in the Directors’
Remuneration Report.
Substantial holdings of
shares in the Company
The Company has received
notification prior to 27 February
2020 in accordance with Rule 5 of
the Financial Conduct Authority’s
Disclosure and Transparency Rules
of the voting rights as a shareholder
of the Company in the table above.
Directors
The names of the Directors in office
at 31 December 2019 together with
short biographical details, are set
out on pages 30 and 31. The Board
considers its three Non-executive
Directors to be independent.
All Directors now retire by rotation
at the AGM in May 2020 and offer
themselves for re-election. P.D.
Atkinson and J. Love have service
contracts dated 6 October 2003
and 11 October 1999 respectively,
with notice periods of twelve
months. S.R. Paterson has a letter
of appointment dated 29 September
2017 with a notice period of six
months. R. McLellan, J.W.F. Baird and
A.M. Dunstan each have letters of
appointment dated 10 March 2019,
8 January 2018 and 1 September
2018 respectively, with a notice
period of three months.
No Director, either during or at
the end of the financial year, had an
interest in any contract relating to
the business of the Company or any
of its subsidiaries. The statement of
Directors’ interests in the ordinary
share capital of Macfarlane Group
PLC is contained in the Directors’
Remuneration Report on page 36.
There are no agreements between
the Company and its Directors
or employees that provide for
compensation for loss of office
or employment that occurs in
the event of 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 donations
It is Macfarlane 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 £3,945,300,
representing 10% of the current
share capital.
Number of
shares held
17,250,000
16,996,325
9,917,419
9,864,735
9,090,909
Percentage
10.9%
10.8%
6.3%
6.3%
5.8%
Disclosure of information
to auditor
The Directors holding 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.
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
Deloitte LLP were appointed as
auditors during the year, following
a tender process, described in the
Audit Committee report. A resolution
to re-appoint Deloitte LLP as the
Company’s auditor will be proposed
at the AGM in 2020.
Company information
The Company is registered in
Scotland (SC 004221) and its
registered office is at 3 Park
Gardens, Glasgow, G3 7YE.
Approval
The Strategic Report on pages 4 to
29, which is incorporated within the
Directors’ Report on pages 4 to 51
were approved by the Board on
27 February 2020.
Derek L.H. Quirk
Company Secretary
27 February 2020
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 34
Remuneration report
Remuneration Committee Chair’s summary statement
On behalf of the Board, I am
pleased to present the Directors’
Remuneration Report for the year
ended 31 December 2019, which has
been drawn up under the provisions
of the Enterprise and Regulatory
Reform Act 2016 taking into
account the new requirements
of The Companies (Miscellaneous
Reporting) Regulations 2018.
In addition to this statement the
Directors’ Remuneration Report
includes the Annual Report on
Remuneration on pages 35 to 40.
Shareholders will be asked to approve
our Directors’ Remuneration Report
at our AGM in May 2020 as a normal,
annual advisory vote. For information,
we have also provided a summary of
the Remuneration Policy, approved
by shareholders at the 2019 AGM,
on pages 41 to 43. This does not form
part of the Directors’ Remuneration
Report which shareholders are being
asked to approve at our 2020 AGM.
The Company has a Remuneration
Committee constituted in
accordance with the 2018 UK
Corporate Governance Code.
The Committee comprises three
independent Non-executive
Directors plus the Company
Chairman. The Committee
determines the remuneration for
the Executive Directors and also, in
consultation with the Chief Executive,
determines the total individual
remuneration package of his direct
reports, setting incentive targets
and determining share award levels
to ensure a competitive reward is
available for key executives within an
appropriate governance framework.
Remuneration in 2019
I am grateful for the support
which our shareholders gave
on the resolutions to approve our
Directors’ Remuneration Report for
2018 and the renewed three-year
Directors’ Remuneration Policy
at our 2019 AGM.
The Group results for 2019 are
as set out in our Strategic Review.
We believe these are appropriately
reflected in the Annual bonus
outcomes for 2019 (46% and 41%
of maximum; 22.98% and 20.48%
of base salary for our two Executive
Directors). We have disclosed the
performance measures for our 2019
Annual bonus plan on page 35.
In May 2019, we also made our first
Performance Share Plan (’PSP’)
awards since 2015. These were
made subject to three year EPS
growth targets, which the Committee
regards as appropriately stretching.
The range of fully diluted EPS before
exceptional items of 6.77p to 8.12p,
to enable vesting, represent a three-
year CAGR range of between 5.8%
and 12.5%. In addition, as an underpin,
no part of a PSP award will vest unless
the Remuneration Committee also
considers that Macfarlane’s overall
performance during the three-year
period to 31 December 2021
warrants vesting. These PSP awards
from 2019 onwards are subject to a
two-year holding period following the
initial three-year performance vesting
period. Executive Directors hold
Macfarlane Group shares worth
between 2.5 and 4 times salary
at 31 December 2019.
The level of PSP awards in 2019 for
our Executive Directors were over
shares worth 100% of the Directors’
base salaries as permitted by the
Directors’ Remuneration Policy. The
Committee had anticipated making
PSP awards at 50% of base salary
and included a statement in the 2018
Directors’ Remuneration Report to
this effect, but after consideration
and further review, the Committee
determined that PSP awards at
100% of base salary should be made
in 2019. The reason for this change of
approach was to recognise that these
awards were the first PSP awards
made since 2015, and accordingly it
was considered to be in shareholders’
interests to ensure that our Executive
Directors are appropriately aligned to
shareholders through slightly larger,
but still modest PSP awards that
directly link potential reward to the
future performance of the Company.
Our Chairman consulted with a
number of our leading shareholders
on this matter before these PSP
awards were granted following
our AGM in May 2019.
Remuneration in 2020
The key components of executive
remuneration at Macfarlane in
2020 are substantially unchanged
from 2019:
• Basic salary and benefits – Base
salaries have increased by 2% from
1 January 2020 (2019: 2%) in line
with the wider employee population
• Annual bonus – in 2020 there
is again a maximum payment
opportunity of 50% of salary with
40% of salary based on Profit
before tax (’PBT’) performance
and 10% of salary based on
personal objectives. Payment of
the personal objectives element
of the Annual bonus is subject
to achieving a threshold PBT
performance. All annual bonus
payments are subject to the
discretion of the Committee
• Pension – pension contribution
levels are unchanged from 2019
• Long term incentives – the
Committee’s intention is to
make further PSP awards in 2020.
The level of 2020 PSP awards for
Executive Directors will be over
shares with a value equivalent
of up to 100% of base salaries.
Vesting will again be subject to
three-year EPS growth conditions
with a further underpin vesting
condition. Details of the
performance conditions for these
awards will be set out in the 2020
Directors’ Remuneration Report.
I do hope that you will feel able to
continue to support the resolution to
approve this Directors’ Remuneration
Report at the AGM in May 2020.
Andrea Dunstan
Chair of the Remuneration Committee
27 February 2020
Macfarlane Group PLC Annual Report and Accounts 2019 35
Annual report on remuneration
The details set out on page 35 and 36 of this report have been audited by Deloitte LLP.
Single total figure of remuneration for each Director
Salary
and fees
£000
Taxable
benefits
£000
Pension
costs
£000
Fixed
pay
£000
Bonus
£000
Variable
pay
£000
Total
pay
£000
2019
Chairman
S.R. Paterson
Executive Directors
P.D. Atkinson
J. Love
Non-executive Directors
R. McLellan
J.W.F. Baird
A.M. Dunstan
Total
2018
67
355
176
34
34
34
700
–
16
9
–
–
–
25
–
78
33
–
–
–
111
67
449
218
34
34
34
836
–
81
36
–
–
–
–
81
36
–
–
–
117
117
Salary
and fees
£000
Taxable
benefits
£000
Pension
costs
£000
Fixed
pay
£000
Bonus
£000
Variable
pay
£000
Chairman
S.R. Paterson
Executive Directors
P.D. Atkinson
J. Love
Non-executive Directors
R. McLellan
J.W.F. Baird (appointed January 18)
A.M. Dunstan (appointed September 18)
M. Arrowsmith (retired August 18)
Total
66
348
172
33
32
11
22
684
–
16
8
–
–
–
–
–
76
33
–
–
–
–
66
440
213
33
32
11
22
24
109
817
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Taxable benefits relate to provision of a company car (or equivalent allowance) and private medical insurance.
Directors’ pension entitlements
P.D. Atkinson receives a cash allowance which equates to 25% of basic salary, including the related employer’s national
insurance contributions. J. Love is a member of Macfarlane Group PLC Pension & Life Assurance Scheme (1974) and
the basis of his benefits is consistent with all active members of the scheme. His accrued pension at 31 December
2019 was £47,300 (2018: £45,100). The related transfer value was £946,000 (2018: £902,000) calculated using HMRC
guidelines. The scheme’s normal retirement date is 65 with no automatic entitlement to early retirement.
Annual bonus for the year ended 31 December 2019
Annual bonus is based on performance against financial targets and personal objectives as set out in the
Remuneration Policy. Bonuses are paid in cash following Board approval of the Group Accounts each year.
The financial targets for 2019 are shown below:
Threshold
Target
Maximum
Actual performance
Payout as a % of salary
25% of incentive
50% of incentive
100% of incentive
2019 profit before tax
£11.75m
£12.25m
£13.75m
£12.02m
15.48%
67
530
254
34
34
34
953
Total
pay
£000
66
440
213
33
32
11
22
817
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 36
Remuneration report (continued)
A bonus of up to 10% of base salary is also payable for achievement of personal performance objectives. No bonus
is payable under the personal performance element unless the threshold level of PBT, £11.75 million, is achieved.
The table below summarises the personal achievements of the Executive Directors.
P.D. Atkinson
J. Love
Payout
% of maximum
7.5%
5.0%
75%
50%
The total bonus payable for 2019 to P.D. Atkinson was £81,476 (22.98% of salary) and to J. Love was £35,968
(20.48% of salary) respectively.
Long term incentives for the year ended 31 December 2019
The Company operates a PSP under which shares are awarded which vest subject to performance over a three-year
period. There were no outstanding awards due to vest during 2019.
Grant of 2019 PSP awards
Awards were granted in 2019 over shares worth 100% of salary to each Executive Director, which will vest subject
to EPS targets for the financial year ended 31 December 2021. The EPS performance conditions are shown below:
Threshold (25% of maximum)
Maximum (100%)
EPS targets (based on fully diluted
EPS before exceptional items)
6.77p
8.12p
Vesting of the award will also be subject to an underpin assessment by the Remuneration Committee that it must
be satisfied regarding overall Company performance before vesting is confirmed. The awards are subject to a
two-year post-vesting holding period.
Awards held at
1 January 2019
Awards granted
during the year
Awards exercised
during the year
Awards lapsed
during the year
Awards held at
31 December 2019
P.D. Atkinson
J. Love
–
–
330,123
163,525
–
–
–
–
330,123
163,525
The 2019 PSP awards were granted at the three-day average share price of 107.4p from the last trading day prior to
grant on 17 May 2019. The face value of awards made in the year was £354,552 to P.D. Atkinson and £175,626 to J. Love.
Payments to past Directors
No payments were made to former Directors in the year or payments made for loss of office.
The shareholdings and share interests of the Directors in office at 31 December 2019 were as set out below:
S.R. Paterson
P.D. Atkinson
J. Love
R. McLellan
J.W.F. Baird
A.M. Dunstan
2019
2018
Beneficial
Options
Beneficial
Options
120,000
854,172
800,000
102,819
66,605
10,000
–
330,123
163,525
–
–
–
120,000
854,172
800,000
102,819
66,605
10,000
–
–
–
–
–
–
Executive Directors are expected to build up a prescribed level of shareholding equivalent to 100% of base salary.
Both P.D. Atkinson and J. Love materially exceed these requirements.
Options held by P.D. Atkinson and J. Love are in respect of the PSP awards made in 2019. These are unvested and
subject to the achievement of performance targets as described above.
The share price ranged from 73.00p to 109.00p in the year. The closing share price on 31 December 2019 was 107.75p.
Macfarlane Group PLC Annual Report and Accounts 2019
37
The remainder of the Annual report on remuneration is not subject to audit.
Performance graph and table
The graph below 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 2010. 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 Macfarlane
Group for this purpose.
Total shareholder return index
900
800
700
600
500
400
300
200
100
0
Macfarlane
Group
FTSE All-Share
Index for
Support
Services
Source:
Thomson
Reuters
2010 2011
2012 2013 2014 2015 2016 2017 2018 2019
CEO single figure
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
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
P.D. Atkinson
Fixed
remuneration
£000
Variable
remuneration
£000
Single figure of total
remuneration
£000
Annual variable
element award vs.
maximum opportunity
Long term incentive
vesting against
maximum opportunity
449
440
433
424
416
408
400
392
400
396
81
0
81
92
92
178*
16
70
15
15
530
440
514
516
508
586
416
462
415
411
46%
0%
48%
55%
56%
46%
10%
45%
10%
10%
n/a
n/a
0%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
* This includes £105k in respect of the exercise of options which vested in 2007.
Percentage change in remuneration of CEO and employees
The table below shows the % change in remuneration from 2018 to 2019 for the CEO and all Group employees.
Change in
Base salary
Benefits
Bonus
No bonus was paid to the CEO in 2018 hence the level of change.
Average for
all eligible
Group
employees
2.0%
11.0%
82.5%
CEO
2.0%
0.0%
100.0%
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
38
Remuneration report (continued)
Relative importance of spend on pay
The difference in expenditure between 2018 and 2019 on remuneration for all employees in comparison to the
distribution to shareholders by way of dividend is set out below:
Total employee pay
Dividend
2019
£000
30,311
3,689
2018
£000
27,791
3,387
Change
+9.1%
+8.9%
CEO to employee pay ratio
The table below shows the ratio of total remuneration for the CEO to that of the lower quartile, median and upper
quartile paid employee.
Financial year
Method
2019
Option B
25th percentile
pay ratio
50th percentile
pay ratio
75th percentile
pay ratio
24.6 : 1
18.9 : 1
16.4 : 1
Notes to CEO to employee pay ratio
Option B, using the gender pay gap reporting data to identify the individuals who represent the three quartiles,
was chosen as the methodology as this data was readily available on a Group-wide basis.
Total remuneration for the CEO and for the individuals who represent the three quartiles was determined for the
year to 31 December 2019. The three individuals are all full-time employees and are considered to be representative
of the 25th percentile, median and 75th percentile pay levels in the Company.
The median pay ratio is reflective of Macfarlane’s approach, including our policy of not paying excessive salaries
to Executive Directors. There was no PSP award vesting in the year, which resulted in a lower ratio than would
otherwise have been the case.
The table below shows the total pay and benefits and the salary component of total pay for the three quartiles.
Financial year
2019
Salary component of total pay and benefits
50th percentile
75th percentile
25th percentile
25th percentile
Total pay and benefits
50th percentile
75th percentile
£18,585
£26,998
£30,600
£21,554
£28,078
£32,324
Statement of implementation of remuneration policy in 2020
The salaries of the Chief Executive and the Finance Director were increased by 2.0% to £361,644 and £179,143
respectively with effect from 1 January 2020, which is in line with the average increase for the Group’s workforce.
Fees paid to the Chairman and Non-executive Directors also increased by 2.0% to £68,931 and £34,465
respectively from 1 January 2020.
There are no changes proposed to the operation of benefits and pensions from the bases operated in 2019.
Executive Directors will be eligible to receive an annual bonus of up to 50% of base salary, with 40% of salary based
on PBT targets and 10% of salary based on personal objectives. No element of the annual bonus is payable if the
PBT threshold target is not achieved. The precise targets are considered by the Board to be commercially sensitive
at this time, but will be disclosed in next year’s Directors’ Remuneration Report.
The Remuneration Committee intends to make awards under the PSP based on the following principles:
• An annual award over shares with a face value of up to 100% of salary (within the existing 100% of salary limit);
• A fixed three year performance period (with no re-testing);
• A two year post-vesting holding period;
• A performance condition based on Earnings per share performance with a 25% threshold level for vesting and
subject also to an ’underpin’ assessment by the Remuneration Committee that it must be satisfied regarding
overall Company performance before vesting is confirmed; and
• The precise targets will be set by the Committee at the time of the award and will be disclosed in next year’s
Directors’ Remuneration Report.
Macfarlane Group PLC Annual Report and Accounts 2019 39
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 47.
The Remuneration Committee used the services of FIT Remuneration Consultants LLP to advise on certain
aspects of remuneration during 2019 and fees of £12,597 were charged for the year for that advice. The Directors
consider FIT Remuneration Consultants LLP to be independent of the Group and objective in their advice.
Remuneration Committee’s reporting obligations
The Remuneration Committee considered its obligations under the 2018 UK Corporate Governance Code
and concluded that:
• The Directors’ Remuneration Policy, as approved by shareholders in May 2019, and our implementation of the
Policy (including the use of PBT and personal performance measures for the Annual bonus and EPS performance
measures for the PSP) support the Company’s strategy.
• The use of PBT and EPS measures reflect the Company’s focus on growing profits and our aims of paying an
attractive level of dividend balanced against the need to retain funds in the business to finance growth, make
pension contributions, fund acquisitions and meet capital expenditure requirements.
• Remuneration for the Executive Directors remains appropriate and consistent with our policy of not paying
excessive salaries. The Remuneration Policy operated as intended in the year, with our Annual bonus plan
delivering 46% of the maximum bonus opportunity to our Chief Executive in the year. This reflects another
strong year for Macfarlane Group in which we exceeded the PBT threshold, although performance fell short
of the maximum stretch level. The maximum stretch targets are deliberately set at challenging levels so as
to reward only truly exceptional performance.
In addition, the Committee addressed the six factors outlined in Provision 40 of the 2018 Code when determining
the Executive Directors’ remuneration.
• Clarity – Our Policy is well understood by the Executive Directors and by our shareholders, with whom we
engaged when revising the Policy last year.
• Simplicity – The Remuneration Committee is conscious that overly complex remuneration structures are less
impactful than simple structures and has strived to keep Executive Directors’ pay as simple as possible whilst
also offering a competitive remuneration package.
• Risk – Our Policy has been designed to ensure that it does not promote excessive risk taking (for example, the
annual bonus and PSP operate on sliding performance scales, rather than relying on binary performance targets)
and prevents ‘payment for failure’ through modest fixed remuneration and the use of stretching financial
performance targets. The PSP, which forms the majority of variable pay opportunity, is delivered in shares which
vest after three years, with a further two-year holding period, ensuring a link to sustained, long-term performance.
Malus and clawback apply to both the annual bonus and the PSP.
• Predictability – Incentive plans for our Executive Directors are subject to individual and overall caps, ensuring
that the Remuneration Committee has control over levels of reward. The weighting of variable pay opportunity
towards the PSP means that actual pay outcomes are highly aligned to the experience of our shareholders.
• Proportionality – All pay levels are appropriately proportionate, not excessive and reflect Macfarlane Group’s
outlook and culture. Executive Directors’ fixed remuneration is set, after consideration of external benchmarks,
at a level that is competitive but affordable for Macfarlane Group, with variable pay linked to the achievement
of stretching performance targets.
• Alignment to culture – The performance targets which are used to measure both the annual bonus and the
PSP are stretching, consistent with Macfarlane Group’s performance-led culture. We do not believe that variable
pay should be paid for poor performance and have a long track record of setting robust performance targets.
The Remuneration Committee receives a report on pay and benefits across the Company which it considers when
setting remuneration for Executive Directors. While employees are not directly consulted when setting Executive
Directors’ remuneration, Andrea Dunstan acts as designated Non-Executive Director for employee engagement
in addition to her role as Remuneration Committee Chair, and so the Remuneration Committee is fully updated
on any views on remuneration which arise from the engagement process.
Whenever the Board has engaged with shareholders during the year, it has received generally positive feedback,
including on remuneration matters.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 40
Remuneration report (continued)
Statement of voting at the Annual General Meeting on 14 May 2019
The Directors’ Remuneration Report received the following votes from shareholders.
For
Against
Total votes cast (for or against)
Votes withheld
Total
The Directors’ Remuneration Policy received the following votes from shareholders.
For
Against
Total votes cast (for or against)
Votes withheld
Total
Total number
of votes % votes cast
55,236,967
8,154,946
87.14%
12.86%
63,391,913
100.00%
227,393
63,619,306
Total number
of votes % votes cast
58,469,089
5,101,010
91.98%
8.02%
63,570,099
100.00%
49,207
63,619,306
Votes received on 14 May 2019 (including votes withheld) amounted to 40.38% of the issued share capital.
Macfarlane Group PLC Annual Report and Accounts 2019 41
Remuneration policy
Pages 41 to 43 detail the principal features of the Directors’ Remuneration Policy approved at the 2019 AGM,
which is shown in full under the Corporate Governance section of the Group website (www.macfarlanegroup.com).
Salary (fixed pay)
Link to strategy
Operation
Opportunity
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 Committee reviews base salaries annually with changes effective from 1 January.
This review takes into account practices elsewhere in the Group. Salary is pensionable.
There is no prescribed maximum salary or maximum rate of increase. The Committee takes
into consideration the general increase for the broad employee population but on occasion
may recognise changes in responsibility, development in the role or specific retention issues.
Retirement benefits (fixed pay)
Link to strategy
Provide competitive pension arrangements to aid recruitment/retention of senior executives.
Operation
The Group pays a pension allowance or contributes to a pension scheme for Executive
Directors. The Group’s legacy defined benefit scheme has been closed to new members
since 2002 and the pensionable salary frozen in 2010. Pension contributions for new
appointments will be kept under review in line with developing market practice.
Opportunity
Company contribution of up to 25% of base salary or equivalent cash allowance in lieu
(inclusive of employer’s national insurance contribution) are currently paid.
Other benefits (fixed pay)
Link to strategy
Operation
Opportunity
Provide cost effective benefits to aid recruitment and retention of senior executives
and to support the wellbeing of employees.
Benefits include, car allowance or company car, private medical insurance, permanent
health insurance and any other such benefits as the Committee considers appropriate.
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.
Annual bonus (variable pay)
Link to strategy
Operation
Opportunity
Performance measures
Incentivise performance over a 12 month period based on the attainment of 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 Committee’s
assessment of delivery against personal objectives. Bonus awards are subject to malus
and clawback provisions for 2 years following the award.
Maximum bonus potential capped at 100% of base salary but remains at 50% for 2019.
The Annual bonus is not pensionable.
Performance measures 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
judgement to adjust the outcome of the plan for any performance measure (from zero to any
cap) should it consider that to be appropriate.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 42
Remuneration policy (continued)
Long term incentives (variable pay)
Link to strategy
Incentivise delivery of strategic targets and sustained performance over the long-term.
Operation
Conditional awards over shares may be granted each year, which can be earned subject to
delivery of performance goals. The Committee will set such performance conditions on PSP
awards as it considers appropriate (whether financial or non-financial and corporate, divisional
or individual). These conditions are for a fixed 3 year period with no re-testing.
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.
LTIP awards are subject to malus and clawback provisions for 3 years following vesting.
Opportunity
Awards are capped at a maximum of 100% of base salary in normal circumstances (200%
in exceptional circumstances).
Performance measures
Conditional awards will vest based on three-year performance against challenging financial
and other targets set and assessed by the Committee in its discretion.
Clawback/malus in the Annual bonus and long term incentives
Provisions are in place for both Annual bonus and LTIP arrangements to operate malus and/or clawback in certain
exceptional circumstances, including the material misstatement of the Company’s results (annual bonus and LTIP),
if the assessment of performance on which vesting is based was based on an error (LTIP only) or circumstances
which would warrant the summary dismissal of the individual, whether or not the Company has chosen to do so.
Consideration of employment conditions elsewhere in the Group
There is a periodic employee survey and the Board receives a regular presentation from the Director of Human
Resources, which includes consideration of the Group’s remuneration policies. As a result, the Remuneration
Committee has not conducted a specific employee consultation exercise on the Directors’ remuneration policy.
While appropriate benchmarks vary by role, the Company seeks to apply the philosophy behind this policy across
the Group as a whole. Where the Company’s pay policy for Directors differs from its pay policies for groups of
employees, this reflects the appropriate market rate position and/or typical practice for the relevant roles. The
Committee takes into account pay levels, bonus opportunity and share awards across the Group when setting
the Remuneration Policy.
Consideration of shareholder views
The Committee considers shareholder feedback received as part of any dialogue with shareholders via the
Chairman, executive management or the Company’s brokers. Where necessary the Remuneration Committee
Chair will engage pro-actively with shareholders such as in advance of proposed awards under the Performance
Share Plan.
Approach to recruitment remuneration
The Remuneration Committee will follow the above policy when setting remuneration for a new Executive
Director. Base salary will be set at a competitive level appropriate for the role and experience of the Director
being appointed. In the case of an external appointment, the Committee may consider it appropriate to recognise
awards or benefits that will or may be forfeited on resignation from the previous appointment. This may be cash
and/or share awards but the maximum payment will be no more than the Committee considers is required to
provide reasonable compensation.
If the Director is required to relocate then reasonable relocation, travel and subsistence payments will be provided
at the discretion of the Committee and for a period of no more than two years following appointment.
Service contracts and letters of appointment
Executive service contracts have a standard notice period of 12 months. The Committee reserves flexibility
to alter these principles to secure the appointment of an appropriate candidate and if appropriate introduce a
longer initial notice period, of up to two years, reducing over time. Executive Directors may accept appointments
outside the Company provided the Board’s permission is obtained, however the Board may require the fees from
these appointments to be accounted for to the Company. Neither P.D. Atkinson nor J. Love currently hold any
external appointments.
Macfarlane Group PLC Annual Report and Accounts 2019 43
Chairman and Non-Executive Director appointments are made using letters of appointment for periods not
exceeding three years subject to re-election at the AGM and contain notice periods of six months and three
months respectively.
Non-executive Director remuneration policy
Chairman
Link to strategy
To attract and retain a high-calibre Chairman by offering a market competitive fee level.
Operation
Opportunity
The Chairman is paid a single fee for all his responsibilities, which is reviewed periodically
by the Committee with reference to other comparable companies.
The current fee is £68,931 and is subject to periodic change under this policy. There is no
maximum fee level.
Non-executive Directors
Link to strategy
Operation
Opportunity
To attract and retain high-calibre Non-executive Directors by offering a market competitive
fee level.
Non-executive Directors are paid a basic fee. Committee Chairs may be paid a supplement
to reflect additional responsibilities. Fee levels are reviewed periodically by the Chairman
and the Executive Directors with reference to other comparable companies.
The current fee is £34,465 and is subject to periodic change under this policy. There are
currently no supplementary fees paid and there is no maximum fee level.
Payment for loss of office
The Committee’s policy for an Executive Director whose employment is to be terminated is to agree a termination
payment based on the value of base salary, contractual pension contributions and other benefits that would have
accrued during the contractual notice period unless there has been a breach of the service agreement by the Director.
The policy is that the departing Director may work or be placed on garden leave for all or part of their notice period
or receive payment in lieu of notice in accordance with the service agreement. The Committee supports the
principle of mitigation and phased payments relative to any settlement and will take legal advice in relation to any
settlements to be proposed. Share-based entitlements for Executive Directors will be determined based on the
relevant plan rules.
The Company has the power to enter into settlement agreements with Directors and to pay compensation to
settle potential legal claims. This policy does not include an explicit cap on the cost of termination payments.
Committee discretions
The Committee has discretion, consistent with market practice, including the terms and the termination of any
contract, in relation to the operation and administration of share plans. Any use of these discretions would be
explained in the Director’s Remuneration Report and if appropriate be the subject of consultation with major
shareholders. The Committee may make minor amendments to the policy set out above without obtaining
shareholder approval.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 44
Corporate governance
The Company is committed
to the principles of corporate
governance set out in the
Financial Reporting Council’s
(‘FRC’). UK Corporate
Governance Code issued
in 2018 (‘the Code’). The
Company’s compliance is set
out in the narrative statement
on pages 44 to 51 and for
Directors’ remuneration in
the Directors’ Remuneration
Report on pages 34 to 43.
Stuart R. Paterson
Chairman
Compliance
The Company fully complied with
all the Code provisions during 2019.
The Company’s auditor, Deloitte
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 Code specified for its review by
the Financial Conduct Authority’s
Listing Rules and to report if it does
not reflect such compliance.
The Board
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 Board comprises the Chairman,
three independent Non-executive
Directors and two Executive
Directors. Their names and
biographical details, illustrating their
range of experience and the benefit
that each Director’s appointment
brings to Macfarlane Group are
set out on pages 30 and 31. 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,
systems of risk management and
the Group’s governance structure
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
effectively fulfil their responsibilities.
Details of Executive Directors’
service contracts are given in
the Directors’ Report with both
Executive Directors’ service
contracts having notice periods
of one 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 have
remained in force throughout 2019
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 30. The Board is satisfied
that these do not interfere with
the performance of Group duties,
which is based on a commitment of
approximately 45 days per annum.
The Board considers its
Non-executive Directors, Bob
McLellan, James Baird and Andrea
Dunstan to be independent both
in character and judgement.
None 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.
Macfarlane Group PLC Annual Report and Accounts 2019
The balance of the Board’s skills
and experience is kept under regular
review. The Board’s succession
plans recognise the need to
consider diversity within the
Group and in Board composition
in the medium-term. We are also
committed to improving the
sustainability both of our operations
and of the products that we offer
our customers. The Board
recognises that both of these
objectives are to the benefit
of all stakeholders of the Group.
The roles of the Chairman
and Chief Executive
The division of responsibilities
between the Chairman and the
Chief Executive is very 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
Directors to bring independent
judgement to bear on all issues. The
Chairman facilitates the effective
contribution of Non-executive
Directors and ensures effective
communication channels with
shareholders. The Chief Executive’s
responsibilities focus on managing
the business and implementing
the Group’s strategy.
Senior Independent Director
Bob McLellan is the Senior
Independent Director. Shareholders
may contact him directly if they
feel their concerns are not being
addressed and resolved through
existing mechanisms for investor
communication.
Re-election of Directors
At the 2020 AGM, all Directors fall
due to retire and, being eligible, offer
themselves for election. Directors’
service contracts and letters of
appointment will be available for
shareholder review prior to the
AGM on 12 May 2020.
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.
45
Board procedures
The Group is controlled by the 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 for
and safeguard the interests of all
shareholders within the appropriate
legal and regulatory framework. The
Board met seven times during 2019
and individual attendance at those
and the Board Committee meetings
is set out in the table on the following
page. In 2019, 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 for 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,
approval of capital expenditure below
Board authority levels and the
development and implementation
of risk management systems.
Board agendas are set by the
Chairman, who consults with the
Chief Executive and discusses
the agendas with the Company
Secretary. A programme of areas
for discussion is maintained by
the Company Secretary to ensure
that all matters reserved for the
Board and any other key issues are
addressed at the appropriate time.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 46
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. These and other regular
reports and papers are circulated
to the Directors in a timely manner
in preparation for Board and
Committee meetings and are
supplemented by information
specifically requested by the
Directors from time to time.
Accountability
The Board is responsible for
presenting a fair, balanced and
understandable assessment of
the Group’s position and prospects
and asks the Audit Committee to
consider and advise the Board
of its view.
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 65, 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 40.
Board and Committee meetings
The number of regular Board and
Committee meetings attended by
each member during 2019 is shown
in the table below.
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
an annual performance evaluation
of the Board, its Committees and
individual Directors. All Directors are
made aware 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 strategic
objectives and the performance
and processes of the Board and all
Board Committees. The results are
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.
The three Non-executive Directors
conduct an annual performance
evaluation of the Chairman.
Relationships with shareholders
The Group maintains a
corporate website
(www.macfarlanegroup.com)
containing a wide range
of information of interest to
institutional and private investors.
Detailed reviews of the
performance and financial position
are included in the Strategic Report
on pages 6 to 29 of this report.
The Board uses this, together with
the Chairman’s Statement on pages
4 and 5 and the remainder of the
Report of the Directors, 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 regular
discussions with institutional
shareholders, including meetings
led by the Chief Executive and the
Finance Director, following the
announcement of the annual
results in February and the interim
results in August. Individual
requests for discussions from
shareholders are considered.
Attendance by Directors at Board and Committee meetings during 2019
Stuart Paterson
Peter Atkinson
John Love
Bob McLellan
James Baird
Andrea Dunstan
Chairman
Chief Executive
Finance Director
Senior Independent Director
Non-executive Director
Non-executive Director
Board
Audit
Committee
Remuneration
Committee
Nominations
Committee
7 (7)
7 (7)
7 (7)
7 (7)
7 (7)
7 (7)
6 (6)*
–
–
5 (6)
6 (6)
6 (6)
4 (4)
–
–
4 (4)
4 (4)
4 (4)
3 (3)
–
–
3 (3)
3 (3)
3 (3)
Figures in brackets indicate the maximum number of meetings in 2019 for which the individual was a Board or Committee member. Where a Director cannot
attend a Board or Committee meeting, any comments the Director has on the papers being reviewed at that meeting are relayed in advance for consideration.
* The Chairman attends but is not a member of the Audit Committee.
Macfarlane Group PLC Annual Report and Accounts 2019 The Board receives feedback on
shareholder meetings including
broker feedback for the meetings
scheduled around the two results’
announcements. 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 all
shareholders have an opportunity
to raise questions with members
of the Board on matters relating
to the Group’s operations and
performance during the meeting
and to meet Directors after the
formal proceedings have ended.
Details of the resolutions to be
proposed at the AGM can be
found in the Notice of Meeting
accompanying the Annual Report
and Accounts. The Notice of
Meeting is sent out more than
20 days in advance of the meeting.
In line with the requirements of the
Code, the results of proxy votes are
disclosed at the AGM, notified to
the Stock Exchange and made
available on the Group website
following the meeting.
47
Nominations Committee
The Nominations Committee
during 2019 was as follows:
Remuneration Committee
The Remuneration Committee
during 2019 was as follows:
Stuart Paterson (Chair)
Bob McLellan
James Baird
Andrea Dunstan
The Nominations Committee
met 3 times during 2019 and
its terms of reference are
available on the Group website
(www.macfarlanegroup.com).
The principal work undertaken by the
Nominations Committee in 2019 was
to consider and recommend that the
Company propose for re-election
any Directors falling due for
re-appointment at the AGM.
The Committee’s ongoing
responsibilities include reviewing
the structure, size and composition
of the Board and giving full
consideration to succession
planning for both executive and
Non-executive 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.
Following a Nominations Committee
held on 21 February 2019 the
Committee proposed Bob McLellan
and John Love for re-election at
the AGM on 14 May 2019.
No Director is involved in any
decisions regarding their own
appointment or re-appointment.
Andrea Dunstan (Chair)
Bob McLellan
James Baird
Stuart Paterson
None of the members of the
Remuneration Committee during
2019 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 4 times during 2019 and
its terms of reference are
available on the Group website
(www.macfarlanegroup.com).
The principal work undertaken
by the Remuneration Committee
in 2019 was:
(a)
To review performance against
2019 financial and personal
objectives and to conclude on
the appropriate performance
related reward under the Annual
bonus plan for senior executives
including the Executive Directors;
(b) To approve the financial and
personal objectives for 2020
in relation to the performance
related Annual bonus plan;
(c) To consider awards of
share-based incentives using
the PSP and determining the
performance conditions for
these awards; and
(d) To approve the Directors’
Remuneration Report.
The work of the Remuneration
Committee is described within the
Directors’ Remuneration Report
on pages 34 to 43.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
48
Corporate governance (continued)
Audit Committee
During 2019 the Audit Committee
comprised:
James Baird (Chair)
Bob McLellan
Andrea Dunstan
James Baird was appointed as Chair
of the Committee on 8 January 2018
given his relevant experience. The
remaining Committee members,
Bob McLellan and Andrea Dunstan
have a wide range of commercial
experience as evidenced in their
biographical details on pages 30 and
31. The Company Chairman attends
meetings to give the benefit of his
relevant experience but is no longer
a member of the Committee.
The Committee Chairman will be
available to answer questions on
any aspect of the Committee’s
work at the AGM.
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. The overall responsibility for
the systems of internal control and
for reviewing their effectiveness
rests with the Board.
• Internal audit
The Committee monitors and
reviews the effectiveness of the
Company’s internal audit function
and its terms of reference
annually and recommends to
the Board any changes required
following the review. Reports from
internal audit are considered at
each meeting and the Committee
actively engages in selecting
areas to be audited.
• Whistle-blowing
The Committee 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.
• External audit
The Committee is responsible
for monitoring the effectiveness
of the external audit process and
making recommendations to
the Board on 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 external
auditor. The Committee considers
the framework for the supply of
non-audit services by the external
auditor and reviews non-audit
services and fees.
• Financial reporting
The Audit Committee monitors
the integrity of the Group’s
financial statements and the
significant judgements contained
therein including assessing the
fair, balanced and understandable
presentation within the reporting.
The Committee also considers
any other formal announcements
relating to the Group’s
performance. Further details are
set out on the following pages.
The Audit Committee met six times
during 2019 and its agenda is linked
to events in the Group’s financial
calendar. The Committee meets
privately with the external auditor,
with internal auditors and Executive
Directors invited to attend
meetings as required. In 2019 the
Audit Committee discharged its
responsibilities by:
• Reviewing its terms of reference;
• Reviewing the Group’s draft
financial statements and interim
results statement prior to Board
approval and reviewing the external
auditor’s reports on the final results
and draft financial statements;
• 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
and associated mitigating controls;
• Reviewing the effectiveness
of the Group’s internal controls
and disclosures made in the
Annual Report;
• Reviewing the effectiveness of
the previous external auditor at
the conclusion of the 2018 audit;
• Agreeing the programme of work
for the internal audit function
taking into account identified risks;
• Discussing reports from the Head
of Internal Audit on internal audit
reports and management
responses to proposals made
in these reports, ensuring that
the responses are actioned and
completed on a timely basis;
• Reviewing the Group’s tax risk
strategy and risk management
policy before publication on
the Group website;
• Conducting an audit tender
process resulting in the
appointment of Deloitte LLP
as the new external auditors;
• Agreeing the external auditor’s
plan for the audit of the Group
accounts which includes
confirmations of auditor
independence and approval
of the engagement letter; and
• Reviewing and approving the
external audit fee and keeping
the level of non-audit fees
under review.
Macfarlane Group PLC Annual Report and Accounts 2019 49
Following each Audit Committee
meeting, copies of the minutes
of the meetings are circulated to
all Board Directors and are made
available to the external auditors by
the Company Secretary, who acts
as Secretary to the Committee.
2019 financial statements
Certain accounting policies require
key accounting judgements or involve
particularly complex or subjective
estimates or assumptions which
will have a significant effect on the
amounts recognised in the financial
statements. The Audit Committee
receives a report from the Finance
Director for each reported set of
results, which summarises principal
judgements taken by executive
management. The Committee
discusses and challenges these
judgements and considers the report
together with the results of the
external audit. The Committee
then makes a recommendation to
the Board on the suitability of the
policies and judgements supporting
the reported results.
For the 2019 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 impact the deficit
are set out in note 25. Investments
are valued at bid price.
The Audit Committee has
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
reflecting the duration of liabilities
in Macfarlane Group’s defined
benefit pension scheme.
The pension scheme deficit
calculated by the actuary and
the related disclosures are based
on these assumptions and the
components of the movement
in the deficit in 2019 have been
explained to the Committee’s
satisfaction. The sensitivities of
movements in the key underlying
assumptions are clearly set out in
note 25. 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, applying an
expected credit loss model. The
Group’s executive management then
reviews local judgements. Whilst
every attempt is made to ensure that
the provision held against doubtful
trade receivables is as accurate as
possible, there remains a risk that
the provision may not match the
level of debt, which ultimately proves
uncollectible. At 31 December 2019,
the Group retained a provision held
against trade receivables of
£310,000 (2018: £304,000)
as set out in note 15.
The Audit Committee receives
details of individual receivables
greater than £25,000 twice in each
year. The Committee reviews the
extent to which year-end balances
have been settled in 2020 to date,
paying particular attention to
receivables outwith terms and any
bad debts written off, comparing
this with similar analyses produced
at previous reporting dates. This is
then considered against the level
of provision held against trade
receivables. 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 for each reporting
period, but does not consider these
matters to be of such significance
as those above. For the 2019
financial statements, the main
other areas included:
• The acquisition of subsidiaries is
accounted for under the acquisition
method. 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 net assets is classified
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 grouping are considered
annually. The Committee reviews
and discusses management’s
approach to impairment testing
including the related sensitivity
analysis. The Committee was
satisfied with the assumptions and
judgements applied, concluding
that there was no evidence of
impairment of goodwill;
• Reviewed the process for
accumulating information and the
disclosures of information on the
adoption of IFRS 16 ’Leases’ on
1 January 2019 and subsequent
year-end reporting;
• The level of and basis for inventory
provisions at 31 December 2019;
• A review of the viability statement
including disclosure of the terms of
the Group’s banking facilities; and
• Disclosure of Alternative
Performance Measures (’APMs’)
in relation to the exceptional
costs in 2018.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 50
Corporate governance (continued)
Audit Committee (continued)
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 Committee 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 of the arrangements
are on the Group website
(www.macfarlanegroup.com).
All concerns are investigated at
the earliest opportunity and the
employee’s anonymity 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 of the
external auditors with ethical and
regulatory requirements to the
Audit Committee, and day-to-day
responsibility to the Finance Director.
The Audit Committee ensures
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 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,
recognising that there will be certain
non-audit work which the external
auditor is best placed to 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. Non-audit work over
a certain value to be undertaken
by the external auditor has to be
approved by the Audit Committee
in advance of any work being
undertaken. Details of amounts paid
to Deloitte LLP during 2019 for audit
and other services are set out in
note 2 to the financial statements.
Audit tender process
In the context of its responsibility for
the oversight of the effectiveness of
the external audit process, the Audit
Committee determined that it would
put the external audit out to tender
during the first half of 2019. Having
assured itself of the independence
of all Selection Panel members, the
Board approved a Selection Panel
(’the Panel’) comprising the Chair of
Audit Committee, the Group Finance
Director and the Group Company
Secretary to manage the tender
process and to present a concluding
recommendation to the Audit
Committee and Board.
Ahead of the issuing of the
invitation to tender letter,
approaches were made to a number
of firms, including firms other
the Big Four UK Audit practices,
to advise them of the upcoming
tender process and to invite
them to confirm their interest in
participating. In doing so, the Panel
noted that the audit market choices
available had to be assessed based
on those firms who confirmed that
they were able to offer the relevant
expertise and experience to
undertake the audit of a fully-listed
company to an appropriate level of
quality. The Panel concluded that
it had undertaken all appropriate
actions to secure the participation
of all relevant audit firms, including
non-Big Four auditors, to support
an appropriately open but also
robust and rigorous tender process.
In planning for the audit tender,
the Panel considered any factors
relevant to the independence of the
participating firms. It was agreed
that any potential conflicts in
respect of work already in progress
with the selected firms would be
terminated in the event that one
of these firms was successful.
The tender process was set out in
the letter inviting firms to participate
in the audit tender. The participating
firms were given access to Group
sites and personnel to enable them
to attain the necessary knowledge
of the Group’s operations and
finances to support their audit
proposal. Each participating firm
submitted a proposal document
in advance of a presentation and
Question and Answer session with
the Panel. Documents received
from the participating firms were
reviewed and evaluated, with any
concerns or areas for clarification
being discussed with the firms
during the presentations.
Macfarlane Group PLC Annual Report and Accounts 2019 51
• Monthly and annual financial
control checklists submitted
by each business unit;
• Discussion by the Committee of
the external auditor’s conclusions
of its annual audit; and
• A robust risk assessment process
as set out below.
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 ensures that management
has identified and implemented
appropriate controls, which are
acceptable to the Board, to address
these risks. The risk register is taken
into account in setting the internal
audit plan each year.
The Audit Committee has received
reports on cyber security matters to
emphasise the importance of having
robust cyber security measures
in place as part of the controls
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.
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
accordance with the principles of
the Code and the related guidance.
The process was in place
throughout 2019 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, Internal Audit has been
staffed in-house. Certain parts
of the internal audit plan may be
outsourced when specific expertise
is required. The Committee
challenges and agrees the annual
internal audit plan, receives reports
on internal audit issues raised and
a six-monthly update from the
Head of Internal Audit;
A standard scorecard and feedback
form was completed by all key
members of the Macfarlane team
who met with the firms during their
site visits as well as by members of
the Panel following their review of
each firm’s proposal documents and
presentation. These were reviewed
by the entire Selection Panel as part
of their evaluation of the firms.
The key evaluation criteria agreed
by the Panel for the participating
firms included:
(i)
(ii)
Capability and competence
to deliver a suitably robust
and rigorous external audit;
Quality and experience of the
audit team, in particular the
listed company experience
of the lead audit partner;
(iii) Developing knowledge of our
business and applying it to the
key judgements and risk areas;
(iv) Effective communication skills
with management and the Audit
Committee on all aspects of
the audit, financial reporting,
internal control, corporate
governance and risk
management; and
Proactive development of
data-driven procedures to
improve the effectiveness
and quality of the audit.
(v)
Whilst the level of fees proposed
was not a significant consideration,
participating firms were asked to
confirm the arrangements under
which fees would be reviewed
for future years if there was no
significant change in audit scope.
Based on the key evaluation criteria
and ratings, and having considered
all of the documents and other
information available as a result of
the tender process as described
above, the Panel concluded that
it should recommend to the Audit
Committee and to the Board that
Deloitte LLP be appointed as
external auditor of Macfarlane
Group with effect from 2019.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 52
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.
In preparing the Group financial
statements, International
Accounting Standard 1 requires
that the Directors:
• properly select and apply
accounting policies;
• present information, including
Company law requires the Directors
to prepare Group and parent
Company financial statements for
each financial year. Under that law
the Directors 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
Article 4 of the IAS Regulation
and have also chosen to prepare
the parent Company financial
statements in accordance with
Financial Reporting Standard 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 the parent Company
financial statements, the Directors
are required to:
• select suitable accounting policies
and then apply them consistently;
• make judgements and accounting
estimates that are reasonable
and prudent;
• state whether Financial Reporting
Standard 101 ’Reduced Disclosure
Framework’ has been followed,
subject to any material departures
disclosed and explained in the
financial statements; and
• prepare the financial statements
on the going concern basis,
unless it is inappropriate to
presume that the Company
will continue in business.
accounting policies, in a manner
that provides relevant, reliable,
comparable and understandable
information;
• provide additional disclosures
when compliance with the specific
requirements in IFRSs are
insufficient to enable users
to understand the impact of
particular transactions, other
events and conditions on the
entity’s financial position and
financial performance; and
• make an assessment of the
Company’s ability to continue
as a going concern.
The Directors are responsible
for keeping adequate accounting
records that are sufficient to
show and explain the Company’s
transactions and disclose with
reasonable accuracy at any time the
financial position of the Company
and enable them to ensure that the
financial statements comply with
the Companies Act 2006. They are
also responsible for safeguarding
the assets of the Company and
hence for taking reasonable steps
for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for
the maintenance and integrity of the
corporate and financial information
included on the Company’s website.
Legislation in the United Kingdom
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 relevant financial reporting
framework, 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;
• The Strategic Report, incorporated
into the Directors’ Report, includes
a fair review of the development
and performance of the business
and the position of the Company
and the undertakings included in
the consolidation taken as a whole,
together with a description of the
principal risks and uncertainties
that they face; and
• The Annual Report and Accounts,
taken as a whole, are fair,
balanced and understandable
and provide the information
necessary for shareholders to
assess the Company’s position
and performance, business
model and strategy.
This responsibility statement
was approved by the Board on
27 February 2020 and signed
on its behalf by:
Peter D. Atkinson
Chief Executive
John Love
Finance Director
27 February 2020
27 February 2020
Macfarlane Group PLC Annual Report and Accounts 2019
53
Independent auditor’s report to the
members of Macfarlane Group PLC
Report on the audit of the financial statements
1. Opinion
In our opinion:
• the financial statements of Macfarlane Group plc (the ‘parent company’) and its subsidiaries (the ‘Group’) give
a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2019
and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice, including Financial Reporting Standard 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.
We have audited the financial statements which comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated and parent company balance sheets;
• the consolidated and parent company statements of changes in equity;
• the consolidated cash flow statement; and
• the related notes 1 to 42.
The financial reporting framework that has been applied in the preparation of the Group financial statements
is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been
applied in the preparation of the parent company financial statements is applicable law and United Kingdom
Accounting Standards, including FRS 101 ’Reduced Disclosure Framework’ (United Kingdom Generally Accepted
Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the
financial statements section of our report.
We are independent of the Group and the parent company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’)
Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the Group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
Key audit matters
The key audit matters that we identified in our first year of appointment were:
•
•
Valuation of trade receivables, pinpointed to balances greater than 60 days and the
completeness of the expected credit loss model.
Inflation, discount rate, and mortality assumptions used in calculating the defined benefit
pension scheme liability.
The materiality that we used for the Group financial statements was £600k which was
determined on the basis of 5% of profit before tax.
Our audit covered 98% of the Group’s revenue, 96% of the Group’s net assets, and 93%
of the Group’s profit before tax.
Materiality
Scoping
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 54
Independent auditor’s report to the
members of Macfarlane Group PLC (continued)
4. Conclusions relating to going concern, principal risks and viability statement
Going concern is the basis
of preparation of the financial
statements that assumes an
entity will remain in operation
for a period of at least 12
months from the date of
approval of the financial
statements.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
Viability means the ability
of the Group to continue over
the time horizon considered
appropriate by the Directors.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
4.1. Going concern
We have reviewed the Directors’ statement within the accounting policies note to the
financial statements about whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them and their identification of any material
uncertainties to the Group’s and Company’s ability to continue to do so over a period
of at least twelve months from the date of approval of the financial statements.
We considered as part of our risk assessment the nature of the Group, its business
model and related risks including where relevant the impact of Brexit, the requirements
of the applicable financial reporting framework and the system of internal control.
We evaluated the Directors’ assessment of the Group’s ability to continue as a going
concern, including challenging the underlying data and key assumptions used to make
the assessment, and evaluated the Directors’ plans for future actions in relation to
their going concern assessment.
We are required to state whether we have anything material to add or draw attention
to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the
statement is materially inconsistent with our knowledge obtained in the audit.
4.2. Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether they were
consistent with the knowledge we obtained in the course of the audit, including the
knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and
the Company’s ability to continue as a going concern, we are required to state whether
we have anything material to add or draw attention to in relation to:
•
•
•
the disclosures on pages 18 and 19 that describe the principal risks, procedures
to identify emerging risks, and an explanation of how these are being managed
or mitigated;
the Directors' confirmation on page 22 that they have carried out a detailed
assessment of the principal and emerging risks facing the Group, including those
that would threaten its business model, future performance, solvency or liquidity; or
the Directors’ explanation on page 22 as to how they have assessed the prospects
of the Group, over what period they have done so and why they consider that period
to be appropriate, and their statement as to whether they have a reasonable
expectation that the Group will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
We are also required to report whether the Directors’ statement relating to the
prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent
with our knowledge obtained in the audit.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit
of the financial statements of the current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These matters included those which had the
greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts
of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
Macfarlane Group PLC Annual Report and Accounts 2019 55
5.1. Valuation of trade receivables, pinpointed to balances greater than 60 days
and the completeness of the expected credit loss model
Key audit matter
description
The Group has material trade receivables, £46,695k (2018: £46,235k). A number
of these receivables are individually material to the financial statements.
The Group has a large number of customers and a significant trade receivables balance with
the majority of sales on 60-75 day credit terms. Given the total value of trade receivables,
we have identified a key audit matter around the risk that balances aged greater than 60 days
(£1,339k) are not recoverable and in the completeness of the expected credit loss model.
Due to the estimation uncertainty in the assessment of recoverability of receivables and
in the calculation of the expected credit loss, we have determined that there is a potential
for fraud through possible manipulation of the balance.
Trade receivables are included within note 15. The Audit Committee’s consideration in respect
of the risk is included on page 49.
The audit procedures we performed in respect of this matter included:
•
•
•
•
•
•
Obtaining an understanding of the relevant controls relevant to the expected credit
loss model;
Assessing the appropriateness of the assumptions, judgements and underlying data
used in the expected credit loss model;
Challenging the recoverability of any debtors overdue for 90 days or longer;
Performing an analytical review of the year-end receivables balance using industry
knowledge to challenge the recoverability of any receivables due from customers that
we may consider to be in financial distress;
Selecting a significant risk sample of trade receivables aged greater than 60 days and a
higher risk sample of all other trade receivables and agreeing to supporting documentation
and, where possible, receipt of cash at bank post year-end; and
Analysing historical trends in raising credit notes, specifically looking at the volume and
value raised throughout the year, not just after year-end.
We concluded that the valuation of trade receivables recorded in the financial statements
is not materially misstated. No misstatements were identified which warranted reporting
to the Audit Committee.
How the scope of our
audit responded to the
key audit matter
Key observations
5.2. Inflation, discount rate and mortality assumptions used in calculating
the defined benefit pension scheme liability
Key audit matter
description
Defined benefit obligation deficit recognised in the statement of financial position
£6,465k (2018: £9,765k)
The Group provides post-retirement benefits, including defined benefit pensions to
employees. The Group engages a third party specialist, Aon Hewitt, to assist in the valuation
of the defined benefit pension scheme liability. The valuation of gross liabilities as disclosed
in note 25, is materially sensitive to small movements in key actuarial assumptions.
There is a risk relating to the significant judgements made, specifically the discount rate,
inflation and mortality assumptions used to derive the scheme liability.
The Group’s accounting policy notes that the actuarial assumptions are included as an area
of key estimate uncertainty. Additional disclosures on the assumptions are included within
note 25 of the financial statements, which includes details of the principal assumptions used
as well as key movements in the assets and obligations of the scheme.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 56
Independent auditor’s report to the
members of Macfarlane Group PLC (continued)
5.2. Inflation, discount rate and mortality assumptions used in calculating
the defined benefit pension scheme liability (continued)
How the scope of our
audit responded to the
key audit matter
The audit procedures we performed in respect of this matter included:
•
•
•
•
•
Obtaining an understanding of the relevant controls relevant to the review of the
assumptions used by the actuary.
Held a planning meeting with management, Aon Hewitt and our actuarial specialists
to challenge the key assumptions.
Obtained internal controls reports for Aon and assessed their competency as scheme actuary.
Tested the estimates determined by management and their external actuary by challenging
the appropriateness of the key assumptions used in the valuation of the scheme’s liabilities.
This was achieved by assessing these against benchmarked rates and through involvement
of our actuarial specialists to review key assumptions.
Compared assumptions used to the Group’s historical experience and market practice.
Key observations
We consider each of the key assumptions both individually and in aggregate to be reasonable,
and are in the middle of our acceptable ranges.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that
the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality
both in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company
financial statements
Profit before tax
£12,024k
Group materiality
£600k
Materiality
£600k
£205k
Basis for
determining
materiality
Rationale for
the benchmark
applied
5% of profit before tax
0.5% of net assets
The main activity of the
parent company is that
of a holding company.
The parent company
holds the investments
in the Group subsidiaries,
the value of which is the
key metric for the users
of the financial
statements.
We have used profit
before tax as the
benchmark for our
determination of
materiality as we
consider this to be
the key performance
metric for the Group
and one which is a key
metric to analysts and
investors given the
prominence in the
Annual Report.
Component
materiality range
£570k to £123k
Profit before tax
Group materiality
Audit Committee
reporting
threshold £30k
Macfarlane Group PLC Annual Report and Accounts 2019 57
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate,
uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole.
Group performance materiality was set at 70% of Group materiality for the 2019 audit. In determining performance
materiality, we considered the following factors:
• This is our first year of engagement, however from our understanding gained in our acceptance and planning
work, no issues have been identified within the control environment that have affected our ability to rely on
controls and no significant control deficiencies have been identified.
• Our risk assessment did not identify a disproportionate number of significant risks of material misstatement.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of
£30k, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.
We also report to the Audit Committee on disclosure matters that we identified when assessing the overall
presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Identification and scoping of components
Our Group audit was scoped by obtaining an understanding of the Group and its environment through discussion
with IT, internal audit, and the Group and component finance teams and by performing walkthroughs of processes
across each of these areas, including Group-wide controls, and assessing the risk of material misstatement at
a Group level.
For components deemed significant to the Group, full scope audit procedures were performed to materiality
levels applicable to each entity, which was lower than the Group materiality level. Components deemed significant
are as follows:
• Macfarlane Group UK Limited
• Nelsons for Cartons & Packaging Limited
• Macfarlane Labels Limited
• Macfarlane Group Ireland (Labels & Packaging) Limited
Macfarlane Labels generates revenues in both Europe and the UK while other Group entities operate primarily
within the UK where 97% of total revenues are generated. Each legal entity operating in the UK generates revenue
through a range of services and customer bases.
This provided audit coverage of over 98% of the Group’s revenue, 96% of the Group’s net assets and 93% of the
Group’s profit.
The remaining non-significant components were subject to analytical reviews. Our audit work on these components
was executed at Group materiality.
At the parent entity level, we also tested the consolidation process.
All work on the significant components and consolidation process was performed by the Group engagement team.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 58
Independent auditor’s report to the
members of Macfarlane Group PLC (continued)
8. Other information
The Directors are responsible for the other information. The other information comprises the information
included in the annual report (including the Chairman’s statement, Macfarlane Group Business Model and Strategy,
Chief Executive’s review, Report of the Directors, Remuneration Report, Corporate Governance Report and
Statement of Directors’ Responsibilities), other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and,
in doing so, consider whether the other information is materially inconsistent with the financial statements or
our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements
of the other information include where we conclude that:
• Fair, balanced and understandable – the statement given by the Directors that they consider 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,
is materially inconsistent with our knowledge obtained in the audit; or
• Audit committee reporting – the section describing the work of the audit committee does not appropriately
address matters communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’
statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate
Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule
9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
9. Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view, and for such
internal control as the Directors determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the 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 the Directors either intend to liquidate the Group or the parent
company or to cease operations, or have no realistic alternative but to do so.
10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these financial statements.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud and
non-compliance with laws and regulations are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Macfarlane Group PLC Annual Report and Accounts 2019 59
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence
that is sufficient and appropriate to provide a basis for our opinion.
11.1 Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and
non-compliance with laws and regulations, we considered the following:
• the nature of the industry and sector, control environment and business performance including the design of the
Group’s remuneration policies, key drivers for Directors’ remuneration, bonus levels and performance targets;
• results of our enquiries of management, internal audit and the audit committee about their own identification
and assessment of the risks of irregularities;
• any matters we identified having obtained and reviewed the Group’s documentation of their policies and
procedures relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances
of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected
or alleged fraud;
– the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;
• the matters discussed among the audit engagement team and involving relevant internal specialists, including
valuations, pensions, and IT specialists regarding how and where fraud might occur in the financial statements
and any potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the
organisation for fraud and identified the greatest potential for fraud in relation to the valuation of trade receivables
and given the assumptions and judgements included in preparing the expected credit loss model. In common
with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of
management override.
We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing
on provisions of those laws and regulations that had a direct effect on the determination of material amounts
and disclosures in the financial statements. The key laws and regulations we considered in this context included
The Companies Act 2006, The UK Corporate Governance Code, The Listing Rules, and Tax Law.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial
statements but compliance with which may be fundamental to the Group’s ability to operate or to avoid a material
penalty. These include UK Employment and Labour Laws and UK Packaging Regulations.
11.2 Audit response to risks identified
As a result of performing the above, we identified valuation of trade receivables as a key audit matter related to
the potential risk of fraud. The key audit matters section of our report explains the matter in more detail and also
describes the specific procedures we performed in response to that key audit matter.
In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance
with provisions of relevant laws and regulations described as having a direct effect on the financial statements;
• enquiring of management, the audit committee and external legal counsel concerning actual and potential
litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks
of material misstatement due to fraud;
• reading minutes of meetings of those charged with governance, reviewing internal audit reports and
correspondence with HMRC; and
• in addressing the risk of fraud through management override of controls, testing the appropriateness of journal
entries and other adjustments; assessing whether the judgements made in making accounting estimates are
indicative of a potential bias; and evaluating the business rationale of any significant transactions that are
unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team
members including internal specialists and remained alert to any indications of fraud or non-compliance with laws
and regulations throughout the audit.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 60
Independent auditor’s report to the
members of Macfarlane Group PLC (continued)
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared
in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the strategic report and the Directors’ report for the financial year for which
the financial statements are prepared is consistent with the financial statements; and
• the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the parent company and their environment
obtained in the course of the audit, we have not identified any material misstatements in the strategic report
or the Directors’ report.
13. Matters on which we are required to report by exception
13.1 Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit
have not been received from branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
13.2 Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of Directors’
remuneration have not been made or the part of the Directors’ remuneration report to be audited is not in
agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14. Other matters
14.1 Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Board of Directors on 12 July 2019
to audit the financial statements for the year ending 31 December 2019 and subsequent financial periods. The period
of total uninterrupted engagement including previous renewals and reappointments of the firm is 1 year, covering
the year ending 31 December 2019.
14.2 Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in
accordance with ISAs (UK).
15. Use of our report
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.
David Sweeney CA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Glasgow, United Kingdom
27 February 2020
Macfarlane Group PLC Annual Report and Accounts 2019
Consolidated income statement
For the year ended 31 December 2019
Continuing operations
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Operating profit*
Finance costs
Profit before tax*
Tax
Profit for the year*
Earnings per share*
Basic
Diluted
61
Note
2019
£000
2018
Before
exceptional
item
£000
Exceptional
item*
£000
2018
£000
1
225,389
(153,256)
217,290
(150,749)
–
–
217,290
(150,749)
1,2
5
6
21
9
72,133
(8,441)
(50,062)
66,541
(8,604)
(45,912)
13,630
(1,606)
12,024
(2,293)
12,025
(809)
11,216
(2,201)
–
–
(330)
(330)
–
(330)
56
66,541
(8,604)
(46,242)
11,695
(809)
10,886
(2,145)
9,731
9,015
(274)
8,741
6.17p
6.16p
5.72p
5.72p
(0.17p)
(0.17p)
5.55p
5.55p
* Details of the 2018 exceptional item are set out in note 3.
Consolidated statement of comprehensive income
For the year ended 31 December 2019
Items that may be reclassified to profit or loss
Foreign currency translation differences
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
Other comprehensive income/(expense) for the year, net of tax
Profit for the year
Total comprehensive income for the year
Note
2019
£000
2018
£000
21
25
19
(62)
537
(92)
(6)
(32)
6
383
9,731
(32)
8,741
10,114
8,709
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 62
Consolidated statement of changes in equity
For the year ended 31 December 2019
Share
capital
£000
Share
premium
£000
Revaluation
reserve
£000
Translation
reserve
£000
Retained
earnings
£000
Total
£000
Note
At 1 January 2018
39,387
12,975
70
299
4,479
57,210
Comprehensive income
Profit for the year
Foreign currency translation differences
Remeasurement of pension scheme liability
Tax on remeasurement of pension
scheme liability
Total comprehensive income
Transactions with shareholders
Dividends
Total transactions with shareholders
At 31 December 2018
Comprehensive income
Profit for the year
Foreign currency translation differences
Remeasurement of pension scheme liability
Tax on remeasurement of pension
scheme liability
Total comprehensive income
21
25
19
8
21
25
19
Transactions with shareholders
Dividends
Share-based payments
Issue of share capital
Total transactions with shareholders
8
26
20,21
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(6)
–
–
(6)
–
–
8,741
–
(32)
8,741
(6)
(32)
6
6
8,715
8,709
(3,387)
(3,387)
(3,387)
(3,387)
39,387
12,975
70
293
9,807
62,532
–
–
–
–
–
–
–
66
66
–
–
–
–
–
–
–
173
173
–
–
–
–
–
–
–
–
–
–
(62)
–
9,731
–
537
9,731
(62)
537
–
(92)
(92)
(62)
10,176
10,114
–
–
–
–
(3,689)
75
–
(3,689)
75
239
(3,614)
(3,375)
At 31 December 2019
39,453
13,148
70
231
16,369
69,271
Macfarlane Group PLC Annual Report and Accounts 2019 Consolidated balance sheet
At 31 December 2019
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Right of use assets
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
Current liabilities
Trade and other payables
Current tax liabilities
Lease liabilities
Bank borrowings
Total current liabilities
Net current (liabilities)/assets
Non-current liabilities
Retirement benefit obligations
Deferred tax liabilities
Trade and other payables
Lease liabilities
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Revaluation reserve
Translation reserve
Retained earnings
Total equity
63
Note
2019
£000
2018
£000
10
11
12
15
19
14
15
16
62,663
9,621
25,855
35
1,224
99,398
15,813
52,044
3,310
71,167
58,648
8,533
–
162
1,851
69,194
16,940
51,360
4,611
72,911
1
170,565
142,105
17
18
16
25
19
17
18
1
1
20
21
21
21
21
48,530
1,084
6,321
15,984
71,919
47,891
1,029
101
17,769
66,790
(752)
6,121
6,465
3,242
22
19,646
9,765
2,993
25
–
29,375
12,783
101,294
79,573
69,271
62,532
39,453
13,148
70
231
16,369
69,271
39,387
12,975
70
293
9,807
62,532
The financial statements of Macfarlane Group PLC, Company registration number SC004221,
were approved by the Board of Directors on 27 February 2020 and signed on its behalf by
Peter D. Atkinson
Chief Executive
John Love
Finance Director
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
64
Consolidated cash flow statement
For the year ended 31 December 2019
Net cash inflow from operating activities
Investing activities
Acquisitions
Proceeds from disposal of property, plant and equipment
Purchase of property, plant and equipment
Cash outflow from investing activities
Financing activities
Dividends paid
(Repayment)/drawdown of bank borrowing facility
Repayment of lease obligations
Cash outflow from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note
23
24
8
23
23
23
2019
£000
2018
£000
19,497
11,832
(6,162)
185
(2,648)
(8,625)
(3,689)
(1,785)
(6,699)
(12,173)
(5,638)
73
(1,452)
(7,017)
(3,387)
1,423
(253)
(2,217)
(1,301)
2,598
4,611
3,310
2,013
4,611
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.
Macfarlane Group PLC Annual Report and Accounts 2019 65
Accounting policies
For the year ended 31 December 2019
Basis of preparation
Macfarlane Group PLC is a public company listed on the London Stock Exchange, incorporated and domiciled in the United
Kingdom and registered in Scotland. The Company’s registered office is 3 Park Gardens, Glasgow, G3 7YE.
Basis of accounting
The principal activities of the Company and its subsidiaries (the Group) and the nature of the Group’s operations are set out
in the strategic report on pages 4 to 29. The 2019 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.
In measuring the financial performance and position, the financial measures used include those which have been derived from
the reported results in order to eliminate factors which distort year-on-year comparisons and/or provide useful information
to stakeholders. These are considered non-GAAP financial measures and include measures such as operating profit before
exceptional items and profit before tax and exceptional items. We believe this information along with comparable GAAP
measurements is useful in providing a basis for measuring the financial performance and position. Note 3 includes further
information on these non-GAAP financial measures which were applied in 2018. There were no items classified as exceptional
in the 2019 results.
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 an appropriate 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 4 to 29.
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. The Group has a committed borrowing facility
of £30 million with Lloyds Banking Group PLC in place until June 2022. 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. Credit risk
is mitigated 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 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 the 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 a period extending at least the next twelve months from the date of
approval of these financial statements. For this reason they continue to adopt the going concern basis in preparing the
financial statements.
Key sources of estimation uncertainty
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts
reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the
year. Due to the nature of estimation, the actual outcomes may well differ from these estimates. No significant judgements
have been made in the current or prior year.
The key sources of estimation uncertainty that have a significant effect on the carrying amounts of assets and liabilities are
discussed below:
Retirement benefit obligations
The determination of any defined benefit pension scheme liability is based on assumptions determined with independent
actuarial advice. The key assumptions used include discount rate, inflation rate and mortality assumptions, for which a
sensitivity analysis is provided in note 25. The Directors consider that those sensitivities represent reasonable sensitivities
which could occur in the next financial year.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 66
Accounting policies (continued)
For the year ended 31 December 2019
Valuation of trade receivables
The provision held against trade receivables is based on applying an expected credit loss model and related estimates of
recoverable amounts, as detailed in note 15. Whilst every attempt is made to ensure that the provision held against doubtful
trade receivables is as accurate as possible, there remains a risk that the provision may not match the level of debt, which
ultimately proves uncollectable. An increase in the average default rate of trade receivables beyond terms from 1.04% to
3.12% above the historic loss rates observed would lead to an increase in the provision recognised of £600,000.
Changes in accounting policies in 2019
This is the first set of financial statements where IFRS 16 ‘Leases’ has been applied, with an initial application date of 1 January
2019. IFRS 16 introduces significant changes to lessee accounting by removing the distinction between operating and finance
leases, requiring the recognition of a right-of-use asset and a lease liability at commencement for all leases, except for
short-term leases and leases of low value assets.
The Company has a large number of property and equipment leases. Details of the Company’s accounting policies under IFRS
16 are set out below, followed by details of the impact on adoption of IFRS 16. Judgements applied in the adoption of IFRS 16
included determining the lease term for those leases with termination or extension options and determining an incremental
borrowing rate where the rate implicit in a lease could not be readily determined.
Whilst there has been no significant impact on profit before tax or net assets from applying the new standard, there are
changes in classifications from the adoption of IFRS 16 in 2019 indicated throughout these financial statements.
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 2020. None of these have been adopted early.
IFRS 17
IFRS 10 and IAS 28 (amendments)
Amendments to IFRS 3
Amendments to IAS 1 and IAS 8
Conceptual Framework
Insurance Contracts
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
Definition of a business
Definition of material
Amendments to References to the Conceptual Framework in IFRS Standards
The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial
statements of the Group in future periods.
Summary of accounting policies
The following accounting policies have been applied consistently for items which are considered to be material in relation
to the financial statements.
(a) Basis of 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 ’Consolidated Financial Statements’.
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 acquisition method. The acquired business is measured at the
effective date of acquisition, defined as the date control is acquired, as the aggregate fair value of assets, liabilities and
contingent liabilities as required under IFRS 3 ’Business Combinations’. Any excess of the cost of acquisition over the fair
value of the separately identifiable net assets of the acquired business is represented as goodwill. Contingent consideration
classified as a liability will be subsequently re-measured through the consolidated income statement.
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.
Macfarlane Group PLC Annual Report and Accounts 2019
67
Transactions eliminated on consolidation
Intra-Group balances and transactions, and any unrealised income and expenses arising from intra-Group transactions,
are eliminated.
(b) 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 separately 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 or more frequently when
there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the
carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated
to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.
An impairment loss recognised for goodwill is not reversed in a subsequent period.
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.
(c) Revenue recognition
The Group is engaged in the delivery of packaging materials, packing machinery, labels and labels machinery to customers.
Revenue is not recognised if there is significant uncertainty regarding the recovery of the revenue consideration. Revenue
represents amounts receivable for goods provided to third parties in the normal course of business, net of discounts,
customer rebates, VAT and other sales related taxes.
IFRS 15 ’Revenue from Contracts with Customers’ 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 the Group’s revenue is generated from the delivery of the
goods to customers and that this represents a single performance obligation. The Group does not enter into any repurchase
agreements. It is therefore appropriate to recognise revenue at the point of transfer of goods to the customer, consistent
with the revenue recognition framework in IFRS 15.
(d) Leasing
From 1 January 2019, the Company recognises a right-of-use asset and a corresponding lease liability with respect to all lease
arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less)
and leases of low value assets below £4,000. For these short-term or low value leases, the Company recognises the lease
payments as an operating expense disclosed in administrative expenses on a straight-line basis over the term of the lease.
For all other leases, the lease liability is initially measured at the present value of lease payments that are not paid at the
commencement date, discounted using the rate implicit in the lease. If this rate cannot be readily determined, the Company
uses its incremental borrowing rate.
Lease liabilities are presented on two separate lines in the balance sheet for creditors due within one year and creditors due
outwith one year. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the
lease liability (using the effective interest method) and by reducing the liability by payments made. The Company remeasures
the lease liability (and adjusts the related right-of-use asset) whenever the lease term has changed or a lease contract is
modified and the modification is not accounted for as a separate lease. The Company did not make any such adjustments
during the period presented.
Right-of-use (’ROU’) assets comprise the initial measurement of the corresponding lease liability and are subsequently
measured at cost less accumulated depreciation and impairment losses.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 68
Accounting policies (continued)
For the year ended 31 December 2019
(d) Leasing (continued)
ROU assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers
ownership of the underlying asset or the cost of the ROU asset reflects that the Company expects to exercise a purchase option,
the related ROU asset is depreciated over the useful life of the asset. Depreciation starts on the commencement date of the lease.
ROU assets are presented within the same category as that within which the corresponding underlying assets would be
presented if they were owned – for the Company these two categories are property and plant, machinery, vehicles and fittings.
As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease
and associated non-lease components as a single arrangement. The Company has not used this practical expedient and has
separated out the non-lease components for its leases. These non-lease components, typically servicing and maintenance
costs, have been recognised as an expense on a straight-line basis and disclosed in administrative expenses in the consolidated
income statement.
Approach to transition
The Company has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative
information. For leases previously treated as operating leases, the Company has elected to follow the approach in IFRS 16.
C8(b)(ii), whereby right of use assets are set equal to the lease liability, adjusted for prepaid or accrued lease payments,
including unamortised lease incentives.
The Group’s incremental borrowing rates applied to lease liabilities as at 1 January 2019 range between 2.75% and 4.00%.
Practical expedients adopted on transition
As part of the Company’s adoption of IFRS 16 and application of the modified retrospective approach to transition,
the Company elected to use the following practical expedients:
• a single discount rate has been applied to assets with reasonably similar characteristics; and
• hindsight has been used in determining the lease term.
Impact on disclosures
Former operating leases
IFRS 16 changes accounting for leases previously classified as operating leases under IAS 17, which were off-balance sheet.
Applying IFRS 16, for all leases, the Company now recognises ROU assets and lease liabilities on the balance sheet, initially
measured as described above. Lease incentives are recognised as part of the measurement of the ROU assets and lease
liabilities, whereas under IAS 17 they resulted in the recognition of a lease incentive liability, amortised as a reduction of rental
expenses on a straight line basis.
ROU assets will be tested for impairment in accordance with IAS 36 Impairment of Assets.
Under IFRS 16 the Company recognises depreciation of ROU assets and interest on lease liabilities in the consolidated income
statement, whereas operating leases previously gave rise to leasing costs in administrative expenses.
Former finance leases
This change has not had a material effect in the financial statements.
Financial impact of IFRS 16 ‘Leases’
The table below sets out adjustments recognised at 1 January 2019, the date of initial application.
Assets
Right of Use assets
Debtors
Impact on total assets
Liabilities
Lease liabilities
Impact on total liabilities
As previously
reported
31 December
2018
£000
–
51,522
At
1 January
2019
£000
27,476
52,009
Impact of
IFRS 16
£000
27,476
487
27,963
(101)
(27,963)
(27,963)
(28,064)
Net assets/shareholder’s funds
62,532
–
62,532
Macfarlane Group PLC Annual Report and Accounts 2019 69
The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to the finance
lease assets and liabilities recognised at 1 January 2019.
Operating lease commitments at 31 December 2018 under IAS 17
Non-lease components expensed under IFRS 16
Short-term and low value leases
Effect of discounting
Finance lease assets/(liabilities) recognised at 31 December 2018
Total finance lease assets/(liabilities) recognised at 1 January 2019
Movements in lease liabilities in 2019 are set out in note 23.
Receivable
£000
738
–
–
(26)
–
712
Payable
£000
(35,575)
2,805
942
3,865
(101)
(28,064)
The application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest
expense compared to IAS 17. During 2019, for all leases the Group recognised the following amounts in the consolidated
income statement.
Depreciation
Interest expense
Operating lease payments made in 2019
Decrease in profit from applying IFRS 16 in 2019
2019
£000
6,223
810
6,806
227
(e) 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.
(f) 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 current and prior periods. These benefits are then
discounted to determine the present value, and the fair values of any scheme investments, at bid price, are deducted. The net
interest on the net retirement benefit obligation for the year is calculated 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.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 70
Accounting policies (continued)
For the year ended 31 December 2019
(f) Retirement benefits (continued)
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
allocated to the relevant subsidiary, with any remaining members allocated to the parent company.
(g) 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 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 generally recognised for all taxable temporary differences.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is
realised based on tax laws and rates that have been substantively enacted at the balance sheet date. Deferred tax is charged
or credited in the consolidated income statement, except when it relates to items charged or credited in other comprehensive
income, in which case the deferred tax is also recorded in the consolidated statement of other comprehensive income.
(h) 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.
(i) 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.
Macfarlane Group PLC Annual Report and Accounts 2019 71
(j) 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. 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 under the expected credit loss model.
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 measured on an expected credit loss model at inception rather than an
incurred loss model. When a trade receivable is uncollectible, it is written off against the provision made on inception or at
a previous reporting period end. Subsequent recoveries of amounts previously written off are credited against the provision.
In accordance with IFRS 9 ’Financial Instruments’ changes in the carrying value of the provision are recognised in the
consolidated income statement.
Cash and cash equivalents comprise cash on hand and on demand deposits, readily convertible to a known amount of cash
and are subject to insignificant risk of changes in value.
Financial liabilities and equity instruments are classified as either financial liabilities or as equity in accordance with the
substance of the contractual arrangements.
Financial liabilities comprise solely other financial liabilities under the terms of IFRS 7. Financial liabilities, including borrowings,
are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised
cost, with interest expense measured on an effective yield basis.
Equity instruments are any contracts evidencing a residual interest in the assets of the Company after deducting all of
its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.
Derivative financial instruments were not used in the current or preceding financial year.
(k) Exceptional items
Where items arise that would distort the presentation of the results for the year, the Directors will classify such items
as exceptional in nature and provide details of the items to enable users of the accounts to understand the impact on
the financial statements.
(l) Provisions
The Group has a small number of surplus properties, 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.
(m) 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 26.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 72
Notes to the financial statements
For the year ended 31 December 2019
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 85% of Group revenue and profit. 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 business segments within Manufacturing Operations represents more than 10% of Group revenue or profit.
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
2019
£000
2018
£000
196,706
10,642
9,148
8,893
225,389
189,835
10,709
8,337
8,409
217,290
(b) Segmental information
Packaging
Distribution
£000
Manufacturing
Operations
£000
2019
Total
£000
Packaging
Distribution
£000
Manufacturing
Operations
£000
2018
Total
£000
Revenue
Total revenue
Inter-segment revenue
External revenue
Cost of sales
Gross profit
Net operating expenses
Operating profit before
exceptional item
Exceptional item
Operating profit
Net finance costs
Profit before tax
Tax
Profit for the year
190,227
(392)
189,835
(133,843)
55,992
(44,820)
11,172
(270)
10,902
32,189
(4,734)
27,455
(16,906)
10,549
(9,696)
853
(60)
793
196,706
–
196,706
(135,525)
61,181
(48,775)
12,406
–
12,406
34,016
(5,333)
28,683
(17,731)
10,952
(9,728)
1,224
–
1,224
230,722
(5,333)
225,389
(153,256)
72,133
(58,503)
13,630
–
13,630
(1,606)
12,024
(2,293)
9,731
Inter-segment revenues are charged at prevailing market prices.
Packaging
Distribution
£000
Manufacturing
Operations
£000
2019
Total
£000
Packaging
Distribution
£000
Manufacturing
Operations
£000
Capital additions
Depreciation/amortisation
Segment assets
Segment liabilities
Net assets
12,074
9,179
151,115
(90,508)
60,607
1,805
1,033
13,879
10,212
4,722
3,350
473
487
19,450
(10,786)
170,565
(101,294)
125,060
(71,173)
8,664
69,271
53,887
17,045
(8,400)
8,645
142,105
(79,573)
62,532
222,416
(5,126)
217,290
(150,749)
66,541
(54,516)
12,025
(330)
11,695
(809)
10,886
(2,145)
8,741
2018
Total
£000
5,195
3,837
Macfarlane Group PLC Annual Report and Accounts 2019
73
(c) Geographical segments
The Group’s operations are primarily located in the UK and Europe.
Packaging Distribution activities are primarily in the UK.
Within 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.
External revenue
Operating profit
Non-current assets
Capital additions
Continuing operations
Europe
£000
UK
£000
2019
Total
£000
Continuing operations
Europe
£000
UK
£000
219,310
6,079
225,389
211,975
13,170
89,719
12,994
460
9,679
885
13,630
99,398
13,879
11,310
67,444
5,141
5,315
385
1,750
54
2018
Total
£000
217,290
11,695
69,194
5,195
(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 (note 11)
Depreciation of Right of Use assets (note 12)
Amortisation of other intangible assets (note 10)
Acquisition related costs
Staff costs (see note 4)
The detailed analysis of auditor’s remuneration is provided below:
Audit services
Fees payable to the auditor for the audit of these financial statements
Fees payable to auditor for the audit of the Company’s subsidiaries
Total audit fees
Non-audit services
Assurance services for review of half-year statement
IFRS 16 project set-up costs
Other assurance services for the audit of the Company pension scheme
Total non-audit fees
Total fees paid to auditor
2018 fees were paid to the previous auditor KPMG LLP.
2019
£000
1,598
6,223
2,391
97
34,937
2018
£000
1,593
–
2,244
115
32,129
46
128
174
–
25
11
36
36
110
146
10
–
8
18
210
164
The IFRS 16 project set-up costs were incurred in advance of the appointment of Deloitte LLP as auditor and the project was
terminated on appointment as auditor, with no reliance being placed on the work undertaken by Deloitte LLP to support the
values disclosed in the financial statements. An alternative provider was engaged to support the Group with its IFRS 16 work.
The Audit Committee reviews and approves 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.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 74
Notes to the financial statements (continued)
For the year ended 31 December 2019
3. Exceptional item 2018
As reported in the 2018 Annual Report, following the High Court judgement involving Lloyds Banking Group in October 2018,
the Directors made the judgement that the estimated effect of Guaranteed Minimum Pension (’GMP’) equalisation on the
Group’s pension liabilities was a past service cost for pensionable service between 1990 and 1997 that should be reflected as
an exceptional item. Any subsequent change in estimate will be recognised in other comprehensive income. The judgement
was based on the fact that pension liabilities for the Group’s pension scheme at 31 December 2017 did not include any amounts
for GMP equalisation.
Accordingly, an exceptional cost of £330,000 was recognised in the 2018 financial statements as a past service cost in respect
of the equalisation of GMP benefits. We believe that this classification as an exceptional cost provides a more meaningful basis
for measuring financial performance.
It is expected that there will be follow-on court hearings to further clarify the application of GMP equalisation in practice and
there may yet be appeals against all or part of the judgement. Whilst the 2018 financial statements reflected our best estimate
of the impact on pension liabilities, the estimate involved a number of assumptions. As the outcome of future court hearings
cannot be reliably predicted, the estimate continues to reflect the information currently available. The Directors will continue
to monitor any clarifications or developments and consider the impact on pension liabilities.
The impact on key performance measures in the 2018 consolidated income statement is shown below. Tax on the exceptional
item was charged at 17% reflecting the impact of the adjustment on the related deferred tax asset.
Operating profit
Finance costs
Profit before tax
Tax
Profit for the year
Earnings per share
Basic and diluted
4. Staff costs
The average monthly number of employees (including Directors) was:
Production
Sales and distribution
Administration
The costs incurred in respect of these employees were:
Wages and salaries
Social security costs
Pension costs
Contributions to defined contribution schemes
Contributions to defined benefit schemes
Share-based payments (note 26)
2018
Before
exceptional
item
£000
Exceptional
item
£000
12,025
(809)
11,216
(2,201)
(330)
–
(330)
56
2018
£000
11,695
(809)
10,886
(2,145)
9,015
(274)
8,741
5.72p
(0.17p)
5.55p
2019
No.
190
496
247
933
2019
£000
30,311
2,860
1,579
112
75
2018
No.
186
476
233
895
2018
£000
27,791
2,621
1,597
120
–
34,937
32,129
Macfarlane Group PLC Annual Report and Accounts 2019
5. Finance costs
Interest on bank borrowings
Interest on leases
Finance cost relating to defined benefit scheme (note 25)
Finance costs
75
2019
£000
573
802
231
1,606
2018
£000
530
17
262
809
Interest on leases in 2019 includes the interest on all leases following the transition to IFRS 16 ‘Leases’ as set out in note 18.
Interest in 2018 only includes the interest on finance leases under IAS 17 ‘Leases’.
6. Tax
Current tax
United Kingdom corporation tax
Foreign tax
Adjustments in respect of prior years
Current tax charge
Deferred tax
Current year
Deferred tax charge (see note 19)
Total tax charge
2019
£000
2018
£000
2,057
104
(53)
2,108
185
185
1,953
98
(42)
2,009
136
136
2,293
2,145
The standard rate of tax based on the UK average rate of corporation tax is 19.0%. Taxation for other jurisdictions is calculated
at the rates prevailing in these jurisdictions.
The actual tax charge varies from the standard rate of tax on the results in the consolidated income statement for the reasons
set out below.
Profit before tax
Tax on profit at 19.0% (2018: 19.0%)
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
2019
£000
2018
£000
12,024
10,886
2,285
2,068
47
14
(53)
107
12
(42)
2,293
2,145
Weighted average effective tax rate for the year
19.1%
19.7%
Macfarlane Group’s corporate tax structure is such that the effective corporation tax rate should be relatively close to the
prevailing tax rate with non-deductible expenses usually the principal reason for any variation.
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 tax charges. Deferred tax assets and liabilities at 31 December 2019 have been
calculated based on the rate of 17% enacted at the balance sheet date.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 76
Notes to the financial statements (continued)
For the year ended 31 December 2019
7. 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 38 to these financial statements.
8. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for 2018 of 1.65p per share (2017: 1.50p per share)
Interim dividend for 2019 of 0.69p per share (2018: 0.65p per share)
2019
£000
2,600
1,089
3,689
2018
£000
2,363
1,024
3,387
A proposed dividend of 1.76p per share will be paid on 4 June 2020 to those shareholders on the register at 15 May 2020.
This is subject to approval by shareholders at the Annual General Meeting on 12 May 2020 and therefore has not been included
as a liability in these financial statements.
9. Earnings per share
Earnings for the purposes of calculating earnings per share
Profit for the year before exceptional items
Profit for the year
Number of shares in issue
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 – before exceptional item
Basic earnings per share – after exceptional item (see note 3)
Diluted earnings per share – before exceptional item
Diluted earnings per share – after exceptional item (see note 3)
2019
£000
2018
£000
9,731
9,015
9,731
8,741
2019
Number of
shares
‘000
2018
Number of
shares
‘000
157,636
393
157,548
–
158,029
157,548
6.17p
6.16p
6.17p
6.16p
5.72p
5.55p
5.72p
5.55p
Macfarlane Group PLC Annual Report and Accounts 2019 77
Packaging
Distribution
£000
Manufacturing
Operations
£000
43,944
17,360
61,304
1,359
–
1,359
Packaging
Distribution
£000
Manufacturing
Operations
£000
40,851
3,093
43,944
1,359
–
1,359
2019
Total
£000
45,303
17,360
62,663
2019
Total
£000
42,210
3,093
45,303
2018
Total
£000
42,210
16,438
58,648
2018
Total
£000
40,664
1,546
42,210
–
–
–
–
43,944
1,359
45,303
40,851
1,359
42,210
10. Goodwill and other intangible assets
Goodwill
Other intangible assets
Goodwill and other intangible assets
Goodwill
Fair value on acquisition
At 1 January
Additions (note 24)
At 31 December
Impairment
At 1 January and 31 December
Carrying value
At 31 December 2019
At 31 December 2018
On 2 May 2019 the Group’s subsidiary, Macfarlane Group UK Limited (’MGUK’), acquired the whole issued share capital of
Carnweather, the intermediate parent and 100% owner of Ecopac (U.K.) Limited. On 30 August 2019, Macfarlane Group PLC
acquired the whole issued share capital of Leyland Packaging Company (Lancs) Limited. For both acquisitions, goodwill arising
on acquisition was added to the Packaging Distribution CGU grouping.
During 2018 MGUK, acquired the whole issued share capital of Tyler Packaging (Leicester) Limited and Harrisons Packaging
Limited, with goodwill on acquisition added to the Packaging Distribution CGU grouping.
At 31 December 2019, the Group had two CGU groupings 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 grouping is determined using ’value in use’ calculations with key assumptions relating
to discount rates, sales growth rates, projected gross margin and overhead costs. A post-tax discount rate of 9.0% (2018: 9.8%)
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 11.1% (2018: 12.1%) for each CGU grouping and the Group’s effective tax rate
is then applied to give the post-tax discount rate. Sales 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 2020 and strategic plans for future years. The assumptions are used to 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. In addition they have conducted a 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 grouping that exceeds its carrying value. Therefore at 31 December 2019 no impairment charge is required against
the carrying value of goodwill.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
78
Notes to the financial statements (continued)
For the year ended 31 December 2019
10. Goodwill and other intangible assets (continued)
Other intangible assets
Fair value on acquisition
At 1 January
Additions (note 24)
At 31 December
Amortisation
At 1 January
Charge for year
At 31 December
Carrying value
At 31 December 2019
At 31 December 2018
Brand
values
£000
Customer
relationships
£000
2019
Total
£000
24,340
3,313
27,653
7,902
2,391
10,293
2018
Total
£000
22,228
2,112
24,340
5,658
2,244
7,902
23,534
3,228
26,762
7,343
2,227
9,570
17,192
17,360
16,191
16,438
806
85
891
559
164
723
168
247
Other intangible assets comprise separately identifiable intangible assets recognised on the acquisitions of businesses
and subsidiary companies in Packaging Distribution between 2014 and 2019. They are recorded at fair value on acquisition
less subsequent amortisation.
These are primarily Brand values, which are calculated on the Relief from Royalty method and a valuation of Customer
relationships, which is calculated 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 relationship valuations
are amortised on a straight-line basis over periods up to five years and over a ten year period respectively.
On 2 May 2019 MGUK acquired the whole issued share capital of Carnweather, the intermediate parent and 100% owner
of Ecopac (U.K.) Limited. On 30 August 2019, Macfarlane Group PLC acquired the whole issued share capital of Leyland
Packaging Company (Lancs) Limited. For both acquisitions, values for Brand values and Customer relationships within
Packaging Distribution were recognised.
At 31 December 2019, the Group retained values in respect of:
Year of
acquisition
Company/business acquired
2014
2014
2015
2016
2016
2016
2017
2018
2018
2019
2019
Packaging business of Lane Packaging Limited
Network Packaging Limited
Packaging business of One Packaging Limited
Packaging business of Colton Packaging Teesside
Packaging business of Edward McNeil Limited
Nelsons for Cartons & Packaging Limited
Packaging business of Greenwoods Stock Boxes Limited and
Nottingham Recycling Limited
Tyler Packaging (Leicester) Limited
Harrisons Packaging Limited
Ecopac (U.K.) Limited
Leyland Packaging Company (Lancs) Limited
Brand
Customer
relationships
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
ü
Macfarlane Group PLC Annual Report and Accounts 2019
11. Property, plant and equipment
Cost
At 1 January 2018
Acquisitions
Additions
Disposals
At 1 January 2019
Acquisitions
Additions
Disposals
At 31 December 2019
Accumulated depreciation
At 1 January 2018
Acquisitions
Charge for year
Disposals
At 1 January 2019
Acquisitions
Charge for year
Disposals
At 31 December 2019
Carrying amount
At 31 December 2019
At 31 December 2018
At 31 December 2017
79
Total
£000
33,651
222
1,452
(533)
34,792
703
2,648
(1,239)
36,904
25,021
137
1,593
(492)
26,259
480
1,598
(1,054)
27,283
9,621
8,533
8,630
Land and
buildings
£000
Plant and
equipment
£000
7,107
–
451
(2)
7,556
–
557
(84)
8,029
3,453
–
380
(2)
3,831
–
427
(77)
4,181
3,848
3,725
3,654
26,544
222
1,001
(531)
27,236
703
2,091
(1,155)
28,875
21,568
137
1,213
(490)
22,428
480
1,171
(977)
23,102
5,773
4,808
4,976
The main components of property, plant and equipment are:
(i)
(ii)
Three properties owned by the Group in Manufacturing Operations and tenant’s improvements at a number of short
and medium-term leases in Packaging Distribution, categorised as Land and buildings.
A significant investment in plant and machinery in 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.
Land and buildings at net book value comprise:
Freeholds
Long leaseholds
Short leaseholds
2019
£000
1,830
1,688
330
3,848
2018
£000
1,868
1,201
656
3,725
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 80
Notes to the financial statements (continued)
For the year ended 31 December 2019
12. Right of use assets
Cost
On adoption of IFRS 16 on 1 January 2019
Acquisitions
Additions
At 31 December 2019
Accumulated depreciation
Charge for year
At 31 December 2019
Carrying amount
At 31 December 2019
Plant,
machinery
& vehicles
£000
Property
£000
22,725
967
1,926
25,618
4,707
4,707
4,751
12
1,697
6,460
1,516
1,516
Total
£000
27,476
979
3,623
32,078
6,223
6,223
20,911
4,944
25,855
The property portfolio in the Packaging Distribution business comprises a number of property leases for periods of between
one year and ten years. The majority of the property arrangements are subject to rent reviews. In addition the Group leases
the majority of its commercial vehicles, motor vehicles and forklift trucks on leasing arrangements, which run for periods of
up to six years.
Following the adoption of IFRS 16 ‘Leases’ on 1 January 2019, these leases now incorporate values for Right of Use assets.
Additional details are set out in the accounting policies and note 18 Lease liabilities.
13. Subsidiary companies
Subsidiary companies, with names, countries of incorporation and registered offices, are shown on page 108.
The Group has agreed to exempt the three companies, Harrison’s Packaging Limited (Company number 06999588), Leyland
Packaging Company (Lancs) Limited (Company number 03775077) and Tyler Packaging (Leicester) Limited (Company number
03460830) from the provisions of the Companies Act relating to the audit of individual accounts by virtue of section 479A.
14. Inventories
Raw materials and consumables
Work in progress
Finished goods and goods for resale
2019
£000
710
204
14,899
15,813
2018
£000
842
288
15,810
16,940
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.
2019
£000
2018
£000
Cost of inventories recognised as an expense in the consolidated income statement
149,014
146,687
Inventories recorded in the Group’s balance sheet comprise large numbers of comparatively small balances. Local teams
review inventory levels, older and obsolete inventories and provide against exposures throughout the year. The Group’s
executive management then reviews these local judgements to ensure they properly reflect movements in absolute inventory
levels, ageing of holdings and known obsolescence.
Macfarlane Group PLC Annual Report and Accounts 2019
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
15. Trade and other receivables
Current
Trade receivables
Loss allowance
Lease receivables
Other receivables
Prepayments and accrued income
Non-current
Other receivables
81
2018
£000
691
–
626
(869)
448
2019
£000
448
187
545
(467)
713
2019
£000
2018
£000
47,005
(310)
46,695
246
2,571
2,532
52,044
46,539
(304)
46,235
–
2,952
2,173
51,360
35
162
Trade receivables represent amounts owed by customers in respect of the revenue for goods or services provided to
customers by Macfarlane Group prior to the year end. The Group’s credit risk is primarily attributable to its trade receivables.
The average credit period taken on sales of goods at the reporting date is 57 days (2018: 59 days). No interest is charged on
overdue receivables.
The Group uses external credit scoring systems to assess new customers’ credit quality and this determines the credit limits
for each customer. The Group has a substantial customer base covering a wide range of customer segments. No individual
customer represents more than 5% of the total receivables balance. Receivables balances > £25,000 are reviewed by the
Board twice in each year.
Since the inception of IFRS 9 ‘Financial Instruments’, Macfarlane Group has applied a simplified approach to measuring ECL,
using a provision matrix which takes into account historical credit loss experience based on the past due status of receivables,
adjusted as appropriate to reflect current conditions and management’s estimates of future economic conditions and known
recoverability issues as a means of measuring the loss allowance for trade receivables carried in the balance sheet at each
reporting date.
The Group writes off trade receivables when there is no realistic prospect of recovery of the receivable. The amount is written
off against the loss allowance held. The credit risk profile of these receivables is presented based on their past due status and
the calculated loss ratios applied to the profiled receivables to give the ECL.
Risk profile category (ageing)
2019
£000
ECL rate
2019 ECL
allowance
2018
£000
ECL rate
2018 ECL
allowance
Current
Overdue
0-30 days
30-60 days
60-90 days
Over 90 days
34,751
0.37%
130
32,537
0.42%
6,381
4,534
1,061
278
47,005
0.75%
1.04%
3.11%
18.67%
48
47
33
52
7,341
5,729
857
75
0.81%
1.12%
3.37%
20.25%
310
46,539
137
59
64
29
15
304
The level of loss allowance has remained steady within a range of 0.66% and 0.75% of the gross value of trade receivables.
Amounts in the balance sheet are shown net of the allowance for trade receivables of £310,000 (2018: £304,000). The ECL
values reflect the Group’s prior experience and assessment of the current economic environment. In determining the
recoverability of trade receivables and the level of loss allowance, known changes in credit quality or expected credit loss
from the date credit was originally granted are taken into account.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 82
Notes to the financial statements (continued)
For the year ended 31 December 2019
15. Trade and other receivables (continued)
Loss allowance
At 1 January
Change in loss allowance for new trade receivables in 2019
Amounts written off as uncollectible (net of recoveries)
At 31 December
2019
£000
304
203
(197)
310
2018
£000
361
181
(238)
304
The Directors consider that the carrying amount of Trade and Other Receivables approximate to their fair value.
16. Financial instruments
The Group funds its operations from a number of sources of finance, 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. Throughout the period under review, the Group's policy is 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 2019. Principal risks arising are liquidity
risk and credit risk, with secondary risks being interest rate risk and currency risk. The Board reviews and agrees policies for
managing each of these risks, which are summarised below and have remained unchanged since the beginning of 2020.
Liquidity risk
The Group’s liquidity requirements are met by ensuring adequate access to funds by maintaining appropriate levels of
committed bank facilities, which are reviewed regularly. The principal Group bank borrowing facility with Lloyds Banking Group
PLC of £30 million is available until June 2022. The facility bears interest at normal commercial rates and carries standard
financial covenants in relation to interest cover and levels of headroom relative to certain trade receivables’ balances.
The maturity profile of debt outstanding at 31 December 2019 is set out 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. Amounts presented in the balance sheet are shown net of an ECL allowance, as estimated by the Group’s
management with details set out in note 15.
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 interest rate exposures by the use of financial instruments
during 2019.
A sensitivity analysis has been prepared based on bank interest rate exposures at the year-end date and the stipulated change
taking place at the beginning of the financial year and held constant throughout the year. If interest rates had been 50 basis points
higher and all other variables held constant, the Group’s profit before tax would have decreased by £96,000 (2018: £84,000).
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 2019 has been to review
the need to hedge currency exposures on a regular basis and it was not considered necessary to cover existing currency
exposures by the use of financial instruments. The Group continues to review the need to hedge exposures on a regular basis.
Macfarlane Group PLC Annual Report and Accounts 2019 83
The Sterling value of foreign currency denominated assets and liabilities at the year-end is as follows:
Euros
Swedish Krone
Assets
2019
£000
4,955
633
5,588
Assets
2018
£000
1,912
1,302
3,214
Liabilities
2019
£000
Liabilities
2018
£000
4,277
253
4,530
1,150
891
2,041
The Sterling value of the Group’s foreign currency denominated profit/(loss) before tax is as follows:
Euros
Swedish Krone
2019
£000
(47)
472
425
2018
£000
(72)
444
372
The following table details the sensitivity to a 5% reduction in Sterling against the respective foreign currencies. The sensitivity
of the Group’s exposure to foreign currency risk is determined based on the exposure at the year-end and on the change taking
place at the beginning of the financial year and held constant throughout the year.
Result
2019
£000
Result
2018
£000
Other equity
2019
£000
Other equity
2018
£000
Euros
Swedish Krone
Cash and cash equivalents
Currency
Sterling
Euros
US Dollars
Swedish Krone
Cash and cash equivalents
Bank borrowings and loans
Currency – Sterling
Bank borrowings and loans
Net bank debt
(2)
23
21
(3)
22
19
34
19
53
2019
£000
2,785
370
54
101
3,310
38
21
59
2018
£000
4,129
469
–
13
4,611
15,984
15,984
17,769
17,769
12,674
13,158
Cash and cash equivalents set out above comprise cash at bank and other short-term highly liquid investments with maturity
of three months or less.
The principal Group bank borrowing facility with Lloyds Banking Group PLC (’Lloyds’) of £30 million is available until June 2022.
Under the facility, the trade receivables of the Group’s largest trading subsidiary, Macfarlane Group UK Limited have been
assigned to Lloyds who then fund the Group in advance of the collection of the transferred receivables. The Invoice Discounting
facility bears interest at normal commercial rates and carries standard financial covenants in relation to interest cover and levels
of headroom relative to certain trade receivables’ balances. The Group is currently in compliance with all conditions in relation
to its borrowing facility.
Interest rates
All Group borrowings are held at floating rates of interest. The average effective interest rate on bank borrowings approximates
to 2.80% per annum (2018: 2.65%).
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 84
Notes to the financial statements (continued)
For the year ended 31 December 2019
16. Financial instruments (continued)
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 2019 all materially equate to book values.
Borrowing facilities
The Group has committed borrowing facilities available at 31 December 2019, in respect of which all conditions precedent
had been met, as follows:
2019
£000
2018
£000
Drawn down
Undrawn
Committed borrowing facilities
15,984
14,016
30,000
17,769
12,231
30,000
The principal Group borrowing facility of £30 million (2018: £30 million) is with Lloyds Banking Group PLC.
The Group’s borrowing profile is as follows:
At amortised cost
Bank borrowings – secured
Lease liabilities
Current borrowings
Non-current – lease liabilities
Total borrowings
Equity
Gearing (net debt to equity) ratio
2019
£000
2018
£000
15,984
6,321
22,305
19,646
41,951
17,769
101
17,870
–
17,870
69,271
62,532
61%
29%
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 at fair value
through profit or loss (note 17)
Carrying
amount
2019
£000
Fair value
2019
£000
Level 1
2019
£000
Level 2
2019
£000
Level 3
2019
£000
Contingent consideration
1,600
1,600
–
–
1,600
Contingent consideration
Carrying
amount
2018
£000
Fair value
2018
£000
1,600
1,600
Level 1
2018
£000
–
Level 2
2018
£000
–
Level 3
2018
£000
1,600
The following table shows the valuation techniques used for Level 3 fair values, and 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 calculated
cash outflows under possible earn-out
scenarios and is not discounted
Trading performance of acquired
subsidiary companies in the 12
months following acquisition
Macfarlane Group PLC Annual Report and Accounts 2019 85
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
Lease liabilities
Trade payables
Non-derivative financial instruments
Secured bank borrowings
Lease liabilities
Trade payables
17. 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
Other creditors
2019 Contractual cash flows
Total
£000
Due < 1 year
or less
£000
Due 1 to 5
years
£000
Due after
5 years
£000
15,984
25,967
36,221
78,172
15,984
6,321
36,199
58,504
–
16,035
22
16,057
–
3,611
–
3,611
2018 Contractual cash flows
Total
£000
Due < 1 year
or less
£000
Due 1 to 5
years
£000
17,769
101
37,154
55,024
17,769
101
37,129
54,999
–
–
25
25
2019
£000
2018
£000
36,199
3,662
1,600
515
6,554
48,530
37,129
3,438
1,600
810
4,914
47,891
22
25
Trade and other payables principally comprise amounts outstanding for trade purchases, ongoing distribution costs and
administrative expenses in all the Group’s businesses, with no interest charged on trade payables. The Directors consider
that the carrying amounts for Trade and Other Payables approximate to their fair value.
18. Lease liabilities
Amounts payable under leases
Within one year
Between one and five years
After more than five years
Present value of 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)
2019
£000
6,321
16,035
3,611
25,967
(6,321)
19,646
2018
£000
101
–
–
101
(101)
–
From 1 January 2019, the Company recognises a right-of-use asset and a corresponding lease liability for all lease
arrangements in which it is the lessee, except for short-term leases with a lease term of 12 months or less and leases of low
value assets. For these short-term or low value leases, the Company recognises the lease payments as an operating expense
in administrative expenses on a straight-line basis over the term of the lease.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 86
Notes to the financial statements (continued)
For the year ended 31 December 2019
18. Lease liabilities (continued)
The lease liability is initially measured at the discounted present value of lease payments not paid at the commencement
date. The Company remeasures the lease liability whenever the lease term changes or a lease contract is modified and the
modification is not accounted for as a separate lease. Other than these remeasurements, lease payments are primarily fixed
rather than variable in nature.
The application of IFRS 16 resulted in a decrease in other operating expenses and an increase in depreciation and interest expense
compared to IAS 17. For all leases, the Company recognised the following amounts in the consolidated income statement:
2019
£000
6,223
810
895
1,083
Total
£000
(641)
(371)
(136)
6
(1,142)
(599)
(185)
Depreciation on ROU assets
Interest expense on lease liabilities
Expense relating to short-term leases expiring during 2019
Expense relating to variable lease payments not included in the lease liability
The Directors consider that the carrying amounts for lease liabilities approximate to their fair value.
19. Deferred tax
Tax losses/
accelerated
capital
allowances
£000
Other
intangible
assets
£000
Retirement
benefit
obligations
£000
At 1 January 2018
Acquisition (note 24)
(Charged)/credited in income statement
Credited in other comprehensive income
Deferred tax on remeasurement of pension scheme liability
At 1 January 2019
Acquisition (note 24)
(Charged)/credited in income statement
Credited in other comprehensive income
Deferred tax on remeasurement of pension scheme liability
166
(13)
(161)
–
(8)
(37)
(121)
–
(2,817)
(358)
381
–
(2,794)
(562)
405
2,010
–
(356)
6
1,660
–
(469)
–
(92)
(92)
At 31 December 2019
2019 deferred tax assets
Due outwith one year
2019 deferred tax liabilities
Due outwith one year
2018 deferred tax assets
Due outwith one year
2018 deferred tax liabilities
Due outwith one year
(166)
(2,951)
1,099
(2,018)
125
(291)
(166)
191
(199)
(8)
–
1,099
1,224
(2,951)
(2,951)
–
(2,794)
(2,794)
–
1,099
1,660
–
1,660
(3,242)
(2,018)
1,851
(2,993)
(1,142)
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. Deferred tax assets and liabilities at 31 December 2019 and
31 December 2018 have been calculated based on this rate.
Macfarlane Group PLC Annual Report and Accounts 2019
87
20. Share capital
Allotted, issued and fully paid:
At 1 January
Issued during the year
At 31 December
Number of
25p shares
2019
£000
2018
£000
157,547,618
264,382
157,812,000
39,387
66
39,453
39,387
–
39,387
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 5 September 2019, the Company issued 264,382 ordinary shares of 25p each at a value of 94.56p per share as non-cash
consideration to the Vendors of Leyland Packaging Company (Lancs) Limited, an effective value of £250,000. The shares were
admitted to the Official List of the London Stock Exchange on 5 September 2019.
21. Reserves
Share
premium
£000
Revaluation
reserve
£000
Translation
reserve
£000
Retained
earnings
£000
Balance at 1 January 2018
Profit for the year
Dividends paid (see note 8)
Foreign currency translation differences – foreign operations
Remeasurement of pension scheme liability taken direct to equity
Deferred tax taken direct to equity
Tax on remeasurement
Balance at 1 January 2019
Profit for the year
Dividends paid (see note 8)
Foreign currency translation differences – foreign operations
Issue of new shares
Expenses of share issue
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 2019
12,975
–
–
–
–
–
12,975
–
–
–
184
(11)
–
–
–
13,148
70
–
–
–
–
–
70
–
–
–
–
–
–
–
–
70
299
–
–
(6)
–
–
293
–
–
(62)
–
–
–
–
–
231
4,479
8,741
(3,387)
–
(32)
6
9,807
9,731
(3,689)
–
–
–
75
537
(92)
16,369
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.
22. Financial commitments
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 £0.4 million, (2018: £0.9 million)
being the sub-lease payments from 1 January 2020 until the conclusion of the head lease in November 2020.
Contractual commitments for capital expenditure for which no provision has been made in the accounts amounted to £Nil
(2018: £800,000).
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 88
Notes to the financial statements (continued)
For the year ended 31 December 2019
23. Notes to the cash flow statement
Profit before tax
Adjustments for:
Amortisation of intangible assets
Depreciation of property, plant and equipment (inc. ROU assets)
Loss/(gain) on disposal of property, plant and equipment
Share-based payments
Finance costs
2019
£000
2018
£000
12,024
10,886
2,391
7,816
5
75
1,606
2,244
1,593
(32)
–
809
Operating cash flows before movements in working capital
23,917
15,500
Decrease/(increase) in inventories
Decrease in receivables
(Decrease)/increase in payables
Pension scheme contributions (less current service cost)
Cash generated by operations
Income taxes paid
Interest paid
Net cash inflow from operating activities
At 1 January 2018
Cash movements
Non-cash movements
Acquisitions
At 31 December 2018
Cash movements
Non-cash movements
IFRS 16 transition on 1 January 2019
New leases
Acquisitions
At 31 December 2019
Net bank debt 2019
Net bank debt 2018
2,006
1,178
(947)
(2,994)
23,160
(2,288)
(1,375)
19,497
Cash
and cash
equivalents
£000
Bank
borrowing
£000
Lease
liabilities
£000
2,013
2,598
–
4,611
(1,301)
–
–
–
(16,346)
(1,423)
–
(17,769)
1,785
(342)
253
(12)
(101)
6,699
–
–
–
(27,963)
(3,623)
(979)
(1,192)
2,183
122
(2,352)
14,261
(1,882)
(547)
11,832
Total
debt
£000
(14,675)
1,428
(12)
(13,259)
7,183
(27,963)
(3,623)
(979)
3,310
(15,984)
(25,967)
(38,641)
3,310
(15,984)
4,611
(17,769)
(12,674)
(13,158)
Cash and cash equivalents (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.
* The movement in net debt is inclusive of the net cash outflow in respect of acquisitions set out in note 24.
Macfarlane Group PLC Annual Report and Accounts 2019 89
24. Acquisitions
On 2 May 2019, the Group’s subsidiary, MGUK acquired 100% of the issued share capital of Carnweather Limited, the parent
company of Ecopac, for a maximum consideration of approximately £3.9 million. £3.1 million was paid in cash on acquisition.
The deferred consideration of £0.8 million is payable in 2020, subject to certain trading targets being met in the twelve month
period ending on 30 April 2020.
On 30 August 2019, Macfarlane Group PLC acquired 100% of the issued share capital of Leyland, for a maximum consideration
of approximately £3.05 million. £2.00 million was paid in cash on acquisition with shares to the value of £0.25 million issued to
the Vendors on acquisition. Deferred consideration of £0.8 million is payable in 2020, subject to certain trading targets being
met in the twelve month period ending on 31 August 2020.
Contingent considerations are recognised as a liability in trade and other payables and are remeasured to fair value of £1.6 million
at the balance sheet date based on a range of outcomes between £Nil and £1.6 million. Trading in the post-acquisition periods
to 31 December 2019 supports the remeasured value of £1.6 million.
In 2018, MGUK acquired 100% of Tyler for a consideration of approximately £2.1 million. £1.5 million was paid in cash on
acquisition, with the deferred consideration of £0.6 million paid in 2019, as trading targets were met in full. In 2018 MGUK
also acquired 100% of Harrisons for a maximum consideration of approximately £2.8 million. £1.8 million was paid in cash
on acquisition. Of the maximum deferred consideration of £1.0 million, £0.6 million was paid in 2019, reflecting the results
in the trading year after acquisition and £0.4 million was released to the income statement.
The impact of the acquisitions on the 2019 results is set out in the Strategic Report on page 8. If the acquisitions had been
completed on the first day of 2019, revenues for the year would have been £10.5 million and profit would have been £1.3 million.
All the businesses detailed above are part of the Packaging Distribution segment. Goodwill arising on the acquisitions is
attributable to the anticipated future profitability of the distribution of Group product ranges and anticipated operating
synergies from future combinations of activities in the Packaging Distribution network.
Fair values assigned to net assets acquired and consideration paid and payable are set out below:
Carnweather
inc. Ecopac
(U.K.)
£000
Leyland
Packaging
(Lancs)
£000
Previous
years’
acquisitions
£000
Net assets acquired
Other intangible assets (note 10)
Property, plant and equipment (inc. ROU assets)
Inventories
Trade and other receivables
Cash and bank balances
Bank borrowings
Trade and other payables
Current tax liabilities
Lease liabilities (inc. IFRS 16 liabilities)
Deferred tax liabilities
Net assets acquired
Goodwill arising on acquisition (note 10)
Total consideration
Contingent consideration on acquisitions
Current year
Prior years
Shares issued for non-cash consideration
1,561
685
395
1,196
211
–
(974)
(91)
(549)
(287)
2,147
1,704
3,851
(800)
–
–
1,752
509
484
601
38
(149)
(684)
(144)
(430)
(312)
1,665
1,389
3,054
(800)
–
(250)
Total cash consideration
3,051
2,004
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,207
–
1,207
Net cash outflow arising on acquisitions
Cash consideration
Cash and bank balances acquired
Net cash outflow – acquisitions
(3,051)
211
(2,840)
(2,004)
(111)
(2,115)
(1,207)
–
(1,207)
2019
Total
£000
3,313
1,194
879
1,797
249
(149)
(1,658)
(235)
(979)
(599)
3,812
3,093
6,905
(1,600)
1,207
(250)
6,262
(6,262)
100
(6,162)
2018
Total
£000
2,112
85
283
831
1,733
–
(1,075)
(161)
(12)
(371)
3,425
1,546
4,971
(1,600)
4,000
–
7,371
(7,371)
1,733
(5,638)
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 90
Notes to the financial statements (continued)
For the year ended 31 December 2019
25. 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 an HMRC registered pension scheme, 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,
with the payment of these benefits at the discretion of the Trustees of the Scheme.
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 at retirement after 1 May 2012.
The Group will consider continued actions to manage and control the deficit in 2020.
Balance sheet disclosures at 31 December 2019
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 results of this valuation showed that
the market value of the relevant investments of the Scheme was £82,100,000 and represented 81% of the actuarial value
of benefits that had accrued to members.
The investment classes held by the Scheme and the Scheme deficit, based on the results of the actuarial valuation as at
1 May 2017, updated to the year-end are as shown below:
Investment class
Equities
UK equity funds
Overseas equity funds
Multi-asset diversified growth funds
Bonds
Liability-driven investment funds
Other
European loan fund
Secured property income fund
Cash
Fair value of scheme investments
Valuation
2019
£000
Asset
allocation
Valuation
2018
£000
Asset
allocation
Valuation
2017
£000
Asset
allocation
8,913
13,226
25,382
10.1%
15.0%
28.8%
6,244
9,781
17,512
8.2%
12.9%
23.1%
7,034
10,660
21,533
8.7%
13.2%
26.6%
27,688
31.5%
28,379
37.4%
28,534
35.2%
6,379
6,192
281
7.3%
7.0%
0.3%
6,645
7,112
154
8.8%
9.4%
0.2%
6,562
6,606
31
8.1%
8.2%
–
88,061
100.0%
75,827
100.0%
80,960
100.0%
Present value of scheme liabilities
(94,526)
Pension scheme deficit
(6,465)
(85,592)
(9,765)
(92,783)
(11,823)
Macfarlane Group PLC Annual Report and Accounts 2019 91
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 2019 adjustments were made between investments to bring the overall allocations
into line with the Trustees’ strategic asset allocation.
Liability-Driven Investment Funds provide a match of 100% against the impact of movements in inflation on pension liabilities
and a match of 85% against the impact of movements in interest rates on pension liabilities.
The ability to realise the Scheme’s investments at, or close to, fair value was considered when setting the investment strategy.
86% 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 2019 were calculated on the following bases as required under IAS19:
Discount rate
Rate of increase in salaries
Rate of increase in pensions in payment
2019
2018
2017
2.00%
0.00%
3% or 5%
for fixed increases
or 2.95% for LPI.
2.15% post
5 April 2006
2.80%
0.00%
3% or 5%
for fixed increases
or 3.20% for LPI.
2.25% post
5 April 2006
2.50%
0.00%
3% or 5%
for fixed increases
or 3.20% for LPI.
2.25% post
5 April 2006
Spouse’s pension assumption
Pensioner/active and deferred members
PIE take up rate
Inflation assumption (RPI)
Inflation assumption (CPI)
Life expectancy beyond normal retirement age of 65
Male
Female
Average uplift for GMP service
70%/80%
45%
3.00%
2.10%
23.3
25.5
0.40%
70%/80%
45%
3.30%
2.30%
23.5
25.7
0.40%
70%/80%
45%
3.30%
2.30%
23.7
25.7
N/A
GMP equalisation
In 2018, the Directors made the judgement that the estimated effect of GMP equalisation on the Group’s pension liabilities
was a past service cost. The average uplift for GMP service for impacted members was reflected through the consolidated
income statement as an exceptional item totalling £330,000 in 2018, with any subsequent changes in the estimate to be
recognised in other comprehensive income. This treatment was based on the fact that reported pension liabilities for the
scheme as at 31 December 2017 did not include any amount in respect of GMP equalisation.
Sensitivity to significant assumptions
The Pension 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 deficit. Assuming all other assumptions are held static then a movement in the
following key assumptions would affect the level of the Pension scheme deficit as shown below:
Assumptions
Discount rate movement of +0.4%
Inflation rate movement of +0.1%
Mortality movement of +0.1 year in age rating
2019
£000
6,048
(482)
284
2018
£000
5,476
(436)
257
2017
£000
5,940
(473)
278
Positive figures reflect a reduction in scheme liabilities and therefore a reduction in the Pension scheme deficit. The sensitivity
information has been prepared using the same method as adopted when updating the results of the 2017 actuarial valuation
to the balance sheet date and is consistent with the approach adopted in previous years. The level of sensitivities shown
reflect average movements in the assumptions in the last three years.
All of the sensitivity information assumes that the average duration of the scheme’s liabilities is seventeen years.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 92
Notes to the financial statements (continued)
For the year ended 31 December 2019
25. Retirement benefit obligations (continued)
UK pension legislation requires that pension schemes are funded prudently. Following the conclusion of the 2017 actuarial
valuation, the scheme’s trustees agreed with the Company to a deficit recovery period of 7 years. As part of this agreement,
the Group reconfirmed its effective unconditional right to a refund of any surplus, based on and in accordance with the terms
and conditions of the defined benefit scheme and minimum funding requirements. Accordingly IFRIC 14 does not require an
adjustment to the net pension liability.
Macfarlane Group PLC paid deficit reduction contributions of £3,106,000 per annum (inclusive of current service costs and
interest of £343,000), 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 2019 will be £3,150,000 (inclusive of estimated service
costs and interest of £234,000).
The employer contribution rate for active members is 28.7% of pensionable salary and the employee contribution rate is 7.0%
of pensionable salary.
Movement in the scheme deficit during the year
At 1 January
Current service costs
Past service costs for GMP equalisation (see note 3)
Contributions from sponsoring employers
Net finance cost (note 5)
Remeasurement of pension scheme liability in the year
At 31 December
Analysis of amounts charged to profit before tax
Current service cost
Past service cost for GMP equalisation
Net finance cost
Pension expense charged to profit before tax
Analysis of the remeasurement of pension scheme liability
recognised in the statement of other comprehensive income
Return on scheme investments excluding amount shown in interest income
Changes in assumptions underlying the present value of scheme liabilities
Remeasurement of the pension scheme liability recognised in the statement
of other comprehensive income
Movement in the fair value of scheme investments
At 1 January
Interest income
Return on scheme investments (excluding amount shown in interest income)
Contributions from sponsoring employers
Contribution from scheme members
Benefits paid
At 31 December
Movement in the present value of scheme liabilities
At 1 January
Current service cost
Past service cost for GMP equalisation
Interest cost
Contributions from scheme members
Changes in assumptions underlying the scheme liabilities
Benefits paid
At 31 December
2019
£000
(9,765)
(112)
–
3,106
(231)
537
(6,465)
(112)
–
(231)
(343)
2018
£000
(11,823)
(120)
(330)
2,802
(262)
(32)
(9,765)
(120)
(330)
(262)
(712)
11,154
(10,617)
(4,143)
4,111
537
(32)
75,827
2,109
11,154
3,106
70
(4,205)
88,061
(85,592)
(112)
–
(2,340)
(70)
(10,617)
4,205
(94,526)
80,960
1,987
(4,143)
2,802
72
(5,851)
75,827
(92,783)
(120)
(330)
(2,249)
(72)
4,111
5,851
(85,592)
Macfarlane Group PLC Annual Report and Accounts 2019 93
The total of £10,617,000, (2018: (£4,111,000)) set out on the previous page 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 £21,366,000 (2018: £21,903,000).
The history of experience adjustments and actual returns on scheme assets and scheme liabilities is as follows:
2019
£000
2018
£000
2017
£000
2016
£000
2015
£000
Present value of defined benefit obligations
Fair value of scheme investments
Pension scheme deficit
(94,526)
88,061
(6,465)
(85,592)
75,827
(9,765)
(92,783)
80,960
(11,823)
(92,345)
77,808
(14,537)
(79,311)
67,793
(11,518)
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
13,263
15.1%
(10,617)
(11.2%)
11,154
12.7%
(2,156)
(2.8%)
4,111
4.8%
(4,143)
(5.5%)
5,795
7.2%
12,080
15.5%
(3,953)
(4.3%)
(15,162)
(16.4%)
706
1.0%
1,769
2.2%
3,730
4.6%
9,610
12.4%
(1,658)
(2.4%)
Defined contribution schemes
The Group also operates a number of defined contribution pension arrangements, set up as the Macfarlane Group Personal
Pension Plan, 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 £1,579,000 (2018: £1,597,000). Contributions amounting to £181,000 (2018: £155,000) were payable to the plans
and are included in trade and other payables at 31 December.
26. Share-based payments
Equity-settled long-term incentive plans
Movements in PSP awards during the year
Outstanding at 1 January
Awarded during the year
Lapsed during the year
Outstanding at 31 December
Number of
shares
2019
Number of
shares
2018
–
604,270
–
604,270
1,135,280
–
(1,135,280)
–
A nil cost option award was granted under The Macfarlane Group PLC Long Term Incentive Plan in May 2019 based on 100%
of salary. The performance condition requires EPS in 2021 to be 6.77p-8.12p for 25%-100% of this part of the award to vest,
working on a straight-line basis. The awards are also subject to an underpin relating to the Remuneration Committee’s view on
overall performance in the three-year period to 31 December 2021. No re-setting of the award is allowed. The vesting period
is three years and any awards, which vest have a holding period of two years following vesting.
The Group recognised an expense of £75,000 (2018: £Nil) in 2019 relating to equity-settled long-term incentive plan awards
on the basis that the awards had an estimated probability of vesting of 65%.
27. Post balance sheet event
On 6 January 2020, the Company’s subsidiary, Macfarlane Group UK Limited acquired the business, goodwill and selected
assets of the packaging distribution business of Armagrip Limited, based in County Durham for a consideration of £0.9 million.
The net assets acquired amounted to £0.5 million.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 94
Notes to the financial statements (continued)
For the year ended 31 December 2019
28. Related party transactions
The Group has related party relationships with:
its subsidiaries, listed on page 108;
its Directors who comprise the Group Board; and
(i)
(ii)
(iii) the Macfarlane Group PLC sponsored pension schemes (see note 25).
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
2019
£000
953
130
1,083
2018
£000
817
113
930
Further details of Directors’ individual and collective remuneration are set out in the Directors’ Remuneration Report on page 35.
The details provided in the Directors’ Remuneration Report address the Companies Act disclosure requirements relating to
Directors’ remuneration.
Details of Directors’ shareholdings in the Company are shown on page 36 and total dividends of £46,000 were paid in respect
of these shareholdings in 2019 (2018: £40,000).
Disclosures in relation to the pension schemes are set out in note 25.
The Directors have considered the implications of IAS 24 ’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 2019 Company balance sheet
At 31 December 2019
Non-current assets
Tangible assets
Right of use 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
95
Note
2019
£000
2018
£000
30
31
32
33
34
34
35
36
41
37
38
38
39
61
134
29,989
439
31,162
61,785
3,135
2,615
5,750
(1,332)
4,418
38
–
35,391
664
27,603
63,696
2,803
3
2,806
(1,025)
1,781
66,203
65,477
(128)
66,075
(2,586)
63,489
39,453
13,148
10,888
63,489
(940)
64,537
(3,908)
60,629
39,387
12,975
8,267
60,629
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 27 February 2020 and signed on its behalf by
Peter D. Atkinson
Chief Executive
John Love
Finance Director
Strategic reviewGovernanceFinancial statementsOverviewShareholder information
96
Company statement of changes in equity
For the year ended 31 December 2019
At 1 January 2018
39,387
12,975
6,989
59,351
Share
capital
£000
Share
premium
£000
Retained
earnings
£000
Total
£000
Note
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
Total transactions with shareholders
At 31 December 2018
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
41
33
8
41
33
8
26
37,38
–
–
–
–
–
–
–
–
–
–
–
–
4,026
770
(131)
4,665
4,026
770
(131)
4,665
(3,387)
(3,387)
(3,387)
(3,387)
39,387
12,975
8,267
60,629
–
–
–
–
–
–
66
66
–
–
–
–
–
–
173
173
5,373
1,038
(176)
6,235
(3,689)
75
–
(3,614)
5,373
1,038
(176)
6,235
(3,689)
75
239
(3,375)
At 31 December 2019
39,453
13,148
10,888
63,489
The accompanying notes are an integral part of this statement of changes in equity.
Macfarlane Group PLC Annual Report and Accounts 2019 97
Notes to the Company financial statements
For the year ended 31 December 2019
29. Significant accounting policies
Macfarlane Group PLC is a public company listed on the London Stock Exchange, incorporated and domiciled in the United
Kingdom and registered in Scotland.
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;
IFRS 2 Share Based Payments in relation to Group-settled share-based payments;
IFRS 3 Business Combinations relating to business combinations undertaken by the Company; and
(i)
(ii)
(iii) IFRS 7 Financial Instruments.
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 as set out
on page 65. 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 only major change from the adoption of new IFRS’s in 2019 is in respect of the adoption of IFRS 16 ‘Leases’. This is the first set of
financial statements where IFRS 16 ‘Leases’ has been applied, with an initial application date of 1 January 2019. IFRS 16 introduces
significant changes to lessee accounting by removing the distinction between operating and finance leases, requiring the recognition
of a right-of-use asset and a lease liability at commencement for all leases, except for short-term leases and leases of low value assets.
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. 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.
Key sources of estimation uncertainty
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts
reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the
year. Due to the nature of estimation, the actual outcomes may well differ from these estimates. No significant judgements
have been made in the current or prior year.
The key sources of estimation uncertainty that have a significant effect on the carrying amounts of assets and liabilities
are discussed below:
Retirement benefit obligations
The determination of any defined benefit pension scheme liability is based on assumptions determined with independent
actuarial advice. The key assumptions used include discount rate, inflation rate and mortality assumptions, for which a
sensitivity analysis for the Group deficit is provided in note 25. The Directors consider that those sensitivities represent
reasonable sensitivities which could occur in the next financial year.
Tangible assets
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Depreciation is calculated 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.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 98
Notes to the Company financial statements (continued)
For the year ended 31 December 2019
29. Significant accounting policies (continued)
Investments
Investments held as fixed assets are stated in note 32 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.
IFRS 16 ‘Leases’
The Company now recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in
which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low
value assets. For these short-term or low value leases, the Company recognises the lease payments as an operating expense
disclosed in administrative expenses on a straight-line basis over the term of the lease.
For all other leases, the lease liability is initially measured at the present value of the lease payments that are not paid at the
commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company
uses its incremental borrowing rate.
Lease liabilities are presented on two separate lines in the balance sheet for liabilities due within one year and liabilities due
after more than one year. The lease liability is subsequently measured by increasing the carrying amount to reflect interest
on the lease liability (using the effective interest method) and by reducing the liability by payments made. The Company
remeasures the lease liability (and adjusts the related right-of-use asset) whenever the lease term has changed or a lease
contract is modified and the lease modification is not accounted for as a separate lease. The Company did not make any
such adjustments during the period presented.
Right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at, or before,
the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation
and impairment losses.
Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease
transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to
exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset.
Depreciation starts at the commencement date of the lease.
As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and
associated non-lease components as a single arrangement. The Company has not used this practical expedient and has separated
out the non-lease components for its leases. These non-lease components, typically servicing and maintenance costs, have been
recognised as an expense on a straight-line basis and disclosed in administrative expenses in the profit and loss account.
Approach to transition
The Company has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative
information. For leases previously treated as operating leases, the Company has elected to follow the approach in IFRS 16.
C8(b)(ii), whereby right of use assets are set equal to the lease liability, adjusted for prepaid or accrued lease payments,
including un-amortised lease incentives.
The Company’s incremental borrowing rate applied to lease liabilities as at 1 January 2019 is 3.0%.
Practical expedients adopted on transition
As part of the adoption of IFRS 16 and application of the modified retrospective approach to transition, the Company elected
to use the following practical expedients:
• a single discount rate has been applied to assets with reasonably similar characteristics; and
• hindsight has been used in determining the lease term.
Macfarlane Group PLC Annual Report and Accounts 2019 There were no adjustments made to the Company balance sheet at 1 January 2019 on adoption of IFRS16 ’Leases’.
The table below presents a reconciliation from operating lease commitments disclosed at 31 December 2018 to lease
liabilities recognised at 1 January 2019.
Operating lease commitments disclosed at 31 December 2018 under IAS 17
Short-term lease liabilities expiring within 12 months
Total lease liabilities recognised at 1 January 2019
Movements in lease liabilities during 2019 are set out in note 36.
99
£000
6
(6)
–
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 over time as the related charges are made.
Financial instruments
Financial assets and financial liabilities are recognised in the Company’s balance sheet when the Company 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 transaction 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 Company after deducting all of
its liabilities. Equity instruments issued by the Company 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 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 26.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 100
Notes to the Company financial statements (continued)
For the year ended 31 December 2019
29. Significant accounting policies (continued)
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 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 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 current and prior periods. These benefits are then discounted to determine
the present value, and the fair values 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 allocated
to the parent company.
Macfarlane Group PLC Annual Report and Accounts 2019 30. Tangible assets
Cost
At 1 January 2019
Additions
Disposals
At 31 December 2019
Depreciation
At 1 January 2019
Charge for the year
Disposals
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
31. Right of use assets
Cost
On adoption of IFRS 16 ‘Leases’ on 1 January 2019
Additions
At 31 December
Depreciation
Charge for year
At 31 December
Net book value
At 31 December
Land and
buildings
£000
Plant and
equipment
£000
15
–
(15)
–
14
1
(15)
–
–
1
246
35
(108)
173
209
7
(104)
112
61
37
101
Total
£000
261
35
(123)
173
223
8
(119)
112
61
38
2019
£000
–
148
148
14
14
134
The Company entered into a new property lease in 2019 which runs for ten years. Following the adoption of IFRS 16 ‘Leases’
on 1 January 2019, the leases are now accounted for with corresponding values for Right of Use assets under these leases.
Additional details are set out in note 29, accounting policies and note 36.
32. Investments
Investment in subsidiaries at cost
At 1 January
Additions
Impaired during the year
Group dividends
Group transfers
At 31 December
2019
£000
2018
£000
35,391
3,054
(939)
–
(7,517)
29,989
39,544
–
(1,421)
(180)
(2,552)
35,391
On 30 August 2019, Macfarlane Group PLC acquired 100% of the issued share capital of Leyland, for a maximum consideration
of approximately £3.05 million. £2.00 million was paid in cash on acquisition with shares to the value of £0.25 million issued to
the Vendors on acquisition. Deferred consideration of £0.8 million is payable in 2020, subject to certain trading targets being
met in the twelve month period ending on 31 August 2020.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 102
Notes to the Company financial statements (continued)
For the year ended 31 December 2019
32. Investments (continued)
During the year the Company wrote down its investment in National Packaging Group Limited to reflect its current realisable value.
The parent company transferred its investment in Network Packaging Limited to Macfarlane Group UK Limited during 2019.
Details of the principal operating subsidiaries are set out on page 108.
33. Deferred tax asset
Deferred tax on pension scheme deficit
At 1 January
Charged to reserves
Charged to profit and loss account
At 31 December
34. 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
2019
£000
664
(176)
(49)
439
2019
£000
2,750
21
326
38
3,135
104
(66)
38
2019
£000
2018
£000
804
(131)
(9)
664
2018
£000
1,500
628
571
104
2,803
310
(206)
104
2018
£000
Due after more than one year
Amounts owed by subsidiary undertakings
31,162
27,603
Amounts owed by subsidiary undertakings attract interest at normal commercial rates.
35. Creditors – amounts falling due within one year
Bank borrowings
Trade creditors
Other taxation and social security
Amounts owed to subsidiary undertakings
Contingent consideration
Corporation tax
Accruals and deferred income
Amounts due under leases (note 36)
2019
£000
–
164
10
21
800
–
324
13
2018
£000
48
270
41
–
–
432
234
–
1,332
1,025
Macfarlane Group PLC Annual Report and Accounts 2019 103
The Company is a party to the Group bank borrowing facility with Lloyds Banking Group PLC, a committed facility of £30 million
available until June 2022. 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 Macfarlane Group UK Limited, the principal
trading subsidiary.
The Company and certain subsidiaries have given inter-company guarantees to secure the drawdown on this facility.
The drawdown at 31 December 2019 by the subsidiary company, Macfarlane Group UK Limited amounted to £15.7 million
(2018: £17.8 million).
36. Creditors – amounts falling due after more than one year
Amounts owed to subsidiary undertakings
Amounts due under leases
Amounts due under leases
Within one year
Between one and five years
After more than five years
Total amount due
Due within one year
Due after more than one year
New leases entered into during 2019
Repayments under leases
At 31 December
2018
£000
940
–
940
2019
£000
–
128
128
13
59
69
141
(13)
128
148
(7)
141
From 1 January 2019, the Company recognises a right-of-use asset and a corresponding lease liability for all lease arrangements
in which it is the lessee, except for short-term leases with a lease term of 12 months or less and leases of low value assets.
For these short-term or low value leases, the Company recognises the lease payments as an operating expense disclosed
in administrative expenses on a straight-line basis over the term of the lease.
The lease liability is initially measured at the discounted present value of lease payments not paid at the commencement
date. The Company remeasures the lease liability whenever the lease term changes or a lease contract is modified and the
modification is not accounted for as a separate lease. Other than these remeasurements, lease payments are primarily fixed
rather than variable in nature.
37. Share capital
Called up, allotted and fully paid:
At 1 January
Issued during the year
At 31 December
Number of
25p shares
2019
£000
2018
£000
157,547,618
264,382
157,812,000
39,387
66
39,453
39,387
–
39,387
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 5 September 2019, the Company issued 264,382 ordinary shares of 25p each at a value of
94.56p per share as non-cash consideration to the Vendors of Leyland Packaging Company (Lancs) Limited, an effective value
of £250,000. The shares were admitted to the Official List of the London Stock Exchange on 5 September 2019.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 104
Notes to the Company financial statements (continued)
For the year ended 31 December 2019
38. Reserves
Share
premium
£000
Profit and
loss account
£000
Balance at 1 January 2018
Profit for the year
Dividends paid (note 8)
Post-tax actuarial gain in pension scheme taken direct to reserves
Balance at 1 January 2019
Profit for the year
Dividends paid (note 8)
Post-tax actuarial gain in pension scheme taken direct to reserves
Share-based payments (note 26)
Issue of new shares
Expenses of share issue
Balance at 31 December 2019
12,975
–
–
–
12,975
–
–
–
–
184
(11)
13,148
39. Reconciliation of movements in shareholders’ funds
Profit for the year
Dividends to equity holders in the year
Post-tax actuarial gain in pension scheme taken direct to equity
Share-based payments
Issue of new shares (net of issue expenses)
Movements in shareholders’ funds in the year
Opening shareholders’ funds
Closing shareholders’ funds
40. Operating profit
Operating profit for the parent company has been arrived at after charging:
Depreciation
Depreciation on Right of Use assets
Auditor’s remuneration Audit services
Non-audit services
Exceptional item
Past service cost for equalisation of GMP benefits (note 41)
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 (note 26)
6,989
4,026
(3,387)
639
8,267
5,373
(3,689)
862
75
–
–
10,888
2019
£000
5,373
(3,689)
862
75
239
2,860
60,629
63,489
2019
£000
8
14
46
36
–
2019
No.
10
2019
£000
1,092
144
25
75
1,336
Total
£000
19,964
4,026
(3,387)
639
21,242
5,373
(3,689)
862
75
184
(11)
24,036
2018
£000
4,026
(3,387)
639
–
–
1,278
59,351
60,629
2018
£000
–
–
6
12
132
2018
No.
11
2018
£000
909
118
23
–
1,050
Macfarlane Group PLC Annual Report and Accounts 2019
105
41. 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 an HMRC registered pension scheme and 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 at retirement after 1 May 2012.
Balance sheet disclosures at 31 December 2019
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 results of this valuation showed that
the market value of the relevant investments of the Scheme was £82,100,000 and represented 81% of the actuarial value
of benefits that had accrued to members.
The investments held by the scheme and the Scheme deficit, based on the 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 are 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 investments
Present value of scheme liabilities
Pension scheme deficit
2019
£000
8,855
10,153
11,075
2,477
2,552
113
35,225
(37,811)
(2,586)
2018
£000
6,410
7,005
11,352
2,845
2,658
60
30,330
(34,238)
(3,908)
2017
£000
7,078
8,613
11,414
2,624
2,642
12
32,383
(37,113)
(4,730)
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 2019 adjustments were made between investments to bring the overall allocations
into line with the Trustees’ strategic asset allocation.
Liability-Driven Investment Funds provide a match of 100% against the impact of movements in inflation on pension liabilities
and a match of 85% against the impact of movements in interest rates on pension liabilities.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 106
Notes to the Company financial statements (continued)
For the year ended 31 December 2019
41. Pensions (continued)
The ability to realise the Scheme’s investments at, or close to, fair value was considered when setting the investment strategy.
86% 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’s liabilities is derived from cash flow projections over
a long period and is thus inherently uncertain. The Scheme’s liabilities at 31 December 2019 were calculated on the following
bases as required under FRS17:
Assumptions
2019
2018
2017
Discount rate
Rate of increase in salaries
Rate of increase in pensions in payment
3.00%
0.00%
3% or 5%
for fixed increases
or 2.95% for LPI.
2.15% post
5 April 2006
2.80%
0.00%
3% or 5%
for fixed increases
or 3.20% for LPI.
2.25% post
5 April 2006
2.50%
0.00%
3% or 5%
for fixed increases
or 3.20% for LPI.
2.25% post
5 April 2006
Spouse’s pension assumption
Pensioner/active and deferred members
PIE take up rate
Inflation assumption (RPI)
Inflation assumption (CPI)
Life expectancy beyond normal retirement age of 65
Male
Female
Average uplift for GMP service
70%/80%
45%
3.00%
2.10%
23.3
25.5
0.40%
70%/80%
45%
3.30%
2.30%
23.5
25.7
0.40%
70%/80%
45%
3.30%
2.30%
23.7
25.7
N/A
In 2018, the Directors made the judgement that the estimated effect of GMP equalisation on the Company’s pension liabilities was
a past service cost in respect of pensionable service between 1990 and 1997. The average uplift for GMP service for impacted
members was reflected through the profit and loss account as an exceptional item totalling £132k in 2018 as set out in note 40, with
any subsequent changes in the estimate to be recognised in other comprehensive income. This treatment is based on the fact that
the reported pension liabilities for the scheme at 31 December 2017 did not include any amount in respect of GMP equalisation.
Movement in scheme deficit during the year
At 1 January
Current service cost
Past service cost for GMP equalisation
Company contributions
Net finance cost
Remeasurement of pension scheme liability in the year
At 31 December
Analysis of amounts charged to operating profit
Current service cost
Past service cost for GMP equalisation
Pension cost charged to operating profit
Analysis of amounts charged to other financial charges
Expected return on pension scheme investments
Interest cost of pension scheme liabilities
Other financial charges
2019
£000
(3,908)
(11)
–
388
(93)
1,038
(2,586)
(11)
–
(11)
843
(936)
(93)
2018
£000
(4,730)
(13)
(132)
302
(105)
770
(3,908)
(13)
(132)
(145)
795
(900)
(105)
Analysis of the remeasurement of the scheme deficit
Return on scheme assets (excluding amount shown in interest income)
Changes in assumptions underlying the present value of the scheme’s liabilities
Remeasurement of the pension scheme deficit
5,336
(4,298)
1,038
(817)
1,587
770
Macfarlane Group PLC Annual Report and Accounts 2019 107
2019
£000
2018
£000
30,330
843
5,336
388
7
(1,679)
35,225
(34,238)
(11)
–
(936)
(7)
(4,298)
1,679
(37,811)
32,383
795
(817)
302
7
(2,340)
30,330
(37,113)
(13)
(132)
(900)
(7)
1,587
2,340
(34,238)
Movement in the fair value of scheme assets
At 1 January
Interest income
Return on scheme assets (excluding amounts shown in interest income)
Contributions from the Company
Contributions from scheme members
Benefits paid
At 31 December
Movement in the present value of scheme liabilities
At 1 January
Service cost
Past service cost for GMP equalisation
Interest cost
Contributions from scheme members
Actuarial (loss)/gain in the year
Benefits paid
At 31 December
The cumulative remeasurement of the pension liability applied against reserves since the transition to IAS 19 on 1 January 2004
is a loss of £1,118,000 (2018: £2,156,000).
2019
£000
2018
£000
2017
£000
2016
£000
2015
£000
Present value of defined benefit obligations
Fair value of scheme investments
Pension scheme deficit
(37,811)
35,225
(2,586)
(34,238)
30,330
(3,908)
(37,113)
32,383
(4,730)
(36,938)
31,123
(5,815)
(31,725)
27,118
(4,607)
Return on scheme investments
6,179
(22)
3,355
5,599
361
Percentage of scheme investments
17.5%
(0.1%)
10.4%
18.0%
1.3%
Experience adjustment to scheme investments
5,336
(817)
2,529
4,610
(585)
Percentage of scheme investments
15.2%
(2.7%)
7.8%
14.8%
(2.2%)
Experience adjustment on scheme liabilities
(4,298)
1,587
(1,634)
(6,107)
1,464
Percentage of scheme liabilities
(11.4%)
4.6%
(4.4%)
(16.5%)
4.6%
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 (2018: £11,000) with no contributions payable to the plan at the balance sheet date.
42. Related party transactions
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation in
the Group financial statements. The Directors have considered the implications of IAS 24 ’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.
Strategic reviewGovernanceFinancial statementsOverviewShareholder information 108
Principal operating subsidiaries and related undertakings
Company name
Principal activities
Country of registration
England
England
England
England
England
England
Scotland
Ireland
Sweden
Tel: 01772 331780
Tel: 0116 2641050
Tel: 01296 652700
Tel: 02476 511511
Tel: 01476 574747
Tel: 01373 858555
Macfarlane Group UK Limited 1
Coventry
Grantham
Westbury
Nelsons for Cartons & Packaging Limited 1
Leicester
Harrisons Packaging Limited 1
Leyland
Ecopac (U.K.) Limited 1
Aylesbury
Leyland Packaging Company (Lancs) Limited 1
Leyland
Nottingham Recycling Limited 2
Nottingham
Macfarlane Labels Limited 3
Kilmarnock
Macfarlane Group Ireland
(Labels & Packaging) Limited 4
Wicklow
Macfarlane Group Sweden AB 5
Helsingborg
Macfarlane Group B.V. 6
Hoofddorp
Tel: 00 353 1281 0234
Tel: 00 46 42 13 75 55
Tel: 00 31 235689207
Tel: 0115 986 7181
Tel: 01772 622622
Tel: 01563 525151
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.
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.
Supply and distribution of all forms of
packaging materials and equipment.
The Netherlands
All the subsidiaries above are wholly owned either by Macfarlane Group PLC or one of its subsidiary companies
and operate in the country of registration. The Group’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.
Company name
Company number
Country of registration
Owned by Macfarlane Group PLC
National Packaging Group Limited 1
Adhesive Labels Limited 1
Owned by Macfarlane Group UK Limited
Online Packaging Limited 1
Macfarlane Packaging Limited 7
Abbott’s Packaging Limited 1
Mitchell Packaging Limited 1
Greenwoods Stock Boxes Limited 7
Network Packaging Limited 8
Tyler Packaging (Leicester) Limited 1
Owned by Harrisons Packaging Limited
Temperature Controlled Packaging Limited 1
Owned by Network Packaging Limited
Networkpack Limited 8
Owned by Macfarlane Group Sweden AB
ReSeal-it Scandinavia 5
Regath HB 5
01355867
00723320
02903657
SC041678
00372831
00535311
SC576825
03400627
03460830
06896225
07076439
556480-9845
969610-8753
England
England
England
Scotland
England
England
Scotland
England
England
England
England
Sweden
Sweden
Registered offices
1 Siskin Parkway East, Middlemarch Business Park, Coventry CV3 4PE
2 Abbeyfield Road, Nottingham NG7 2SX
3 Bentinck Street, Kilmarnock KA1 4AS
4 Kilmacullagh, Newtownmountkennedy, Co. Wicklow, Ireland
5 Kapplöpningsgatan 14, f252 30 Helsingborg, Sweden
6 Siriusdreef 17, 2132WT Hoofddorp, The Netherlands
7 3 Park Gardens, Glasgow G3 7YE
8 Unit 5, Lanesfield Drive, Spring Road Industrial Estate,
Ettingshall, Wolverhampton WV4 6UA
Macfarlane Group PLC Annual Report and Accounts 2019
Financial diary
Financial results
Interim: Announced – August
Final: Announced – February
Accounts and Annual General Meeting
Report and financial statements – Posted to shareholders on 3 April 2020
Annual General Meeting – Held in Glasgow on 12 May 2020
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.
Designed and produced by Thunderbolt Projects
Head Office
Macfarlane Group PLC
First Floor
3 Park Gardens
Glasgow G3 7YE
t. 0141 333 9666
e. investorinfo@macfarlanegroup.com
www.macfarlanegroup.com