Mears Group PLC
Annual report and accounts 2016
Helping clients
in new ways
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We carry out
6,000
repairs a day
Find out more
about our Housing
business on page 4
Mears today employs over 15,000 people, providing
services in every region of the UK. In partnership
with our Housing clients, we maintain, repair and
upgrade the homes of hundreds of thousands of
people in communities from remote rural villages
to large inner city estates. Mears has extended its
activities to provide broader housing solutions to
solve the challenge posed by the lack of affordable
housing. Our Care teams provide support to
around 20,000 people a year, enabling older and
disabled people to continue living in their own homes.
We focus on long-term outcomes for people, rather
than short-term solutions and invest in innovations
that make a positive impact on people’s quality
of life and on their communities’ social, economic
and environmental wellbeing
by helping clients in new ways…
Check out what we are up to on our
website, www.mearsgroup.co.uk,
and connect with us on social media
Mears Group
@mearsgroup
Mears Group PLC
Contents
Strategic report
02 Our year in brief
03 Our business
06 Chairman’s statement
08 Chief Executive’s strategy overview
09 Q&A with CEO David Miles
10 Business model
12 Our strategic priorities
14 How have we performed?
18
22
24 Review of operations: Housing
28 Review of operations: Care
32
36 Social value
42
Risk management and principal risks
Viability statement
Financial review
Independent Committee members’ report
on Mears’ social value activities
We provide care to more than
20,000
elderly and disabled people
Find out more about our Care business on page 5
Corporate governance
Report of the Nomination Committee
Introduction to corporate governance
Your Board
45
46
48 Corporate governance report
54
56 Report of the Audit Committee
61
63 Remuneration policy
70 Annual remuneration report 2016
79 Report of the Directors
81
82
Statement of Directors’ responsibilities
Independent auditor’s report
Report of the Remuneration Committee
Financial statements
Financial statements – Group
88 Principal accounting policies
100 Consolidated income statement
Consolidated statement
101
of comprehensive income
102 Consolidated balance sheet
103 Consolidated cash flow statement
104
105 Notes to the financial statements
Consolidated statement of changes in equity
Financial statements – Company
137 Principal accounting policies
140 Parent Company balance sheet
141
142 Notes to the financial statements
Parent Company statement of changes in equity
Shareholder information
148 Five-year record (unaudited)
149
Shareholder and corporate information
Annual report and accounts 2016 01
Mears Group PLC
Our year in brief
Mears is a market leader in providing housing management
and maintenance services to the affordable housing sector
and a major presence in the homecare and support market.
Key highlights
→ Group revenue of £940.1m (2015: £881.1m), reflecting strong organic
growth in Housing following a record year for new contract bidding in 2015.
→ Group profit before tax and before acquisition intangible amortisation
of £40.1m (2015: £36.8m).
→ Housing revenue of £787.5m (2015: £735.1m), reflecting strong organic
growth underpinned by the growth in Housing Management.
→ Housing operating margin of 5.6% (2015: 5.8%) reflects some dilution
from the record number of new contract mobilisations.
→ Service quality remains our key differentiator; the proportion
of customers rating our service as ‘excellent’ was maintained
at the record level of 91% (2015: 91%).
→ Care revenue increased by 5% to £152.6m (2015: £146.0m), reflecting
the full-year impact of the acquisition of Care at Home from Care UK.
→ Rationalisation of our Care business – closure of circa 20% of Care
branches and redirection of activities towards maintaining a portfolio
of good quality contracts that can provide clear and sustainable margins
with more sophisticated clients.
→ Care operating results reflect the cost of care rationalisation. Excellent
progress made in securing charge rate increases following the introduction
of the National Living Wage.
→ EBITDA cash conversion of 70% (2015: 99%) is below our historic norm.
Average net debt of £85m (2015: £68m) and net debt at 31 December 2016
of £12.4m (2015: net cash of £0.8m), reflecting the working capital expansion
required to fund organic growth, a changing sales mix and an outflow of
£10m relating to deferred consideration payable in respect of the acquisition
of Omega.
→ Total dividend increased by 6% to 11.70p per share (2015: 11.00p),
reflecting the Board’s confidence in the underlying performance
of the Group and the future.
→ New contract wins of circa £500m (2015: £1 billion); Housing awards
of over £250m with a conversion rate of 39% (2015: £900m and 49%); and
Care awards of over £200m with a conversion rate of 74% (2015: £80m
and 63%).
→ Order book at £3.1 billion (2015: £3.5 billion) and a solid pipeline
of new opportunities.
→ Visibility of 94% of consensus forecast revenue for 2017 and in excess
of 82% for 2018 (2015: 96% and 83% respectively at the turn of the year).
02
Mears Group PLC
Annual report and accounts 2016
Group revenue
£940.1m +7%
2016
2015
2014
£940.1m
£881.1m
£838.7m
Group operating profit*
£41.9m +8%
2016
2015
2014
£41.9m
£38.7m
£43.3m
Dividend per share
11.70p +6%
2016
2015
2014
11.70p
11.00p
10.00p
Normalised diluted earnings per share**
30.36p +9%
2016
2015
2014
30.36p
27.94p
32.20p
*
Operating profit before amortisation of acquisition
intangibles (see note 1 to the financial statements).
** On continuing operations, see note 9 to the
financial statements.
Strategic report Our business
We focus on long-term outcomes and positive
social, economic and environmental impact.
Our vision
Mears’ vision is to make a positive
difference to the communities we serve.
We do this by improving homes, improving
communities and improving lives. Our
approach is based on the development of
outstanding partnerships with employees,
clients, tenants, customers, their families
and the wider community.
Our values
→ We value our customers and communities,
putting the needs of our customers at the
heart of everything we do.
→ We value teamwork, supporting each other,
sharing ideas and never excluding others.
→ We value personal responsibility, setting
and achieving consistently high standards
in our work and our conduct and never
adopting a negative attitude.
→ We value innovation, being inventive in our
approach and never allowing conventional
thinking or bureaucracy to get in the way.
Our key strengths
Differentiated
service delivery
In order for customers
to recommend us, we must
deliver excellent service. We
randomly conduct around
80,000 Housing customer
surveys each year.
Strategic relationships
We listen carefully to the needs
of our clients and their tenants.
As our clients’ needs have
changed, we have developed a
broader service offering which
has increased the depth of our
client partnerships.
Strong financial
management
We operate in a high volume,
low value and low margin
environment where we have
delivered consistent financial
results over an extended period
of time. This is achieved through
works management systems,
conservative accounting
policies and a culture of
giving attention to detail.
Social value
We aim to lead the way
with social value in the
markets where we operate,
delivering meaningful outcomes
through positive community
engagement projects and
effective measurement.
Customer excellence rating
91%
Value of new contracts
mobilised in 2016
£1bn
Normalised EPS
+9%
Net social impact in 2016
£3,555,877
Find out more about our business
model on page 10
Find out more about our strategic
objectives on page 12
Find out more about our social
values on page 36
Annual report and accounts 2016 03
Mears Group PLC
Strategic report Our business continued
Housing
We repair and maintain around 15% of the Social
Homes in the UK and we are increasingly focused
on providing broader affordable housing solutions.
The Housing division made
excellent progress in 2016
Our broader service offering, incorporating our new homes
capability, alongside housing management and maintenance,
supports our involvement in new partnering models as they
emerge alongside traditional outsourcing contracts.
We have broadened the services we offer across the sphere of
affordable housing. In particular, our acquisition of Omega in
2014 has unlocked a large number of new housing management
opportunities. We will look to make further acquisitions to
reinforce our market-leading position.
Our clients are increasingly looking for partners who can operate
strategically as well as operationally across a range of housing
services. Mears has extended its core reactive and planned
maintenance offering to include housing management to support
clients in delivering more integrated solutions, aligned to their
strategic challenges.
In focus
→ Milton Keynes regeneration page 28
→ Empty Homes – improving neighbourhoods page 27
Our services
→ Repairs and
maintenance
→ Planned and cyclical
maintenance
→ Estate management
→ Asset management
→ Income management
→ Emergency
accommodation
Our customers
→ Local Authorities
→ Registered Social
Landlords
→ Private landlords
→ Tenants and
service users
→ Community groups
Revenue
£787.5m +7%
2016
2015
2014
£787.5m
£735.1m
£714.7m
Operating profit
£44.1m +4%
2016
2015
2014
£44.1m
£42.4m
£34.4m
Operating margin
5.6%
2016
2015
2014
5.6%
5.8%
4.8%
See note 1 to the financial statements.
We repair and maintain over
700,000
homes nationwide
Read about our Housing
division on page 24
04
Mears Group PLC
Annual report and accounts 2016
Strategic report Care
We provide personal care to over
20,000 elderly and disabled people.
The Care division made good progress
in a challenging period
We are continuing to see the emergence of new commissioning
models that are long-term partnering orientated, focused on
improving quality and cost over time and combining services into
an integrated approach to achieve better outcomes for users at
less overall cost to the public purse.
Whilst there has been no shortage of demand for care work,
our barrier has been recruiting sufficient numbers of good quality
carers. However, we believe the current funding pressure will be
the catalyst for change as will the impact of the National Living
Wage on the underlying cost of care.
We have a comprehensive range of domiciliary care and complex
care services enhanced by the ability to deliver a range of housing
adaptations and assistive technology such as telecare. We
deliver broad solutions to the independent living challenges
faced by so many elderly people, as well as younger people
with physical or mental disabilities.
In focus
→ Wiltshire Help to Live at Home page 29
Our services
→ Independent
living services
→ Aids and adaption
→ Complex care
→ Assistive technology
(telecare)
→ Live-in care
→ Extra care
Our customers
→ Local Authorities
→ NHS
→ Charities
→ Community groups
Our staff volunteered over
20,000
hours last year
Read about our Care
division on page 28
Revenue
£152.6m +5%
2016
2015
2014
£152.6m
£146.0m
£124.0m
Operating profit
£(1.2)m +25%
2016 £(1.2)m
2015 £(1.6)m
2014
Operating margin
(0.8)%
2016
(0.8)%
2015
(1.1)%
2014
£9.6m
7.8%
See note 1 to the financial statements.
05
Strategic report Chairman’s statement
Bob Holt
Chairman
I continue to be impressed at the
strong growth being delivered by our
Housing Management business.
Summary
→ This has been the busiest year on record, with nine
new Housing contracts successfully mobilised
→ We secured a new contract with Milton Keynes Council,
representing one of the single largest contracts ever
awarded to Mears
→ During the year we took the decision to exit from
in excess of 20% of our existing care contracts
where the pricing, longevity and spend certainty
did not allow us to deliver a high quality service
at sustainable margins
→ Our aim to make sure jobs and opportunities are open
to everyone has been enhanced by our continued
Social Mobility Champion status
06 Mears Group PLC
Annual report and accounts 2016
I am delighted to report a year of solid progress, particularly
within our Housing division, where we have continued to extend
our services from our traditional maintenance base to a broader
affordable housing offering. The year was the busiest on record
for new contract mobilisations, with nine new Housing contracts
successfully mobilised.
A particular highlight for the year was Mears’ success in securing
and mobilising a new partnership with Milton Keynes Council,
which represents one of the single largest contracts ever awarded
to Mears. The contract initially saw the commencement of repairs
and maintenance services to nearly 11,500 homes. The scope of
works quickly expanded with Mears engaged to develop 80 new
homes. In addition, a number of temporary accommodation solutions
are being developed through the joint venture partnership.
We anticipate seeing further new client opportunities, similar
to Milton Keynes, which bring together all elements of our
Housing service offering.
Our Housing Management business continues to deliver strong
growth. Since Mears extended its services to housing management,
accelerated by the acquisition of Omega in 2014, the Group has
successfully grown the business from around 2,000 homes under
full management to a figure in excess of 9,000. This remains an
exciting area for us given the urgency for our clients to find
solutions to address the homelessness issue, and the pipeline
remains buoyant. We are bringing a number of new innovative
service models to this area which I look forward to reporting
on in the future.
We firmly believe in our long-term Care strategy and that Mears
is best placed to benefit from the inevitable market evolution.
During the year we took the decision to exit from around 20% of
our existing contracts where the pricing, longevity and certainty
of spend did not allow us to deliver a high quality service at
sustainable margins.
I am pleased to report a solid financial performance for the
year to 31 December 2016. Group revenue amounted to £940.1m
(2015: £881.1m), with this organic growth being driven by our
Housing business. Group profit margin edged upwards to 4.26%
(2015: 4.17%) with profit before tax and, before acquired intangible
amortisation increasing by 9% to £40.1m (2015: £36.8m). Normalised
diluted earnings mirrored the increase in operating profits,
increasing by 9% to 30.36p (2015: 27.94p). Our performance by
operating division is discussed in greater detail in the Review
of Operations.
The order book sits at £3.1 billion, edging back from the record
high of £3.5 billion reported at the end of 2015. Importantly,
revenue visibility for 2017 at the turn of the year stood at 93%, which
is just below our key performance target of 95%. Revenue visibility
for 2017 has subsequently increased to 94%. Revenue visibility for
2018 is 82%, in line with our expectations.
Cash generated from continuing operations as a proportion of
EBITDA was 70% (2015: 99%) and there was net debt at the year end
of £12.4m (2015: net funds of £0.8m). Average daily net debt for the
year increased to £85.0m (2015: £68.0m) reflecting the working
capital expansion required to fund the strong organic growth this
year together with the £10m of deferred consideration payable in
respect of the acquisition of Omega. We have a robust cash
management culture and, whilst I have no concerns in respect
of falling short of our cash target in 2016, we fully understand
the importance placed by our investors on this metric.
Strategic report UK exit from the European Union
While uncertainty is never positive for business, Mears does not
envisage any significant negative impact from an EU exit. It was
disappointing that the Government’s domestic policy agenda
took a back-seat through much of 2016 as the referendum took
centre stage. It is pleasing now that since the turn of the year,
significant momentum is building in respect of both Housing
and Care policy.
Social value
At the heart of Mears lies a strong sense of responsibility towards
improving people’s lives. We aim to lead the way with social value
in the markets where we operate, delivering lasting and meaningful
outcomes. During the year we conducted a review of our social value
strategy, identifying our key priorities to ensure that we effectively
engage with communities and deliver social value on the ground
throughout the business, with an effective measurement of the
social impact that is created.
We continued to secure Social Mobility Champion status from
the Department of Business, Energy & Industrial Strategy. Social
mobility is about creating opportunities for young people from
disadvantaged backgrounds. At Mears, we aim to make sure jobs
and opportunities are open to everyone.
Our people
I commend our employees for their commitment and energy
throughout another significant period for the Group and I continue
to be impressed by their quality, professionalism and loyalty.
Mears has a diverse workforce of circa 15,000 staff including
400 apprentices; the vast majority of our employees live
in the areas in which they work.
I look forward to reporting news of our further success during
the coming year.
Dividend
The Board remains confident in the future opportunities in our
growth markets and consequently it expects to continue following
a progressive dividend policy. The Board has recommended a
final dividend of 8.40p per share which, when combined with the
interim dividend, gives a total dividend for the year of 11.70p
(2015: 11.00p), a 6% increase, reflecting the Board’s confidence in
the underlying performance of the Group. The dividend is payable,
subject to shareholder approval, on 6 July 2017 to shareholders
on the register on 16 June 2017. The Board regularly reviews the
Group’s dividend policy to maximise returns to shareholders
whilst maintaining a prudent capital structure and retaining the
ability to invest for growth.
Corporate governance and risk management
The Board continues to set itself high standards of corporate
governance. Our Corporate Governance Report issued within
our Annual Report details how we approach governance and the
areas of focus for the Board in 2016 and into the future. In line
with good practice, we have reviewed and updated the Group’s
risk register. The Senior Management Team plays a central role
in reviewing and challenging the Group’s risks. The Group risk
team presented risk management training modules to all levels of
management via the Group development programme, to reinforce
our strong risk management ethos.
During 2016 the Group has continued to enhance its risk and
control environment. A number of new assurance provider functions
have been created, including an IT security governance team to
provide extra focus on the increasing challenges of cyber-security.
Board evaluation and effectiveness
Performance evaluation of the Board, its Committees and individual
Directors takes place on an annual basis. The Directors were asked
for their views on a broad range of areas including Group strategy,
independence, experience and effectiveness and the interaction
between Board members. It is vital that as a Board we have the
right mix of skills, experience and diversity, ensuring that Board
members have sufficient knowledge of the Company whilst
maintaining their independence and objectivity. I am fortunate
as Chairman to be able to call upon a Board with a broad range
of expertise and specialist knowledge.
During the year, a number of our Non-Executive Directors reached
nine years’ service on the Board, and as such are not offering
themselves for re-election. I would like to thank David Hosein
and Mike Rogers for their significant contribution to the Group.
It was also with deep regret that we announced the passing of
Rory Macnamara, who had been a Director since June 2010 and
chaired our Nomination Committee. Rory will be greatly missed
by the Board for his strong technical contribution, and as a
trusted colleague.
Read more in the governance
section on page 45
Annual report and accounts 2016 07
Mears Group PLC
Strategic report Chief Executive’s strategy overview
The 2016 year saw the largest number of new contract
mobilisations in our history. Positively, we performed strongly
during this period in terms of both delivering excellent customer
service whilst also putting in place robust structures and processes
that ensure that these contracts deliver both operationally and
financially in the future.
Within our Housing division, we have continued to extend our
services from our traditional maintenance base to a broader
affordable housing offering. Our strategy to broaden our service
offering in Housing has created a significant sustainable competitive
advantage for Mears. We expect our Housing business to continue
to grow through further contract wins. Whilst we are the market
leader, we deliver maintenance services to around 15% of the
UK’s social housing, which provides us with significant headroom
for growth. Furthermore, our Housing Management capabilities
offer material growth opportunities, as the demand for affordable
housing requires that housing providers work harder and smarter
to increase the supply of suitable housing through innovation and
partnership. We believe the Housing division is well positioned to
deliver strong organic growth. Where appropriate, we will continue
to make the right acquisitions to develop the breadth and depth
of our services.
Our guidance remains unchanged in Housing. We remain on track
to deliver annual revenue growth of 5–10% per annum over the
medium term and the strong revenue visibility underpins the
Board’s confidence. We believe we can maintain our Housing
margin at its historic normalised range of 5.7–6.0%, assisted by
the shifting sales mix towards housing management services,
which typically generate a higher operating margin.
We firmly believe in our long-term Care strategy and that Mears is
best placed to benefit from the inevitable market evolution. The
reduction in revenues, following our exit from around 20% of our
existing contracts, has allowed the business to focus on operational
quality and switch focus to those strategically important clients
which we believe have potential to develop into partnerships and
where we are able to deliver a high quality service at sustainable
margins. We believe the margin generated by this division can
reach similar levels to those of Housing in the medium to long
term, however the short term remains more challenging.
Continued funding issues in the care market will create a catalyst
for change. Whilst we do not see a strong prospect of immediate
fundamental change, we are clear in our view that, increasingly,
commissioners will have to look to rebalance their contract estate,
focusing on working with fewer, better run, service delivery partners.
Moreover, further opportunities will result from localised health
related outsourcing. Our market-leading approach to service
quality and innovation puts us in a strong position, and as the
care market evolves, we expect to benefit disproportionately.
Our dedication to providing our clients with first class service
and value remains undiminished and is key to how we manage
the business.
David Miles
Chief Executive Officer
I am more confident than ever in
the quality of our leadership team
and our front line people.
Summary
→ Our strategy to broaden our service offering in
Housing has created a significant sustainable
competitive advantage for Mears
→ We firmly believe in our long-term Care strategy
and that Mears is best placed to benefit from
the inevitable market evolution
→ We continue to perform well against all of our
strategic priorities and are better placed than
ever to meet growing client opportunities
→ Our commitments to our workforce have never been
greater and have included significant investment in
training and championing improvements in the pay
and conditions of care workers
08
Mears Group PLC
Annual report and accounts 2016
Strategic report Q&A with CEO David Miles
Our client partnerships have never been stronger and are increasingly
based on clients purchasing a broader range of services.
How have you performed against your
strategic priorities?
We continue to perform well against all of our strategic priorities
and are better placed than ever to meet growing client opportunities.
We are particularly pleased that 2016 saw the largest number of
contract mobilisations ever and that these all went well, giving
us a really positive platform for future development. Our client
partnerships have never been stronger and are increasingly
based on them purchasing a broader range of services from us.
Our business has been built on high levels of customer service and
2016 saw another good performance in all areas of our business.
I am more confident than ever in the quality of our leadership
team and our front line people, given our increasing investment in
training and development, backed up by technology enabling us to
better deliver and to gain real-time feedback on our performance.
Why has there been such significant growth
in housing management services?
In a short space of time, we have become a leading housing
management services provider in the UK. There is a huge demand
for services that help address the shortage of suitable affordable
accommodation. Mears has created a range of innovative solutions
that enable homelessness to be addressed cost effectively and
for the long term. We are now managing over 9,000 homes nationally,
helping Councils reduce their costs and at the same time giving
often vulnerable people a decent and stable home environment.
This capability has developed following the acquisition of the
Omega business in 2014. Since then we have significantly grown
the business, invested in structure and expanded our footprint
to many places outside of the South East.
Mears has withdrawn from some care contracts.
Why is this and will there be more?
We remain optimistic for the long-term prospects for homecare.
The decision to withdraw from a contract is only made if a Council
is not prepared to pay a rate that allows us to meet our pay obligations
to our workforce and our service requirements to our customers.
Unfortunately there are some Councils that commission care services
at rates that do not allow either of the above and we have decided
it is the responsible thing to not deliver homecare in these areas.
We continue to lead the market on outcome-based partnering
contracts and this is where we will focus our energies going
forward. Whilst it is likely that we will withdraw from further
contracts, where certain Councils do not feel an obligation to
reflect the Living Wage within their costs of care, there are an
increasing number of care commissioners who are acting
responsibly and balancing their own tight budgets with a realistic
understanding of the cost of delivering care. We also expect
Government to go further in terms of investment in Social Care.
Recent announcements mean that Councils can raise additional
funding to support these services in 2017 but Mears and others
are of course encouraging the Government to put in place more
long-term financing solutions, which we believe must and will happen.
What do you see as the key opportunities for 2017?
There continues to be a good pipeline of opportunities for housing
repairs and maintenance services and our leadership position has
never been stronger but, in addition, I would highlight three particular
areas for 2017. Firstly, Housing Management will continue to see
good growth and we expect to see more integrated multi-service
contracts, such as the one we have in Milton Keynes. Secondly,
given the positive mobilisations in 2016, we do expect these
contracts to develop strongly in 2017. Thirdly, given the pressures
on the care system, we are seeing more Councils considering
outcome-based partnering contracts, this being an area where
Mears has also established a leadership position.
How has the Social Value Act impacted on
Mears’ approach to sustainability and
supporting local communities?
Acting responsibly, both nationally and within local communities,
has always been a fundamental part of the Mears approach.
Our Sustainability Strategy has five guiding principles: long-term
customer relationships, excellent employee experience, awareness
of the environment, being responsible leaders and ensuring a diverse
and inclusive approach to our business. In 2016, we introduced a
Social Value Group into Mears with three independent experts.
Their role has been to challenge Mears to do more building on its
solid foundations (see their report on page 42). We make specific
social value commitments to each of our clients, whether this
be investment in apprenticeships or using our skills to improve
important local facilities for the benefit of the communities in
which we operate. Our new Geo-Stat tool allows us to target
interventions to specific areas of greatest need, for example
where there is an area with a high level of worklessness
and social isolation. Our commitments to our workforce have
never been greater and have included significant investment
in training, championing improvements in care worker pay
and conditions and taking a national lead in encouraging
more women to consider the building trade for their career.
Read about our strategic
priorities on page 12
Annual report and accounts 2016 09
Mears Group PLC
Strategic report Business model
We focus on long-term outcomes and positive social,
economic and environmental impact.
Key resources and relationships
Outstanding partnerships
We work with Local Authority, Housing Association and
care commissioner clients. Our end service users are
the recipients of housing services and care in the home.
Exceptional people
We recognise our staff as our greatest asset.
Mears employees are skilled in delivering an excellent
service whilst showing a strong customer service
ethos and an empathy for our service users.
Market-leading technology
Our performance is built on a bedrock of first class
IT platforms giving market-leading capability and
driving innovation.
Supply chain partners
We choose suppliers who share our values and meet
our standards. We work closely with suppliers to
develop innovative services and integrate them
with our core systems.
Financial stability
We receive funding through shareholder capital,
retained profits, debt and cash generation to run
our business and fund its activities.
What we do
H ousing
p
e
e
D
e n o ur partnership
1
s
p
i
h
s
r
e
d
a
2
M a in tain our le
Valuing our
customers
D
e
v
e
l
o
p
o
u
r
3
p
e
o
ple
Care
How are we maintaining our leadership position
How we measure ourselves
We measure ourselves
with a suite of KPIs focused
upon financial and
non-financial measures,
mindful of there being
multiple stakeholders.
How we reward for
our value creation
Our remuneration policy
creates an alignment
between the creation of
value and the remuneration
of our Executive Directors
and employees.
Read more about our key
performance indicators
on page 14
Read more about our
Remuneration Policy
on page 63
Link to strategy
Our strategic goals sit at the
heart of our business model
and dictate how we respond
to changes taking place in
the markets we serve.
Read more about our strategic
priorities on page 12
1
2
3
How we generate revenue
Mears’ revenue is generated from
payments from its Local Authority,
Housing Association and NHS Trust
clients in respect of its Housing and Care
services. Whilst the end service users are
at the centre of our business model, they
do not pay for the service directly.
Read about our revenue breakdown in more
detail in the Review of Operations on page 24
10
Mears Group PLC
Annual report and accounts 2016
Strategic report
Why clients and users choose us
Service delivery
Our service delivery is our key differentiator. We invest heavily
in training our people and we are committed to providing them
with the skills and equipment to deliver great service. We
measure our performance to drive further improvements.
Innovation
The challenge of delivering service improvements at lower cost
requires innovative thinking. We create and lead best practice
in our markets.
Responsibility, transparency and accountability
Operating our business safely, responsibly and in compliance
with regulations is paramount. We have a number of open book
arrangements and our clients rightly require a high level of
financial visibility.
Social value
Mears defines its responsibilities to society to include social,
economic and environmental impact. It takes a proactive approach
to these responsibilities and recognises that highlighting the
positive difference this makes in communities enthuses staff,
motivates customers and clients, creates substantial environmental
and social benefits and builds competitive advantage for Mears.
This is why Mears refers to its social and environmental activities
as “Social Value” – because through these activities it is creating
value for Mears and the wider communities in which it operates.
How we create value
Shareholders
We generated a normalised diluted EPS of 30.36p and the proposed
dividend for the year increased by 6% to 11.70p per share.
Customers
We maintain over 700,000 homes in the UK amounting to around
6,000 repairs per day. Mears has extended its activities to provide
solutions to resolve the challenges of homelessness. Our Care
division provides care and support to around 20,000 people,
enabling older and disabled people to continue living in their
own homes for longer.
Communities
At the heart of Mears lies a strong sense of responsibility towards
improving people’s lives. We employee over 15,000 people, including
around 400 apprentices. We are proud of our Social Mobility
Champion status, creating opportunities and enabling people to
develop new skills within some of the most disadvantaged and
marginalised communities in the UK. Every branch of Mears makes
a social value pledge, which focuses on specific activities to improve
its local community in at least one of our social value priorities.
Government
In 2016, we paid £4.9m in corporation tax, £78m in payroll taxes
and £46m in indirect taxes. In addition, through the services we
provide to the public sector, we are delivering significant cost
savings and better value to Local Authorities and the NHS.
How we develop our people
Mears is committed to training. We
employ over 400 apprentices and
provide a number of alternative training
solutions for upskilling employees and
the professional development of Mears’
managers. We are proud to have been
appointed as one of only twelve Government
Social Mobility Champions working in
some of the most marginalised
communities in the UK.
Read about our new Rotherham
Training Academy on page 31
How we manage ourselves
Corporate governance
We are committed to the
highest standards of
corporate governance,
ensuring the safeguard
of stakeholders’ interests
and the long-term success
and sustainability of
our business.
Risk management
Effective risk management
is central to the continuing
success of Mears.
The Board of Directors
has ultimate responsibility
for ensuring that risk
is effectively managed
across the Group.
Read more in the Corporate
Governance section on page 48
Read more about our risk
management and principal
risks on page 18
Values
Our organisational
values shape the way
we do business with
all stakeholders.
Read more about our social
value priorities on page 36
Mears Group PLC
Annual report and accounts 2016
11
Strategic report Our strategic priorities
Our strategy is to be the market leader in transforming
Housing and Care environments.
1
Deepening our client partnerships in both core markets
Performance in 2016
→ Record year of new contract mobilisations, in particular our Milton Keynes
partnership and Key Worker Housing contract
→ Retention of key client relationships in 2016 including Sedgefield and Manchester
→ Successful development and introduction of new innovative service offerings such
as our partnership with London Borough of Bromley (read more about this on page 25)
→ Mears was awarded further contracts by Wiltshire Council following service failure
by other care providers. We now deliver around 75% of Local Authority funded care
in Wiltshire
→ We undertook hundreds of local community projects with our staff and our supply
partners often volunteering their time and resources for the benefit of local communities
2
Maintaining quality leadership
Performance in 2016
→ 91% of our customers rated our service as excellent
→ Re-accreditation with Customer Service Excellence including the Community
Engagement standard
→ Contractor accreditation for the fifth year running for TPAS (Tenant Participation
Advisory Service) for our approach to tenant and customer engagement
→ In Care, we have delivered strong regulatory performance in our key Scottish market.
Our performance in England has been less consistent, with processes and controls
at times falling short of our high expectations
→ Increasing commitment by Mears to deliver social value to our clients and
communities (read more about this on page 36)
Performance in 2016
→ During 2016, we opened two new bespoke academies in Rotherham and Brentwood
→ We employ 400 apprentices and have been named a Top 100 Apprentice Employer
→ We have continued to secure Social Mobility Champion status. Social mobility is about
giving young people equal chances in life, regardless of their social background
→ Successful delivery of a range of upskilling and professional development for Mears
managers and employees together with programmes for young and/or unemployed
people from our communities
→ In 2016, Mears once again retained its Investors in People (IIP) accreditation
3
Developing our people
12
Mears Group PLC
Annual report and accounts 2016
Strategic report Deepening our client partnerships in both core markets
Maintaining quality leadership
Developing our people
Find out more about our KPIs
on page 14
Find out more about our risks
on page 18
Focus in 2017
→ Maximise growing opportunities in our Housing
Management business
Link to KPIs
→ Housing new contract
success rate
Link to risks
→ Reputation
→ Business continuity
→ Focus on Local Authorities adopting partnership-based
→ Order book growth
and outcome-based commissioning in Care
→ Continue to raise client awareness of Mears’ wide range
of services across Housing and Care
→ Revenue secured
→ Revenue growth
Focus in 2017
→ Improve use of technology to improve the way that services
are delivered for our customers
→ Focus on care quality through better care worker recruitment
and retention and continued development of care managers
→ Continue to deliver strong regulatory performance in our
Scottish Care operation. Improve the consistency of our
English Care delivery
→ Continue to drive social value, addressing community issues
around social mobility, social isolation and fuel poverty
Link to KPIs
→ Housing new contract
success rate
→ Order book growth
→ Customer complaints
→ Excellent service rating
Link to risks
→ Health and safety
→ Business continuity
→ People
→ Reputation
Focus in 2017
→ The expansion of our apprenticeship programme in Housing
and Care
Link to KPIs
→ Housing new contract
success rate
Link to risks
→ Health and safety
→ People
→ The integration of apprenticeships and other qualifications
→ Order book growth
for Care staff
→ Management of the CITB levy together with the introduction
of the Apprenticeship Levy
→ Increased focus on succession planning
→ Increased commitment to enhance the terms and conditions
of our employees, in particular of carers where the valuable
role they play remains undervalued
→ Revenue secured
→ Revenue growth
→ Carer churn
Mears Group PLC
Annual report and accounts 2016
13
Strategic report How have we performed?
Our KPIs are our most important measures to monitor our business and
to ensure that we are on target to deliver our strategic priorities. Service
delivery remains our key differentiator. Our strong contract bidding and
financial performance are direct outputs for delivering great service.
Great service delivery
“Excellent” service rating
(Housing)
Customer complaints
(Housing)
Carer churn
(Care)
Definition
In order for customers to recommend
us, we must deliver excellent service.
We randomly conduct around 80,000
customer surveys per year.
Definition
Incidents resulting from poor service
result in a complaint. We are committed
to dealing with all complaints on an
individual basis.
Definition
The carer churn figure is calculated as the
total number of leavers during the year as
a proportion of the average carer headcount.
Carer churn data is only available from 2014.
Results from the year
91%
2016
2015
2014
2013
91%
91%
91%
82%
Results from the year
0.27%
2016
2015
2014
2013
0.27%
0.30%
0.30%
0.31%
Results from the year
44%
2016
2015
2014
44%
58%
54%
We are delighted that our service delivery
has remained at the high levels reached in
the last two years. Strong performance will
ensure competitiveness as we continue
to be ranked above our peers.
We are committed to providing our
colleagues with the skills and equipment
to deliver great service. We seek to
identify trends in order to improve our
overall service quality.
There has been some improvement in carer
churn rates. We have increased carer pay
rates across the business and focused on
those Care contracts which provide a
better mix of longevity, spend certainty
and price, which allows us to offer carers
more attractive terms and conditions.
How we performed
2016 target
91%
On target
2017 target
91%
How we performed
2016 target
<0.30%
How we performed
2016 target
30%
Out performance
Under performance
2017 target
<0.27%
2017 target
30%
14
Mears Group PLC
Annual report and accounts 2016
Strategic report
Strong contract bidding
New contract success
(Housing)
Order book growth
(Group)
Secured revenue
(Group)
Definition
Contract success is measured by results
of tender by contract value. We typically
tender around £1 billion of new opportunities
each year. The average contract length
is around six years. In order to achieve our
organic growth forecasts, we monitor the
proportion of new contracts secured
as a proportion of total tendered works.
Definition
Contracts with our clients are long term.
Housing contracts average six years and
Care contracts average around three
years. We only account for contractually
secured orders. We anticipate a solid
period of new contract bidding in 2017,
but would be satisfied to maintain the
order book at current levels.
Definition
Secured revenue measures how much
revenue is secured in respect of our
revenue forecast for the following year.
This performance measure is taken at
the beginning of each financial year.
Government procurement policy means
tenders take around twelve months
from advertisement to contract award.
Results from the year
39%
2016
2015
2014
2013
39%
49%
35%
32%
Results from the year
-11%
2016
2014
-11%
-13%
2015 +6%
2013
+2%
Results from the year
93%
2016
2015
2014
2013
93%
94%
92%
92%
The strategy established two years ago
was to provide a broader service offering
which includes housing management.
We are pleased with our bidding success
in 2016, with over £250m of new orders
secured. However, the total value of tenders
submitted was lower than expected.
Following our excellent period of new
contract success in 2015, our order book
had increased by 6% to £3.5 billion. It was
not surprising to see some reduction in
2016, falling to £3.1 billion.
We have fallen narrowly short at 93%
visibility of 2017 revenues. The time lag in
securing and mobilising new works means
that it is important that the Group secures
the remaining 7% early in 2017. We are in a
strong position to achieve forecast revenue.
How we performed
How we performed
How we performed
2016 target
33%
2016 target
+6%
2016 target
95%
Out performance
Under performance
Under performance
2017 target
33%
2017 target
+0%
2017 target
95%
Mears Group PLC
Annual report and accounts 2016
15
Strategic report
How have we performed? continued
Financial KPIs are critical to measuring
and understanding our financial health.
Financial performance
Revenue growth
(Housing)
Operating margin
(Group)
Profit to cash conversion
(Group)
Definition
Revenue represents the amounts due for
services provided during the year. In order to
measure organic growth, we deduct incremental
revenue arising from acquisitions. We believe
that organic growth gives a better indication
of business performance, as it is a purer
aggregation of market growth, success in new
contract bidding and contract retention.
Definition
Operating margin is the KPI used to
measure and understand the profitability
of our activities. This KPI is used to
continually monitor our costs to ensure
services are being delivered efficiently.
Definition
This is a working capital management KPI,
which remains the cornerstone of our
business. The key measure is cash inflow
from operating activities as a proportion
of EBITDA. Whilst we internally target
100%, our external target allows some
leniency reflecting an increased working
capital requirement to fund organic growth.
Results from the year
+7%
2016
+7%
2015 +1%
2014 -4%
2013
+10%
Results from the year
4.6%
2016
2015
2014
2013
4.6%
4.6%
5.3%
5.0%
Results from the year
70%
2016
2015
2014
2013
70%
99%
96%
103%
We are pleased to have achieved this
target, driven by a very successful
new contract success rate in 2015.
We continue to invest in our people
and systems to provide capacity
to achieve our target.
The Group’s operating margin has been
diluted in both 2016 and 2015 by the
performance of Care. The Housing
margin was strong, despite the diluting
impact of new mobilisations.
The solid organic growth delivered in 2016
resulted in some working capital expansion
and the increase in trade receivables. The
Group also reported a reduction in trade
payables due to a changing sales mix.
Management is disappointed with
this outcome.
How we performed
How we performed
How we performed
2016 target
+6%
2016 target
>5.1%
2016 target
90%
Out performance
Under performance
Under performance
2017 target
5%
2017 target
>5.1%
2017 target
90%
16
Mears Group PLC
Annual report and accounts 2016
Strategic report
Read more about our Housing
operations on page 24
Read more about our Care
operations on page 28
Health & safety
Normalised diluted EPS
(Group)
Accident frequency rate
(Group)
Definition
Normalised earnings are stated
before exceptional costs and exclude
the amortisation of acquisition intangibles
together with an adjustment to reflect a
full tax charge.
Definition
Providing our employees with a safe
working environment remains paramount.
Our accident frequency rate (AFR) is
calculated as the number of reportable
incidents divided by the number of hours
worked, multiplied by 100,000.
Results from the year
+9%
2016 +9%
2015
-13%
2014
+15%
2013 +10%
Results from the year
0.16
0.16
0.17
2016
2015
2014
2013
0.23
0.31
Our headline EPS increased by 9%, mirroring
the increase in profits. However, EPS of
30.36p still sits below the equivalent
figure of 32.20p reported in 2014 due to
the poor trading results delivered by the
Care division. We are working hard to
improve that position.
We are pleased to have maintained our
accident record at low levels. Mears
delivers much of its health and safety
training through its in-house registered
training provider, which is a key factor
in achieving year-on-year improvement.
How we performed
2016 target
>10-15%
How we performed
2016 target
<0.17
Under performance
Out performance
2017 target
>10%
2017 target
<0.16
Mears Group PLC
Annual report and accounts 2016
17
Strategic report
Risk management and principal risks
Effective management of risks and opportunities is essential
to the delivery of the Group’s strategic objectives, the achievement
of sustainable shareholder value and maintaining good standards
of corporate governance.
Risk management process
Strategic governance
Board
Audit
Committee
Nomination
Committee
Remuneration
Committee
Chief Executive
Officer
Operational
and financial
governance
First line of
defence
Second line
of defence
Third line of
defence
Senior
Management
Team
Operational
management
Central
support
functions
Details of financial risk management and exposure
to price risk are given in note 19 on pages 124 to 128
Risk
management
function
(including
internal audit
and external
advisers)
The Senior Management Team
The Senior Management Team reviews and identifies the key risks which may impact
upon the achievement of the Group’s strategic goals and will consider how these risks
are developing with changes in the operations, markets and the regulatory environment.
The nature of the risk is reviewed, including the possible triggering events and the
aggregated impacts, before setting appropriate mitigation strategies directed at the
causes and consequences of each risk. The risk is assessed in relation to the likelihood
of occurrence and the potential impact of the risk upon the business, and assessed
against a matrix scoring system which is then used to escalate risks within the Group as
appropriate. The Senior Management Team has responsibility for managing the Group’s
key risks.
18
Mears Group PLC
Annual report and accounts 2016
The Board
The Board has overall responsibility
for determining the nature and extent of
risk it is willing to take within the agreed
strategy, and ensuring that risks are
managed effectively across the Group.
Risk is a regular agenda item at Board
meetings and is closely aligned to
strategy review.
The Board also reviews reports on the
effectiveness of the systems and processes
of risk management and internal control.
The Audit Committee
The Audit Committee monitors the
Group’s key risks identified by the risk
assessment processes and reports
findings to the Board. It also has delegated
responsibility for reviewing in detail the
effectiveness of the Group’s system of
internal control policies, and procedures
for the identification, assessment and
reporting of risk.
Risk management function
The Group risk function headed by the
Group’s Chief Risk Officer supports the
risk management process by providing
guidance and support to management.
Group risk also acts as the central point
for the coordination and initial review of
risk assessment and risk monitoring
procedures. To ensure our risk management
process continues to drive improvement,
the Group risk function monitors the
ongoing status and progress of mitigation
plans on a quarterly basis.
The Group outsources elements of
internal audit and cyber-security,
to external advisers.
The control environment is underpinned
by a detailed scheme of delegated
responsibilities that defines processes
and procedures for the approval process
in respect of decision making. This ensures
that decisions within the organisation
are made by the appropriate level
of management.
Strategic report Risk management approach
The Group’s approach to risk management is targeted at early
identification of risks and mitigation of those risks to reduce their
likelihood and impact.
The Group is committed to protection of its assets through an
effective risk management process, supported by insurance
where appropriate. Examples of assets within scope include
human, intellectual, physical property and financial resources.
Reporting within the Group is structured so that key issues can
be escalated rapidly through the management team to the Board
where appropriate. Risks are continually monitored, contingency
plans are provided and this information is reported through
established procedures. There is extensive fieldwork undertaken
by risk auditors incorporating systems review, branch visits and
cross business surveillance.
The internal control approach is designed to manage rather
than eliminate the risk of failure and thus can only provide a
reasonable, rather than absolute, assurance against material
misstatement or loss.
Risk management process
The responsibility for risk identification, analysis, evaluation and
mitigation rests with the line management of the businesses. They
are also responsible for reporting and monitoring key risks in
accordance with established processes under the Group
operational policies.
Identified risks are documented in risk registers showing:
the risks that have been identified; characteristics of the risks;
consequences of the risks; the basis for determining the mitigation
strategy; and what reviews and monitoring are necessary. The
person(s) accountable for assessing and monitoring each risk
is noted.
We continue to drive improvements in our risk management
process. We also review our business model, core markets and
business processes to ensure that we have properly identified all
risks. We continually review our mitigating actions to ensure that
they are sufficient to minimise our residual risk.
Key financial and non-financial risks identified by the business
from the risk assessment processes are collated and reviewed
by the Audit Committee. The financial and non-financial risk
registers are reviewed to monitor the status and progression
of mitigation plans; the key risks are reported to the Board
on a regular basis.
Principal risks
The Board has carried out a robust assessment of the principal
risks facing the Group, including those that threaten the business
model, strategy, future performance, solvency and liquidity.
Risks have been identified as principal based on the likelihood of
occurrence and the severity of the impact on the Group, and have
been identified through the application of policies and processes
previously outlined.
The Board is keen to simplify the reporting of risks, to ensure
the risks disclosed to shareholders are those that are considered
as business critical or potentially catastrophic. Therefore no
additional risks have been disclosed in this Annual Report. These
business-as-usual risks are monitored by divisional management.
Prioritising our risks
The Group’s risk register rates risks on a matrix scoring system
based on their likelihood and potential severity. This severity can
be measured using financial, life and limb, customer service,
growth, regulatory compliance and reputational criteria. Therefore,
Mears measures more than simply the financial impact of the
risk. These scores are used to escalate risks and to drive the
mitigation plans.
Read more in the Corporate
governance section on
page 48
Read more in the Report
of the Audit Committee on
page 56
Gross risk
Key
Net risk
IT and data
Health
and safety
IT and data
Reputation
People
Reputation
People
Health
and safety
Low
Moderate
Serious
Critical
Severity of impact
Mears Group PLC
Annual report and accounts 2016
19
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Strategic report
Risk management and principal risks continued
Risks are identified as principal based on the likelihood of occurrence
and the potential impact on the Group. The Group’s principal risks
are identified below, together with how we mitigate those risks.
Key risk movements
Each principal risk is considered in the context of how it relates to achievement of the Group’s strategic objectives. The risk discussion
includes assessment of gross risk and net risk. Gross risk reflects the exposure and risk landscape before considering the mitigations
in place, with net risk being the residual risk after mitigations. The gross risk movement from the prior year for each principal risk has
been assessed and is presented below:
Mitigations in place supporting the management of the risk to a net risk position are also described for each principal risk.
Mitigation
→ In-house IT system developed to
provide operational management
with a real-time dashboard of
service delivery indicators.
→ Internal auditing of KPI reporting
including ‘mystery shoppers’.
→ Strict process in place for vetting
and approval of subcontractors.
→ We drive a culture of putting our
customers first; this is continually
reinforced within internal
communications.
No change
→ Well communicated policy for
dealing with press enquiries
and incident management.
→ Care risk plans for dealing
with vulnerable customers.
→ Compliance management of
bribery and corruption legislation
and whistleblowing policy.
→ We induct and train all new
starters. This induction ensures that
all employees understand our values
and it reinforces the Group’s culture.
→ We ensure that staff are properly
trained for their roles. We ensure
that we deliver relevant training
and implement best practice.
Reputation
Definition
We recognise that significant commercial
value is attributable to the Mears brand.
Poor service delivery would damage our
reputation. Both our housing and care
markets are close-knit communities
where examples of poor performance
are quickly communicated widely.
Furthermore, in Care we deliver services
to people who are elderly and vulnerable.
A service delivery failure within our Care
division could result in the physical harm
or, in the most extreme cases, death
of a service user.
In the environment of caring for vulnerable
people, there is a risk of isolated incidents
of abuse and neglect which rightly receive
significant press coverage with the inevitable
reputational damage.
KPIs associated with risk:
→ ‘Excellent’ service rating
→ Customer complaints
→ Net carer recruitment and retention
20
Mears Group PLC
Annual report and accounts 2016
Strategic report People
Definition
The Group employs over 15,000 employees
who are critical to the success of our
contract performance. Attracting and
maintaining good relations with employees
and the investment in their training and
development is essential to the efficiency
and sustainability of the Group’s operations.
Delivery of strategic objectives increases
our ability to attract, motivate and
retain talent.
In addition, the Care division is facing
a challenging environment where the
ability to recruit and retain carers is
restricting performance.
KPIs associated with risk:
→ ‘Excellent’ service rating
→ Customer complaints
→ Carer net recruitment and retention
Decreased gross risk exposure
→ An annual appraisal process is
completed for all employees to ensure
that all people receive feedback in
respect of their performance and to
identify future training and development
requirements. We hold a national
accreditation as an Investor in People.
→ We are continually looking to improve
our position as an employer of choice
by improving the level of engagement
with our employees through formal
communications, awards to recognise
success, local events and family
fun days.
→ We are continually monitoring our
future skills requirements.
→ We regularly undertake employee
surveys to gauge employee satisfaction
and engagement, and any barriers to
high level performance.
Mitigation
→ We induct and train all new starters.
This induction ensures that all new
employees understand our strategy,
vision and values. All Care staff have
access to NVQ training.
→ We regularly review and benchmark
our remuneration packages to ensure
that they remain competitive.
→ In Care, we are investing in an
innovative recruitment process to
ensure an increase in the volume and
quality of carers. Local Care branches
are targeted on a monthly basis in the
areas of recruitment and retention.
→ At the senior end of the business, we
have increased our focus on succession
planning and increased our investment
in senior management development.
Our Senior Leadership programme
has identified a cross-section of the
Group’s brightest talent that we would
envisage will play central roles in our
future business.
→ The investment in an in-house dedicated
training division to provide a range of
employee development services through
two academies in Rotherham
and Brentwood.
Health and safety
Definition
Mitigation
Increased gross risk exposure
Prevention of injury or loss of life for
both employees and customers is of
utmost importance. In addition, it is
vital to maintaining the confidence
our customers and clients have
in our business.
KPIs associated with risk:
→ Accident frequency rates
→ Reportable incidents
→ Customer complaints
→ ‘Excellent’ service rating
IT and data
Definition
A major incident or catastrophic event
could impact on the Group’s ability to
trade. In addition, it is essential that the
security of customer, employee and
Company confidential data is maintained.
A major breach of information security
could have a major negative financial and
reputational impact on the business. The
risk landscape of IT and data is constantly
increasing with deliberate acts of cyber
crime becoming more sophisticated and
frequent across all markets.
→ Significant investment in the centralised
health, safety and environment (HSE)
function to maintain consistency
and quality.
→ We have comprehensive safe systems
of work which are well communicated
through a robust and coordinated
internal training regime.
→ Regular HSE training and updates
are held, predominantly delivered
by the internal function.
→ Independent review of health and
safety cases by insurers where
recommendations of change
are implemented.
→ Internal Health and Safety auditing
→ We have robust processes for inducting
takes place using third party validation.
new staff to ensure importance of health
and safety is emphasised together
with detailed method statements
for working safely.
→ Annual Group Health and Safety
strategy and plan are produced.
Mitigation
→ The Business Continuity Plan is
constantly reviewed and frequently
tested to ensure it is fit for purpose.
→ Business continuity and IT disaster
recovery management resource is
convened at short notice to manage
the response and any associated risk
to the Group.
→ Various information security policies
and standards are in place with a focus
on network security, access controls,
encryption, system security, data
protection and information handling.
Increased gross risk exposure
→ Information security penetration
is externally tested to identify
improvement recommendations
which are then implemented.
→ Data Security Committee in place to
monitor and review both physical data
security and IT data security.
Annual report and accounts 2016 21
Mears Group PLC
Strategic report Viability statement
The Group has a broad spread of customers – our largest client
constitutes less than 7% of Group revenues which, while significant,
would, in the event of its loss, not impact on the Group’s wider viability.
Business planning and financial viability
In accordance with C.2.2 of the UK Corporate Governance Code 2014,
the Directors have assessed the viability of the Group over a five-year
period. A period of five years has been chosen as it reflects the
average contract length of five years. Whilst the Group holds
contracts which extend beyond this time horizon, a period of
greater than five years is considered too long, given the inherent
uncertainties involved.
Two scenarios were modelled. The first scenario assumed a
significant business failure within the Housing division. The model
assumed a 6% per annum compound reduction in revenues for
each year within the five-year plan, a total reduction of 22%.
This was combined with a 1% deterioration in the Housing gross
margin which, when combined with an under-recovery in central
support overheads, resulted in a reduction in Group net profit
margin from 4.3% to 3.0% in year five of the model.
The Board considered its key risks. The principal risks are set out
on pages 18 to 23 and the most relevant of these risks to viability
were considered to be:
→ a service delivery failure, possibly resulting in the death
or harm of a service user, with significant negative publicity
and long-term reputation damage;
→ deterioration in carer churn rates and poor recruitment
practices resulting in a material reduction in carer numbers,
sales volumes and profitability;
→ a health and safety failure resulting in serious personal injury
or death of an employee or service user, leading to significant
financial penalties and significant reputation damage; and
→ a failure in our IT systems, impacting upon our ability to deliver
our services. We provide services to vulnerable people and
even a short period of downtime could cause severe reputation
damage. A serious system failure could have significant impact
on invoicing our customers and collecting cash.
A financial model has been built on a contract-by-contract basis
for the next twelve months and extended on a business-by-business
basis for the following four years. The five-year plan considers cash
flows as well as financial covenants. Consideration was given to a
number of key assumptions, namely future revenue growth, operating
margins and working capital management. The assumptions set
were considered conservative given the focus of the model is in
respect of underperformance. Sensitivity analysis was undertaken
to stress test the resilience of the Group and its business model
to the potential impact of the Group’s principal risks, or a combination
of those risks. The Board overlaid the potential impact of the
principal risks which could affect solvency or liquidity in ‘severe
but plausible’ scenarios.
The second scenario assumed a similar failure within the
Care division. The model assumed a 15% per annum compound
reduction in revenues for each year within the five-year plan, a total
reduction of 50%. This was combined with a 2% deterioration in
the Care gross margin which resulted in a Care operating loss
of £4.3m in year five of the model but no reduction in Group net
profit margin in the reducing materiality of Care in this scenario.
Both scenarios showed that the Group would remain viable even
in the event of a severe business failure over an extended period.
No mitigating actions were included within either scenario, which
was considered conservative albeit not entirely realistic.
Whilst the Group’s continuing operations are entirely based in the
UK, the large network of branches does reduce the risk of serious
business interruption. In addition, the Group has a broad spread of
customers – our largest client constitutes less than 7% of Group
revenues which, while significant, would, in the event of its loss,
not impact on the Group’s wider viability.
The Board has recently completed an ‘amend and extend’ of
the Group’s revolving credit facility which now runs to July 2020.
The Board has considered the Group’s ability to renew the existing
debt facilities in July 2020 and believes that the Group has a high
level of comfort that replacement sources of funding will be
available at that time.
The Board also considered the impact of Brexit on the business
activities and does not envisage any significant negative effect
impacting on the Group’s viability.
The Board accepts that uncertainty of results increases as
the projections cover a five-year period. However, the Board
concluded that there was a reasonable expectation that the
Group will continue in operation and would be able to continue
to meet liabilities as they fall due over the five-year period of
business planning.
22
Mears Group PLC
Annual report and accounts 2016
Strategic report Key risks impacting upon viability and delivery of our strategic priorities
Reputation
Service quality remains our key
differentiator and underpins our
future viability.
Customer excellence rating
91%
(2015: 91%)
People
We have over 15,000 employees;
the majority of these are interacting
with our customers on a daily basis.
It is this day-to-day contact which
is fundamental in delivering a
differentiated service and high
levels of satisfaction. It is imperative
to Mears’ viability that the Group’s
strategic goals are well communicated
and understood by all employees.
Health and safety
Mears’ services and operations
involve a series of high risk
activities, ranging from dealing
with vulnerable customers in need
of care, to our building related
services, such as working at
height and working with gas
and electricity.
Customer complaints
0.27%
(2015: 0.30%)
Accident frequency rate
0.16
(2015: 0.17)
The Board reviewed the
Group’s viability in terms of
both its financial viability
and its ability to achieve
its strategic goals.
Our strategic priorities
page 12
Effective risk management
underpins the Group’s
long-term viability.
Risk management and
principal risks page 18
Annual report and accounts 2016 23
Mears Group PLC
Strategic report Review of operations
Summary
→ The Housing business has continued to deliver
excellent financial performance.
→ We have positioned ourselves to provide a broader
service offering to a market where we are seeing an
increasing blurring of the boundaries around social,
affordable and private rented housing.
→ The Group has made significant progress in
rebalancing its portfolio of Care contracts to focus
upon those which have a better mix of longevity,
spend certainty and price.
→ In Care, whilst we have become increasingly selective
in new contract bidding, it is pleasing that we have
enjoyed a particularly buoyant period for winning
new work.
2016
Operating
segments
Housing
£m
Care
£m
Total
£m
Housing
£m
2015
Care
£m
Total
£m
Revenue
787.5
152.6
940.1
735.1
146.0
881.1
Operating
result*
Operating
margin*
44.1
(1.2)
42.9
42.4
(1.6)
40.8
5.60% (0.79%) 4.56% 5.77% (1.10%)
4.63%
*
Pre amortisation of acquisition intangibles and long-term incentive plans.
Housing
Mears has quickly become
the leading provider of housing
management services to the
public sector, delivering a range of
innovative and unique solutions.
The Board is very pleased with the progress made by our Housing
division, where we have positioned ourselves to provide a broader
service offering to a market where we are seeing an increasing
blurring of the boundaries around social, affordable and private
rented housing. Whilst we have increased the depth and breadth
of our capabilities, we place particular emphasis upon ensuring
that our wide spectrum of core skills is delivered from the individual
operating unit, which is important given the increasingly complex
housing challenges being faced by our clients.
The Housing business has continued to deliver excellent
financial performance with revenues of £787.5m (2015: £735.1m),
an increase of 7% reflecting a particularly busy period of new
contract mobilisations. Our operating margin of 5.6% (2015: 5.8%)
reflects some dilution given this high number of new contract
mobilisations. Typically, the Group anticipates a lower margin
from a new contract during its mobilisation phase, being a time
when the primary focus is in investing resources to establish
excellent customer service. Having reported an operating margin
of below 5.0% in the first half year, it is pleasing that operating
margins normalised during the second half of the year.
The Housing division has secured new contracts of over £250m,
with a contract win rate on competitively tendered works of 39%
(by value) (2015: £900m and 49%). Following a significant period
of new contract awards in 2015, in the past year we have focused
our attention upon existing contract renewals, notably Sedgefield
and Manchester, both of which I am pleased to confirm have chosen
to continue their existing relationship with Mears. We were also
successful in extending our relationship with Gateshead, although
the maintenance will now follow an insourcing solution.
Whilst we focus upon a single Housing division, the following
provides a breakdown of the revenue streams:
Maintenance
Regeneration
Housing Management
Total Housing revenues
2016
£m
2015
£m
602.0
589.0
86.0
99.5
98.4
47.7
787.5
735.1
24
Mears Group PLC
Annual report and accounts 2016
Strategic report Maintenance
The Housing division saw maintenance revenues increase to £602.0m
(2015: £589.0m). Organic growth of 2% underplays the level of activity in
this area. Whilst our historic record of contract renewals is strong, we were
disappointed to report, in early 2016, the loss of our flagship contract with
Birmingham City Council following a competitive retender, a contract with
annual revenues of some £28m. However, it was pleasing to report overall growth
in 2016 despite the loss of such a significant contract. The majority of new contract
awards commenced in April 2016 and as such only nine months’ trading is
reflected in the 2016 trading numbers. Notable contract activities include:
→ Mears forming a new joint venture with Milton Keynes Council called
YourMK, focusing upon the regeneration of key areas in Milton Keynes.
The contract, which mobilised in April 2016, initially delivered repairs and
maintenance services to nearly 11,500 homes but has since enjoyed a significant
extension to the scope of works. This contract is valued at £250m.
→ Mears’ success in resecuring its Sedgefield contract, delivering responsive
and planned maintenance to approximately 8,500 homes, which is valued
at £110m over the ten-year contract term. This is a contract renewal,
with the original contract having been awarded in 2008.
→ Mears being re-awarded with a multi-service contract with Manchester
City Council on its own behalf and on behalf of Northwards Housing.
The contract is for day-to-day repairs and maintenance including void
property and general building works to Northwards Housing managed
stock and leasehold properties and to Manchester City Council managed
hostels, shared houses and residential dwellings. The contract is valued
at £31m over its initial four-year term with potential to increase to £78m,
subject to extension, over its full ten-year term.
Revenue
£787.5m +7%
2016
2015
2014
£787.5m
£735.1m
£714.7m
Operating profit
£44.1m +4%
2016
2015
2014
£44.1m
£42.4m
£34.4m
Operating margin
5.6%
2016
2015
2014
5.6%
5.8%
4.8%
See note 1 to the financial statements.
CASE STUDY: HOUSING
Joint venture tackles homelessness
Homelessness is a growing problem,
especially in London, and increasingly
councils are looking for innovative ways
to fulfil their duties to vulnerable households.
Investors gain a return on their
investment while the Council stands
to save substantially on B&B costs over
the long term.
More than 1,000 households in Bromley
are in temporary accommodation – in many
cases this means costly B&Bs, as there is
not enough suitable accommodation to
meet demand.
A new joint venture between the London
Borough of Bromley and Mears, named
More Homes Bromley, will see Mears
purchase and refurbish 400 properties to
the Decent Homes standard and manage
them on behalf of the council.
The £80m landmark venture is funded
by BAE Systems Pension Funds.
Annual report and accounts 2016 25
Mears Group PLC
Strategic report Review of operations continued
Regeneration
The Housing division saw capital work revenues reduce to £86.0m
(2015: £98.4m). Whilst the level of spend on one-off refurbishment
projects has reduced, we are seeing a high number of new
development opportunities with existing customers. During the
last twelve months, Mears has broadened its service capability
to include the provision of new build services through our
supply-chain partnerships, primarily targeting our existing
Housing clients. Mears is not a property developer or general
builder; rather, we will use our entire portfolio of services to provide
a more integrated solution which enhances our focus on managing
assets for the benefit of owners and client public sector bodies.
We see this as a growth area for our Housing division; however,
during this transitional period, the new development opportunities
have not generated sufficient revenues to replace the reduction
of refurbishment works. Notable contracts secured during
the period include the following:
→ Further to the long-term maintenance works that we are delivering
for our Welwyn and Hatfield Council client, we have been engaged
to develop 29 affordable rented homes on a brownfield site.
The works are valued at £5.6m and the contract is due to
complete at the end of 2017. Mears will take over the long-term
maintenance of these new homes, giving a seamless solution
to the housing requirements of Welwyn and Hatfield Council.
→ Mears’ success in securing the joint venture with Milton Keynes
Council, which saw the commencement of repairs and maintenance
services in April 2016, has already seen the scope of works
expanding. Mears has been engaged to develop 80 new homes
spread across seven infill sites around the city. These homes
will be for affordable rent, once finished, with a contract value
of approximately £11m. Site work commenced during the first
quarter of 2017 and will complete in early 2018.
Housing Management
The Housing division saw Housing Management revenues more
than double to £99.5m (2015: £47.7m). This business stream is
seeing significant growth opportunities with an annual revenue
run rate now at around £120m. Mears has quickly become the
leading provider of housing management services to the public
sector, delivering a range of innovative and unique solutions.
The innovative nature of these propositions has meant that
much of the work has been secured without the requirement
for an extended, competitive tender process. We expect this
to be a continuing trend.
→ Mears mobilised a Key Worker Housing contract providing
a full housing management service throughout the UK. This
includes sourcing properties, managing the application and
allocation process as well as the subsequent day-to-day
administration. The contract, which fully mobilised in April 2016,
is valued at over £160m over the initial three-year term.
→ Mears has been engaged by the London Borough of Bromley
(Bromley) to arrange the purchase and refurbishment of
400 homes currently under private ownership. The key aim
is to provide Bromley with an alternative, affordable housing
supply to replace the significant bed and breakfast accommodation
costs currently incurred by Bromley. Mears has engaged funding
partners to finance the purchase of properties on behalf of the
client. We will then carry out refurbishment works and act as
managing agent for the portfolio. The contract will be operated by
Bromley and Mears for up to 40 years and is valued at circa £50m.
The operation mobilised in February 2016, and the purchase
and refurbishment phase will continue over a period of 24 months.
This is typical of a number of opportunities within the pipeline.
→ Mears has entered into a contract with Safe Haven, a charity
which acquires homes to use as temporary accommodation
for the London Borough of Ealing. Safe Haven owns around
200 homes with a clear plan to increase this number to 400.
Mears is engaged, over an initial 20-year term, to carry out
all housing management services, including an initial
refurbishment programme, so that the homes will now
be a long-term affordable housing provision.
Our strategy
We have maintained a consistent strategy across Housing over a long period:
1
Focus on delivering a high level
of customer service
We have continued to maintain high
levels of customer satisfaction. Over
90% of tenants regard our services
as excellent.
2
Drive innovation to provide better
outcomes for tenants
Successful development and
introduction of new partnership
models such as our joint ventures
with Milton Keynes Council and the
London Borough of Bromley.
Our service delivery is supported by
our internally developed IT systems
underpinning our capabilities and
driving innovation.
3
Evolve the breadth and depth of
our service offering
We have, over recent years,
extended our Housing offering from
our original maintenance offering to
full maintenance, regeneration and
housing management capability.
In addition, Mears provides solutions
for clients who wish to insource their
maintenance services.
26
Mears Group PLC
Annual report and accounts 2016
Strategic report → Mears, through its Registered Provider of Social Housing, and
HB Villages are working in partnership to create a new supply
of purpose-built accommodation for the Care sector. The objective
is for HB Villages to develop and fund the new housing with
Mears providing long-term tenancy and asset management
services to the residents. The first scheme in Northampton is
for an 80-home extra care complex, with Mears providing both
housing management and care services.
→ Mears completed a transaction with Chapter 1 Housing Association
for the management of 900 homes in the South and West of England.
Following a strategic review by Chapter 1, this form of private
sector leased property for homeless families was considered
non-core, and they searched for a partner that could ensure a
continuity of a quality service. This arrangement also introduced
Mears to a further twelve Local Authorities and Mears will look
to extend its service offering to those new customer relationships.
CASE STUDY: HOUSING
Empty homes – improving neighbourhoods
With a severe shortage of affordable
homes in the UK, empty properties
represent a significant waste of resources
and a missed opportunity for meeting the
housing needs of communities across
the country.
In the London Borough of Newham,
Mears was selected as the preferred
partner to refurbish, let and manage
185 flats and houses in 2011, this has
risen to over 270 properties. The annual
savings to Newham are expected to be in
the region of £1.5m.
Bringing long-term empty properties
and redundant commercial buildings
back into use is much more cost effective
than building new properties to tackle the
shortage of affordable homes, and also
improves neighbourhoods.
Mears works with several Local
Authorities in London, Luton and the
South East to revitalise empty properties
and provide ongoing management
and maintenance.
Mears has also worked with:
→ London Borough of Hounslow –
40 unit hostel
→ London Borough of Sutton –
40 self-contained units
→ Luton Borough Council – 54 Room Hostel
→ Rushmoor Borough council –
45 self-contained units
Other customers include London Borough
of Enfield, Circle Housing Group and East
Thames Housing Association.
4
Focus on building sustainable,
long-term partnerships
During 2016, we retained a number
of key client relationships including
Sedgefield and Manchester.
5
Our broader service offering is
enabling us to generate multiple
revenue streams from single
client relationships.
Invest in the workforce to ensure
that it is both motivated and
well trained
We invest in extensive training
and development of staff at all
levels. We have recently opened
National Training Academies in both
Rotherham and Brentwood. We are
one of only twelve UK companies
who have been recognised by the
Government as a Social Mobility
Champion. This is for our work in
creating opportunities for people
from disadvantaged backgrounds.
We employ over 400 apprentices.
6
Primarily focus upon
organic growth
Given our broad capabilities, our
primary focus is on organic growth.
We continue to consider bolt-on
acquisitions to reinforce our
leadership position.
Annual report and accounts 2016 27
Mears Group PLC
Strategic report Review of operations continued
CASE STUDY: HOUSING
YourMK joint venture partnership
YourMK, the partnership between Milton Keynes Council
and Mears, came into existence on 1 April 2016. YourMK
is responsible for the strategic asset management of
around 11,500 council-owned properties and leading
the regeneration programme in Milton Keynes.
Since April, the operational team has completed
around 25,000 jobs, with 99% completed within the
28-day target. They have reduced the void turnaround
from 16 days to ten, and achieved an average customer
satisfaction score of 96.5%.
In addition, YourMK is leading the affordable housing
building programme for Milton Keynes Council and
is currently working with Mears on five sites, with
potential for considerably more in the pipeline.
The five-year business plan – detailing where
regeneration and related work will begin, plus the
planned works programme aligned to the business
plan – will be published in spring 2017.
Completed over
25,000
jobs, with over 99% completed
within the 28-day target
Customer satisfaction score
>95%
28
Mears Group PLC
Annual report and accounts 2016
Care
The Group has made significant
progress in rebalancing its portfolio
of Care contracts to focus upon
those which have a better mix of
longevity, spend certainty and price.
Revenues for the Care division were £152.6m (2015: £146.0m),
reflecting the full-year impact of the Care at Home acquisition.
The Care division reported a loss of £1.2m (2015: £1.6m), broadly
in line with management expectations and reflecting the continued
challenges of homecare and the additional costs incurred in
restructuring our Care activities.
The Group has made significant progress in rebalancing its
portfolio of Care contracts to focus upon those which have a
better mix of longevity, certainty of spend and price. The Group
entered 2016 with the imminent introduction of the National
Living Wage (NLW) hanging over the Care sector with an increase
in the National Minimum Wage from £6.70 to £7.20 per hour from
April 2016. In addition, the Scottish Living Wage (SLW) signposted
an increase from £6.70 to an enhanced £8.25 per hour, which further
impacted on around 25% of our Care operations. Whilst the majority
of care providers were very supportive of the principle of paying
carers a rate that is more reflective of the crucial role that they
deliver, the additional pressure on clients’ already overstretched
budgets brought significant uncertainty as to how this additional
cost would be funded. The Government has continued to provide
some short-term relief, allowing Local Authorities to levy a new
social care precept of up to 2% on Council tax, with the money
raised to be spent exclusively on adult social care. In addition, the
Spring Budget 2017 committed a further £1 billion of additional
funding to 2017/18 that will go some way to preventing an immediate
collapse but does not represent a long-term solution.
During the second half of 2015, and running into 2016, we carried
out a detailed review, on a contract-by-contract basis, of charge
rates and care worker pay rates. The process placed particular
focus upon managing the impact of the NLW and also identifying
more effective solutions to the sourcing and retention of sufficient,
good quality, care workers. Pleasingly a large number of care
commissioners have shown a deeper understanding of the true
underlying cost of delivering care. This has resulted in an
increasing acceptance that the NLW only really represents a legal
minimum, and that one cannot expect to recruit individuals to
deliver homecare, and to accept the responsibilities that go with
this role, at this minimum rate. It remains a key part of our
long-term strategy to see care workers properly recognised
as the skilled workers they undoubtedly are.
Strategic report In aggregate, Mears enjoyed an increase in charge rates of
circa 7% within England and Wales and around 15% in Scotland,
which is generally in line with the increase in our carer payroll
cost and is better than the average increase given to providers
across the sector. The outcome of our review has highlighted
those care commissioners who we believe, in the medium term,
have little desire to change their commissioning strategies and
where there is little likelihood of contract pricing that will allow
providers to deliver care responsibly. This outcome led us to carry
out a substantial restructuring of our Care division, which has
seen a reduction in our Care activities by some 20%, a significant
proportion of which arose within the North of England, which has
the lowest charge rates and more traditional procurement methods.
The initial round of branch closures was substantially completed
in 2016. Further refining has taken place since the end of the year,
seeing Mears withdraw from Northern Ireland and a number
of Midlands-based contracts.
CASE STUDY: CARE
Help to live at home
Mears’ partnership with Wiltshire Council
to deliver the innovative Help to Live at
Home care service has extended to cover
six of the county’s eight areas.
The new contract is worth £80m over
four years, with the option to extend for
a further two years.
Help to Live at Home takes a different
approach to homecare, getting away
from the traditional ‘time and task’ model,
focusing instead on what people want from
their care based on outcomes.
Outcomes-based commissioning aims to
help people regain independence and prevent
them from needing longer-term care.
In the first three months of operating the
new areas, Mears was able to grow the
amount of work delivered by 17%, helping
to reduce the rising pressures on health
and social care.
Mears already successfully runs the service
in the South of the region and the new
contract extends the service in the East,
West and much of the North of the county.
New contract value
£80m
over four years
Revenue
£152.6m +5%
2016
2015
2014
£152.6m
£146.0m
£124.0m
Operating profit
£(1.2)m +25%
2016 £(1.2)m
2015 £(1.6)m
2014
Operating margin
(0.8)%
2016
(0.8)%
2015
(1.1)%
2014
£9.6m
7.8%
See note 1 to the financial statements.
Annual report and accounts 2016 29
Mears Group PLC
Strategic report Review of operations continued
A summary of the changing volumes and charge rates as a result
of the refocusing of our Care activities is detailed below:
Hours
per week
Annualised
revenue £m
Charge rate
per hour £
As at 1 January 2016*
216,000
148.1
13.19
Contract closures
Material new contract awards
Other net volume decrease
(48,200)
9,100
(15,500)
As at 31 December 2016
161,400
126.2
15.04
* Includes contracts under notice of termination as at balance sheet date.
Whilst we have experienced significant downsizing in certain
geographic areas, we are experiencing a solid pipeline of good
quality bidding opportunities. In addition there are growth
opportunities with the majority of our remaining clients.
Whilst we have become increasingly selective in new contract
bidding, it is pleasing that we have enjoyed a particularly buoyant
period for winning new work, securing over £200m of contract wins
at a win rate of 74% by value (2015: £80m and 63%). More importantly,
the quality of the new orders secured is much improved, enjoying
a significantly higher charge rate, which enables us to reflect this
within our carer pay and conditions. The average contract lengths
of these latest awards has increased to in excess of five years and
the number of providers reduced significantly, which reflects the
trends which we anticipated and should in the future result in a better
quality of earnings from our Care activities. Notable wins include:
→ a contract with Devon County Council for the provision of
homecare services. The contract is for an initial five-year period
with an option to extend for a further two years and is worth over
£100m. Mears is acting as the lead provider partner in four
geographic areas across the South of Devon and is responsible
for organising and delivering personal care services in that
area, predominantly coordinating and supporting the local
SME providers. The contract commenced in July 2016;
→ further contracts by Wiltshire Council, as lead provider within
zones in the North and West regions of the county, to add to
our existing work in the South and East. The new contract,
which is valued at around £85m over its six-year term, means
Mears is the prime provider for the significant majority of this
work across the county, doubling its previous value of work.
The new contract commenced in August 2016;
→ the renewal of our existing Care contract with the London
Borough of Richmond, a client with whom we have enjoyed
a long-standing relationship. The new contract, which
commenced in July 2016, is for six years and will see us
doubling our sales volume; and
→ being re-awarded its existing Care contract with Aberdeenshire
Council, delivering a wide spectrum of homecare and supported
living services to people with complex needs, including autism
and mental health. The contract has increased our provision
to 4,000 hours of support per week.
The main limitation to achieving growth in Care and to delivering
a consistent, good quality service, remains the sourcing and retention
of sufficient care workers of good quality. Whilst we have experienced
some improvement in carer turnover during the year, with churn rates
falling by 14%, this still remains at unsustainable levels. We remain
committed to driving improvement to the conditions of care workers,
including better financial rewards and incentives and a more
formalised career pathway.
Our annual survey of staff also showed a significant increase
in job satisfaction, reflecting the effort we have put into making
Mears the place to work for care staff interested in developing
a career in the sector.
We are pleased to see the various UK regulators implementing
tougher standards around quality, which will play to our strengths.
We are particularly pleased with our regulatory performance in
our key Scottish market and, while we have seen some pressure
points in England, our processes and controls continue to improve.
Our strategy
We have maintained a consistent strategy across Care over a long period:
1
Focus on delivering a high level
of customer service
We achieved Customer Service
Excellence accreditation for our
Care division, which adds to our
existing accreditation for
housing services.
We have delivered excellent
regulatory compliance in Scotland.
We are working hard to improve the
consistency of our service delivery
in England.
2
Drive innovation to provide better
outcomes for service users
Our Wiltshire contract is very much
the flagship for the development
of outcome-based working, as
opposed to the traditional care
focus on task and time. Within
Wiltshire, all care plans are written
based upon achieving specific
outcomes for individual service
users. We anticipate more clients
commissioning care in this way.
3
Evolve the breadth and depth
of our service offering
Increasing integration of NHS
and social services is growing
the number of people with more
complex conditions who need care
at home. Complex care covers
services such as spinal injury
treatment, head injury treatment,
end of life care, dementia care and
learning disability support.
30
Mears Group PLC
Annual report and accounts 2016
Strategic report
There has never been greater stakeholder pressure to increase
funding into social care, including from organisations such as the
NHS, which has really been feeling the impact of the underfunded
social care system. Mears is playing its part in encouraging
additional investment to be made and the additional funding
secured from the Spring Budget 2017 and Council tax increases
is positive. Mears is widely recognised now as the organisation
in homecare that is doing the most to drive change, which we
believe is a real positive for the long-term development
of our business.
CASE STUDY: HOUSING
National Training Academy
Mears opened our new national Training
Academy at the New York Stadium in
Rotherham, running courses on plumbing,
electrics, roofing, carpentry, joinery,
plastering and painting and decorating.
The Training Academy delivers accredited
apprenticeships for those starting a career
in construction or repairs and maintenance,
as well as providing training for those
currently working in the trades.
The Training Academy is our national
training facility which also operates a
training academy in Brentwood, Essex.
The Training Academy also supports
unemployed young people and adults
of all ages and sexes to gain skills
for employment. This includes a new
business and management school and,
in the future will offer purpose-designed
courses and services to our clients.
During 2016, Mears
recruited over
100
new apprentices
4
Focus on building sustainable,
long-term partnerships
We are increasingly selective
in bidding for new contract
opportunities. Our recent success in
being awarded five-year contracts
with both Devon County Council and
Wiltshire Council is reward for this.
These contracts are secured at rates
which allow us to recruit a workforce
delivering high quality care.
5
Invest in the workforce to ensure
that it is both motivated and
well trained
We have agreed new minimum pay
levels for our staff which are set
ahead of NLW. We are also investing
further in training and a range of other
benefits. We believe this investment
is fundamental in helping reduce
the staff churn rate.
It is central to our strategy that care
workers are properly recognised as
the skilled workers they are.
6
Focus upon organic growth
With the current challenges in Care,
we are entirely focused upon developing
our Care offering organically. Whilst
we continue to have aspirations to
grow the business, our focus in the
short term will be on quality and we
may see some reduction in size.
Annual report and accounts 2016 31
Mears Group PLC
Strategic report Financial review
Andrew Smith
Finance Director
We operate in a high volume, low
value and low margin environment
where we have delivered consistent
financial results over an extended
period of time.
Summary
Earnings
The normalised diluted EPS, which allows for the
potential dilutive impact of outstanding share options,
increased by 9% to 30.36p (2015: 27.94p).
Dividend
The Board has recommended a final dividend of 8.40p
per share which, when combined with the interim
dividend, gives a total dividend for the year of 11.70p
(2015: 11.00p), a 6% increase, reflecting the Board’s
confidence in the underlying performance of the Group.
Cash
The efficiency with which the Group manages working
capital remains a cornerstone of our business. The
Group’s conversion of EBITDA to cash in the year was
below target at 70% (2015: 99%). The solid organic growth
delivered in 2016 resulted in some working capital
expansion and the increase in trade receivables
reflects this.
32
Mears Group PLC
Annual report and accounts 2016
Group revenue
£940.1m
(2015: £881.1m)
Dividend per share
11.70p
(2015: 11.0p)
Group operating profit*
£41.9m
(2015: £38.7m)
Cash conversion
70%
(2015: 99%)
* Before acquisition intangible amortisation.
This provides further key information in respect of the financial
performance and financial position of the Group to the extent
that this is not already covered within the Review of Operations.
Acquisitions
Having completed a number of significant acquisitions in recent
years, notably the Care at Home division of Care UK in 2015
and the Omega Group in 2014, the past year was focused upon
consolidation and organic growth with no new acquisitions
completed in the period.
Contingent consideration of £10.0m was paid during the year,
relating to the previous acquisition of Omega. A further payment
of £5.0m has been paid in the early part of 2017. The Directors
believe it is highly probable that the full contingent consideration
will be paid, with the final instalment of £5.0m therefore
anticipated in January 2018.
The acquisition of Omega included an interest in 50% of the share
capital of three jointly owned entities. During 2015, the Group
increased its holding to 75% in the year for a cash consideration
of £6.1m. Mears has agreed a forward purchase agreement
to acquire the remaining 25% for consideration of £6.1m
in January 2018.
Discontinued activities
In November 2013, the Group completed the disposal of the
entire share capital of Haydon Mechanical and Electrical Limited
(‘Haydon UK’). As part of that disposal, the Group retained the
beneficial interest in 49% of the share capital of an investment
in a company registered in the United Arab Emirates, Haydon
Mechanical and Electrical Company LLC (Haydon LLC). This
beneficial interest was retained due to a number of performance
guarantees in place at the time of the disposal which would
unwind as the underlying contracts were completed. During the
year, the Group reduced its interest to 1% of the share capital in
return for a nominal consideration. At 31 December 2016, a balance
of £3.3m was due from Haydon LLC to the Group. Upon the
remaining guarantees being satisfied and the outstanding
debtor settled, the Group is in the process of transferring
the remaining share to the local management.
Strategic report In the year, the Group made a full provision against all remaining
amounts due from Haydon UK. This was balanced with an operating
profit generated by Haydon LLC in the period leading up to its
disposal. Accordingly, the net impact on the profit for the year
was zero.
Amortisation of acquisition intangibles
A charge for amortisation of acquisition intangibles of £10.7m
(2015: £10.8m) arose in the year. This charge relates to a number
of acquisitions in both Housing and Care over recent years.
The remaining unamortised value of £19.7m (2015: £26.8m),
predominantly relating to order book and customer relationships,
will be written off over their estimated lives.
Net finance charge
A net finance charge of £1.8m has been recognised in the year
(2015: £1.9m). The finance cost in respect of bank borrowings was
£2.8m (2015: £2.7m), reflecting a slightly higher average debt level.
The Group held two interest rate swaps covering 2016. The first
fixed at a rate of 1.92% on £27.5m of borrowings and expired in
August 2016. The second, which ran throughout the year, fixed at
a rate of 1.85% on £30.0m of borrowings. The remaining debt bore
a variable LIBOR rate. The Group pays a margin over and above
LIBOR which is subject to a ratchet mechanism and which, during
the year, was typically in the region of 1.5% above LIBOR.
The Group entered into further interest rate swaps impacting upon
future periods. One swap, which commenced in January 2017, fixed
the rate for a period of four years at 0.83% on £40.0m of borrowings.
The net finance costs also include a net credit generated from
defined benefit pension accounting of £0.9m (2015: £0.7m).
Tax expense
Current tax recognised in income statement
Deferred tax recognised in income statement
Total tax expenses recognised
in income statement*
Profit before tax and before amortisation
of acquired intangibles
Profit before tax
Effective current tax rate
* Continuing activities.
2016
£m
4.7
(1.0)
3.7
2015
£m
5.1
(1.3)
3.8
40.1
36.8
29.4
25.9
16.0%
19.7%
The Group complies with all relevant tax laws and regulations
regarding the payment of tax and the provision of information to tax
authorities. Mears does not undertake any aggressive tax planning
or schemes that utilise low tax regimes in other jurisdictions for
the purposes of tax avoidance. Mears seeks to maintain an open
and honest relationship with the tax authorities and benefits
from an HMRC ‘low risk’ status.
The headline UK corporation tax rate for the year was 20.0%
(2015: 20.3%). The total tax charge for the year on continuing
operations was £3.7m (2015: £3.8m) resulting in an effective total
tax rate of 11.6% (2015: 14.7%). The key reconciling items to the
headline rate were the utilisation of brought forward losses relating
to previous acquisitions, an annual corporation tax deduction in
respect of share options and adjustments in respect of the prior
year estimated tax charge.
Total tax includes deferred tax, which is an estimate of the tax
due on any differences between the carrying value and the tax
base of assets or liabilities. The current tax charge excludes
deferred tax and is therefore affected by both permanent and
temporary differences in the recognition of items for tax and
accounting purposes.
The current tax charge for the year on continuing operations was
£4.7m (2015: £5.1m), which represents an effective tax rate of 16.0%
(2015: 19.7%). For both the years, the key reconciling items to the
headline rate were permanent differences on the amortisation of
acquisition intangibles and the utilisation of brought forward tax
losses primarily associated with the Morrison business.
Earnings per share (EPS)
2016
p
2015
p
Change
%
Diluted earnings per share*
23.41
20.10
+16%
Normalised diluted earnings
per share**
Dividend per share
* Continuing activities.
30.36
11.70
27.94
11.00
+9%
+6%
** Continuing activities before acquired intangible amortisation with
an adjustment to reflect a full tax charge.
The normalised diluted EPS, which allows for the potential dilutive
impact of outstanding share options, increased by 9% to 30.36p
(2015: 27.94p). Normalised earnings are based upon continuing
activities and exclude the amortisation of acquisition intangibles
together with an adjustment to reflect a full tax charge of 18%
(2015: 18%). We believe that this normalised diluted EPS measure
better allows the assessment of operational performance, the
analysis of trends over time, the comparison of different
businesses and the projection of future performance.
Read the Report of the Audit
Committee on page 56
View the primary statements
on page 100
Annual report and accounts 2016 33
Mears Group PLC
Strategic report
Financial review continued
Cash performance
Operating profit*
Depreciation and amortisation
EBITDA
Cash inflow from operating activities
EBITDA to cash conversion
Net (debt)/cash at balance sheet date
Average net debt in year**
* Before amortisation of acquisition intangibles.
** Average debt represents a 366-day mean.
2016
£m
41.9
7.4
49.3
34.5
70%
(12.4)
85.0
2015
£m
38.7
6.3
45.0
44.5
99%
0.8
68.0
The efficiency with which the Group manages working capital
remains a cornerstone of our business. The Group’s conversion
of EBITDA to cash in the year was below target at 70% (2015: 99%),
reflecting the organic growth delivered in 2016 resulting in some
working capital expansion and the increase in trade receivables
reflects this. The Group saw a reduction in trade payables and
its associated cash outflow, impacted by a changing sales mix.
The Group continues to drive a cash culture internally, which is so
important in a high volume, low value and public sector environment.
A cash conversion target of in excess of 90% remains the key
performance measure and one which historically the Group
historically has an excellent track record of delivering.
Balance sheet
Goodwill and intangible assets
Property, plant and equipment
Inventories
Trade receivables
Trade payables
Net (debt)/cash
Deferred consideration
Cash flow hedge
Pension
Taxation
Net assets
2016
£m
2015
£m
219.6
224.9
20.3
11.2
18.4
9.0
157.2
146.9
(186.6)
(188.5)
(12.4)
(16.5)
0.4
8.5
(3.0)
0.8
(20.9)
(0.9)
4.0
(2.1)
198.7
191.6
34
Mears Group PLC
Annual report and accounts 2016
Goodwill and intangible assets
The carrying value of identifiable acquisition intangibles at
31 December 2016 was £19.8m (2015: £26.8m), which predominantly
relates to order book and customer relationships valued on
acquisition. The carrying value will be amortised over its useful
economic life, with over half of this value being expensed over the
next two years. The net movement in the year comprised an increase
of £3.7m relating to the finalisation of the fair value adjustments
made in respect of the Care at Home acquisition completed in
2015 together with a reduction of £10.7m relating to amounts
amortised and charged to the Income Statement during the year.
The carrying value of goodwill of £193.7m (2015: £193.1m) is
not amortised but is reviewed for impairment on an annual basis
or more frequently where there is an indication of impairment.
The headroom between the goodwill carrying value of the Care
division has been low for a number of years. The Board has carried
out a detailed impairment review and was encouraged that the
improved financial and non-finance performance, driven by the
Care rationalisation, has resulted in a significant improvement
in this headroom.
In addition, intangible assets includes the capitalisation of
expenditure incurred in developing the in-house IT platform.
Additions in the year amounted to £2.9m (2015: £3.0m) with a
carrying value of £6.1m (2015: £5.1m), which is amortised over
four years.
Tangible fixed assets
The Group capital expenditure of £7.4m (2015: £6.2m) relates to
IT hardware, other office equipment and the refurbishment of
new office premises. The level of capital expenditure in respect
of property, plant and equipment in any single year has a close
correlation to the number of new contracts mobilised in that
period. As detailed within the Review of Operations, 2016 was
a record year in respect of new contract mobilisations.
The majority of plant utilised by our operational teams is subject
to short-term hire and motor vehicles are subject to operating
leases and hence neither are included within capital expenditure
or recognised as an asset within the balance sheet. Similarly, the
Housing Management business has a large number of short-term
property leases which are similarly not carried on the balance
sheet. The new accounting standard IFRS 16 ‘Leases’ requires
lessees to recognise assets and liabilities for all leases, subject
to materiality, and is effective for the Group’s 2019 year end.
A detailed analysis is being prepared during the course of 2017 to
properly understand the impact of this new standard. The Directors’
current expectation is that the accounting methodology will have
a material impact upon the balance sheet but is not expected
to have a material impact upon the profit before tax. The Group’s
bank facility agreement, and associated covenants, will not be
impacted by these changes.
Working capital and net debt
Trade receivables and inventories increased to £168.4m
(2015: £155.9m), which reflects the working capital expansion
required to fund the organic growth delivered in the year.
Trade payables reported a reduction to £186.6m (2015: £188.5m),
reflecting a shift in the sales mix in favour of Housing Management,
which carries a lower level of trade payables compared to the
Housing maintenance activities.
Strategic report Our net debt position at 31 December 2016 was £12.4m
(2015: net cash of £0.8m). The Group seeks to minimise its trade
receivables at both its June and December period ends, resulting in
an atypical low net debt balance. A far more important metric is the
Group’s daily net debt balance, which provides a better indication
of working capital management. The average net debt over the
year was £85m, which represents an increase compared to the
prior year, having funded both acquisitions and organic growth.
During the year, the Group completed an ‘amend and extend’ to
its revolving capital facility which extended the expiry date from
July 2018 to July 2020. The total commitment under the facility
increased from £120m to £140m. The revised facility enjoys a
reduction to the interest cost, with the margin payable over and
above LIBOR, which is subject to a ratchet mechanism, reducing
from a range of 150–250bps to 120–220bps. The Group continues
to maintain a strong relationship with both of its bankers,
Barclays and HSBC, and meets with them regularly.
Pensions
Scheme assets
Scheme liabilities
Net asset/(liability)
Current service cost
Scheme assets
Scheme liabilities
Net asset/(liability)
Current service cost
Group
schemes
£m
2016
Other
schemes
£m
Total
£m
149.5
406.9
556.5
(137.7)
(410.3)
(548.0)
11.8
2.1
(3.3)
4.4
Group
schemes
£m
2015
Other
schemes
£m
8.5
6.5
Total
£m
116.5
332.7
449.2
(111.3)
(333.8)
(445.1)
5.2
2.1
(1.1)
5.5
4.1
7.7
The Group participates in two principal Group pension schemes
(2015: two) together with a further 33 (2015: 30) individual defined
benefit schemes where the Group has received Admitted Body
status in a Local Government Pension Scheme. At the point of
tendering for new contract opportunities, the Group seeks to
minimise its exposure to future changes in the required pension
contribution rates and to future liabilities resulting from
scheme deficits.
Whilst the aggregate of all the schemes reports a net asset
position, the Group is mindful of managing its risks in this area.
Under IAS 19, pension scheme liability values are driven by changes
in the net discount rate, which is the yield on high quality corporate
bonds less the long-term rate of expected price inflation. Following
the result of the EU referendum, an increasingly volatile macro-
economic environment has resulted in a downward move in the
net discount rate. This has led to a significant increase in pension
liabilities. Positively, the pension schemes are reporting strong
increases in their scheme assets which have, in aggregate, exceeded
the increase in the associated defined benefit obligation.
Overall, the Group has reported an increase in its pension net
asset from £4.1m to £8.5m.
However, one significant negative resulting from the changing
assumptions is the charge to the income statement, being the
current service cost. The pension charge to the income statement
for 2017, which is fixed at the start of the year using the assumptions
set at December 2016, is £9.0m, increasing from £6.5m. This
element of pension accounting is a non-cash item. Typically cost
recovery for pension costs within the underlying customer contracts
is aligned to employers’ contributions which are, in the short term
at least, unchanged.
Guidance for 2017
The 93% visibility of consensus forecast revenues secured for 2017
at the turn of the year fell marginally short of the 95% target. Revenue
visibility for 2017 has subsequently increased to 94%. The Group
targets annual revenue growth in Housing of 5% to 10% per annum,
and our expectation for growth in 2017, given the small short-fall
on the headline visibility measure, would be at the bottom end
of that range.
Our Housing margin has historically been in the range of 5.6%–5.9%.
The lower number of new contract mobilisations in 2017 will remove
some of the margin dilution experienced in 2016. The shifting
sales mix towards Housing Management services, which typically
generate a higher operating margin, also provides an opportunity
for margins to improve slightly. On the downside, the increase in
pension service costs, following a reduction in the associated net
discount rate, will reduce Housing profits by circa £2.5m.
In Care, the Group is focused on achieving good levels of service
at sustainable margins and there is less ambition for achieving
revenue growth. During 2016, the Group took the decision to exit
from around 20 of its Care contracts and a number of these closures
have continued into 2017. However, a number of key new contract
wins have also delivered some strong organic growth. The Group
has previously made commitments on its Care margins, with the
expectation that over time a margin can be delivered in Care that
is similar to those delivered in Housing. In 2017, we expect Care
performance to be in line with that trajectory and return to profit.
We will continue to manage working capital to a high standard,
targeting EBITDA to cash conversion in excess of 90%.
Annual report and accounts 2016 35
Mears Group PLC
Strategic report Social value
At the heart of Mears lies a strong sense of responsibility towards
improving people’s lives. We are committed to achieving this by
ensuring everyone we work with creates greater value and receives
wider benefits from an integrated social value approach.
We aim to lead the way with social value in the markets
where we operate, delivering lasting and meaningful outcomes
through positive community engagement projects and
effective measurement.
The concept of social value has long been embedded in Mears.
We already have a strong reputation for delivering some great
long-term community and legacy projects. To maintain the focus
on delivering excellence in social value, responding to the changing
requirements of the Social Value Act of 2012, Mears conducted a
review of our social value strategy. We needed to demystify social
value by exploring the key challenges that social housing and
service providers face in meeting the requirements of the Act.
The review identified four key social value priorities. These have
become the focus areas against which all of our community and
engagement activities are considered and measured.
Mears has a strong belief and culture that we have a responsibility
to contribute to the needs of our wider society. So, further to
understanding the outcomes of the legislation, the challenge we
approached and delivered, with our social value commitments,
was to develop a strategy and framework of practical approaches
to effectively engage with communities and deliver social value
on the ground throughout the business, with an effective
measurement of the social impact that is created.
Thought leadership approach
Mears has taken an active approach to initiate thought leadership
campaigns, to drive the agenda for social value in our markets.
Mears has continued to lead thinking across the housing and care
sectors. We have produced a report with the think tank ResPublica
looking at factors influencing regeneration programmes and
highlighting our work with Milton Keynes Council.
Mears has also once again championed the case nationally for
greater focus and investment in homecare and this subject has now
risen significantly as an area of national debate. We will continue
to champion the cause of care workers and service users.
Social value board: our key influencers
To support our approach to developing and continually improving
our social value framework, the social value board was created.
Our social value board will ensure we take a strategic approach
to corporate social responsibility and embed it into each aspect
and area of our operations. The board will provide validation and
challenge, ensuring a continuous improvement focus to our social
value delivery.
To help us realise our vision, we have appointed three external
experts to lead the board, who are all experts in the field.
Net social impact
£3,555,877
in the year
Read the Independent Committee
Members’ Report on Mears’
Social Value Activities on page 42
36
Mears Group PLC
Annual report and accounts 2016
Hazel Blears
The former Secretary of State for
Communities and Local Government and
Minister for Health championed the Social
Value Act through Parliament.
Richard Kennedy
Richard is chair of the board for Social Value
UK and co-chair of Social Value International.
Dr Greg Lavery
Greg is a global expert in sustainability
with 18 years’ experience of implementing
carbon reduction and money-saving waste
management strategies across the world.
Greg has spoken internationally on low
carbon and sustainability.
Strategic report Mears’ four social value priorities
Championing local
Improving the wellbeing of the people
and communities we serve
Fair for all
Reducing prejudice, improving
understanding of differences and
supporting social inclusion
Creating chances
Providing career, skills and
employment opportunities
Healthy planet
Making a positive
contribution to our planet
Delivering solutions for local activities
The introduction of an annual social value calendar delivers national
themes and awareness for local activity, focusing on the four key
social value priorities. This has enabled the branches to design
and deliver local activities, which supports the overall strategy
and the delivery of the branch social value plan.
Embedding the commitment and
approach with accreditation success
To ensure we always strive to improve, we open ourselves to an
annual programme of accreditations. These external assessments
tell us if we’re reaching what we aim to achieve.
MARCH – JUNE
Social Value Activity Planner 2016
14th-18th
National
Apprentice
week
7th
World Health
Day
9th
National
No Smoking
Day
S c h o o l
a w a r e n e s
i o n s
s
s e s
A p p r e n t
s
f o r
c e s
i
2nd-8th
Deaf
awareness
week
JULY – OCTOBER
Social Value Activity Planner 2016
1st
International
day of older
persons
1st-7th
Volunteers
Week
17th-23rd
Dementia
awareness
week
6th-12th
Child Safety
week
12th
Disability
awareness
Day
Promotework
placements
25th
Macmillan
coffee
morning
Sustainability
month
3rd-9th
Dyslexia
awareness
week
17th-23rd
National baking
week
Children
in Need
MARCH
APRIL
MAY
JUNE
JULY
AUGUST
SEPTEMBER
OCTOBER
PLAN YOUR
VOLUNTEERING
HOURS
4th-10th
National
Public Health
week
16th-22nd
Learning at
work week
Alcohol
awareness
month
6th-12th
Carers
Week
13th-19th
Adult learners
Week
PLAN ALEAF
EVENT
S U P P O R T
A L O C A L
S P O R T S
E V E N T
12th
International
youth day
Macmillan
cancer
awareness
month
World
Altzheimers
month
2nd
World smile
day
Breast
cancer
awareness
month
10th
World mental
health day
World
mental health
awareness
month
Fair
for all
Championing
Local
Creating
Chances
Healthy
Planet
Fair
for all
Championing
Local
Creating
Chances
Healthy
Planet
Social Value Activity Planner 2016
NOVEMBER – DECEMBER
We’re delighted to say that 2016 brought great success. Mears was
accredited by G4S (on behalf of CSE) for customer service excellence,
including community engagement, and by TPAS for our approach
to tenant and customer engagement. We also continued to secure
Social Mobility Champion status from the Department for
Business Innovation and Skills.
21st-25th
Road safety
week
Social
isolaton
awareness
month
10th-16th
Recycling
week
Heavenly
hampers
giveaway
Winter
warm
awareness
month
International
day of
persons with
disabilities
27th
Small
business
saturday
1st
NOVEMBER
DECEMBER
Celebration
events for
trainees/
apprentices
16th-22nd
Alcohol
awareness
week
Christmas
hope
Safe toys
and gifts
month
Local
Christmas
charities
19th
Social
enterprise
day
Consider
social isolation,
plan a
Christmas
lunch
Social mobility is about giving young
people equal chances in life, regardless
of where they were born, the school they
go to, or the jobs their parents do.
At Mears, we aim to make sure jobs and opportunities are open
to everyone and we want to inspire other businesses to follow suit.
Championing
Local
Creating
Chances
Healthy
Planet
Fair
for all
Measuring our success
It’s vital to know if what we’re doing really does make a difference.
The only way to do that is by measuring – but how can you
measure social impact? It’s a tough challenge, particularly when
social impacts can be hard (such as new jobs created) and soft
(something as simple and yet profound as increased happiness).
Our approach is based on evaluating wellbeing. A bespoke social
value calculator enables Mears to measure our impacts
and outcomes.
“ The Social Mobility Champions have risen
to the challenge set by Government and
shown genuine commitment to bringing
about positive change.
They have gone beyond just volunteering in
schools or changing the way they advertise
jobs; they have made social mobility a core
part of their corporate strategy.”
Nick Boles, Skills Minister
Annual report and accounts 2016 37
Mears Group PLC
Strategic report
Social value continued
Focus on
championing local:
Improving the wellbeing of people
and the communities we serve
Working with partners and clients is key to identifying the
local social value projects for the business to get involved in.
Through the development of branch social value plans, which
are measured to establish social impact, we can really push
the boundaries to deliver the social value commitments in our
communities locally. The local approach, whilst utilising the
benefit of national partners, really makes a difference and we
urge all business units and branches to develop their plans,
to talk to their partners and clients, to work together, utilising
our commitment of volunteers from the business, and to make
a real POSITIVE difference to enable the individuals and the
communities in which we operate to flourish and thrive.
Total number of projects in the year to date
496
Total volunteering hours
58,650
Doing the right thing #BetterBusiness
Delivering our social value plans: in practice
We plan to make it easy for everyone in Mears to get behind
our goal, by creating awareness and understanding and providing
the framework and tools needed for success. The social value
strategy and framework of tools have been cascaded to all
key stakeholders in the business, utilising new methods of
communication such as webinars, in addition to the traditional
briefings and approach.
Every branch of Mears makes a social value pledge, which
focuses on specific activities to improve its local community
in at least one of these areas. All branches are measured on
a social value plan.
Insight into focusing on the right projects
in the right locations…
We have developed a bespoke market-leading online portal that
gives our colleagues an insight into local demographics and helps
identify areas of deprivation. This enables users throughout the
business to drill down into a local area and find out more information
about the demographics of an area, including layer crime statistics,
depravation information and isolation data, along with health
and environmental data.
This allows us to target intervention and outreach to the most
disadvantaged groups, focus on the right outcomes and make
targeted social value decisions.
Further development of this solution will allow insight into
specific housing stock locations, aligned to our client business,
to fully support the collaborative approach to targeting the right
outcomes in the right locations.
38
Mears Group PLC
Annual report and accounts 2016
Strategic report Focus on
fair for all:
Targeting under-represented groups
Mears commits to a fully structured approach to target groups
that are under-represented in the building and construction
sector such as females, black and minority ethnic groups (BME)
groups and those with disabilities in the area. To achieve this
objective we conducted a focused recruitment campaign to
target particular groups and organised a series of events to
support the campaign.
In focus: addressing training needs of hard-to-reach
groups through collaborative working
Through our contract with Manchester City Council, and working
with our partners Yes Manchester and The Skills Company, we
held a pilot Pre-recruitment Programme to target candidates out
of reach of the employment market. They included a diverse mix
of individuals representing the hard-to-reach groups, including
persons with mental health issues and an ex-offender.
One area of particular focus is to encourage more women into
the trades and management. Mears has a funded partnership
with the CITB. This has the aim of increasing the number of
female trade apprentices and operatives in the social housing
business maintenance sector. Through a targeted and
curriculum-based approach to working with schools and colleges,
we provide a focused approach to supporting local schools
and college sessions.
Leading the way in fair for all in the care market
Our Care division has experienced a challenging market
environment this year. The sector has been under severe funding
pressure. We have focused on those strategically important clients
which we believe have potential to develop into partnerships where
we are able to deliver a high quality service.
We take a responsible and ethical approach to paying our carers
and have endeavour to influence clients in this area.
We are fully supportive of the new National Living Wage legislation,
which we believe is really important in attracting a workforce
capable of delivering to the growing demands of the care market.
Given our focus on quality, we will only bid for opportunities where
we can pay our workforce at a level that will not only meet legal
minimum requirements but will ensure we have the workforce to
deliver the high quality service that is at the heart of our strategy.
Training
Opportunities
Continued funding issues in the care market will create a
catalyst for change, as will the consequences of implementing
the National Living Wage, and Mears will proactively engage
in this challenge to shape the service, supporting the fair
for all focus.
Employment
Opportunities
The pilot was a great success and we directly recruited six out of the
eight candidates for the Mears National Apprenticeship Programme
and all of them are currently working towards NVQ Levels 2 and 3
in a range of trade and technical specialisms.
One of the barriers that we encountered in formulating the
Pre-recruitment Programme related to the issue of candidates
being disqualified from receiving Universal Credit during the six
weeks of training. To overcome this The Skills Company negotiated
a special arrangement with JobCentre Plus so that candidates
could continue to receive their benefits.
One of the critical factors contributing to the success of
the Pre-recruitment Programme has been the time taken to
communicate and explain the training in detail at the outset. This
has ensured that candidates fully understand the programme
objectives, what is entailed, what is required from them and the
possibility of an apprenticeship at the end of the training.
One trainee maintenance operative got her opportunity through
Yes Manchester which helped her to secure a six-week
traineeship on the pre-recruitment Programme.
After completing the traineeship, she was offered a place
on our apprenticeship programme as a maintenance trainee
and is currently working towards her NVQ. Our trainee said:
“ This has been life changing for me. Instead
of jobs with no future and suffering from
stress, I am now doing something I enjoy.
It’s really boosted my confidence and had
a positive effect on my health and wellbeing.”
Training
Opportunities
NEETs
?????
NEETs
Employment
?????
Opportunities
Promoting
SMEs
Promoting
SMEs
Number of work placement opportunities offered
to young people from lower socioeconomic groups
between January and December 2016
350+
Local
business
Disadvantaged
Communities
Annual report and accounts 2016 39
Mears Group PLC
Social
Enterprise
Local Economy
Benefits
Disadvantaged
Communities
Local
business
Young
People
Recycling
Opportunities
Local Economy
Benefits
Social
Enterprise
Young
People
Recycling
Opportunities
Strategic report Social value continued
Focus on
creating chances:
Mears is investing in the future through training
and skills
The Academies are dedicated to improving the skills of
employees and the employability of people within the
communities we serve.
During 2016 Mears opened two brand new, bespoke Academies
in Rotherham, South Yorkshire, and Brentwood, Essex.
The Academies are fully equipped and accredited to deliver practical
training and apprenticeships across the trades, and have IT suites
and modern classroom facilities. Our flagship Rotherham Academy
houses our national gas training centre, accredited by BPEC, to train
operatives to the standard required for registration with Gas Safe.
Across the Group, we employ 400 apprentices and have
been named as a Top 100 Apprentice Employer by the National
Apprenticeship Service in recognition of the positive experience
apprentices have with us. Mears runs Study Programmes for young
people as a precursor to apprenticeships and an alternative to
school or college. Around 20 16 to 19-year-olds participate in the
programme at any point in time.
Transforming lives is at the heart of what we strive to achieve.
Through our genuine commitment to social value and providing
training opportunities to local people in the areas we operate,
Mears is in a unique position to make a real, sustainable and
long-term difference to the lives of local people. Mears has an
impressive training track record as we currently employ around
400 apprentices nationally, with a clear commitment to working
with our clients and partners, which will support the transformation of
lives through greater access to a wide range of training opportunities.
During 2017 we will bring together the delivery of qualifications
and apprenticeships to Care staff under the umbrella of one
national service provider, primarily to improve quality and
standards as well as the experience of the learner.
Number of employees involved in delivering
social value projects
7,000+
Number of apprentices on structured
apprenticeship framework
400+
40
Mears Group PLC
Annual report and accounts 2016
Rotherham careers event brings
employment opportunities
Mears brought together local businesses and organisations to
showcase employment and training opportunities at the annual
Local Employment Advisory Forum (LEAF) event in Rotherham,
with over 1,429 attending, and supported by 65 local businesses,
with over 500 current vacancies to showcase employment and
training opportunities in the area, as well as providing advice on
how to gain the skills needed by employers.
The event was sponsored by Mears and Rotherham Council,
delivered in partnership with Jobcentre Plus.
Focus on creating chances:
providing career, skills and
employment opportunities
Our approach is to target excluded
and hard-to-reach groups, entering
partnerships at a national and
regional level with organisations.
Creating chances is about having a workforce drawn from local
communities, thus creating opportunities for careers and
enabling people to develop new and existing skills.
Number of school students who attended
careers talks and engagement projects
8,500
Number of schools engaged in our projects
90+
Strategic report
Focus on health and safety
It was another positive year for the Mears safety and quality
in 2016. We have reduced accident rates by over 10% and achieved
RoSPA President’s Award (14 consecutive Golds), for our continued
commitment to accident and ill-health prevention.
We successfully continued our certification to ISO 9001, ISO 14001
and OHSAS 18001. We also attained a diversion from landfill of over
94% of our waste.
Having gained approval as a CITB Training Provider we now have
14 registered instructors available to deliver the full suite of CITB
Site Safety schemes.
In 2017 we will continue to challenge our standards and look to
continuously improve the safety environment for all of our employees.
In focus: working with social enterprise
to reuse materials
We engage and collaborate with social enterprises to facilitate
the reuse of various items we come across whilst undertaking our
services. We have worked with a number of social enterprises such
as Electronics Recycling (Relectricals) and Mustard Tree, which is
a Manchester-based social enterprise working to tackle homelessness
and provide employment opportunities. This approach, whilst
supporting our wider social value objectives, ensures that any
reusable items are reused/recycled and waste to landfill is minimised.
Focus on
healthy planet:
A successful partnership with
Network Waste has helped Mears to
achieve 90% recycling rates and more
than a 10% reduction in waste costs.
We are committed to being a good corporate citizen in all our
dealings with customers, colleagues, suppliers and in the
communities where we work. To ensure a consistent approach
throughout our supply chain, we expect our suppliers to have or
adopt similar business principles to our own. We are working
towards a set of social values where suppliers will be required
to acknowledge the significance of social, environmental and
ethical matters in their conduct, and work towards improving
quality standards.
We are committed to minimising the environmental impact of our
activities and our success to date has been externally recognised
through our accreditations to the Carbon Footprint Status and
Green Accord Premier Status. We are also members of the
Sustainable Homes Index for Tomorrow (SHIFT) and a member of
the FTSE4Good Index, the leading global responsible investment
index which is designed to measure the performance of companies
that meet globally recognised corporate responsibility standards.
In line with our environmental accreditations, we actively measure
all carbon emissions and waste to identify improvement
opportunities and set clear targets for reduction.
Our environment proposals are aligned with the social value
priorities and are designed to ensure that our commitments
can be clearly evidenced and measured through the tangible
outcomes we will demonstrate:
→ Reduce waste and increase recycling rates using a national
waste strategy, site waste management plans and our
partnership with Network Waste.
→ Reduce fleet emissions using a recently upgraded green fleet,
GPS tracker systems and Smarter Driver Training.
→ Reduce the carbon footprint of our activities using a mixture
of Company-wide measures and bespoke initiatives tailored
to the priorities of the partnership.
→ Produce a SMART plan to manage and measure our
environmental commitments against the environmental
priorities identified.
Annual report and accounts 2016 41
Mears Group PLC
Strategic report Independent Committee members’ report
on Mears’ social value activities
Authored by the independent members
of the Mears Social Value Committee:
→ Dr Greg Lavery
→ Richard Kennedy
→ Rt Hon Hazel Blears
Read our Social Value key influencers on page 36
How corporate social responsibility/
social value is done at Mears
Mears defines its responsibilities to society to include its social,
economic and environmental impact. It takes a proactive approach
to these responsibilities and recognises that highlighting the
positive difference this makes in communities enthuses staff,
motivates customers and clients, creates substantial environmental
and social benefits and builds competitive advantage for Mears.
This is why Mears refers to its social and environmental activities
as ‘Social Value’ – because through these activities it is creating
value for Mears and the wider communities in which it operates.
Social Value in Mears is delivered by staff, often on a daily
basis alongside their job. Social Value is overseen by Mears’ Social
Value Committee, headed by Director Alan Long and comprising
senior executives from within the business as well as independent
external experts.
Mears has chosen four strategic pillars of Social Value to focus
its efforts where it can create the greatest impact in a way which
is most relevant to the business. These are:
→ Championing Local: improving the wellbeing of people
and the communities they serve;
→ Fair for All: reducing prejudice, improving understanding
of differences and supporting social inclusion;
→ Creating Chances: providing career, skills and
employment opportunities; and
→ Healthy Planet: making a positive contribution to our planet.
The ‘Red Thread’ defines the culture of the organisation and
expected behaviours. This culture sets the aspirations and standards
of the Company, which, together with the four themes above,
provide the parameters within which staff focus their efforts
to create Social Value.
Delivery and creation of Social Value is site and staff specific,
with a vast range of activities occurring that are all chosen for
their local relevance.
Strengths and weaknesses of Mears’
approach to social value
Narrowing the scope of such a broad topic of Social Value,
through the four themes, is considered prudent, enabling
the organisation/staff to focus on a few priorities that deliver
the most impact.
Allowing a wide range of activities under these themes empowers
teams/staff to address local issues where the needs are greatest.
This has the added benefit of creating bespoke and well researched
action plans that are attractive to clients because they add value
beyond the contracted services which Mears provides, while also
addressing local issues.
However, these bespoke local solutions mean that Mears is
currently not easily able to present a simple story of its activities
to external observers, which makes it difficult to capture the full
impact of its work.
Key achievements of the Social Value
Committee in the last year
The importance of managers in the creation of Social Value
was identified. This starts with creating consequences for and
addressing poor management and recognising that improvement
requires management training. Positive leadership which drives
Social Value should be rewarded. These key points have been
addressed through manager training in people management
as well as through management personnel changes.
HR practices and policies have been reviewed and compared
with best practice, leading to:
→ a review of the salary banding structure, bonus scheme and
process for annual pay awards (consistently administered);
→ a review of the gender gap and actions taken to address this
with a particular focus on ensuring a more equal representation
of females at the operative level;
→ the development of a reward and consequence model; and
→ a review of the appraisal system.
The staff satisfaction survey was reviewed and actions were
identified to improve Mears’ performance.
Mears’ collaboration with and expectations of suppliers were
examined with the specific focus of driving Social Value through
Mears’ procurement.
A series of metrics related to Social Value has been created,
enabling Mears to measure performance and progress.
42
Mears Group PLC
Annual report and accounts 2016
Strategic report
Areas for further improvement
Find better ways to extract Social Value through pre-competitive
collaboration with key suppliers and subcontractors. Examples
could include:
→ transport collaboration to reduce both environmental impacts
and costs;
→ more creative ways to train future leaders of Mears, such as
exchanges/secondments with other friendly organisations,
such as Travis Perkins;
→ sharing Mears’ Social Value lessons with suppliers and
subcontractors to lead change throughout the sector; and
Overall assessment compared to most companies
and leading companies
The independent Social Value Committee members commend
Mears on its wide range of Social Value initiatives in all regions
that demonstrate strong community focus and excellent social
and environmental behaviours from management and staff.
The level of local consultation to unearth and identify community
needs and build them into bids is ahead of current mainstream
business practices and is strongly focused on creating maximum
Social Value while contributing to winning contracts. This is an
excellent alignment that creates a win-win situation for all parties.
→ setting targets for suppliers around employment opportunities
and local sourcing.
Mears is also a leader in engaging its front line staff with
practical Social Value projects to which they willingly contribute.
Mears can further integrate its Social Value work into its value
proposition for clients to aid with market differentiation and
competitive advantage. For example, substantial work is being
done by the Care division tackling loneliness, supporting those
with dementia, facilitating timely discharge from hospital, and
providing support at home and in the community. All of these
have clear and measurable cost advantages in savings to the
healthcare system as well as improvements in wellbeing for
those with health conditions and their carers and families.
Articulating this value and building it into client discussions,
bids and reports is a logical, if not easy, next step.
Mears is currently missing the marketing benefits of its Social
Value activities due to the perceived difficulty in communicating
the diverse range of its actions as well as the general sense of
humility within the business. It is recommended that Mears
recognise and communicate its local and tailored approach,
giving examples from real projects to illustrate it. Mears should
be communicating that it is committed to addressing the most
important issues where it is able to have an impact in each
community where it operates. No two communities are the same,
so Mears develops bespoke programmes for each. This is an
easy-to-communicate message that is attractive to clients and
accurately represents Mears’ value-adding approach.
There could be opportunities to reduce the environmental impact
of Mears’ activity through smart procurement, for example using
sustainable office refurbishment options to address the second
biggest concern from staff in the recent staff satisfaction survey
(i.e. office conditions).
Environmental performance and improvements have not yet been
discussed by the Social Value Committee, nor have the business
opportunities related to environmental sustainability and
resource efficiency.
In 2016 Mears demonstrated sector leadership by enacting the
Living Wage and remaining uncompromising on staff working
hours throughout its challenging price renegotiations with clients.
Further, Mears has been courageous and outspoken on this
important issue, leading the care sector. An example of this is
Mears walking away from contracts where clients were unwilling
to pay for the Living Wage and appropriate travel time. The long-term
approach of Mears will benefit all in the sector.
Mears is a modest company which has not captured many of the
marketing benefits offered by Social Value creation. In this respect
it lags behind many sustainability leaders. Addressing this issue
should improve bid success rates and profitability for Mears,
as well as building staff pride.
The Strategic Report was approved by the Board of
Directors on 27 March 2017 and signed on its behalf by
The work of the Social Value Committee continues, with a
range of aspects of the business not yet reviewed. As a result,
this report should be read as an interim document as part of
a work in progress.
D J Miles
Chief Executive Officer
david.miles@mearsgroup.co.uk
Annual report and accounts 2016 43
Mears Group PLC
Strategic report Corporate governance
Report of the Nomination Committee
Introduction to corporate governance
Your Board
45
46
48 Corporate governance report
54
56 Report of the Audit Committee
61
63 Remuneration policy
70 Annual remuneration report 2016
79 Report of the Directors
81
82
Statement of Directors’ responsibilities
Independent auditor’s report
Report of the Remuneration Committee
We seek to maintain
high standards of
corporate governance as
this will help to facilitate
the success of the
Company and sustain
this over time.
44
Mears Group PLC
Annual report and accounts 2016
Introduction to corporate governance
Bob Holt
Chairman
Code compliance
We apply the provisions of the UK Corporate
Governance Code 2014 (the ‘Code’). The Directors
confirm that the Group has complied with all
provisions set out in the Code during the year
ended 31 December 2016.
Dear shareholder,
We seek to create a working culture where honesty,
openness and fairness are valued.
We seek to maintain high standards of corporate governance as
this will help to facilitate the success of the Company and sustain
this over time. An important distinction between the management,
led by David Miles, Chief Executive Officer, and the Board is that
the management is responsible for running the business while the
Board, acting under my leadership, provides constructive challenge
to management, which is necessary to create accountability and
drive performance. This results in an environment that creates
and preserves value for shareholders.
It is vital that, as a Board, we have the right mix of skills, experience
and diversity, ensuring that Board members have sufficient
knowledge of the Company whilst maintaining their independence
and objectivity. I am fortunate as Chairman to be able to call upon
a Board with a broad range of expertise and specialisms. It was
with deep regret that we announced the passing of Rory Macnamara,
who had been a Director since June 2010 and chaired our
Nomination Committee. Rory will be greatly missed by the Board
for his strong technical contribution, and as a trusted colleague.
Julia Unwin has agreed to become the replacement Chair
of the Nomination Committee.
During the year, a number of our Non-Executive Directors have
reached nine years’ service, and as such are not offering themselves
for re-election. I would like to thank David Hosein and Mike Rogers
for their significant contribution to the Group. Peter Dicks has also
now reached nine years’ service. However, given the unexpected
loss of Rory Macnamara, I have asked Peter to remain on the Board
as Senior Independent Non-Executive Director for a further year
to provide continuity and stability.
We take succession at Board and senior management level very
seriously. We believe we have a good record of resourcing the needs
of our business along with developing our own people in line with
our desired culture. Since the year end, we have identified two new
recruits to the Board. I am delighted to propose to shareholders
that they approve the appointment of Roy Irwin and Jason Burt
as Directors at the 2017 AGM. I believe that we have achieved a
good balance with the right skills and experience which will add
considerably to Board discussions. We will keep the Board
composition under continuous review and I would expect the
Group to make further Non-Executive Director appointments
during 2017 to bring additional skills and even further diversity
to the Board.
During 2016, the Board visited two of our largest operations in
Gateshead, which is the hub for a number of significant Housing
contracts, and our newly opened Rotherham Training Academy.
Such visits are essential to enable the Non-Executive Directors
to understand better the day-to-day functioning of our business.
We will not compromise on our governance principles. The Board
is committed to maintaining the Group’s operations in accordance
with the highest standards of corporate governance as set out in the
UK Corporate Governance Code issued in 2014 and has complied
with all Code principles and relevant provisions throughout the year.
We continue to engage with our shareholders and explain our
business model and key priorities to ensure that we deliver
our strategic goals and value to all our stakeholders.
R Holt
Chairman
bob.holt@mearsgroup.co.uk
27 March 2017
Annual report and accounts 2016 45
Mears Group PLC
Corporate governance Your Board
Bob Holt OBE
Non-Executive Chairman
Age: 62
Tenure: 20 years
Skills and experience:
Bob had a controlling interest
in Mears at the time of flotation
in October 1996. He has a
background in developing
support service businesses.
He has operated in the service
sector since 1981, initially in a
financial capacity then moving
into general management.
Principal external appointments:
Chairman, Lakehouse PLC
Chairman, Totally PLC
Chairman, DX Group PLC
David J Miles
Chief Executive Officer
Age: 50
Andrew C M Smith
Finance Director
Age: 44
Alan Long
Executive Director
Age: 54
Tenure: 20 years (10 years
on the Board)
Tenure: 17 years (10 years
on the Board)
Tenure: 11 years (7 years
on the Board)
Skills and experience:
Skills and experience:
Skills and experience:
David joined Mears in 1996
and, prior to his appointment
to the Board in January 2007,
was Managing Director of the
Mears Social Housing division.
Prior to joining Mears, David
held a senior position with the
Mitie Group. His background
is in electrical engineering.
Principal external appointments:
None
Andrew joined Mears in 1999
and, prior to his appointment
to the Board, was Finance
Director covering the Group’s
subsidiaries. Andrew qualified
as a Chartered Accountant in
1994 and worked in professional
practice prior to joining Mears.
Principal external appointments:
None
Alan joined Mears in 2005
and, prior to his appointment
to the Board in August 2009,
was Managing Director of the
Group’s Care division, having
previously held the position
of Group Sales and Marketing
Director. Prior to joining
Mears, Alan held senior roles
at Britannia Building Society,
Mars and Smith & Nephew.
Principal external appointments:
None
Non-Executive proposed appointments
to be confirmed at the 2017 AGM
N
Julia Unwin CBE
Non-Executive Director
Age: 60
Jason Burt
Non-Executive Director
Age: 51
Roy Irwin
Non-Executive Director
Age: 62
Tenure: 1 year
Skills and experience:
Skills and experience:
Skills and experience:
Julia is former Chief Executive
of the Joseph Rowntree
Foundation and the Joseph
Rowntree Housing Trust. She
has significant experience in
the housing and care sectors,
having been a member of the
Housing Corporation Board for
ten years.
Principal external appointments:
Yorkshire Water Services Limited
Jason Burt was a senior partner
at Plexus Law, specialising in
complex employers’ and public
liability claims. His appointment
will further integrate health
and safety into the Group’s
governance structures, driving
good working and health and
safety practices. Jason will
chair a newly formed Health,
Safety and Environment core
group and be a member of the
Audit and Risk Committee.
Principal external appointments:
None
Roy Irwin has significant
experience in the social
housing sector, having lately
been Chief Inspector for the
Audit Commission following a
career of over 30 years in public
sector housing. Since 2013,
Roy has held the position of
Non-Executive Chairman of
Plexus and Omega Housing,
being Mears’ registered
providers of social housing
with the Homes and
Communities Agency.
Principal external appointments:
None
46
Mears Group PLC
Annual report and accounts 2016
Rory Macnamara
It was with deep
regret that the Group
announced the passing
of Rory Macnamara,
who served as a Director
throughout the year until
the date of his death,
17 December 2016.
Corporate governance R A N S
A
N
R
Peter F Dicks
Non-Executive Deputy
Chairman and Senior
Independent Director
Age: 74
Tenure: 9 years
Skills and experience:
Peter has been active in the
venture capital and investment
fields for a number of years.
He is currently a Director of a
number of companies. He joined
Mears in 2008 and is Chairman
of the Remuneration Committee.
Principal external appointments:
Chairman,
Miton UK MicroCap Trust plc
Geraint Davies CBE
Non-Executive Director
Age: 62
David L Hosein*
Non-Executive Director
Age: 53
Michael G Rogers*
Non-Executive Director
Age: 75
Tenure: 1 year
Tenure: 9 years
Tenure: 9 years
Skills and experience:
Skills and experience:
Skills and experience:
Geraint is a fellow member
of the Institute of Chartered
Accountants in England and
Wales. He was previously a
partner for a leading
professional practice for over
25 years. His commercial
experience includes working
with Registered Social
Landlords and a number
of organisations in the
healthcare sector.
Principal external appointments:
Cardiff International
Airport Limited
David has over 17 years’
consulting experience, the last
five of which have been at
OC&C Strategy Consultants
Limited where he is a partner.
David has worked extensively
in the support services sector
for corporate and private equity
clients. Previously, he was a
partner in Arthur Andersen.
He joined Mears in 2008.
Principal external appointments:
Partner, OC&C
Michael founded Careforce
in 1999 and has over 30 years’
experience in healthcare services
and care provision. In 1976 he
joined Nestor Medical Group
Limited as Managing Director
and went on to become Chief
Executive of Nestor Healthcare
Group plc from 1986 to 1996.
From 1996 to 1999 he worked
as a consultant to a number of
healthcare related organisations.
Principal external appointments:
Non-Executive Director,
Totally PLC
* Not standing for re-election.
Ben Westran
Company Secretary
Age: 40
Tenure: 13 years
Skills and experience:
Ben is a Chartered Accountant and, prior to his appointment
as Company Secretary, was Group Financial Controller and Director
of a number of the Group’s subsidiaries. Ben joined the Group
in 2004 having previously worked in professional practice.
Key:
R Remuneration Committee
A Audit Committee
N Nomination Committee
Chairman
S Senior Independent Non-Executive Director
Length of tenure of Board
Non-Executive/Executive Directors
10+ years
7-9 years
0-3 years
2
4
Executive
3
3
Non-Executive
6
Annual report and accounts 2016 47
Mears Group PLC
Corporate governance Corporate governance report
Leadership
How the Board operates
The Board leads and provides strategic direction to the Group and carries
ultimate responsibility for management of the Group’s activities and financial
performance. The Board acknowledges accountability to shareholders for
proper conduct of the business, and responsibility for the long-term success
of the Group, having regard to the interests of all stakeholders.
The Board’s prime objective is to ensure the ongoing commercial
and financial success of the Group. The Board provides entrepreneurial
leadership of the Group within a sound and prudent risk management
framework using effective internal control systems which enable
risk to be assessed and managed. The Board sets the Group’s
strategic objectives, and the nature and extent of principal risks
it is willing to take in achieving these strategic objectives, and
ensures that the necessary financial and human resources are
in place for the Group to meet these objectives. The Board sets
the Group’s values and standards and ensures that the Group’s
obligations to its shareholders and others are understood and met.
It is through the Divisional Boards that the operational and
financial business of the Group is delivered. The Housing and
Care Boards meet monthly and the key matters considered include:
→ financial performance and actual performance in comparison
to forecast;
→ review of quarterly revised forecasts;
→ monitoring strategic developments;
→ business development and review of active tenders
and opportunity pipeline;
The Group’s business model and strategic priorities can be found
on pages 10 and 11 and 12 to 13.
→ monitoring service delivery performance measures
and driving improvement;
The Board maintains and regularly reviews a full list of matters
and decisions that are reserved to, and can only be approved by,
the Board. These are reviewed annually and include but are not
limited to:
→ Group strategy and operating plans;
→ corporate governance and risk management;
→ the approval of budgets;
→ changes to the Group’s debt and equity funding;
→ appointment, termination and remuneration of Directors
and the Company Secretary;
→ financial reporting and audit, including interim and full-year
results announcements and dividends;
→ approving significant acquisitions and disposals; and
→ values and ethics.
The day-to-day running of the business is delegated to the
Executive Directors through Divisional Boards, which comprise
the Chief Executive Officer, the Finance Director and the Executive
Director together with other senior divisional team members.
→ values and culture and driving consistency and best practice
together with employee engagement; and
→ health, safety and environment.
The Board delegates certain responsibilities to its three
principal Committees.
→ The Audit Committee ensures the integrity of financial information,
the effectiveness of the financial controls and the internal
control and risk management systems.
→ The Nomination Committee recommends the appointment
of Directors and conducts a review of succession planning
at Board and Operating Board levels.
→ The Remuneration Committee sets the remuneration policy
for Executive Directors and determines their individual
remuneration arrangements.
The Chairman of each Committee briefs the Board at each
meeting on the principal items that were discussed, decisions
made and key issues. The activities of these Committees are
discussed in more detail later in this report.
Each Committee comprises Non-Executive Directors only, as
required by the UK Corporate Governance Code 2014. The Chair
of each Committee is present at the AGM to answer questions
from shareholders.
48
Mears Group PLC
Annual report and accounts 2016
Corporate governance Corporate governance framework
Responsibility for good governance lies with the Board. There is a strong
and effective governance system in place throughout the Group which
ensures that integrity and good ethical conduct are the foundations of
our decision making.
The governance framework extends to operational activities, as outlined in the risk management process on pages 18 to 23.
The Chairman
The Chief Executive Officer
Key responsibilities:
→ is responsible for the leadership of the Board and ensuring its effectiveness;
→ sets the Board’s agenda and ensures adequate time is available for discussion of all agenda items;
→ ensures all discussion is in the context of the long-term success of the Group;
→ promotes a culture of openness and debate by facilitating the effective contribution
of Non-Executive Directors;
→ ensures that the Directors receive accurate, timely and clear information; and
→ is responsible for designing a rigorous annual evaluation of the performance of the Board
and individual Directors.
Audit Committee
Remuneration Committee
Nomination Committee
The Board
Key objective: The Audit
Committee is responsible
for effective corporate
governance in respect of
financial reporting, agreeing
the scope of the external
audit, the setting of the
auditor’s remuneration and
reviewing the effectiveness
of the Group’s internal
controls, risk management
and internal audit processes.
Key objective: The
Remuneration Committee
is responsible for setting,
reviewing and recommending
the remuneration policy
and strategy in respect of
Executive remuneration.
Key objective: The
Nomination Committee
is responsible for ensuring
that the Board comprises
a high level and range of
business experience,
skills and diversity to
enable the Group to be
managed effectively.
Key responsibilities:
→ manages the day-to-day
business operations of
the Group;
→ ensures that the
appropriate standards
of corporate governance
permeate throughout
the organisation;
→ recommends key
strategies and is
responsible for
execution of those
agreed by the Board;
→ takes a leading role in
the relationship with all
external agencies and in
promoting Mears Group
PLC; and
→ directs the risk profile
of the Group in line
with the risk appetite
and categories of
risk identified and
accepted by the Board.
Read the Report of the
Audit Committee on
page 56
Read the Report of the
Remuneration Committee
on page 61
Read the Report of the
Nomination Committee
on page 54
Read the Review of Operations
on page 24
Divisional Boards
Key objective: The Housing and Care Divisional Boards are the principal forum through which
the operational and financial business of the Group is delivered.
Annual report and accounts 2016 49
Mears Group PLC
Corporate governance Corporate governance report continued
Leadership
Board composition and meetings in 2016
Number of meetings
Potential
Actual
Potential
Actual
Potential
Actual
Potential
Actual
Potential
Actual
Board
Strategy days
Audit
Nomination
Remuneration
R Holt
D J Miles
A C M Smith
A Long
M G Rogers
P F Dicks
D L Hosein
R Macnamara
G Davies
J Unwin
6
6
6
6
6
6
6
6
6
2
6
6
6
6
6
6
6
4
6
2
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
—
5
5
—
—
5
—
5
5
—
—
5
5
—
—
5
—
4
5
—
—
—
—
—
—
1
1
1
—
—
—
—
—
—
—
1
1
1
—
—
—
—
—
—
2
2
—
2
—
—
—
—
—
—
2
2
—
1
—
—
During the year, the Board had a total of eight Directors, all of
whom, with the exception of Rory Macnamara, served throughout
the year. Rory Macnamara died on 17 December 2016.
The roles of the Chairman and the Chief Executive Officer are
clearly established, set out in writing and agreed by the Board.
The table above shows the attendance of Directors at scheduled
Board and Committee meetings. The Board scheduled seven
meetings during the year including one strategy day. Additional
ad hoc meetings or conference calls were also organised pertaining
to specific matters which required Directors’ involvement between
the scheduled meetings.
The Board comprises the Chairman, the Chief Executive Officer,
the Finance Director, the Executive Director and six Non-Executive
Directors. Peter Dicks was the Senior Independent Non-Executive
Director throughout the period. The Directors’ biographical details
are set out on page 46. These indicate the respective backgrounds
and range of business experiences which enable the Board to operate
effectively. Their differing mix of skills and business experience
is a major contribution to the proper functioning of the Board
and its Committees, ensuring that matters are challenged
and there is constructive debate.
In addition to the meetings scheduled, the Chairman and the
Non-Executive Directors met without the presence of the Executive
Directors, and the Non-Executive Directors met without the
presence of the Executive Directors and the Chairman.
The Chairman and the Chief Executive Officer
The roles of the Chairman and the Chief Executive Officer
are separate and clearly defined. Nonetheless, they maintain
a close working relationship to ensure integrity of the Board’s
decision-making process and successful delivery of the Group’s
strategic priorities.
Bob Holt is Non-Executive Chairman. The Chairman creates and
manages the constructive dialogue between the Executive and
Non-Executive Directors. He works with the Company Secretary
to ensure appropriate matters are discussed during Board meetings.
David Miles is the Chief Executive Officer. He has the responsibility
for leading the Executive Directors and the senior team in the
day-to-day management of the business and ensures effective
implementation of Group strategy.
Non-Executive Directors and independence
of our Board
At the date of this Annual Report, the Group has a Non-Executive
Chairman and five Non-Executive Directors. The Non-Executive
Directors constructively challenge and develop proposals on
strategy and scrutinise the performance of management in
meeting agreed goals and objectives and monitor the reporting
of performance. They satisfy themselves on the integrity of
financial information and that financial controls and systems
of risk management are robust and defensible. They determine
appropriate levels of remuneration of Executive Directors and
have a prime role in appointing and, where necessary, removing
Executive Directors.
Peter Dicks was the Senior Independent Non-Executive Director
throughout 2016. Peter is not intending to stand for re-election
at the 2018 AGM having reached nine years’ service. The Senior
Independent Non-Executive Director, if required, will deputise for
the Chairman. He is available to talk to shareholders if they have
issues or concerns.
50
Mears Group PLC
Annual report and accounts 2016
Corporate governance In addition to planned Board meetings, the Chairman meets with
the Non-Executive Directors to discuss, on a less formal basis,
Group performance, strategy, governance and Board succession
plans. The Executive Directors do not attend these meetings.
The Chairman, having started the year fulfilling an Executive role,
is not considered independent.
The Board considers all other Non-Executive Directors who
served during the year to be independent in terms of judgement
and character and free from any relationship that might materially
interfere with the exercise of independent judgement. Independence
of long-serving Independent Non-Executive Directors has been
determined as part of the Board appraisal, where conduct and
communications recorded from meetings were assessed.
All Directors act in what they consider to be the best interests
of the Company, consistent with their statutory duties. The Code
suggests that the length of tenure is a factor to consider when
determining independence. The Nomination Committee is
responsible for the progressive refreshing of the Board’s
membership. The terms of reference of Non-Executive Directors
are reviewed annually as part of the Board performance evaluation.
Activities of the Board during the year
Board discussion during 2016 to deliver strategic priorities
Strategy
→ Discussed strategy
and performance of both
operating segments
Financial performance
→ Approval of 2016 budget
→ Reviewed performance
by business segment
→ Approval of 2015 Annual Report
and dividend
→ Approval of announcement
of final results for 2015
→ Approval of amend and extend
to revolving debt facility
→ Approval of interest rate and fuel
hedging instruments
Deliver our
strategic
priorities
1
Deepening our client
partnerships in both
core markets
2
Maintain quality
leadership
3
Corporate governance
and risk management
→ Reviewed and considered
matters discussed at Audit
Committee meetings
→ Selection and appointment of
new Non-Executive Directors
Values and ethics
→ Review of social mobility plan
→ Red Thread
→ Review of output from employee
satisfaction survey
→ Visited our new Rotherham
Training Academy
Develop our people
Stakeholder engagement
Read about our strategic
priorities on page 12
→ Engaged with private shareholders
at AGM
→ Reviewed and considered investor
feedback following final and interim
results investor roadshows
Annual report and accounts 2016 51
Mears Group PLC
Corporate governance Corporate governance report continued
Effectiveness
Board performance evaluation overview
The performance evaluation process included:
→ a review of the areas of Board roles and responsibility;
→ an internally facilitated review by the Chairman, which
included meeting with all Board members individually;
→ the structure and composition of the Board and its
Committees and the performance of the Committees;
→ the quantity, quality and scope of information provided
to the Board;
→ an assessment of the appropriateness of Directors’ terms
of reference;
→ the content of Board meetings and presentations to
meetings; and
→ the openness of communications between the Board
members and Executive Management.
Board performance
The Chairman is responsible for ensuring Directors are properly
briefed on issues to be discussed at Board meetings and that
they have full and timely access to relevant information, including
minutes of previous Board and Committee meetings. Timely access
to information is a priority in order for Directors to be able to
consider and present their own challenges to each meeting. The
quality and timeliness of information provided to Directors was
included as part of the Board evaluation. The findings were that
information provided to Directors was thorough and relevant,
and in all instances provided suitably in advance.
Director induction and development
The Group’s policy is to provide appropriate training to its Directors.
Training takes into account each individual’s qualifications and
experience and includes environmental, social and governance
training, tailored to individual requirements as appropriate. The
Chairman regularly meets with each Director to review and agree
any training and development needs.
All Directors have access to the Company Secretary, who is
responsible for ensuring that Board procedures and applicable
rules and regulations are observed. All Directors also have unfettered
access to the Group’s operations and staff. In accordance with
Board policy, following her appointment, Julia Unwin received
a full, formal and tailored induction relating to all of the Group’s
activities upon joining the Board.
Board appraisal
Performance evaluation of the Board, its Committees and
individual Directors takes place on an annual basis. The 2016
Board performance evaluation was internally facilitated.
The Chairman met with all Board members individually
and asked for their views on a broad range of areas including
Group strategy, independence, experience, effectiveness,
shareholders and the interaction between Board members.
Each Board member provided feedback and key observations
on the Board’s effectiveness as well as suggestions for further
enhancement. The performance of the Chairman was reviewed
separately in a process led by the Senior Independent Director.
The Chairman reviewed the range of feedback provided and
identified some broad themes. Some recommendations were
proposed which have been implemented, but the overall
conclusion was that the Board is working effectively.
An externally facilitated performance evaluation will be conducted
during 2017 in line with the requirements of the Code.
Your Board has due regard for the benefits of diversity in its
membership, including gender, and strives to maintain the right
balance. It comprises individuals with deep knowledge and
experience in core and diverse business sectors within local,
international and global markets, bringing a wide range of
perspectives to the business. This diversity ensures thorough
challenge during discussions which results in effectiveness
in all aspects of the Board.
Re-election of Directors
To promote good governance, and in accordance with the
requirements of the Code, each of the current Directors will offer
themselves for re-election annually. Following the evaluation of
the Board’s performance during the year, it is confirmed that the
performance of each of the Non-Executive Directors continues
to be effective and that they are considered to demonstrate
appropriate commitment to the role.
Indemnifications of Directors
In accordance with our Articles of Association and to the extent
permitted by the laws of England and Wales, Directors are granted
an indemnity from the Company in respect of liabilities incurred as
a result of their position in office. However, our indemnity does not
cover Directors or officers in the event of being proven of acting
dishonestly or fraudulently.
52
Mears Group PLC
Annual report and accounts 2016
Corporate governance Shareholder engagement
Principal methods of communication
with investors
→ Annual Report and Accounts
→ Interim statements
→ Trading updates
→ Quarterly newsletters
→ Group website (www.mearsgroup.co.uk)
Investor relations
The Company is committed to maintaining good communications
with investors. Normal shareholder contact is the responsibility
of the Executive Directors, who respond on a daily basis to queries
from institutional and private investors. The Chairman, the Senior
Independent Director and other Non-Executive Directors are available
to shareholders to discuss any matters they wish to raise. The
Directors regularly meet shareholders at operational locations,
which both parties find more rewarding as it provides greater insight
into the business and its processes. All Directors are available
at each AGM and shareholder participation is encouraged.
The Board is committed to maintaining regular contact through
the provision of the Annual Report, regular Interim Reports and
regular trading updates. This information can be found on the
Group’s website (www.mearsgroup.co.uk).
There is an active programme of communication with existing and
potential shareholders. There is increased dialogue with institutional
investors following the publication of final and interim results,
which is facilitated through a series of formal presentations.
The Group regularly receives and responds to questions raised
by small private shareholders through the investor enquiry portal
within the Group’s website. In addition, a number of private
shareholders attend the Company’s AGM.
Feedback from communications with major shareholders and
other investors, where necessary, is discussed at each Board
meeting. In addition, analyst views are shared prior to Board
meetings enabling an opportunity for discussion and challenge.
Shareholders are given access to other members of the Senior
Management Team, giving an insight into the strength of the
Senior Management Team.
The feedback from this year’s shareholder dialogue gave consistent
support for the Group’s Housing strategy, particularly the recent
development in Housing Management. The shareholder feedback
in respect of Care was less consistent and the Board welcomes
this challenge. Succession planning has been identified as a key
area for the Group ensuring that there is less reliance on the
Group Chief Executive.
The Group has more regular contact with its banking partners,
Barclays and HSBC, and the Group values this close relationship.
P F Dicks
Senior Independent Non-Executive Director
peter.dicks@mearsgroup.co.uk
27 March 2017
Q1 2016
Investor meetings prior to the close period.
Following release of final results for 2015, investor
roadshow spanning six days, meeting with both
‘buy’ and ‘sell’ side.
Q2 2016
Regular update meetings with existing
and prospective shareholders.
AGM held in June 2016, providing an opportunity
to meet a number of private investors.
Q3 2016
Following release of interim results for 2015, investor
roadshow spanning five days, meeting with both
‘buy’ and ‘sell’ side.
Q4 2016
Regular update meetings with existing
and prospective shareholders.
Investor lunch providing cross-section of fund managers
to meet the key management beneath the PLC Board.
Shareholder consultation in respect of setting the
remuneration policy for approval at the 2017 AGM.
10.5m
10.3%
Total shareholdings over 2%
75.5m
73.6%
9.9m
9.7%
7.2m
7.0%
6.3m
6.1%
5.7m
5.6%
4.3m
3.2%
4.3m
4.2%
4.4m
4.2%
5.1m
5.0%
5.2m
5.1%
2.2m
2.1%
2.3m
2.2%
2.4m
2.4%
2.6m
2.5%
3.1m
3.0%
PrimeStone Capital
Columbia Threadneedle Investments
Majedie Asset Management
Artemis Investment Management
Heronbridge Investment Management
Fidelity Management & Research
Shareholder Value Management
Invesco Asset Management
Schroder Investment Management
BlackRock Inc
Legal & General
Investment Management
Franklin Templeton Investments
Montanaro Asset Management
Slater Investments
Close Asset Management
Annual report and accounts 2016 53
Mears Group PLC
Corporate governance Report of the Nomination Committee
It was with great sadness that, in December 2016, we learnt of the
death of Rory Macnamara who had been Chair of the Nomination
Committee for the past six years. The Committee had already
commenced a process to identify new Non-Executive Directors
with the right balance of skills and experience to succeed retiring
Non-Executive Directors, and on my appointment as Chair in
February 2017 I was delighted to propose the appointment of
Roy Irwin and Jason Burt. Together these appointments bring
significant and valuable experience. Roy Irwin deepens our
understanding of local authorities, and Housing Associations,
through a career spent in the housing environment. Jason Burt
brings great knowledge of the health and safety operating
environment, and his appointment underlines our commitment
to outstanding performance in this area. Subject to the approval
of shareholders at the 2017 AGM, Roy Irwin and Jason Burt will
be formally appointed as Non-Executive Directors.
During the year, the Committee considered the membership of
each Board Committee and updated its succession plans for
Executive and Non-Executive Directors and senior management.
The Committee will search actively for additional Non-Executive
Directors who can further enhance the quality of the Board and
anticipates the appointment of a further Non-Executive Director
during 2017.
Mears has a diverse workforce of around 15,000 employees,
including 400 apprentices. The Company believes in promoting
diversity at all levels of the organisation. Diversity and respect for
all are core to our induction programmes. It will be an important
part of my new role to ensure the Group makes further progress
in respect of diversity across the Group, including at Board level.
During the year, the Group retained its status as one of the
Government’s Social Mobility Champions. Social mobility is about
giving young people equal chances in life, regardless of where
they were born, the school they attend or the jobs of their parents.
The Government initiative began during 2015 and Mears was one
of just twelve UK companies awarded the status of Social Mobility
Champion; we have pledged to lead by example – encouraging
behavioural change in our business to ensure jobs and opportunities
are open to everyone. The benefits of diversity are appropriately
balanced with their capabilities, values and approach.
Julia Unwin
Nomination Committee Chairman
Introduction
The Nomination Committee
ensures there is an effective
balance of skills and experience
for Board discussions. Succession
and diversity are key aspects of
our agenda to ensure the Board
is continually challenged.
54
Mears Group PLC
Annual report and accounts 2016
Corporate governance Committee meetings
Given three Non-Executive Directors reached nine years’ service,
and can no longer be considered independent, this year has been
a particularly active one in terms of ensuring the Board secures
new Non-Executive appointments whilst maintaining the right
mix of skills and experience. The Committee formally met once
during the year with all members of the Committee present at the
meeting. In addition to its formal meeting, there was regular contact
between Committee members as well as ad hoc meetings with
other Board members and management, when deemed necessary
by the Committee Chairman, particularly relating to the search
process for the new Non-Executive Directors. The Committee
considered the balance of skills, experience and diversity
of the Board.
The Board acknowledges that diversity extends beyond the
boardroom and supports the management effort to build a
diverse organisation. The Company believes in promoting
diversity at all levels of the organisation; at present 23% of our
senior managers are female. The Board is confident that this will
increase over time. It is the aspiration of the Board for the diversity
in membership to mirror the diversity in our Senior Management
Team. Currently 9% of Board members are female (2015: 9%).
When considering the optimum composition of the Board, the
benefits of diversity are appropriately balanced with their skills,
knowledge, experience and approach.
J Unwin
Nomination Committee Chairman
julia.unwin@mearsgroup.co.uk
27 March 2017
“ There is a formal, rigorous and transparent
procedure for the appointment of new
Directors to the Board. The search for
Board candidates is conducted, and
appointments are made, on merit, against
objective criteria and with due regard to
the benefits of diversity on the Board,
including gender.”
Role of the Committee
The Nomination Committee’s responsibilities include:
→ keeping under review the composition of the Board
and succession to it and succession planning for senior
management positions within the Group;
→ making recommendations to the Board concerning appointments
to the Board, whether of Executive or Non-Executive Directors,
having regard to the balance of skills, knowledge, experience
and diversity of the Board;
→ reviewing the length of service of Non-Executive Directors
to ensure a progressive refreshing of the Board, whilst
retaining the correct level of experience;
→ making recommendations to the Board concerning the
re-appointment of any Non-Executive Director at the conclusion
of his/her specified term and the re-election of any Director by
shareholders under the retirement provisions of the Company’s
Articles of Association;
→ managing a formal, rigorous and transparent procedure
for any appointments of new Directors to the Board;
→ prior to the appointment of a Director, requiring that the proposed
appointee discloses any other business interests that may
result in a conflict of interest and reports any future business
interests that could result in a conflict of interest; and
→ ensuring that, on appointment to the Board, Non-Executive
Directors receive a formal letter of appointment setting out
clearly what is expected of them in terms of time commitment,
Committee service and involvement outside Board meetings.
Annual report and accounts 2016 55
Mears Group PLC
Corporate governance Report of the Audit Committee
Accountability
This report sets out how the Committee has discharged its
responsibilities during the year. The Board is required to ensure
that the Annual Report is fair, balanced, concise and understandable,
and the Committee assists in considering this. This report also
sets out, in relation to the financial statements, the significant
issues considered and how these were addressed.
I have spent considerable time during my first year as Chairman
of the Audit Committee meeting the divisional senior management
and I have had a number of detailed review meetings with the
Group’s Chief Risk Officer (CRO) during which I have obtained a
high degree of comfort around the risk management and control
environment of the Group. With this being my first full year as
Audit Committee Chairman, I believe that I have added fresh
challenge and value to what is already a robust process.
The work of the Committee is far-ranging. However, without attempting
to summarise here, I would draw attention to the following:
In relation to financial reporting, the two primary significant
judgements relate to the carrying value of goodwill and revenue
recognition. Both of these have a high level of materiality and also
carry a significant level of judgement. In reaching its conclusions,
the Audit Committee has had detailed discussions with management
and also gained assurance from the procedures carried out by
Grant Thornton when testing both areas. In addition to these two,
the Audit Committee has included defined benefit pension valuations
as a third key estimate. Whilst the valuations are prepared by qualified
actuaries providing a high level of comfort as to the reasonableness
of the carrying value, the Audit Committee is mindful that in today’s
volatile economic environment, assumptions around discount
rates and corporate bond rates have become unpredictable and
can result in a material change in the carrying value of pension
assets and liabilities over a short time period.
In relation to risk management and internal control, we focused
on financial controls and updating and reviewing the risk register
which enables the review of the internal audit plan and the internal
audit findings which are produced by our internal audit team led by
the CRO. Principal risks are generated from our risk register; further
information relating to principal risks can be found on pages 18 to 23.
In relation to risk management, the Senior Management Team
plays a central role in safeguarding against risk. The Group’s risk
personnel present risk management training modules to ensure
operations are conducted with a strong risk management ethos
and I attended and presented at a senior management
development event.
In relation to the independence and effectiveness of the external
auditor, the Committee continues to review the external audit
engagement on an annual basis having carried out a tender
exercise in 2013. The review process includes reviewing reports
produced by the external auditor, and Committee discussion
around the sophistication and appropriateness of audit procedures
and approach. The tender process resulted in the re-appointment
of Grant Thornton UK LLP, which has been the Group’s external
auditor since 1996.
The Senior Statutory Auditor, Simon Lowe, will rotate off the
Mears audit, in accordance with the Ethical Standards, at the end
of the 2016 audit process and a new person will be introduced to
this role. The Audit Committee anticipates carrying out an audit
tender in 2018.
Geraint Davies
Audit Committee Chairman
Introduction
The Audit Committee assists
the Board in fulfilling its oversight
responsibilities regarding, in particular,
the Company’s financial and
corporate reporting, risk management
and internal controls, and the
independence and effectiveness
of the external auditor.
56
Mears Group PLC
Annual report and accounts 2016
Corporate governance Role of the Committee
The Committee has access to the financial expertise of the Group
and its auditor and, if required, can seek further professional
advice at the expense of the Group.
The key responsibilities of the Committee are to:
→ consider the appointment of the external auditor, its reports to
the Committee and its independence, including an assessment
of its appropriateness to conduct any non-audit work;
→ review the financial statements and announcements relating
to the financial performance of the Company;
→ review the internal audit programme and ensure that the
internal audit function is adequately resourced and has
appropriate standing within the Company;
→ discuss with the external auditor the nature and scope of the audit;
→ review, and challenge where necessary, the actions and
judgements of management, in relation to the interim and
annual financial statements before submission to the Board;
→ formally review the effectiveness of the external and internal
audit processes;
→ consider management’s response to any major external or
internal audit recommendations;
→ review the Company’s plans for business continuity;
→ review the Company’s plans for prevention and detection
of fraud, bribery and corruption;
→ review the effectiveness of the whistleblowing arrangements; and
→ report to the Board on how it has discharged its responsibilities.
The Committee’s terms of reference are available on the
Company’s website and on request from the Company Secretary.
The Committee comprises financially literate members with
the requisite ability and experience to enable it to discharge
its responsibilities. With the very sad and untimely death of
Rory Macnamara, who had sat on the Committee for six years,
I am working with the Chair of the Nomination Committee to
find a replacement with suitable recent and relevant
financial experience.
Committee meetings
The Committee met five times during the year with attendance
by all members. These meetings were also attended by the Group
Chief Executive Officer, the Group Finance Director and the Chief
Risk Officer as required by invitation from the Chairman of the
Audit Committee. The external auditor, Grant Thornton UK LLP,
was invited to all meetings. There was also significant dialogue
outside formal meetings between Committee members, Executive
Directors and the external auditor particularly during the audit
process and the preparation of the Annual Report. The Audit
Committee Chairman meets with the external auditor regularly
throughout the year.
Main activities of the Committee during the year
Financial and business reporting
The Audit Committee shares the responsibility with the Board for
reviewing the appropriateness of the Annual Report and half-year
announcements, to ensure that they properly reflect the Group’s
business model, strategic priorities, key risks and financial and
non-financial performance. Consideration is given to the
reasonableness of the accounting policies, adherence to
accounting standards and sufficiency and clarity of the
information disclosed.
The primary areas of judgement considered by the Committee in
relation to the 2016 accounts, and how these were addressed, were:
Carrying value of goodwill
For the purposes of assessing impairment, assets are grouped
at the lowest level for which there are separately identifiable
cash flows; these are termed as cash-generating units (CGUs).
Due to the Board successfully integrating the newly acquired
Care business into the existing Care business, there have been two
CGUs identified: Social Housing and Care. Determining whether
goodwill is impaired requires an estimate of the value in use of each
of the CGUs to which goodwill has been allocated. The value-in-use
calculation involves an estimate of the future cash flows of the
CGU and also the selection of an appropriate discount rate to
calculate present values. Future cash flows are estimated using
the current one-year budget, extrapolated for five years to
December 2021 using specific rates with a general terminal growth
rate being used thereafter. This has been derived from the extensive
business planning process described in greater detail within note 10
on pages 114 to 117 of the Annual Report. Estimated growth rates
over each period are based on past experience and knowledge of the
individual sector’s markets. The Directors consider that the estimates
and judgements involved in determining the value in use of the
Care CGU goodwill are the most significant to the Group and they
have therefore utilised the services of an external consultant to
assist with this impairment review. The value in use is most sensitive
to changes in the terminal growth rate, the explicit growth rate
during the forecast period and the discount rate. The sensitivity
to changes in these estimations is detailed in note 10. The Audit
Committee takes reassurance from the previous year’s impairment
review, where the key assumptions have subsequently been found
to have been reasonably conservative and that the actual results in
the subsequent year have delivered better outcomes than anticipated.
The headroom in the period, being the excess between value in
use compared to carrying value, has increased which gives the
Audit Committee further reassurance although the Committee
remains mindful that there is still significant uncertainty in the
Care sector and key assumptions could change and materially
impact upon the carrying value of the Care business.
Annual report and accounts 2015 57
Mears Group PLC
Corporate governance Report of the Audit Committee continued
Main activities of the Committee during the year
continued
Financial and business reporting continued
Carrying value of goodwill continued
The Audit Committee addressed this area of judgement by reviewing
the key assumptions proposed by management, notably forecast
growth rate, discount rate, terminal growth rate and carer recruitment
and retention rates. Given the importance of these assumptions,
the Committee also reviewed reports prepared by a third party
valuation expert, PwC, which provided validation to the
management proposals:
→ the Committee reviewed the asset valuation report prepared
by PwC on behalf of management to discuss the report in detail.
The Committee gave particular focus to the sensitivity analysis
which showed the level of changes in key value-in-use
calculation assumptions that would be required before
triggering any impairment;
→ the Committee reviewed the disclosure in the notes to the
financial statements; and
→ this area represented a prime area of audit focus and Grant
Thornton UK LLP provided detailed feedback to the Committee.
Revenue recognition
Revenue is recognised when the outcome of a job or contract can
be estimated reliably; revenue associated with the transaction is
recognised by reference to the stage of completion of work at the
balance sheet date. The outcome of the transaction is deemed to be
able to be estimated reliably when all the following conditions
are satisfied:
→ the amount of revenue can be measured reliably;
→ it is probable that the economic benefits associated with
the transaction will flow to the entity;
→ the stage of completion of the transaction at the balance
sheet date can be measured reliably; and
→ the costs incurred for the transaction and the costs to
complete the transaction can be measured reliably.
Full provision is made for future losses on all contracts in the
year in which the loss is first foreseen.
The Audit Committee addressed this area of judgement in the
following ways:
→ the Committee reviewed the key judgements report prepared
by management which provided a detailed explanation in
respect of the valuation of unbilled works and the recognition
of revenues;
→ the Committee took comfort from the contract management
system which is central in generating the valuation of works
(both billed and unbilled) and the integrated process that
follows to ensure an accurate cut-off so that revenue is
appropriately matched to cost. Grant Thornton tested these
systems during its audit fieldwork and provided feedback
to the Committee on this crucial area; and
58
Mears Group PLC
Annual report and accounts 2016
→ this area represented a prime area of external audit focus.
Grant Thornton UK LLP carried out both controls-based and
substantive testing of the amounts recoverable on contracts,
adopting a blend of risk-based and random sampling approaches
to testing, and provided detailed feedback to the Committee
in this area. Grant Thornton’s comments can be seen on page 82.
Defined benefit pension valuation
A number of key estimates have been made, which are given
below and which are largely dependent on factors outside the
control of the Group:
→ inflation rates;
→ mortality;
→ discount rate; and
→ salary and pension increases.
Details of the particular estimates used are included in the
pensions note (note 24) on pages 131 to 135.
Where the Group has a contractual right to recover the costs
of making good any deficit pension scheme, the fair value of that
asset has been recognised and disclosed. The right to recover
costs is limited to exclude situations where the Group causes the
scheme to incur service costs in excess of those which would
have been incurred were the members employed within Local
Government. The Directors have made judgements in respect
of whether any of the deficit is as a result of such situations.
The right to recover costs is also limited to situations where
the cap on contributions payable by the Group is not set so as to
contribute to reducing the deficit in the scheme. The Directors,
in conjunction with the scheme actuaries, have made judgements
in respect of the predicted future service cost and contributions
to the scheme to reflect this in the fair value of the asset recognised.
The Audit Committee addressed this area of judgement in the
following ways:
→ the Committee reviewed the key assumptions proposed by
management, notably assumptions in respect of discount
rate, RPI, CPI and future salary increases. Given the materiality
of this area, the Committee reviewed a report prepared by
Ernst & Young LLP which validated the assumptions set by
management and provided a comparison with other
quoted companies;
→ the Committee reviewed the accounting treatment of pension
related transactions. Full disclosure has been provided within
the pensions note (note 24) on pages 131 to 135; and
→ given the technical nature of this area, the Committee placed
reliance upon the actuarial reports prepared by the respective
scheme actuaries in respect of each of the defined benefit
pension schemes.
Corporate governance Internal control and risk management
With respect to its oversight of risk management and internal
controls, the Board reviewed and discussed a wide range of
matters with management, internal audit and external audit,
as appropriate. This extends to cover all material controls,
including operational, compliance and financial controls and risk
management systems. The Directors are satisfied that procedures
are in place to ensure that the Group complies with the Guidance
on Risk Management, Internal Control and Related Financial and
Business Reporting (the Risk Guidance) published by the
Financial Reporting Council in September 2014.
The Board has delegated some of these responsibilities to the
Audit Committee which has reviewed the effectiveness of the
system of internal control and ensured that any remedial action
has been or is being taken on any identified weaknesses. The
system of internal controls is designed to manage rather than
eliminate the risk of failure to achieve business objectives and
can only provide reasonable, but not absolute, assurance against
material misstatement or loss. It includes all controls including
financial, operational and compliance controls and risk
management procedures.
The Group has an ongoing process for identifying, evaluating
and managing the significant risks faced by the Group. The Group
endeavours to ensure that the appropriate controls, systems and
training are in place and has established procedures for all business
units to operate appropriate and effective risk management.
The processes used to assess the effectiveness of the internal
control systems are ongoing, allowing a cumulative assessment
to be made, and include the following:
→ delegation of day-to-day management to operational
management within clearly defined systems of control, including:
→ the identification of levels of authority within clearly identified
organisational reporting structures;
→ the identification and appraisal of financial risks both
formally, within the annual process of preparing business
plans and budgets, and informally, through close
monitoring of operations;
→ regular reviews by the Board and the Audit Committee
of identified fraudulent activity and actions being taken
to remedy any control weaknesses;
→ regular reviews by management and the Audit Committee
of the scope and results of internal and external audit work
across the Group and the implementation of recommendations;
→ consideration by the Board and by the Audit Committee
of the major risks facing the Group and of the procedures
in place to manage them and to ensure controls react to
changes in the Group’s overall risk profile. These include
health and safety, people, legal compliance, quality assurance,
insurance and security, and reputational, social, ethical
and environmental risks;
→ discussion relating to a presentation from the IT Director on
cyber-security, including an assessment of vulnerabilities
and the programmes being implemented to protect the Group
against this evolving and potentially catastrophic risk;
→ consideration and discussion relating to regular updates
from the Finance Director regarding developments within
the finance function; and
→ review of the Group’s treasury policies with the Finance Director
and Head of Treasury in order to ensure best practice is being
adhered to.
The Board has reviewed these procedures and considers them
appropriate given the nature of the Group’s operations. The Chief
Risk Officer (CRO) and the Finance Director presented a report on
the robustness of the internal controls for the year and an internal
audit plan for 2017. The Committee has concluded that the system
of internal control and risk management is embedded into the
operations of the Group and the actions taken to mitigate any
weaknesses are carefully monitored.
The key controls in place are:
→ a defined organisational structure and an appropriate level
of delegated responsibility to operational management;
→ authorisation limits for financial and non-financial transactions;
→ written operational procedures;
→ a comprehensive financial reporting system within which
→ a robust system of financial budgeting and forecasting;
→ a robust system of financial reporting with actual results
compared to budget and forecast results; and
→ regular reporting of operational performance and risks
to the Board.
actual results are compared with approved budgets, quarterly
reforecasts and previous years’ figures on a monthly basis
and reviewed at both local and Group level; and
→ an investment evaluation procedure to ensure an appropriate
level of approval for all capital and revenue expenditure;
→ discussion and approval by the Board of the Group’s strategic
directions, plans and objectives and the risks to achieving
them, combined with regular reviews by management of the
risks to achieving objectives and actions being taken to
mitigate them;
→ review and approval by the Board of annual budgets, combined
with regular operational and financial reviews of performance
against budget, prior year results and regular forecasts by
management and the Board;
Annual report and accounts 2016 59
Mears Group PLC
Corporate governance Report of the Audit Committee continued
Main activities of the Committee during the year
continued
Internal control and risk management continued
In 2014 a review of internal controls was performed by
independent internal audit outsourced partners KPMG. This
work was commissioned on a risk-based approach and was
performed to provide the Committee with independent assurance
over the quality of risk management and strength of internal
controls. The procedures performed by KPMG were undertaken
within inherently risky areas that would affect KPI performance.
This assignment was finalised during 2015 and the independent
view of internal controls was that controls were generally adequate,
though improvements were suggested. The improvements have
been implemented. In line with the Audit Plan for 2017, the Committee
anticipates refreshing and extending this review during the
course of the coming year.
The Company has in place internal control and risk management
systems in relation to the Company’s financial reporting process
and the Group’s process for the preparation of consolidated accounts.
The consolidated financial statements are produced by the Group
finance function, which is responsible for the review and compilation
of reports and financial results from each of the operating
subsidiaries in accordance with the Group reporting procedures.
The consolidated financial statements are supported by detailed
working papers. The Audit Committee is responsible for overseeing
and monitoring these processes, which are designed to ensure
that the Company complies with relevant regulatory reporting
and filing requirements. As at the end of the period covered by
this report, the Audit Committee, with the participation of the
Chief Executive Officer and the Finance Director, evaluated the
effectiveness of the design and operation of disclosure controls
and procedures designed to ensure that information required to be
disclosed in financial reports is recorded, processed, summarised
and reported within specified time periods.
The Committee carried out a review of its effectiveness with
input from Committee and Board members, management and
the external auditor. The review concluded that the Audit Committee
members had sufficient expertise and committed time to discharge
their responsibilities.
External audit related services
The Committee is also responsible for monitoring and
reviewing the performance, independence and objectivity of
Grant Thornton UK LLP, the external auditor. The external auditor
has also confirmed that it has complied with relevant UK
independence standards. It is expected that the formal rotation
of the current lead audit partner will be effective from the audit
of the financial statements for 2017.
During the year the Financial Reporting Council (FRC) undertook
an audit quality review of the Grant Thornton statutory audit of
2015. The results were discussed separately by me with both the
FRC and Grant Thornton. The Audit Committee was pleased with
the positive outcome and two minor amendments have been
made to the audit process for the current year.
The Company has adopted a strict policy of prohibiting the
external auditor from carrying out non-audit services, in order
to safeguard audit objectivity and independence. The Committee
is responsible for approval of all non-audit services provided by
Grant Thornton; however, this is considered to be in exceptional
circumstances only. In such an exceptional event, the Audit
Committee would approve only where the Company would be
disadvantaged by engaging an alternative provider, for instance
where Grant Thornton possesses a detailed knowledge of the
structure of the business or an understanding of the markets
that the Group operates in.
During 2016, Mears was delighted to retain its accreditation with
Investors in People (IIP). This followed a four-week assessment
programme which involved external assessors visiting 16 branches
and interviewing around 300 employees. IIP in the South of England
is delivered by Grant Thornton under licence from the UK Commission
for Employment and Skills. Whilst Mears played no part in the
selection of Grant Thornton as its external assessor, the fee of
£45,000 paid to Grant Thornton for this assessment is required to
be disclosed within non-audit services. Other than in respect of
this IIP assessment, there were no fees paid to Grant Thornton
during the year in respect of non-audit services. In the comparative
2015 year, fees relating to non-audit services amounted to
£0.03m, being 7% of total fees.
G Davies
Audit Committee Chairman
geraint.davies@mearsgroup.co.uk
27 March 2017
60
Mears Group PLC
Annual report and accounts 2016
Corporate governance Report of the Remuneration Committee
Peter Dicks
Remuneration Committee Chairman
Dear shareholder,
On behalf of the Board, I am
pleased to present the report
on Directors’ remuneration
for 2016.
You will have read earlier in the Annual Report that 2016 has been
a solid year of further progress for the Company. During the last
twelve months, the Company has continued to make significant
progress in a number of areas including:
→ achieving a broader housing service offering;
→ an important step forward with the award of the long-term
joint venture partnership with Milton Keynes Council;
→ an order book standing at £3.1 billion with solid visibility
for 93% of 2016 consensus revenues reflecting strong
progress in positioning the business for the future; and
→ continued financial discipline evidenced by
conservative accounting policies and a track
record of strong cash management.
Despite progress made during the year that ensures that the Group
is well positioned, the external operating environment around the
Care business remains challenging, impacting earnings for the year.
As a result, there will be no contribution to the Management
Incentive Plan (MIP) in 2016. Details of our performance against
MIP targets are as follows.
Performance measures*
Threshold
Maximum
Actual
EPS growth
TSR growth
Cash conversion (underpin)
ROCE (underpin)
8%
10%
80%
10%
13%
20%
80%
10%
5%
3%
70%
18%
*
See pages 73 and 74 for definitions of performance measures and actual
remuneration outcomes.
Review of remuneration policy
The Company’s remuneration policy was last approved at
the 2014 AGM and as such is due for renewal at the 2017 AGM.
During the year, the Committee undertook an in-depth review of the
current policy to ensure that we have in place a forward-looking
policy that supports the evolving business strategy, striking a
balance between short-term corporate success and long-term
value creation ensuring there is no payment for failure.
In making its review, the Remuneration Committee also
considered the goals it would like the remuneration policy
to support. These are set out below:
→ ensuring that Executive remuneration is linked to performance
and sustained achievement of annual financial, strategic and
operational objectives which lead to the creation of long-term
shareholder value;
→ providing greater alignment between Executives’ interests
and those of shareholders;
→ awareness of the need for more fairness in pay outcomes
across the wider workforce;
→ maintaining flexibility, in recognition of the uncertain business
environment, while making sure that remuneration outcomes
are aligned to long-term shareholder interests by ensuring a
significant proportion of any incentive payout is linked to the
achievement of hard financial targets; and
Annual report and accounts 2016 61
Mears Group PLC
Corporate governance Report of the Remuneration Committee continued
“ The Company’s remuneration structure has
been designed to support the evolving
business strategy and foster a pay for
performance culture, helping us achieve
our corporate goals.”
Review of remuneration policy continued
→ shareholder support for the rationale and structure
of Executive remuneration of our key Executives who
are critical to executing the business strategy.
Following the review, the Committee determined that it wanted
to retain the simplified salary and single ‘deferred annual bonus’
style incentive arrangement but that it needed to make a number
of key changes primarily targeted at further strengthening the
alignment of Executive pay with the interests of shareholders.
These changes are designed to bring parts of the structure into
line with best practice corporate governance whilst recognising
certain aspects of the industry in which our employees operate.
The Company is proposing to introduce a new incentive arrangement,
the Executive Incentive Plan (EIP), which will replace the current
Management Incentive Plan (MIP). The EIP, which will be split into two
parts, simplifies the current annual incentive arrangement through
the removal of the bonus banking construct and the cash payment
mechanism. Significantly, under the EIP, annual award levels will be
reduced from 250% to 200% of salary, paid in shares with no element
of cash bonus. This reduction in incentive value has been largely driven
by the Executive team, which is mindful of the pay structure of the
wider workforce and wants to implement a greater fairness in pay
structure. The Remuneration Committee is comfortable that this
reduction in award levels does not present a retention risk as the
proposed structure is designed to enable management to build up
a meaningful level of equity in the business over the next five years.
Of the reduced annual award level of 200% of salary, 100% of salary
will be granted in deferred shares to ensure that the management
team is locked in over the next five years. This element of the award
will feature a financial underpin relating to earnings growth.
Management is therefore provided with the opportunity to build up
a meaningful stake in the business which ensures simple alignment
with the long-term sustainable performance of the business.
Furthermore, the high probability of payout of this element provides
an enhanced lock in mechanism to reflect the reduction in
award levels.
The other 100% of salary will be granted as a ‘performance on
grant’ type share award and will be granted based on the successful
achievement of a range of annual performance measures which
support the business strategy on a rolling basis. Amounts earned will
vest over a three to five-year period on the same basis as the deferred
share award. The Committee believes that it is important that shares
start to vest at the three-year point rather than a longer period in
order to ensure strong alignment with the interests of shareholders
and the tenure of the management team.
The EIP has been designed to ensure that it is fully aligned with the
strategic priorities of the Group and provides a holistic assessment
of overall corporate performance. The deferred share element
featuring an EPS underpin provides a simple alignment with the
long-term sustainable performance of the business by ensuring
that management can build up and retain a meaningful
shareholding in the Company.
62
Mears Group PLC
Annual report and accounts 2016
The performance element of the EIP focuses on those metrics which
will drive long-term value creation on a rolling basis from both:
→ a financial and operational perspective – growing earnings
(EPS) and the quality of those earnings (ROCE) from both an
organic and non-organic perspective balanced with strong
cash and balance sheet management (cash conversion); and
→ a strategic perspective – strong customer service and our
good health and safety record which helps win new contracts
with end users and support new innovative operating models.
Specific targets will be set on an annual basis taking account
of both the short and medium-term business plan to ensure that
the targets are sufficiently stretching and in the best interest of
the shareholders. The Committee is mindful to ensure that there
is no payment for poor performance and will therefore ensure
that it reviews all incentive awards prior to grant and will exercise
discretion to moderate the total annual incentive outcomes if
necessary, to ensure that they balance management performance
and the shareholder experience in any given financial year.
Other remuneration and related issues
The Remuneration Committee is acutely aware of the sensitivity
around increasing pay levels in excess of the general workforce
increase but believes that this is necessary to retain individuals
as part of an overall remuneration strategy in which overall levels
of remuneration remain conservative and a high proportion of
total pay is delivered in long-term equity. As such it should be
noted, that even after the proposed increases, the remuneration
of the Executive Directors will be some of the lowest in the sector.
Furthermore, the shareholding requirement will be increased
over time to 400% of salary to reflect the new share award
structure. This will ensure that the Executive Directors build up
a meaningful shareholding in the Company so that their interests
are directly aligned with those of shareholders in line with
investor sentiment.
2017 AGM
The Committee wishes to thank those shareholders who
have actively engaged in helping the Committee shape a new
remuneration policy. We have taken feedback into account
and believe we have a structure that will both retain and motivate
management, while being sensitive to the external and internal
operating environment.
The Directors’ remuneration policy will be subject to a binding
shareholder vote, and the Annual Report on Remuneration along
with this statement will be subject to an advisory shareholder
vote at the forthcoming AGM on 7 June 2017.
I hope that you find the information in this report helpful and I
look forward to your support at the forthcoming AGM. I am always
happy to hear from the Company’s shareholders and you can contact
me direct, or via the Company Secretary, Ben Westran, if you have
any questions on this report or more generally in relation to the
Company’s remuneration.
P F Dicks
Remuneration Committee Chairman
peter.dicks@mearsgroup.co.uk
27 March 2017
Corporate governance Remuneration policy
Directors’ remuneration policy
Remuneration policy and philosophy
Remuneration policy
How is this achieved?
A simple and transparent remuneration structure
that retains and motivates Executives while being
sympathetic to Mears’ operating environment from
both an external and internal perspective.
→ Conservative levels of fixed remuneration balanced with one annual incentive
strongly linked to performance.
→ The performance element of the annual incentive incorporates robust
financial, operational and strategic KPIs that are aligned with an evolving
business strategy in an uncertain economic environment.
→ All incentive payments are deferred into equity over a five-year period ensuring
clear alignment with shareholders’ interests and ‘at-risk’ remuneration.
A proportion of each Executive’s total compensation
should be linked to performance related pay and the
provision of equity.
→ All incentive payments are delivered in ‘deferred’ shares. At stretching
performance, around one third of the Executive Directors’ total remuneration
is based on the achievement of key corporate metrics that are aligned to the
Company’s long-term strategy.
There should be a commitment to fostering a
performance culture that aligns an individual’s
rewards with the key corporate metrics that drive
shareholder value creation.
→ The performance measures used in the Executive Incentive Plan are directly
aligned with our corporate goals and as such ensure that there is no payment
for poor performance.
→ The Committee will ensure that the remuneration package does not lead
to irresponsible behaviour and that it takes appropriate account of risk.
Executive Directors
The table below sets out the key elements of the policy for Executive Directors:
Objective and
link to strategy
Base salary
Operation
Maximum opportunity
Performance measures
and assessment
Not applicable.
The purpose of the base
salary is to:
The Committee reviews base salaries annually
in April.
→ help recruit and retain
key individuals;
→ reflect the individual’s
experience, role and
contribution within
the Group; and
→ ensure fair reward
for ‘doing the job’.
The Committee will retain the discretion to increase
an individual’s salary where there is a significant
difference between current levels and a market
competitive rate. When determining base salaries
and whether to increase levels the Committee will
take the following into consideration:
→ the performance of the individual Executive Director;
→ the individual Executive Director’s experience
and responsibilities;
→ the impact on fixed costs of any increase;
→ pay and conditions throughout the Group; and
→ the economic environment.
When setting the salary levels for the Executive
Directors, in addition to the factors summarised
above, salary levels paid by companies of a similar
size and complexity to Mears are taken into account.
The annual increase will
not exceed 10% of annual
base salary.
The Committee is guided by
the general increase for the
broader employee population
but may decide to award a
lower increase for Executive
Directors or indeed exceed this
to recognise, for example, an
increase in the scale, scope
or responsibility of the role
and/or to take into account
relevant market movements.
The Company will set out in the
section headed Implementation
of Remuneration Policy, in the
following financial year, the
salaries for that year for each
of the Executive Directors.
Annual report and accounts 2016 63
Mears Group PLC
Corporate governance Remuneration policy continued
Directors’ remuneration policy continued
Executive Directors continued
Objective and
link to strategy
Other benefits
Operation
Maximum opportunity
Performance measures
and assessment
To provide benefits
that are valued by
the recipient and are
appropriately competitive.
The Executive Directors receive additional benefits
including a company-provided car or an allowance in
lieu, life assurance and private medical insurance.
Other benefits may be provided where appropriate.
Benefits in kind are not pensionable.
Benefit values vary year on year
depending on premiums and the
maximum potential value is the
cost of these provisions.
Not applicable.
Pension
To provide a framework to
save for retirement that is
appropriately competitive.
All Executive Directors receive a contribution into
their respective defined contribution plans, which
are subject to periodic review to ensure that they
remain in line with rates applicable in the market.
Only the base salary is pensionable.
The Executive Directors receive
a contribution of 15% of salary.
Not applicable.
Executive Incentive Plan (EIP)
To provide a link between
reward and corporate
performance in order to
appropriately retain and
motivate the Executive
Directors and senior
management who are
critical to executing the
business strategy.
To align the interests of
Executive Directors and
senior management more
closely with shareholders
over the longer term and
provide a greater exposure
to share price movements
over this period.
Annual awards of nil-cost options will be
made based on the achievement of annual
performance measures.
Awards will be made in two parts:
→ 50% of the maximum award will be granted
in deferred shares (“Part A”); and
→ 50% of the maximum award will be granted
based on the achievement of a range of annual
performance measures (“Part B”).
Both awards will vest 60% after three years, with a
further 20% after four years and the remaining 20%
after five years.
The Committee may award dividends/dividend
equivalents on shares to the extent that the
shares vest.
In exceptional circumstances (such as recruitment)
the Committee retains the discretion to provide an
element of the award in cash.
Further details of the operation of the EIP, including
the performance measures for 2017, are set out on
pages 76 and 77.
Annual awards made to
Executive Directors will be
capped at a maximum of
200% of salary. For Part A of
the award, 100% will vest if
the EPS metric is met in full.
For Part B of the award:
→ 20% of the award will vest for
threshold performance; and
→ 100% of the award will vest
for maximum performance.
There is straight-line vesting
between these points.
The performance measure
for Part A will be earnings
per share.
The performance measures
for Part B of the 2017
awards are as follows:
earnings per share
(EPS), return on capital
employed (ROCE), cash
conversion, customer
satisfaction and health
and safety.
The Remuneration
Committee has discretion
to set performance
measures and weightings
on an annual basis, with
performance measures
for the next financial year
set out in the Statement of
Implementation on pages
76 to 78.
The EIP contains malus
(up to date of vesting) and
clawback (two years post
vesting) provisions.
64
Mears Group PLC
Annual report and accounts 2016
Corporate governance Directors’ remuneration policy continued
Executive Directors continued
Objective and
link to strategy
Operation
Maximum opportunity
Performance measures
and assessment
All-employee share plans
Under the SIP, Sharesave and
CSOP, the maximum amount is
equal to the regulatory limits
set from time to time.
Not applicable.
Encourages employees
to own shares in order
to increase alignment
over the longer term.
All employees are eligible to participate in the Company’s
Share Incentive Plan (SIP) and Sharesave Plan.
Under the terms of the Sharesave Plan all employees
can apply for three or five-year options to acquire the
Company’s shares priced at a discount of up to 20%.
Under the terms of the SIP the Company can choose
to offer free shares, partnership shares, matching
shares (up to two for one on any partnership shares
purchased) and/or dividend shares.
In addition the Company operates a discretionary
unapproved share plan and a Company Share Option
Plan (CSOP). No awards to Executive Directors are
proposed under these plans.
Shareholding requirement
Secures a long-term
locked-in alignment
between the Executive
Directors and shareholders,
ensuring that they build up
and maintain a minimum
level of shareholding
throughout their
employment with
the Company.
The shareholding requirement will operate in the
following manner:
Minimum shareholding
requirement is 400% of salary.
Not applicable.
→ only shares unconditionally owned by the
Executive Director will count against the
requirement; and
→ shares can be built up over a five-year period
from implementation of the policy through the
vesting and retention of share awards and/or
MIP/EIP payments.
Provisions of previous policy that will continue to apply
No further contributions can
be made to participants’ plan
accounts under the MIP.
Not applicable.
Management Incentive
Plan (MIP)
Participants have a plan account into which
annual contributions by Mears are made.
No further contributions are due to be made
under the new policy.
Each year participants are entitled to withdraw
up to 50% of the plan account balance in cash or
shares with the remaining 50% deferred in shares.
50% of the plan account is at risk of forfeiture each
year if minimum levels of performance are not met.
2017 is the final year of the MIP. No further contributions
will be made; however, the final balance of a participant’s
plan account is due to be paid out in shares. The
Committee has determined that this final payment will
be deferred into shares which vest in annual instalments
(rather than a single payment) over 2017–2019.
Further details of the operation of the MIP, including
the performance measures for 2016, are set out on
page 73.
Annual report and accounts 2016 65
Mears Group PLC
Corporate governance Remuneration policy continued
Directors’ remuneration policy continued
Notes to the future policy table
Changes to remuneration policy from previous policy
The Management Incentive Plan (MIP) has been replaced by
the EIP as the Company’s variable incentive arrangement. The
EIP retains the single ‘deferred annual bonus’ style of the MIP
but has a small number of key changes which are designed to
further strengthen the alignment of the Executives’ pay with
the interests of shareholders.
→ Under the EIP, awards will be made 100% in shares rather than
split between cash and shares.
→ An element of deferral has been retained with awards vesting 60%
after three years, 20% after four years and 20% after five years.
This compares to the MIP, which had a decreasing length of
holding period as the plan progressed.
→ Maximum award levels have been reduced from 250% of salary
to 200% of salary. Of this, 100% of salary will be granted as
deferred shares. The remaining 100% of salary will be awarded
based on the successful achievement of a range of annual
performance measures, as per the previous construct.
→ Strategic and operational performance measures have been
introduced to sit alongside the previous EPS and TSR measures.
→ Malus and clawback provisions have been introduced in line
with UK corporate governance best practice.
Deferred awards under the MIP will continue to vest though the
payment schedule, which has been increased to four years from
two to provide further alignment between Executive Directors and
shareholders. See page 73 for further details.
In addition to the all-employee Sharesave Plan, the Company
is intending to introduce the Mears Share Incentive Plan (SIP).
The previous Share Plan will not continue to operate for Executive
Directors under the new policy. All awards under this incentive have
now vested.
Reasons for selecting performance measures
The Committee wanted to ensure that the performance
measures selected provide a holistic assessment of overall
corporate performance and tie in to the non-financial objectives
that the Company embraces throughout the organisation.
EPS growth has been selected as it provides direct alignment to
the Company’s strategic objectives over the long term and is also
transparent, fully understood by participants and an externally
audited metric over which they have line of sight.
The use of ROCE and cash conversion (previously incorporated
as underpins) ensures that quality of earning is protected and
the Company maintains strong working capital management.
Customer satisfaction and health and safety performance
conditions are included as these are key KPIs that the Company
focuses on and by performing strongly in these areas, it will help
win new contracts with end users and support new innovative
operating models.
Targets are calibrated to reflect the Committee’s assessment of
good to exceptional performance and taking into account internal
budgets and the current economic environment.
66
Mears Group PLC
Annual report and accounts 2016
Differences in remuneration policy for all employees
The Company sets terms and conditions for employees which
reflect the different legislative and labour market conditions that
operate in each of our jurisdictions. We will always meet or exceed
national minimum standards for terms and conditions of employment
in each of our business areas. Pay arrangements in our businesses
also reflect local performance with personal increases based on
achievement, individually assessed. Mears believes in the value of
continuous improvement, both for the individual and for the Company.
In general, all employees receive base salary, benefits and pension,
and are eligible to participate in the Company’s share plans. Share
awards and bonus plans are cascaded down below Executive level
to senior management, aligning the Senior Management Team to
deliver value for the Group.
The remuneration of the Executive Directors and Senior
Executives is more heavily weighted towards variable pay than
for other employees with a large proportion of their overall
package dependent on successful and sustained execution
of the business strategy over the longer term.
Committee discretions
The Committee will operate the EIP and MIP according to their
respective rules. The Committee retains discretion, consistent
with market practice, in a number of regards to the operation and
administration of these plans. These include, but are not limited
to, the following:
→ the participants;
→ the timing of grant of an award;
→ the size of an award;
→ the determination of vesting;
→ discretion required when dealing with a change of control
or restructuring of the Group;
→ determination of the treatment of leavers based on the rules
of the plan and the appropriate treatment chosen;
→ adjustments required in certain circumstances (e.g. rights
issues, corporate restructuring events and special dividends);
→ the annual review of performance measures and weighting
for the EIP and exercise conditions (if any) for the EIP and the
MIP; and
→ in exceptional circumstances the payment of a proportion
of the EIP in cash.
These discretions, which in certain circumstances can
be operated in both an upward and downward manner, are
consistent with market practice and are deemed necessary for
the proper and fair operation of the schemes in order to achieve
their original purpose. It is the Committee’s policy, however, that
there should be no element of reward for poor performance and any
upward discretion will only be applied in exceptional circumstances.
Corporate governance Directors’ remuneration policy continued
Illustrations of application of remuneration policy
We estimate that the level of remuneration received by each
Executive Director for the first full year in which the policy applies
will be, indicatively, at three different levels of performance:
→ minimum performance includes where only fixed pay
(salary, benefits and pension);
→ on-target performance includes Part A of the EIP and 60%
of Part B of the EIP; and
→ maximum performance includes the maximum opportunity
under the EIP.
Fixed pay is base salary for 2017 plus the value of pension
and other benefits.
The charts demonstrate the balance between fixed and variable pay
for minimum, threshold and maximum performance for Executive
Directors’ remuneration in 2017 in line with the relevant policy.
Approach to recruitment remuneration
In the event that the Company recruits a new Executive Director
(either from within the organisation or externally), when determining
appropriate remuneration arrangements, the Committee will take
into consideration all relevant factors (including but not limited to
quantum, the type of remuneration being offered and the jurisdiction
the candidate was recruited from) to ensure that arrangements are
in the best interests of both the Company and its shareholders
without paying more than is necessary to recruit an Executive
of the required calibre.
The Committee would generally seek to align the remuneration
of any new Executive Director following the same principles as for
the current Executive Directors (set out in the table on page 70).
The elements that would be considered by the Company for
inclusion in the remuneration package for a new Director are
in line with those offered to existing Directors (see policy table
on pages 63 to 65 for more details):
→ salary and benefits including defined contribution pension
participation or a salary supplement in lieu of pension provision;
→ participation in the EIP of up to 200% of salary;
→ participation in all-employee share plans operating at that
time; and
→ costs relating to but not limited to relocation, legal, financial,
tax and visa advice and pre-employment medical checks.
The maximum variable remuneration will be 200% of salary.
The Committee may make awards on appointing an Executive
Director to ‘buy out’ remuneration arrangements forfeited on
leaving a previous employer. Awards made by way of compensation
for forfeited awards would be made on a comparable basis, taking
account of performance achieved (or likely to be achieved), the
proportion of the performance period remaining and the form
of the award. Compensation could be in cash or shares.
D J Miles
1,400
’
800
1,000
) 1,200
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
R
400
600
200
57%
£619
43%
£464
63%
£774
37%
£464
100%
£464
0
Minimum
On-target
Maximum
A C M Smith
Annual variable
Fixed
)
’
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
R
1,000
800
600
400
200
0
58%
£413
42%
£304
63%
£516
37%
£304
100%
£304
Minimum
On-target
Maximum
Annual variable
Fixed
A Long
1,000
)
’
0
0
0
£
(
n
o
i
t
a
r
e
n
u
m
e
R
800
600
400
200
0
57%
£338
43%
£254
63%
£422
38%
£254
100%
£254
Minimum
On-target
Maximum
Annual variable
Fixed
Annual report and accounts 2016 67
Mears Group PLC
Corporate governance
Remuneration policy continued
Directors’ remuneration policy continued
Approach to recruitment remuneration continued
The Committee’s policy is for all Executive Directors to have rolling service contracts with a notice period of twelve months, unless on an
exceptional basis to complete an external recruitment successfully, when a longer initial period reducing to twelve months may be used.
Service contracts and payment for loss of office
Director
Executive
D J Miles
A C M Smith
A Long
Chairman/Non-Executive
R Holt
D L Hosein
M G Rogers
P F Dicks
R Macnamara
G Davies
J Unwin
J Burt
R Irwin
Date of contract/
letter of appointment
Notice period
by Company or Director
June 2008
June 2008
August 2009
June 2015
June 2008
June 2008
June 2008
June 2010
October 2015
January 2016
February 2017
February 2017
12 months
12 months
12 months
Rolling 6-month appointment
Rolling 6-month appointment
Rolling 6-month appointment
Rolling 6-month appointment
Rolling 6-month appointment
Rolling 6-month appointment
Rolling 6-month appointment
Rolling 6-month appointment
Rolling 6-month appointment
All Executive Directors’ contracts are rolling and, therefore, will continue unless terminated by written notice. In the event of the termination
of an Executive Director’s contract, salary and benefits will be payable during the notice period. There will, however, be no automatic entitlement
to bonus payments or share incentive grants during the period of notice.
The rules of the EIP and the MIP set out what happens to awards if a participant ceases to be an employee or Director of Mears before
the end of the vesting period. Generally, any outstanding share awards will lapse on such cessation, except in certain circumstances.
If the Executive Director ceases to be an employee or Director as a result of death, injury, ill health, redundancy, retirement, the sale
of the business or company that employs the individual or any other reason at the discretion of the Committee, then they will be treated
as a ‘good leaver’ under the plan rules.
Under the EIP, a proportion of a good leaver’s award will vest on cessation of employment by reference to the time elapsed from grant to
cessation. The Committee has discretion to determine the period during which the good leaver may exercise their award after cessation.
On a change of control, all awards under the EIP will vest immediately.
Under the MIP, a good leaver’s accumulated plan account (as measured at the date of cessation of employment) will be paid to them.
For other leavers, any amounts not vested will lapse. On a change of control, the accumulated plan accounts of all participants
(as measured at the date of change of control) will be paid to them.
68
Mears Group PLC
Annual report and accounts 2016
Corporate governance Directors’ remuneration policy continued
Chairman and Non-Executive Directors
The Board as a whole is responsible for setting the remuneration of the Non-Executive Directors, other than the Chairman whose
remuneration is determined by the Committee and recommended to the Board.
The table below sets out the key elements of the policy for the Chairman and Non-Executive Directors.
Objective and link to strategy
Operation
Maximum opportunity
Performance measures and assessments
To provide compensation
that attracts individuals
with appropriate knowledge
and experience.
Fee levels are reviewed periodically
taking into account independent
advice and the time commitment
required of Non-Executive Directors.
The fees paid to the Chairman
and the fees of the other
Non-Executive Directors aim
to be competitive with other
listed companies which the
Committee (in the case of the
Chairman) and the Board
(in respect of the Non-Executive
Directors) consider to be of
equivalent size and complexity.
Non-Executive Directors receive a
base fee and additional fees for the
role of Senior Independent Director
or membership and/or chairmanship
of certain Committees.
The Chairman receives a single
fee and does not receive any
additional fees for membership
and/or chairmanship of Committees.
Non-Executive Directors
also receive reimbursement
of reasonable expenses (and any
tax thereon) incurred through
undertaking their duties and/or
Company business.
Any increase in Non-Executive
Director base fees or additional
Committee/membership fees
(if introduced) may be above the
level awarded to other employees,
given that they may only be
reviewed periodically and may
need to reflect any changes to time
commitments or responsibilities.
Non-Executive Director fees
are not performance related.
Non-Executive Directors
do not receive any variable
remuneration element.
The maximum potential value
of any benefits provided is the cost
of these provisions.
The Company will pay
reasonable expenses incurred
by Non-Executive Directors.
Current fee levels are set out in the
Statement of Implementation on
page 76.
Annual report and accounts 2016 69
Mears Group PLC
Corporate governance Remuneration policy continued
Directors’ remuneration policy continued
Other Non-Executive appointments
Executive Directors have an obligation to inform the Board,
specifically the Remuneration Committee, of any Non-Executive
positions held or being contemplated and of the associated
remuneration package. The Remuneration Committee will consider
the merits of each case and carefully consider the work and time
commitment required to fulfil the Non-Executive duties and the
potential benefit to the Group and then determine whether the
remuneration should be retained by the Executive or passed
over to the Group.
Consideration of employment conditions elsewhere
in the Company in developing policy
In setting the remuneration policy for Executive Directors, the
Remuneration Committee takes into account Group and business
unit performance including both financial performance and safety
improvements in the year. Due to the wide variety of labour market
conditions and the markets in which we operate, pay rates are
not normally considered when considering Executive Director
base pay reviews. The Remuneration Committee reviews and
notes the salaries of Senior Executives within the Group.
The Committee has not expressly sought the views of employees
and no remuneration comparison measurements were used when
drawing up the Directors’ remuneration policy. Through the Board,
however, the Committee is updated as to employee views on
remuneration generally.
Consideration of shareholder views
The Committee is committed to an ongoing dialogue with
shareholders and seeks shareholder views when any significant
changes are being made to remuneration arrangements. We remain
sensitive to the views of shareholders and sought to consult many
of our largest shareholders regarding the changes we are proposing
to the remuneration policy.
As a result of the feedback received, the Committee made a
number of changes to the initial design to ensure that the new
incentives are delivering the necessary lock-in and motivation to
deliver long-term shareholder value, particularly given the reduction
in total share-based incentive levels from 250% to 200%.
The Company will continue to monitor shareholder comments
and retain an open dialogue as necessary.
Annual remuneration report 2016
Annual report on remuneration
This section of the Remuneration Report contains details of how the Company’s remuneration policy for Directors was implemented
during the financial year.
Single total figure of remuneration (audited)
Executive Directors
The remuneration of Executive Directors showing the breakdown between elements and comparative figures is shown below.
Figures provided have been calculated in accordance with the regulations.
Executive Director (£’000)
D J Miles
A C M Smith
A Long
Year
Salary
Taxable
benefits
Pension
Annual
incentives
Total
remuneration
2016
2015
2016
2015
2016
2015
363
363
242
242
198
198
19
19
7
7
11
11
54
54
36
36
30
30
—
—
—
—
—
—
436
436
285
285
239
239
70
Mears Group PLC
Annual report and accounts 2016
Corporate governance Annual report on remuneration continued
Single total figure of remuneration (audited) continued
Non-Executive Directors
The remuneration of Non-Executive Directors showing the breakdown between elements and comparative figures is shown below.
Figures provided have been calculated in accordance with the regulations.
Chairman and Non-Executive Director (£’000)
R Holt
D L Hosein
M G Rogers
P F Dicks
D Marston
R Macnamara
G Davies
J Unwin
1. From the 2017 AGM, R Holt will receive no benefits.
Year
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Basic
fees
250
250
45
45
45
45
45
45
—
22
45
45
45
11
45
—
Additional
fees
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Other
95 1
95
—
—
—
3
—
—
—
—
—
—
—
—
—
—
Total
fees
345
345
45
45
45
48
45
45
—
22
45
45
45
11
45
—
Annual report and accounts 2016 71
Mears Group PLC
Corporate governance Annual remuneration report 2016 continued
Annual report on remuneration continued
Additional details in respect of single total figure table (audited)
The outcome of the MIP for the year ended 31 December 2016, being year four on the schematic, is set out on page 73.
The following schematic illustrates the operation of the MIP:
Start of year 1
Year 1
Year 2
Year 3
Year 4
Year 5
Measurement date at the end of each plan year
Contribution
Contribution
or deduction
Contribution
or deduction
Contribution
or deduction
Participants’ plan accounts
50% of closing balance paid at the end of each plan year as a combination
of cash or shares. Unpaid balance deferred in shares
100% of
closing balance
in plan paid
in shares
72
Mears Group PLC
Annual report and accounts 2016
Corporate governance Annual report on remuneration continued
Additional details in respect of single total figure table (audited) continued
The performance measures and targets for the MIP for the year ended 31 December 2016 are detailed below:
Description
Weighting
Calculation
Targets
Earnings per share (EPS)
80%
→ Growth in diluted EPS.
→ Threshold:
Absolute total shareholder
return (TSR)
20%
Cash conversion (underpin)
N/A
Return on capital employed
(ROCE) (underpin)
N/A
Diluted EPS is stated before
exceptional costs, share-based
payments, costs relating to
the MIP and amortisation of
acquisition intangibles and is
adjusted for a normalised tax
charge from 1 January 2016
to 31 December 2016.
→ Base figure of 29.58p
to be used.
8% EPS growth leads to 20%
maximum contribution.
→ Maximum:
13% EPS growth leads to
100% maximum contribution.
→ Straight-line contribution
between 8% and 13% growth.
→ Growth in absolute
→ Threshold:
TSR from 1 January 2016
to 31 December 2016
(using an average period
of 30 days for both dates).
→ Starting share price is £4.47.
→ Cash inflow from operating
activities as a proportion
of operating profit before
acquisition intangible
amortisation measured
at 31 December 2016.
→ Operating profit before
acquisition intangible
amortisation and exceptional
costs/(total assets – current
liabilities less all balances
relating to bank borrowings
and overdrafts classified
within non-current liabilities)
at 31 December 2016.
10% TSR growth leads to 20%
maximum contribution.
→ Maximum:
15% TSR growth leads to 100%
maximum contribution.
→ Straight-line contribution
between 10% and 15% growth.
→ A threshold level of cash
conversion of 80% must
be achieved.
→ If this threshold level is not
achieved, 50% of any annual
contribution in relation to EPS
will be forfeited.
→ A threshold level of ROCE
of 10% must be achieved.
→ If this threshold level is not
achieved, 50% of any annual
contribution in relation to EPS
will be forfeited.
The actual performance achievement is summarised below:
Performance measures
EPS growth
TSR growth
Cash conversion (underpin)
ROCE (underpin)
Actual
5%
3%
82%
18%
% of target
satisfied
0%
0%
Yes
Yes
The Remuneration Committee was also satisfied that a minimum level of corporate performance had been exceeded and so no forfeiture
of the accumulated plan account was necessary.
Annual report and accounts 2016 73
Mears Group PLC
Corporate governance Annual remuneration report 2016 continued
Annual report on remuneration continued
Additional details in respect of single total figure table (audited) continued
The value of plan accounts following the contribution for the year is set out below:
2015 closing balance brought forward (shares)
2015 closing balance brought forward (£)1
2016 contribution (£)
% of salary
2016 plan account balance (£)
2016 plan account balance (shares)1
2016 account balance to be withdrawn in shares (£)
2016 account plan balance converted into deferred shares, vesting over 2017 and 2019 (shares)
D J Miles
207,998
948,469
—
—
948,469
207,998
474,235
103,999
A C M
Smith
138,665
632,313
—
—
632,313
138,665
316,157
69,333
A Long
113,453
517,347
—
—
517,347
113,453
258,674
56,727
1. Using share price as at 31 December 2016 = 456p.
As set out in the policy, it is proposed that, following the withdrawal of 50% of the 2016 plan account balance in shares, the remaining
balance will be converted into deferred shares, with vesting in annual instalments over 2017 to 2019. The Committee believes that the
change to the timings of payments and 100% use of shares will provide further alignment between Executive Directors and shareholders.
The deferred shares remain subject to continued employment and as such only the portion vesting each year will be included in the single
figure table.
Statement of Directors’ shareholding and share interests (audited)
Directors’ share interests are set out below:
Director
D J Miles
A C M Smith
A Long
R Holt
D L Hosein
M G Rogers
P F Dicks
G Davies
J Unwin
J Burt
R Irwin
Share interests
Conditional
unvested
Vested but
unexercised
Share
awards/
options
Options
Total
interests
held at
year end
103,999
69,333
56,727
443,748
164,729
248,666
69,333
149,684
56,727
150,000
— 150,000
—
—
—
— 40,000
—
— 39,541
—
2,500
—
—
—
—
—
—
—
—
—
—
—
Number of
beneficially
owned
shares
175,020
110,000
36,230
—
—
40,000
39,541
2,500
—
—
—
On 29 April 2016 the following Directors and connected persons exercised options over shares received pursuant to the Mears Group PLC
Share Plan (2013):
Date of
transaction
29 April 2016
29 April 2016
29 April 2016
Number
of options
exercised
and sold
203,367
135,578
110,927
Option
price
Sale price
per share
Gain on
exercise
1p per share
1p per share
1p per share
£4.00
£4.00
£4.00
811,434
540,956
442,599
Director
D J Miles
A C M Smith
A Long
74
Mears Group PLC
Annual report and accounts 2016
Corporate governance Annual report on remuneration continued
Shareholder dilution
In accordance with the Association of British Insurers’ guidelines, the Company can issue a maximum of 10% of its issued share capital
in a rolling ten-year period to employees under all its share plans. In addition, of this 10% the Company can issue 5% to satisfy awards
under discretionary or Executive plans. The Company operates all its share plans within these guidelines.
Performance graph and table (unaudited)
The graph below shows the Group’s performance, measured by TSR, compared with the constituents of the FTSE All-Share support
service sector over the last eight years. The Index is the most relevant to compare the Group’s performance against its peers.
£285
£240
£195
£150
£105
£60
Dec 08
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Mears
FTSE All-Share SS
FTSE AS
The table below shows the Chief Executive Officer’s remuneration package over the past eight years, together with incentive payout/
vesting as compared to the maximum opportunity.
Year
2016
2015
2014
2013
2012
2011
2010
2009
Single figure
of total
remuneration
(£’000)
Bonus
payout
(as %
maximum
opportunity)
Long-term
incentive
accrual
rate (as %
maximum
opportunity)
436
436
412
825
409
384
270
600
—
—
—
—
—
—
—
—
—
20%
35%
100%
—
—
—
—
—
Name
D J Miles
D J Miles
D J Miles
D J Miles
D J Miles
D J Miles
D J Miles
R Holt
R Holt
1,095
100%
Annual report and accounts 2016 75
Mears Group PLC
Corporate governance Annual remuneration report 2016 continued
Annual report on remuneration continued
Percentage change in Chief Executive Officer’s remuneration
The table below compares the percentage change in the salary of the Chief Executive Officer with that of the wider employee population.
Chief Executive Officer
Office salaries
Remuneration
Salary
entitlement
Benefits
Bonus/
incentives
5%
1%
0%
—
0%
—
Relative importance of spend on pay
The table below sets out the relative importance of spend on pay in the financial year and previous financial year compared with other
disbursements from profit.
Significant distributions
Total Directors’ pay
Profit distributed by way of dividend
Underlying profit before tax
Disbursements
from profit
in financial
year
2016
£’000
Disbursements
from profit
in previous
financial year
2015
£’000
1,530
11,483
40,062
1,858
10,445
36,757
%
change
1%
10%
9%
Statement of implementation of remuneration policy in the following financial year
Executive Directors
Salary
The salary entitlements for the forthcoming year are set out below:
Executive Director
D J Miles
A C M Smith
A Long
Pension
Details of pension contributions for the year ended 31 December 2016 are set out below:
Executive Director
D J Miles
A C M Smith
A Long
2017
£
386,817
257,912
211,019
2016
£
381,100
254,100
207,900
%
change
1.5%
1.5%
1.5%
Pension
15%
15%
15%
EIP
As set out in the policy table, the EIP is split into two parts: the deferred share award and the performance share award. Set out below
is the maximum opportunity of each part for the year ended 31 December 2017:
Part A – Deferred share award
(% of salary)
100%
Part B – Performance share award
(% of salary)
100%
76
Mears Group PLC
Annual report and accounts 2016
Corporate governance Statement of implementation of remuneration policy in the following financial year continued
Executive Directors continued
EIP continued
For the 2017 EIP, the performance share award threshold level of vesting is 20% for each measure. The measures and weightings are
set out below:
Condition
Earnings per share (EPS)
ROCE
EBITDA cash conversion
Other
Customer satisfaction
Health and safety
In setting these targets, the Committee is taking under consideration (amongst other items):
→ the Company’s business plan;
→ consensus forecasts for the Company; and
→ alignment with the Company’s business strategy.
Non-Executive Directors
The following table sets out the fee rates for the Non-Executive Directors:
Chairman fee
Base fee
Committee Chairman fee
Committee membership fee
Weighting
40%
40%
20%
Payout range
(threshold to
maximum opportunity)
20%–100%
20%–100%
20%–100%
20%–100%
20%–100%
2017
2016
250,000
50,000
15,000
5,000
—
45,000
—
—
%
change
N/A
11
N/A
N/A
It should be noted that the Chairman no longer receives any benefits from the date of the 2017 AGM. For 2016 the benefits amounted
to £95,000.
Role of the Committee and activities
The Committee determines the total individual remuneration packages of each Executive Director of the Group and certain other senior
employees (and any exit terms) and recommends to the Board the framework and broad policies of the Group in relation to Senior Executive
remuneration. The Committee determines the targets for all of the Group’s performance related remuneration and exercises the Board’s
powers in relation to all of the Group’s share and incentive plans.
There is a formal and transparent procedure for developing policy on Executive remuneration and for determining the remuneration
of individual Directors.
The Remuneration Committee is responsible for:
→ determining and agreeing with the Board the broad remuneration policy for:
→ the Chairman, the Executive Directors and senior management; and
→ the Executive Directors’ remuneration and other benefits and terms of employment, including performance related bonuses
and share options; and
→ approving the service agreements of each Executive Director, including termination arrangements.
No Director is involved in determining his/her own remuneration.
Annual report and accounts 2016 77
Mears Group PLC
Corporate governance Annual remuneration report 2016 continued
Statement of implementation of remuneration policy in the following financial year continued
Annual overview
The Committee has continued to work to build investor confidence with regard to its Executive remuneration policies and remains
committed to the following actions:
→ improving the level of openness and transparency in remuneration reporting through a detailed Annual Remuneration Report;
→ operating a structured incentive arrangement with clear financial performance targets for each year;
→ undertaking a regular review of the remuneration policies for Executive Directors and other Senior Executives within the Group
to ensure that they remain appropriate to retain and motivate such individuals;
→ considering pay policies within the Group as a whole when determining Executive Directors’ remuneration packages;
→ encouraging Executive Directors and Senior Executives to build up a meaningful shareholding in the Company to more closely align
the interests of shareholders and Executives; and
→ being kept fully aware and informed on developments and best practice in the field of remuneration and corporate governance from
external advisers, institutional shareholders and their representative bodies.
Notwithstanding the above, the Committee recognises that the success of the Group is dependent upon the efforts of key individuals
and that they should be fairly rewarded for their efforts and contributions in making Mears the success it is.
Advisers to the Committee
In 2016, the Committee continued to engage PwC and received wholly independent advice on Executive compensation. PwC is a member of
the Remuneration Consultants Group and complies with its code of conduct that sets out guidelines to ensure that its advice is independent
and free of undue influence. Fees paid to PwC in respect of these services in the year ended 31 December 2016 were £30,000.
Statement of voting at general meeting
The table below shows the historic voting outcomes in respect of the remuneration policy and Annual Remuneration Report.
Item
Votes
for
%
Votes
against
%
Votes
withheld
To approve the Directors’ Remuneration Report (2016)
84,285,932
97.924
1,740,944
2.023
45,779
To approve the remuneration policy (2014)
73,134,765
90.863
7,350,317
9.132
3,688
The total number of ordinary shares eligible to vote at the 2016 AGM was 102,526,212. Every shareholder has one vote for every ordinary
share held.
78
Mears Group PLC
Annual report and accounts 2016
Corporate governance Report of the Directors
The Directors present their report together with the consolidated
financial statements for the year ended 31 December 2016.
Principal activities
The principal activities of the Group are the provision of a range of
outsourced services to the public and private sectors. The principal
activity of the Company is to act as a holding company.
Appointment of Directors
Directors are appointed by ordinary resolution, or the existing
Directors may appoint a person as a Director to either fill a vacancy
or as an additional Director provided that the number of Directors
does not exceed the maximum permissible. Any person appointed
by the Directors must retire at the next AGM but will be eligible
for re-election at that meeting.
Business review
The Company is required to set out a fair review of the business of
the Group during the reporting period. The information that fulfils
this requirement can be found in the Strategic Report, Review of
Operations and Financial Review. The results of the Group can be
found within the Consolidated Income Statement. Information
required to be disclosed in respect of emissions and future
developments is included within the Strategic Report.
Dividend
The final dividend in respect of 2015 of 7.90p per share was paid
in July 2016. An interim dividend in respect of 2016 of 3.30p was
paid to shareholders in November 2016. The Directors recommend
a final dividend of 8.40p per share for payment on 4 July 2017 to
shareholders on the Register of Members on 16 June 2017. This has
not been included within the consolidated financial statements
as no obligation existed at 31 December 2016.
Corporate governance
Details of the Group’s corporate governance are set out on
pages 48 to 53.
Key performance indicators (KPIs)
We focus on a range of key indicators to assess our performance.
Our performance indicators are both financial and non-financial
and ensure that the Group targets its resources around its customers,
employees, operations and finance. Collectively they form an
integral part of the way that we manage the business to deliver
our strategic goals. Our primary performance indicators are
detailed on pages 14 to 17.
Directors
The present membership of the Board is set out with the
biographical detail on page 46.
In line with current practice, all of the Directors will retire and, being
eligible, offer themselves for re-election at the AGM in June 2017.
The beneficial interests of the Directors in the shares of the
Company at 31 December 2016 and 31 December 2015 are
detailed within the Remuneration Report on page 74.
The process governing the appointment and replacement of Directors
is detailed within the Report of the Nomination Committee on
pages 54 and 55.
Amendment to Articles of Association
The Company’s Articles of Association can be amended only by
a special resolution of the members, requiring a majority of not
less than 75% of such members voting in person or by proxy.
Share capital authorisations
The 2016 AGM held in June 2016 authorised:
→ the Directors to allot shares within defined limits. The Companies
Act 2006 requires directors to seek this authority and, following
changes to FSA rules and institutional guidelines, the authority
was limited to one third of the issued share capital, a total of
£340,000 plus an additional one third of issued share capital
of £340,000 that can only be used for a rights issue or similar
fund raising;
→ the Directors to issue shares for cash on a non pre-emptive
basis. This authority was limited to 10% of the issued share
capital of £104,000 and is required to facilitate technical
matters such as dealing with fractional entitlements or
possibly a small placing; and
→ the convening of general meetings (other than an AGM) on
14 days’ notice. This results from a European Union directive that
became effective on 3 August 2010 and will override Section 307
of the Companies Act 2006 where the requirement to give 21 days’
notice for certain meetings has been amended.
Further details of these authorisations are available in the notes
to the 2016 Notice of AGM. Shareholders are also referred to the
2017 Notice of AGM, which contains similar provisions in respect
of the Company’s equity share capital as detailed below.
AGM
The 2017 AGM will be held at the offices of Buchanan, 107 Cheapside,
London EC2V 6DN on 7 June 2017 at 9.30am and a formal Notice
of Meeting and Form of Proxy are enclosed. The ordinary business
to be conducted will include the re-appointment of all Directors.
The special business will comprise the following resolutions:
→ to authorise the Directors to allot shares within defined limits.
The Companies Act 2006 requires Directors to seek this authority
and, following changes to FSA rules and institutional guidelines,
the authority, as in previous years, will be limited to one third
of the issued share capital, plus an additional one third of issued
share capital that can only be used for a rights issue or similar
fund raising;
→ to authorise the Directors to issue shares for cash on a
non pre-emptive basis. This authority is limited to 10% of the
issued share capital and is required to facilitate technical
matters such as dealing with fractional entitlements or
possibly a small placing;
→ to authorise the convening of general meetings (other than an
AGM) on 14 days’ notice. This results from a European Union
directive that became effective on 3 August 2010 and will
override Section 307 of the Companies Act 2006 where the
requirement to give 21 days’ notice for certain meetings
has been amended; and
→ to approve the amended rules of the Mears All-Employee
Share Plan in the form produced to the meeting and the
Directors be authorised to do all things necessary in order
to adopt and carry the amended scheme into effect.
Annual report and accounts 2016 79
Mears Group PLC
Corporate governance Report of the Directors continued
Principal risks and uncertainties
Risk is an accepted part of doing business. The Group’s financial
risk management is based upon sound economic objectives and
good corporate practice. The Board has overall responsibility for
risk management and internal control within the context of achieving
the Group’s objectives. Our process for identifying and managing
risks is set out in more detail within the Corporate Governance
Statement. The key risks and mitigating factors are set out on
pages 18 to 23. Details of financial risk management and exposure
to price risk, credit risk and liquidity risk are given in note 19 on
pages 124 to 128.
Contracts of significance
The Group is party to significant contracts within each segment
of its business. The Directors do not consider that any one of those
contracts is essential in its own right to the continuation of the
Group’s activities.
Payment policy
The Company acts purely as a holding company and as such is
non-trading. Accordingly, no payment policy has been defined.
However, the policy for Group trading companies is to set the
terms of payment with suppliers when entering into a transaction
and to ensure suppliers are aware of these terms. Group trade
creditors during the year amounted to 61 days (2015: 57 days)
of average supplies for the year.
Capital structure
The Group is financed through both equity share capital and debt.
Details of changes to the Company’s share capital are given in
note 21 to the financial statements. The Company has a single
class of shares – ordinary 1p shares – with no right to any fixed
income and with each share carrying the right to one vote at the
general meetings of the Company. Under the Company’s Articles
of Association, holders of ordinary shares are entitled to participate
in any dividends pro-rata to their holding. The Board may propose
and pay interim dividends and recommend a final dividend for
approval by the shareholders at the AGM. A final dividend may
be declared by the shareholders in a general meeting by ordinary
resolution but such dividend cannot exceed the amount
recommended by the Board.
Substantial shareholdings
As at 28 February 2017 the Company has been notified of, or is
aware of, the shareholders holding 2% or more of the issued
share capital of the Company, as detailed in the table adjacent.
80
Mears Group PLC
Annual report and accounts 2016
Fund manager
Number
(m)
City
London
PrimeStone Capital
London
Majedie Asset Management
Bath
Heronbridge Investment Management
Frankfurt
Shareholder Value Management
London
Schroder Investment Management
London
Legal & General Investment Management
London
Franklin Templeton Investments
London
Columbia Threadneedle Investments
Edinburgh
Artemis Investment Management
Fidelity Management & Research
Boston
Invesco Perpetual Asset Management Henley-on-
Thames
London
London
London
London
BlackRock Inc
Montanaro Asset Management
Slater Investments
Close Asset Management
10.5
9.9
7.2
6.3
5.7
5.2
5.1
4.4
4.3
4.3
3.1
2.6
2.4
2.3
2.2
%
10.3
9.7
7.0
6.1
5.6
5.1
5.0
4.2
4.2
4.2
3.0
2.5
2.4
2.2
2.1
Disabled employees
Applications for employment by disabled persons are always fully
considered, bearing in mind the aptitudes of the applicant concerned.
In the event of members of staff becoming disabled, every effort
is made to ensure that their employment with the Group continues
and that appropriate training is arranged. It is the policy of the
Group that the training, career development and promotion of
disabled persons should, as far as possible, be identical to that
of other employees.
Employee information and consultation
The Group has received recognition under the ‘Investors in People’
award. The Group continues to involve its staff in the future
development of the business. Information is provided to employees
through a daily news email, a quarterly newsletter posted out to
all staff, the Group website and the intranet to ensure that employees
are kept well informed of the performance and objectives
of the Group.
CREST
CREST is the computerised system for the settlement of share
dealings on the London Stock Exchange. CREST reduces the amount
of documentation required and also makes the trading of shares
faster and more secure. CREST enables shares to be held in an
electronic form instead of the traditional share certificates. CREST
is voluntary and shareholders can keep their share certificates if
they wish. This may be preferable for shareholders who do not trade
in shares on a frequent basis.
Auditor
Grant Thornton UK LLP offers itself for re-appointment as auditor
in accordance with Section 489 of the Companies Act 2006.
By order of the Board
B Westran
Company Secretary
ben.westran@mearsgroup.co.uk
27 March 2017
Corporate governance Statement of Directors’ responsibilities
In respect of the Directors’ Report and financial statements
The Directors are responsible for preparing the Annual Report,
the Remuneration Report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare Group financial statements in accordance
with International Financial Reporting Standards (IFRS) as adopted
by the European Union and have elected to prepare the Company
financial statements in accordance with United Kingdom Generally
Accepted Accounting Practice including FRS 102 ‘The Financial
Reporting Standard Applicable in the UK and the Republic of Ireland’
(United Kingdom Accounting Standards and Applicable Law).
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 and profit or loss of the Group and the
Company for that period. In preparing these financial statements,
the Directors are required to:
→ select suitable accounting policies and then apply
them consistently;
→ make judgements and estimates that are reasonable and prudent;
→ state whether applicable accounting standards have 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.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group and
Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Group and the Company
and enable them to ensure that the financial statements and
Remuneration Report comply with the Companies Act 2006 and
Article 4 of the IAS Regulation. 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 confirm that:
→ so far as each Director is aware there is no relevant audit
information of which the Company’s auditor is unaware; and
→ the Directors have taken all the steps that they ought to have
taken as Directors in order to make themselves aware of any
relevant audit information and to establish that the auditor
is aware of that information.
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.
To the best of my knowledge:
→ the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the
consolidation taken as a whole; and
→ the Annual 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.
The Directors are responsible for preparing the Annual Report
in accordance with applicable law and regulations. The Board
considers the Annual Report and Accounts, taken as a whole,
as fair, balanced and understandable and that it provides the
information necessary for shareholders to assess the Company’s
performance, business model and strategy.
Going concern
We principally operate in robust defensive markets, Social Housing
and Care, where spend is largely non-discretionary and our contracts
tend to be long-term partnerships.
The Group had net debt of £12.4m at 31 December 2016. The core
debt required to satisfy the day-to-day requirements of the business
is in the region of £85m. This represents significant headroom
against the £140m unsecured revolving credit facility, with an
additional accordion mechanism allowing the facility to be
increased to a maximum of £200m, maturing in July 2020.
After reviewing the Group’s and Company’s budget for the
next financial year and longer-term plans, the Directors consider
that, as at the date of approving the financial statements, it is
appropriate to adopt the going concern basis in preparing the
financial statements.
On behalf of the Board
A C M Smith
Finance Director
andrew.smith@mearsgroup.co.uk
27 March 2017
Annual report and accounts 2016 81
Mears Group PLC
Corporate governance Independent auditor’s report
To the members of Mears Group PLC
Our opinion on the financial statements is unmodified
In our opinion:
→ the financial statements give a true and fair view of the
state of the Group’s and of the Parent Company’s affairs
as at 31 December 2016 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 applicable law and United
Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice) including FRS 102 ‘The Financial
Reporting Standard Applicable in the UK and Republic of
Ireland’; and
→ the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the Group financial statements, Article 4 of the
IAS Regulation.
Who we are reporting to
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.
What we have audited
Mears Group PLC’s financial statements for the year ended
31 December 2016 comprise the Group principal accounting
policies, the Consolidated Income Statement, the Consolidated
Statement of Comprehensive Income, the Consolidated Balance
Sheet, the Consolidated Cash Flow Statement, the Consolidated
Statement of Changes in Equity, the related Group notes, the
Company principal accounting policies, the Parent Company Balance
Sheet, the Parent Company Statement of Changes in Equity and
the related Company notes.
*
*
y
t
i
l
i
b
a
b
o
r
P
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 United Kingdom
Generally Accepted Accounting Practice including FRS 102
‘The Financial Reporting Standard Applicable in the UK
and Republic of Ireland’.
Overview of our audit approach
→ the key audit risks were identified as: revenue recognition and
contract accounting, goodwill impairment, and defined benefit
pension schemes;
→ overall Group materiality was set at £2.1m, which represents
4.8% of the Group’s earnings before interest, tax and
amortisation; and
→ we performed full scope audits at three companies and specific
audit procedures over certain balances and transactions at
six further companies to gain sufficient, appropriate audit
evidence over all material balances at both divisional and
Group levels.
Our assessment of risk
At the outset of our audit we identified the risks and matters that
would need to be considered in dispensing our duties and then
updated them as the audit progressed. These were first presented
to the Audit Committee on 2 December 2015 and then as part of
our concluding procedures on 3 March 2016. The following graph
illustrates the risks identified by us and our assessment of the
impact of them on our audit approach.
Revenue recognition
and contract accounting
Financial instruments
and hedging
Defined benefit
pension schemes
Goodwill
impairment
Fraud and
whistleblowing
Going
concern
Compliance
with legislation
Financial statements,
disclosure and
compliance
Valuation of goodwill
and intangibles
Contract
costs
Taxation
Control over
investees
Capitalisation
of costs
Employee
remuneration
Impact*
* Impact that the identified risk would have on the Group’s financial statements.
** Probability that the identified risk could occur during the year if not
properly controlled.
Key
Significant risks
Other risks
Other areas of focus
82
Mears Group PLC
Annual report and accounts 2016
Corporate governance Our assessment of risk continued
In arriving at our opinions set out in this report, we highlight the following risks that, in our judgement, had the greatest effect on our audit:
Audit risk
How we responded to the risk
Revenue recognition and contract accounting
Our audit work included but was not restricted to:
Refer to pages 92 to 94.
Revenue is recognised throughout the Group as the
fair value of consideration receivable in respect of the
performance of contracts and the provision of services.
Provision is made for expected contract losses as soon
as they are foreseen.
Determining the amount of revenue to be recognised,
requires management to make significant judgements
and estimates as to the stage of completion, the costs
to complete, the impact of any changes in scope of work
and the recoverability of work-in-progress and
receivables balances.
We therefore identified revenue recognition
and contract accounting as a significant risk.
→ an evaluation of the methodology by which the Directors determine the
amount of revenue and profit to recognise based on each type of contract
as disclosed in the accounting policies. This included assessing whether
the accounting policies adopted by the Directors are in accordance with
the requirements of International Accounting Standard (IAS) 11 “Construction
Contracts”, IAS 18 “Revenue” and IFRIC 12 “Service Concession
Arrangements”, and whether management accounted for revenue
in accordance with the accounting policies;
→ testing key controls, where applicable, over the recognition of revenue
and the allocation of costs to the contracts, including invoicing, cost
approval and cost allocation;
→ judgementally selecting contracts by reference to materiality and other
risk factors including loss making contracts and contracts with significant
aged work-in-progress and receivables balances;
→ selecting a samples of contract balances, accrued income and revenue
transactions, including contract invoicing, care invoicing and rental and
rebates income, to ensure coverage across the Group;
→ assessing, for the selected items and samples, whether the revenue and
profit recognised are in accordance with the Group’s accounting policies
by agreeing inputs to contract terms, re-performing management’s
calculations and assessing management’s assumptions and assertions
underpinning their forecasts for contracts’ future performance by reference
to supporting documentation, such as contract KPIs, historical performance
against forecasts and discussions with key operations personnel;
→ reviewing contracts that are loss making or at risk of incurring
future losses during the remaining life of the contract and challenging
management’s assumptions and assertions relating to the future results
of those contracts by reference to supporting evidence such as management’s
plans to return the contract to profit, forecast models, previous history
of turning around loss making contracts and correspondence with clients
where appropriate. We also visited a number of sites during the year in
order to further understand the operations; and
→ investigating the recoverability of receivables, accrued income and
work-in-progress balances by reference to post balance sheet cash
collection, certifications performed by the Group or external Quantity
Surveyors, reviewing the quality of supporting evidence, including internal
and external legal opinions, expert valuer reports and correspondence
with customers, and examining the Group’s historical experience of recovery.
Annual report and accounts 2016 83
Mears Group PLC
Corporate governance Independent auditor’s report continued
To the members of Mears Group PLC
Our assessment of risk continued
Audit risk
How we responded to the risk
Goodwill impairment
Our audit work included but was not restricted to:
Refer to pages 90 and 91.
The Directors are required to make an annual assessment
to determine whether the carrying value of goodwill of
£193.7m is impaired. Past experience has indicated that
there is significant headroom in the goodwill balance
relating to the Housing division cash-generating unit (CGU)
but limited headroom in the goodwill balance relating to
the Care division CGU, which accounts for £99.6m of the
carried goodwill.
→ obtaining management’s discounted cash flow forecast for the
Care division used in the impairment review and comparing it to
our understanding of the division and recalculating the arithmetical
accuracy of those calculations;
→ testing and challenging the assumptions utilised in the impairment
models, including the ability for the Group to recruit and retain the
appropriate levels of carers, the rate at which the Group can pass
National Living Wage increases on to customers, the rate at which
the Group can increase its contracted hours and the discount rates
and terminal values used;
The process for assessing whether an impairment
exists under IAS 36 ‘Impairment of Assets’ is complex.
The process of determining the value in use, through
forecasting cash flows related to CGUs and the
determination of the appropriate discount rate
and other assumptions to be applied, can be highly
judgemental and can significantly impact the results
of the impairment review.
→ we involved our specialist valuation team to consider whether the
market level assumptions used were appropriate to the Care division’s
circumstances and where possible, benchmarked these assumptions
against available industry data; and
→ testing the accuracy of management’s forecasting through a comparison
of budget to actual data and historical variance trends and reviewing the
cash flows for exceptional or unusual items or assumptions.
We therefore identified the impairment review of
goodwill undertaken by management in relation
to the Care division as a significant risk.
Defined benefit pensions schemes
Our audit work included but was not restricted to:
Refer to page 95.
The Group operates two defined benefit pension
schemes and is admitted body of a number of other
defined benefit pension schemes. At 31 December 2016
the defined benefit pension schemes had a combined
net surplus of £24.2m, of which £8.5m is recognised in
the financial statements as recoverable. The gross value
of the pension assets and obligations which form the net
surplus amounted to £572.2m and £548.0m respectively.
→ utilising the expertise of our actuarial specialists in order to review
the appropriateness of the assumptions used in the calculation of the
obligations and testing the appropriateness of the valuation methodologies
and their inherent actuarial assumptions by benchmarking key assumptions
such as discount rates, wages and salary growth rates and mortality
rates to available market data;
→ testing the accuracy of underlying membership data utilised by the
Group’s actuaries for the purpose of calculating the scheme liabilities by
selecting a sample of employees and agreeing key standing data such as
date of birth, gender and date of membership to underlying records;
The measurement of the obligations in accordance with
IAS 19 (revised) “Employee Benefits” involves significant
judgement and their valuation is subject to complex actuarial
assumptions. Small variations in those actuarial
assumptions can lead to a materially different value
of pension liabilities being recognised within the Group
financial statements.
→ directly confirming the existence and valuation of pension scheme
assets with asset managers for Group schemes and analysing the
movements on assets for a sample of admitted body schemes; and
→ considering the appropriateness of the recognition of any scheme
surpluses by reviewing scheme rules to assess whether the Group will
benefit from any future refund or reduction in future contributions as
a result of such surpluses.
We therefore identified the valuation of the defined
benefit pension schemes obligations as a significant risk.
84
Mears Group PLC
Annual report and accounts 2016
Corporate governance Our application of materiality and an overview
of the scope of our audit
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 in determining the nature, timing
and extent of our audit work and in evaluating the results of that work.
We determined materiality for the audit of the Group financial
statements as a whole to be £2.1m (2015: £1.7m), which is 4.80%
(2015: 4.75%) of the Group’s earnings before, interest, tax and
amortisation. This benchmark is considered the most appropriate
because it is the key financial measure by which management
assess the performance of the Group and is used to report to
investors on the financial performance of the Group.
Materiality for the current year is higher than the level that we
determined for the year ended 31 December 2015 as a result
of higher earnings before, interest, tax and amortisation of the
Group in the year.
We use a different level of materiality, performance materiality,
to drive the extent of our testing and this was set at 75% of financial
statement materiality for the audit of the Group financial statements.
We also determine a lower level of specific materiality for certain
areas such as Directors’ remuneration and related party transactions.
We determined the threshold at which we will communicate
misstatements to the Audit Committee to be £105,000. In addition
we communicate misstatements below that threshold that, in our
view, warrant reporting on qualitative grounds.
Overview of the scope of our audit
A description of the generic scope of an audit of financial statements
is provided on the Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.
We conducted our audit in accordance with International Standards
on Auditing (ISAs) (UK and Ireland). Our responsibilities under those
standards are further described in the ‘Responsibilities for the
financial statements and the audit’ section of our report. We believe
that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.
We are independent of the Group in accordance with the Auditing
Practices Board’s Ethical Standards for Auditors, and we have
fulfilled our other ethical responsibilities in accordance with
those Ethical Standards.
Our audit approach was based on a thorough understanding
of the Group’s business and is risk-based. In order to address the
risks described above as identified during our planning procedures,
we performed a full scope audit of the financial statements of the
Parent Company, Mears Group PLC, and of the Group’s operations
throughout the United Kingdom.
The companies of the Group were evaluated by the Group audit
team based on a measure of materiality considered as a percentage
of total Group assets, revenues and profit before taxes, to assess
the significance of the component and to determine the planned
audit response. For those components that we determined to be
significant components, either a full scope approach or specific
procedures in relation to specific balances and transactions were
carried out. This approach was determined based on their relative
materiality to the Group and our assessment of audit risk.
The Group’s companies vary significantly in size. We performed
full scope audits at three companies. Specific audit procedures
over certain balances and transactions were performed on a
further six companies, to give appropriate coverage of all material
balances at both divisional and Group levels. Together, the reporting
units subject to audit procedures, being full scope and specific
procedures, were responsible for 90% of the Group’s revenues,
89% of the Group’s earnings before, interest, tax and amortisation
and 88% of Group’s total assets.
For significant components requiring a full scope approach an
interim visit was conducted before the year end to undertake
substantive procedures in advance of the final visit and to evaluate
the Group’s internal control environment including its IT systems.
We then evaluated and tested controls over the financial reporting
systems identified as part of our risk assessment, reviewed the
accounts production process and addressed critical accounting
matters. We sought wherever possible, to rely on the effectiveness
of the Group’s internal controls which allows us to reduce substantive
testing. We then undertook substantive testing on significant
transactions and material account balances, including the
procedures outlined above in relation to the key risks. For the
components where specific procedures were carried out a similar
testing strategy was applied, focused on the significant
transactions and material account balances.
The remaining non-significant components of the Group were
subject to analytical procedures over their financial performance
and position after taking into account the risks identified above
and the significance of the component to the Group. The charts
on page 86 summarise the extent of our audit approach.
Annual report and accounts 2016 85
Mears Group PLC
Corporate governance Independent auditor’s report continued
To the members of Mears Group PLC
24%
10% 76+
66+
13% 59+
Total assets
Revenue
EBITA
66%
59%
29%
76%
12%
11%
Full scope
Specific procedures
Analytical
Full scope
Specific procedures
Analytical
Full scope
Specific procedures
Analytical
Other reporting required by regulations
Our opinion on other matters prescribed by the Companies Act
2006 is unmodified
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006.
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
Matters on which we are required to report
by exception
Under the Companies Act 2006 we are required to report
to you if, in our opinion:
→ adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
→ the Parent Company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
→ certain disclosures of Directors’ remuneration specified by law
are not made; or
→ the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.
→ we have not received all the information and explanations we
require for our audit.
Matter on which we are required to report
under the Companies Act
In the light of the knowledge and understanding of the Group and
the Parent Company and its environment obtained in the course
of the audit, we have not identified material misstatements in the
Strategic Report or the Directors’ Report.
Under the Listing Rules, we are required to review:
→ the Directors’ statements in relation to going concern
and longer-term viability, set out on pages 22 and 23
respectively; and
→ the part of the Corporate Governance Statement relating to
the Company’s compliance with the provisions of the UK Corporate
Governance Code specified for our review.
86
Mears Group PLC
Annual report and accounts 2016
Corporate governance24
+
10
+
z
11
+
13
+
z
29
+
12
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z
Responsibilities for the financial statements
and the audit
What the Directors are responsible for:
As explained more fully in the Statement of Directors’ responsibilities
set out on page 81, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give
a true and fair view.
What we are responsible for:
Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and ISAs (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
Simon Lowe
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
27 March 2017
Matters on which we are required to report
by exception continued
Under the ISAs (UK and Ireland), we are required to report
to you if, in our opinion, information in the annual report is:
→ materially inconsistent with the information in the audited
financial statements; or
→ apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired
in the course of performing our audit; or
→ otherwise misleading.
In particular, we are required to report to you if:
→ we have identified any inconsistencies between our
knowledge acquired during the audit and the Directors’
statement that they consider the Annual Report is fair,
balanced and understandable; or
→ the Annual Report does not appropriately disclose those
matters that were communicated to the Audit Committee
which we consider should have been disclosed.
We have nothing to report in respect of any of the above matters.
We also confirm that we do not have anything material to add or
to draw attention to in relation to:
→ the Directors’ confirmation in the annual report that they have
carried out a robust assessment of the principal risks facing
the Group including those that would threaten its business
model, future performance, solvency or liquidity;
→ the disclosures in the Annual Report that describe those risks
and explain how they are being managed or mitigated;
→ the Directors’ statement in the financial statements about
whether they have 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 ability
to continue to do so over a period of at least twelve months
from the date of approval of the financial statements; and
→ the Directors’ explanation in the Annual Report 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.
Annual report and accounts 2016 87
Mears Group PLC
Corporate governance Principal accounting policies – Group
Basis of preparation
The consolidated financial statements of the Group have been prepared in accordance with IFRS as adopted by the European Union
and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS and therefore the Group financial
statements comply with Article 4 of the EU International Accounting Standards Regulations. The financial statements are prepared
under the historical cost convention as modified by the revaluation of derivative financial instruments and share-based payments.
The accounting policies remain unchanged from the previous year except for the modification of a number of standards with effect from
1 January 2016. Changes include Disclosure Initiative (Amendments to IAS 1), Accounting for Acquisitions of Interests in Joint Operations
(Amendments to IFRS 11), Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS
10 and IAS 28), Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) and Annual
Improvements 2012–2014 (which made amendments to IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, IFRS 7
‘Financial Instruments: Disclosures’, IAS 19 ‘Employee Benefits’ and IAS 34 ‘Interim Financial Reporting’). The adoption of these
amendments had no material effect on the Group’s financial statements.
The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and
judgements that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the year. Although these estimates are based on the Directors’ best knowledge of the amounts, actual
results may ultimately differ from those estimates. The most significant estimates made by the Directors in these financial statements
are set out in ‘Use of judgements and estimates’ on pages 98 and 99.
Mears Group PLC is incorporated and domiciled in England and Wales (registration number 3232863). Its registered office and principal
place of business is 1390 Montpellier Court, Gloucester Business Park, Brockworth, Gloucester GL3 4AH. Mears Group PLC’s shares
are listed on the London Stock Exchange.
The Directors consider that as at the date of approving the financial statements, there is a reasonable expectation that the Group
and the Company have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors
continue to adopt the going concern basis in preparing the financial statements. The Directors have discussed the principal risks
and uncertainties of the business in the Risk Management section on pages 18 to 23.
Basis of consolidation
The Consolidated Balance Sheet includes the assets and liabilities of the Company and its subsidiaries and is made up to 31 December 2016.
Entities over which the Group has the ability to exercise control over financial and operating policies are accounted for as subsidiaries.
Control is achieved where the Company has existing rights that give it the current ability to direct the activities that affect the Company’s
returns and exposure or rights to variable returns from the entity. Interests acquired in entities are consolidated from the effective date
of acquisition and interests sold are consolidated up to the date of disposal.
All significant intercompany transactions and balances between Group enterprises, including unrealised profits arising from intra-group
transactions, are eliminated on consolidation; no profit is taken on sales between Group companies.
Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the Group’s equity therein.
Non-controlling interests consist of the amount of those interests at the date of the original business combination and the non-controlling
shareholders’ share of changes in equity since the date of the combination. Total comprehensive income is attributed to non-controlling
interests even if this results in the non-controlling interest having a deficit balance.
A joint venture is a joint arrangement whereby the parties that have joint control have the rights to the net assets of the arrangement.
Investments in joint ventures are accounted for using the equity method of accounting. Under this method, the Group’s share of
post-acquisition profits or losses is recognised in the Consolidated Income Statement; the cost of the investment in a given joint
venture, together with the Group’s share of that entity’s post-acquisition changes to shareholders’ funds, is included in investments
within the Consolidated Balance Sheet.
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Annual report and accounts 2016
Financial statements Business combinations
Business combinations are accounted for using the acquisition method. The acquisition method involves the recognition at fair value
of all identifiable assets and liabilities, including contingent liabilities of the subsidiary at the acquisition date, regardless of whether or
not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities
of the subsidiary are included in the Consolidated Balance Sheet at their fair values, which are also used as the bases for subsequent
measurement in accordance with the Group accounting policies. Goodwill is stated after separating out identifiable intangible assets.
Goodwill represents the excess of acquisition cost over the fair value of the Group’s share of the identifiable net assets of the acquired
subsidiary at the date of acquisition.
Where applicable the consideration for an acquisition includes any assets or liabilities arising from a contingent consideration arrangement,
measured at fair value at the acquisition date. Subsequent changes in such fair values are adjusted against the cost of acquisition
where they result from additional information obtained up to one year from the acquisition date about facts and circumstances that
existed at the acquisition date. All other subsequent changes in the fair value of contingent consideration classified as an asset or
liability are recognised in accordance with IAS 39 in the Consolidated Income Statement.
Costs relating to acquisitions in the year have been expensed.
For transactions with non-controlling parties that do not result in a change of control, the difference between the fair value
of the consideration paid and the amount by which the non-controlling interest is adjusted is recognised in equity.
Any business combinations prior to 1 January 2010 were accounted for in accordance with the standards in place at the time, which
differ in the following respects: transaction costs directly attributable to the acquisition formed part of the acquisition costs; contingent
consideration was recognised if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a
reliable estimate was determinable; and subsequent adjustments to the contingent consideration were recognised as part of goodwill.
Property, plant and equipment
Items of property, plant and equipment are stated at historical cost, net of depreciation. Historical cost includes expenditure that is
directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a
separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow into the Group
and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Income Statement during the
financial period in which they are incurred.
Freehold land is not depreciated. Depreciation on other assets is calculated to write down the cost less estimated residual value over
their estimated useful economic lives. The rates generally applicable are:
Freehold buildings
Leasehold improvements
Plant and machinery
–
–
–
2% p.a., straight line
over the period of the lease, straight line
25% p.a., reducing balance
Fixtures, fittings and equipment –
25% p.a., reducing balance
Motor vehicles
–
25% p.a., reducing balance
Residual values are reviewed annually and updated if appropriate. The carrying value is reviewed for impairment in the period if events
or changes in circumstances indicate the carrying value may not be recoverable. An asset’s carrying value is written down immediately
to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within
administrative expenses in the Income Statement.
Annual report and accounts 2016 89
Mears Group PLC
Financial statements
Principal accounting policies – Group continued
Intangible assets
In accordance with IFRS 3 (Revised) ‘Business Combinations’, an intangible asset acquired in a business combination is deemed to have
a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the
probability that the future economic benefits embodied in the asset will flow to the Group. Where an intangible asset might be separable,
but only together with a related tangible or intangible asset, the group of assets is recognised as a single asset separately from goodwill
where the individual fair values of the assets in the Group are not reliably measurable. Where the individual fair values of the complementary
assets are reliably measurable, the Group recognises them as a single asset provided the individual assets have similar useful lives.
Intangible assets are amortised over the useful economic life of those assets.
Development costs incurred on software development are capitalised when all the following conditions are satisfied:
→ completion of the software module is technically feasible so that it will be available for use;
→ the Group intends to complete the development of the module and use it;
→ the software will be used in generating probable future economic benefits;
→ there are adequate technical, financial and other resources to complete the development and to use the software; and
→ the expenditure attributable to the software during its development can be measured reliably.
Costs incurred making intellectual property available for use (including any associated borrowing costs) are capitalised when
all of the following conditions are satisfied:
→ completion of the data set is technically feasible so that it will be available for use;
→ the Group intends to complete the preparation of the data and use it;
→ the data will be used in generating probable future economic benefits;
→ there are adequate technical, financial and other resources to complete the data set and to use it; and
→ the expenditure attributable to the intellectual property during its development can be measured reliably.
Development costs not meeting the criteria for capitalisation are expensed as incurred. Careful judgement by management is applied
when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success
of any development is uncertain and may be subject to future technical problems at the time of recognition. Judgements are based on
the information available at each balance sheet date. In addition, all internal activities related to the research and development of new
software are continually monitored by management.
The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare
the asset to be capable of operating in the manner intended by management. Directly attributable costs include employee costs
incurred on software development.
Amortisation commences upon completion of the asset and is shown within other administrative expenses. Until the asset is available
for use on completion of the project, the assets are subject to impairment testing only. Development expenditure is amortised over the
period expected to benefit.
The identifiable intangible assets and associated periods of amortisation are as follows:
Order book
Client relationships
Development expenditure
Intellectual property
–
–
–
–
over the period of the order book, typically three years
over the period expected to benefit, typically five years
20 to 25% p.a., straight line
over the period of usefulness of the intellectual property, typically five years
Goodwill
Goodwill arises on the acquisition of subsidiaries and represents any excess of the cost of the acquired entity over the Group’s interest
in the fair value of the entity’s identifiable assets and liabilities acquired and is capitalised as a separate item. Goodwill is recognised
as an intangible asset.
Under the business combinations exemption of IFRS 1, goodwill previously written off directly to reserves under UK GAAP is not
recycled to the Income Statement on calculating a gain or loss on disposal.
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Annual report and accounts 2016
Financial statements
Impairment
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash
flows: cash-generating units (CGUs). As a result, some assets are tested individually for impairment and some are tested at CGU level.
Goodwill is allocated to those CGUs that are expected to benefit from synergies of the related business combination and represent the
lowest level within the Group at which management monitors the related cash flows.
Goodwill or CGUs that include goodwill and those intangible assets not yet available for use are tested for impairment at least annually.
All other individual assets or CGUs are tested for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.
An impairment loss is recognised in the Income Statement for the amount by which the asset or CGU’s carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value in use
based on an internal discounted cash flow evaluation. Impairment losses recognised for CGUs, to which goodwill has been allocated,
are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro-rata to the other assets in the
CGU. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously
recognised may no longer exist.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is the actual purchase price of materials.
Work in progress
Work in progress is included in inventories after deducting any foreseeable losses and payments on account not matched with revenue.
Work in progress represents costs incurred on contracts that cannot be matched with contract work accounted for as revenue. Work in
progress is stated at the lower of cost and net realisable value. Cost comprises materials, direct labour and any subcontracted work
that has been incurred in bringing the inventories and work in progress to their present location and condition.
Amounts recoverable on contracts
Amounts recoverable on contracts are included in trade and other receivables and represent revenue recognised in excess of payments
on account.
Accounting for taxes
Income tax comprises current and deferred taxation.
Current tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities that are unpaid at the balance
sheet date. They are calculated according to the tax rates and tax laws applicable to the accounting periods to which they relate, based
on the taxable profit for the year.
Where an item of income or expense is recognised in the Income Statement, any related tax generated is recognised as a component
of tax expense in the Income Statement. Where an item is recognised directly to equity or presented within the Consolidated Statement
of Comprehensive Income, any related tax generated is treated similarly.
Deferred taxation is the tax expected to be repayable or recoverable on differences between the carrying amounts of assets and
liabilities in the financial statements and corresponding tax bases used in the computation of taxable profit and is accounted for using
the balance sheet liability method.
Deferred taxation liabilities are generally recognised on all taxable temporary differences in full with no discounting. Deferred taxation
assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences
can be utilised. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or
liability, unless the related transaction is a business combination or affects tax or accounting profit.
Deferred taxation is calculated using the tax rates and laws that are expected to apply in the period when the liability is settled or the
asset is realised, provided they are enacted or substantively enacted at the balance sheet date. The carrying value of deferred taxation
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 against which taxable temporary differences can be utilised. Deferred tax is charged or credited to either the Consolidated
Income Statement, the Consolidated Statement of Comprehensive Income or equity to the extent that it relates to items charged or
credited. Deferred tax relating to items charged or credited directly to equity is also credited or charged to equity.
Annual report and accounts 2016 91
Mears Group PLC
Financial statements Principal accounting policies – Group continued
Revenue
Revenue is measured in accordance with IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’ at the fair value of the consideration
received or receivable, for goods and services provided in the normal course of business, net of rebates and discounts and after
eliminating sales within the Group.
Housing
Revenue is recognised when the outcome of a job or contract can be estimated reliably; revenue associated with the transaction
is recognised by reference to the stage of completion of work at the balance sheet date. The outcome of the transaction is deemed
to be able to be estimated reliably when all the following conditions are satisfied:
→ the amount of revenue can be measured reliably;
→ it is probable that the economic benefits associated with the transaction will flow to the entity;
→ the stage of completion of the transaction at the balance sheet date can be measured reliably; and
→ the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
Whilst all Housing contracts can fit within the guidelines laid down for revenue recognition as detailed above, the alternative
contractual pricing mechanisms do result in different methods of assessing the stage of completion. The Group has therefore
recognised revenue dependent on the nature of transactions in line with IAS 18.
There are some contracts where we are entitled to a fee to reimburse the costs relating to a new contract start-up. This fee is sometimes
paid on commencement or paid in instalments over an extended period. Where the contractual entitlement to this income crystallises upon
commencement, the revenue is recognised. All costs relating to pre-commencement and mobilisation are written off as they are incurred.
There are numerous contractual pricing mechanisms but one can broadly divide these into five types.
Schedule of rates (SOR) contracts
There is an element of SOR in the majority of contracts. At tender stage we enter a price for each of the numerous tasks carried out in
respect of property maintenance. Typically we price for uplift or a discount against a pre-priced schedule. This price will, in some cases,
be an all-encompassing price for the cost of direct works, the local site overhead, central overhead and profit contribution. In other instances,
the SOR tendered may only recover direct works with an alternative mechanism to recover the other elements. Wherever possible, we
seek to identify all works tickets received individually and capture costs and billing at the individual work ticket level. In so doing, this
allows revenue to be recognised with a high degree of accuracy. Typically, reactive maintenance works are invoiced within a month of
completion; hence, the majority of revenue recognised has already been valued at the individual work ticket level and the significant
majority has been subsequently settled. The only element of revenue or profit recognition that requires judgement is against those
jobs that are part complete or those completed works that have not been subject to a final valuation.
For part completed works, consideration needs to be given as to whether the Group will recover the transaction costs incurred.
Whether the outcome of the transaction can be estimated reliably needs to be considered contract by contract based on historic
outcomes and knowledge of any events that may affect future job profitability. Where the outcome of the transaction cannot be estimated
reliably, revenue is recognised only to the extent that the costs incurred are anticipated to be recovered. Where the outcome of the
transaction can be estimated reliably, an element of anticipated profit is recognised within revenue to the extent that historic outcomes
adjusted for knowledge of any events that may affect future job profitability support such recognition.
For completed but not yet priced works, the outcome of the individual valued work tickets is not reviewed individually for the purposes
of profit and revenue recognition. However, given the high volume of historical data to provide an accurate indication of underlying
contract margin at a particular site, the Group considers that the application of an anticipated profit margin on cost to all completed
and unbilled works produces a reliable measure.
For completed and priced works, the likely outcome for the individual work ticket can be determined individually for the purposes of
profit and revenue recognition. The Group considers that the recognition of the anticipated profit for the individual job within revenue
is appropriate.
Full provision is made in respect of any job if a future loss is foreseen.
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Annual report and accounts 2016
Financial statements Revenue continued
Housing continued
Open book contracts
Typically the open book element of contracts relates to the local site overhead. A priced overhead model is usually provided to a client
at tender stage and the client pays the Group a fixed sum for maintaining this local site. This is typically an agreed fixed price. Revenue is
recognised in line with cost incurred and similarly the attributable profit recognised against that cost.
Any over or underspends are typically at the risk of the Group. The actual overhead spend is often subject to an open book review which
is then used as the basis for agreeing future pricing.
On the rare occasions that a contract does recover costs under a pure ‘cost plus’ arrangement, revenue is recognised in line with cost
incurred and similarly the attributable profit recognised against that cost.
Full provision is made in respect of any contract if a future loss is foreseen.
Lump sum contracts
This type of contract is becoming more commonplace. To avoid the onerous burden of administering a high volume, low value activity,
the pricing mechanism is reduced to either a price per ticket or a price per property. Historically, many gas servicing and breakdown
contracts have been procured on a lump sum basis. However, it is now becoming increasingly common within the reactive maintenance
environment. There is typically an exclusions list for works that are not considered repairs and not deemed to fall within the lump sum
price. It is normal for this excluded element of the works to be billed under an SOR arrangement.
For practical purposes, in the majority of lump sum contracts, revenue is recognised on a straight-line basis over the contract term.
There is not a material impact of seasonality in a client’s reactive maintenance spend (in terms of either volume or value of orders
received). In terms of the lump sum element of the contract, the revenue is split evenly across the twelve-monthly reporting periods.
No element of revenue is either advanced or deferred.
There are a small number of lump sum contracts where recognising revenue on a straight-line basis would be inappropriate. These are
contracts where the phasing of the works over the contract term varies materially over the period of the contract and there is a mismatch
between the delivery of works and the timing of invoicing against those works. For these contracts, the Group has historically reverted
to recognising revenue based on the proportion of costs incurred to date compared with the estimated total costs of the contract.
Full provision is made in respect of any contract if a future loss is foreseen.
Rental income
Rental income relating to Housing Management activities is recognised in the Income Statement on a straight-line basis over the term
of the lease.
Where initial costs are required to make good the housing to perform Housing Management activities, a straight-line basis of revenue
recognition would not be appropriate. Where there are initial costs, revenue is recognised based on the proportion of costs incurred to
date compared with the estimated total costs of the contract. Full provision is made in respect of any contract if a future loss is foreseen.
Construction contracts
Revenue reflects the contract activity during the year and is measured at the fair value of consideration received or receivable. When
the outcome can be assessed reliably, contract revenue and associated costs are recognised as revenue and expenses respectively by
reference to the stage of completion of the contract activity at the balance sheet date. The stage of completion of the contract at the
balance sheet date is usually assessed by comparing the proportion of costs incurred to estimated total contract costs. Where this is
not representative, contract milestones are used as a basis of assessing the stage of completion. Where the outcome of a construction
contract cannot be estimated reliably, revenue is recognised only to the extent that it is probable that contract costs incurred will be
recoverable. Contract costs are recognised as an expense in the period in which they are incurred.
In the case of a fixed price contract, the outcome of a construction contract is deemed to be estimated reliably when all the following
conditions are satisfied:
→ it is probable that economic benefits associated with the contract will flow to the Group;
→ both the contract costs to complete the contract and the stage of completion at the balance sheet date can be measured reliably; and
→ the contract costs attributable to the contract can be clearly identified and measured reliably so that actual contract costs incurred
can be compared with prior estimates.
Annual report and accounts 2016 93
Mears Group PLC
Financial statements Principal accounting policies – Group continued
Revenue continued
Housing continued
Construction contracts continued
The gross amount due from customers for contract work is presented as an asset for all contracts in progress for which costs incurred,
plus recognised profits (less recognised losses), exceed progress billings. The gross amount due to customers for contract work is presented
as a liability for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less losses).
Full provision is made for losses on all contracts in the year in which the future loss is first foreseen.
Care
Revenue is recognised when the actual care has been delivered and is generally based on a price per time period of care delivered.
Revenue relating to care delivered and not invoiced is accrued and disclosed under trade and other receivables as amounts recoverable
on contracts. Certain ‘block’ contracts guarantee a certain level of revenue. Revenue attributable to any unused capacity under block
contracts, where the Group is able to invoice for contracted services not provided, is recognised when the recovery of income is
considered virtually certain. There is minimal scope for judgement based on the care process.
The Group utilises rostering systems to manage care. These systems allow for planning a rota for each staff member, together with the
corresponding pay and bill rates for the particular service type, length of service and time of delivery. These results are very accurate in
the calculation of billable time, income and corresponding employee pay for a particular contract, branch or region.
Accrued income is determined by applying an average historical billing rate to the number of unbilled hours delivered at the balance
sheet date. Variances are reviewed in the following month once actual billing is known. The rostering systems allow unbilled hours to be
calculated based on planned, rostered and actual visits along with the corresponding pay and bill rates for the particular service type,
length of service and time of delivery. These results are very accurate in the calculation of billable time, income and corresponding
employee pay for a particular contract, branch or region.
Segment reporting
Segment information is presented in respect of the Group’s operating segments based upon the format that the Group reports
to its chief operating decision makers.
The Group considers that the chief operating decision makers are the Executive Directors and Senior Executives of the business.
Exceptional costs
Exceptional costs are disclosed on the face of the Consolidated Income Statement where these are material and considered necessary
to explain the underlying financial performance of the Group. They are either one-off in nature or necessary elements of expenditure
to derive future benefits for the Group which have not been capitalised in the Consolidated Balance Sheet.
Costs of restructure are only considered to be exceptional where the restructure is transformational and the resultant cost is significant.
Acquisition costs are only considered to be exceptional where the acquisition and the resultant cost are significant.
Employee benefits
Retirement benefit obligations
The Group operates both defined benefit and defined contribution pension schemes as follows:
i) Defined contribution pensions
A defined contribution plan is a pension plan under which the Group pays fixed contributions into an independent entity.
The Group has no legal obligations to pay further contributions after payment of the fixed contribution.
The contributions recognised in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be
recognised if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally
of a short-term nature.
The assets of the schemes are held separately from those of the Group in an independently administered fund.
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Annual report and accounts 2016
Financial statements Employee benefits continued
Retirement benefit obligations continued
ii) Defined benefit pensions
The Group contributes to defined benefit schemes which require contributions to be made to separately administered funds.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement,
usually dependent on one or more factors such as age, years of service and salary. The legal obligations for any benefits from this kind
of pension plan remain with the Group, even if plan assets for funding the defined benefit plan have been set aside.
Scheme liabilities are measured using the projected unit funding method, applying the principal actuarial assumptions at the balance
sheet date. Assets are measured at market value. In accordance with IFRIC 14, the asset that is recognised is restricted to the amount
by which the IAS 19 (Revised) service cost is expected, over the lifetime of the scheme, to exceed funding contributions payable in
respect of accruing benefits.
Where the Group has a contractual obligation to make good any deficit in its share of a Local Government Pension Scheme (LGPS) but
also has the right to recover the costs of making good any deficit from the Group’s client, the fair value of that guarantee asset has been
recognised and disclosed. The right to recover costs is limited to exclude situations where the Group causes the scheme to incur service
costs in excess of those which would have been incurred were the members employed within Local Government. The right to recover
costs is also limited to situations where the cap on employer contributions payable by the Group is not set so as to contribute to reducing
the deficit in the scheme. Movements in the guarantee asset are taken to the Income Statement and to the Statement of Comprehensive
Income to match the movement in pension assets and liabilities.
Actuarial gains and losses are taken to the Statement of Comprehensive Income as incurred. For this purpose, actuarial gains and
losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences
between the previous actuarial assumptions and what has actually occurred.
Other movements in the net surplus of deficit are recognised in the Income Statement, including the current service cost, any past
service cost and the effect of curtailments or settlements. The net interest cost is also charged to the Income Statement. The amount
charged to the Income Statement in respect of these plans in included within operating costs.
The Group’s contributions to the scheme are paid in accordance with the rules of the schemes and the recommendations of the actuary.
Share-based employee remuneration
All share-based payment arrangements that were granted after 7 November 2002 and had not vested before 1 January 2005 are
recognised in the consolidated financial statements in accordance with IFRS 2.
The Group operates equity-settled and cash-settled share-based remuneration plans for its employees. All employee services
received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined
by reference to the fair value (excluding the effect of non-market based vesting conditions) of the share options awarded. Their value is
determined at the date of grant and is not subsequently remeasured unless the conditions on which the award was granted are modified.
The fair value at the date of the grant is calculated using the Black Scholes option pricing model and the cost is recognised on a straight-line
basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period. For SAYE plans,
employees are required to contribute towards the plan. This non-vesting condition is taken into account in calculating grant date fair value.
All share-based remuneration is ultimately recognised as an expense in the Income Statement. For equity-settled share-based
payments there is a corresponding credit to the share-based payment reserve; for cash-settled share-based payments the Group
recognises a liability at the balance sheet date.
Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value
of the shares issued are allocated to share capital, with any excess being recorded as share premium.
Annual report and accounts 2016 95
Mears Group PLC
Financial statements Principal accounting policies – Group continued
Leases
In accordance with IAS 17 ‘Leases’, the economic ownership of a leased asset is transferred to the lessee if they bear substantially all
the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of inception of the lease
at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any, to be borne by
the lessee. A corresponding amount is recognised as a finance leasing liability, irrespective of whether some of these lease payments
are payable upfront at the date of inception of the lease.
Subsequent accounting for assets held under finance lease agreements, i.e. depreciation methods and useful lives, correspond to
those applied to comparable acquired assets. The corresponding finance leasing liability is reduced by lease payments less finance
charges, which are expensed to finance costs. Finance charges represent a constant periodic rate of interest on the outstanding
balance of the finance lease liability.
All other leases are treated as operating leases. Payment on operating lease agreements is recognised as an expense on a straight-line
basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.
The Group does not act as a lessor.
Financial instruments
Financial assets and liabilities are recognised in the Balance Sheet when the Group becomes party to the contractual provisions
of the instrument. The principal financial assets and liabilities of the Group are as follows:
Financial assets
When financial assets are recognised initially under IAS 39 ‘Financial Instruments: Recognition and Measurement’, they are measured
at fair value, net of transaction costs other than for financial assets carried at fair value through the Income Statement.
The Group’s financial assets are included in the Balance Sheet as current assets, except for those maturing more than twelve months
after the balance sheet date, whereupon they are classified as non-current assets. The Group’s financial assets comprise ‘Trade and
other receivables’, ‘Amounts recoverable on contracts’ and ‘Cash at bank and in hand’ in the Balance Sheet.
Loans and receivables
Trade receivables, amounts recoverable on contracts and cash at bank and in hand are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. Trade receivables and amounts recoverable on contracts are initially
recorded at fair value net of transaction costs, being invoiced value less any provisional estimate for impairment should this be necessary
due to a loss event. Trade receivables are subsequently remeasured at invoiced value, less an updated provision for impairment.
Any change in their value through impairment or reversal of impairment is recognised in the Income Statement.
Provisions against trade receivables and amounts recoverable on contracts are made when objective evidence is received that the
Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write
down is determined as the difference between the asset’s carrying amount and the present value of estimated future cash flows.
Individually significant balances are reviewed separately for impairment based on the credit terms agreed with the customer. Other
balances are grouped into credit risk categories and reviewed in aggregate.
Cash and cash equivalents include cash at bank and in hand and bank deposits available with no notice or less than three months’
notice from inception that are subject to an insignificant risk of changes in value. Bank overdrafts are presented as current liabilities
to the extent that there is no right of offset with cash balances.
Following initial recognition, financial assets are subsequently remeasured at amortised cost using the effective interest rate method.
Financial liabilities
The Group’s financial liabilities are overdrafts, trade and other payables including contingent consideration, and interest rate swaps.
They are included in the Balance Sheet line items ‘Short-term borrowings and overdrafts’, ‘Trade and other payables’, ‘Financial
liabilities’ and ‘Other liabilities’.
All interest related charges are recognised as an expense in ‘Finance cost’ in the Income Statement with the exception of those
that are directly attributable to the construction of a qualifying asset which are capitalised as part of that asset.
96
Mears Group PLC
Annual report and accounts 2016
Financial statements Financial instruments continued
Financial liabilities continued
Bank and other borrowings are initially recognised at fair value net of transaction costs. Gains and losses arising on the repurchase,
settlement or cancellation of liabilities are recognised respectively in finance revenue and finance costs. Borrowing costs are recognised
as an expense in the period in which they are incurred with the exception of those which are directly attributable to the construction
of a qualifying asset which are capitalised as part of that asset.
Trade payables on normal terms are not interest bearing and are stated at their fair value on initial recognition and subsequently
at amortised cost.
Contingent consideration is initially recognised at fair value and is subsequently measured at fair value through the Income Statement.
Derivative financial instruments
The Group uses derivative financial instruments to hedge its exposure to interest rate risks arising from operational and financing activities.
Derivative financial instruments are recognised initially and subsequently at fair value, with mark-to-market movements recognised
in the Income Statement except where cash flow hedge accounting is applied.
The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance
sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties.
In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes.
Hedge accounting for interest rate swaps
Where an interest rate swap is designated as a hedge of the variability in cash flows of an existing or highly probable forecast loan
interest payment, the effective part of any valuation gain or loss on the swap instrument is recognised in ‘Other comprehensive income’
in the hedging reserve. The cumulative gain or loss is removed from equity and recognised in the Income Statement at the same time
as the hedged transaction. The ineffective part of any gain or loss is recognised in the Income Statement immediately.
When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative
gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the
hedged transaction is no longer probable, the cumulative unrealised gain or loss recognised in equity is recognised in the Income
Statement immediately.
Nature and purpose of each reserve in equity
Share capital is determined using the nominal value of shares that have been issued.
Share premium represents the difference between the nominal value of shares issued and the total consideration received.
Equity-settled shared-based employee remuneration is credited to the share-based payment reserve until the related share options
are exercised. Upon exercise the share-based payment reserve is transferred to retained earnings.
The hedging reserve represents the effective part of any gain or loss on a cash flow hedge which has not been removed from equity
and recognised in the Income Statement.
The merger reserve relates to the difference between the nominal value and total consideration in respect of the acquisition of
Careforce Group plc, Supporta plc and Morrison Facilities Services Limited where the Company was entitled to the merger relief
offered by the Companies Act.
Dividends
Dividend distributions payable to equity shareholders are included in ‘Current financial liabilities’ when the dividends are approved
in a general meeting prior to the balance sheet date.
Annual report and accounts 2016 97
Mears Group PLC
Financial statements Principal accounting policies – Group continued
Use of judgements and estimates
The preparation of financial statements requires management to make estimates and judgements that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of income and expenditure during the reported period. The estimates and associated judgements are based on historical experience
and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making
judgements about carrying values of assets and liabilities that are not readily apparent from other sources.
The estimates and underlying judgements are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period
in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision
affects both current and future periods.
In the preparation of these consolidated financial statements, estimates and judgements have been made by management concerning
the selection of useful lives of property, plant and equipment, provisions necessary for certain liabilities, when to recognise revenue on
long-term contracts, actuarial judgements, discount rates used within impairment reviews, the underlying share price volatility for
valuing equity-based payments and other similar evaluations. Actual amounts could differ from those estimates.
Critical judgements in applying the Group’s accounting policies
Revenue recognition
Revenue is recognised based on the stage of completion of job or contract activity. As described in the Revenue section on pages 92 and 93,
certain types of Housing pricing mechanisms and Care revenue require minimal judgement; however, Housing lump sum contracts and
construction contracts do require judgements and estimates to be made to determine the stage of completion and the expected outcome
for the individual contract.
Joint arrangements
The Group participates in a number of joint arrangements where control of the arrangement is shared with another party. A joint
arrangement is classified as a joint operation or as a joint venture, depending on management’s assessment of the legal form and
substance of the arrangement.
The classification can have a material impact on the consolidated financial statements. The Group’s share of assets, liabilities,
revenue, expenses and cash flows of joint operations would be included in the consolidated financial statements on a line-by-line
basis, whereas the Group’s investment and share of results of joint ventures are shown within single line items in the Consolidated
Balance Sheet and Consolidated Income Statement respectively.
Key sources of estimation uncertainty
Impairment of goodwill
Determining whether goodwill is impaired requires an estimate of the value in use of the CGUs to which goodwill has been allocated.
The value-in-use calculation involves an estimate of the future cash flows of the CGUs and also the selection of appropriate discount
rates to calculate present values. Future cash flows are estimated using the current one-year budget forecast, extrapolated for a future
growth rate. The estimated growth rates are based on past experience and knowledge of the individual sector’s markets. Changes in
the estimated growth rate could result in variations to the carrying value of goodwill. The Directors consider that the estimates and
judgements involved in determining the value in use of the Care CGU goodwill are the most significant and have therefore utilised the
services of an external consultant to undertake this impairment review. The estimated cash flows and future growth rates are based
on past experience and knowledge of the sector. The value in use is most sensitive to changes in the terminal growth rate, the explicit
growth rate and the discount rate. The sensitivity to changes in these estimations is detailed in note 11.
98
Mears Group PLC
Annual report and accounts 2016
Financial statements Use of judgements and estimates continued
Key sources of estimation uncertainty continued
Defined benefit liabilities
A number of key estimates have been made, which are given below, which are largely dependent on factors outside the control
of the Group:
→ inflation rates;
→ mortality;
→ discount rate; and
→ salary and pension increases.
Details of the particular estimates used are included in the pensions note. Sensitivity analysis for these key estimates is included
in note 24.
Where the Group has a contractual obligation to make good any deficit in its share of an LGPS but also has the right to recover the costs
of making good any deficit from the Group’s client, the fair value of that asset has been recognised and disclosed. The right to recover
costs is limited to exclude situations where the Group causes the scheme to incur service costs in excess of those which would have
been incurred were the members employed within Local Government. The Directors have made judgements in respect of whether any
of the deficit is as a result of such situations.
The right to recover costs is also limited to situations where the cap on employer contributions to be suffered by the Group is not set so
as to contribute to reducing the deficit in the scheme. The Directors, in conjunction with the scheme actuaries, have made judgements
in respect of the predicted future service cost and contributions to the scheme to reflect this in the fair value of the asset recognised.
New standards and interpretations not yet applied
IFRS 9 ‘Financial Instruments’ specifies how an entity should classify and measure financial assets, including some hybrid contracts.
The Group is expected to apply this standard for the Group’s 31 December 2018 financial statements.
IFRS 15 ‘Revenue from Contracts with Customers’. This standard introduces a new revenue recognition model that recognises revenue
either at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how
much and when revenue is recognised. The Group is currently expected to apply this standard for the Group’s 31 December 2018 financial
statements. Management has started to assess the impact of this standard but is not yet in a position to provide quantified information.
IFRS 16 ‘Leases’. Under IFRS 16 lessees have to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for
almost all lease contracts. This is a significant change compared to IAS 17 under which lessees were required to make a distinction between a
finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 contains an optional exemption for certain short-term
leases and leases of low value assets. The Group is expected to apply this standard for the Group’s 31 December 2019 financial statements,
subject to endorsement by the EU. Management has started to assess the impact of this standard but is not yet in a position to provide
quantified information.
A number of standards have been modified. These include Disclosure Initiative (Amendments to IAS 7), Recognition of Deferred Tax
Assets for Unrealised Losses (Amendments to IAS 12) and Classification and Measurement of Share-based Payment Transactions
(Amendments to IFRS 2). None of these amendments are expected to have a material effect on the Group’s Financial Statements.
Annual report and accounts 2016 99
Mears Group PLC
Financial statements Consolidated income statement
For the year ended 31 December 2016
Continuing operations
Sales revenue
Cost of sales
Gross profit
Other administrative expenses
Amortisation of acquisition intangibles
Total administrative costs
Operating profit before amortisation of acquisition intangibles
Operating profit
Finance income
Finance costs
Profit for the year before tax and the amortisation of acquisition intangibles
Profit for the year before tax
Tax expense
Profit for the year from continuing operations
Discontinued operations
Loss from discontinued operations
Tax income from discontinued operations
Loss for the year after tax from discontinued operations
Profit for the year from continuing and discontinued operations
Attributable to:
Owners of the Parent
Non-controlling interest
Profit for the year
Earnings per share – from continuing operations
Basic
Diluted
Earnings per share – from continuing and discontinued operations
Basic
Diluted
The accompanying accounting policies and notes form an integral part of these financial statements.
100
Mears Group PLC
Annual report and accounts 2016
Note
2016
£’000
2015
£’000
1
940,100
881,139
(695,206)
(649,007)
244,894
232,132
(203,044)
(193,470)
11
(10,690)
(10,837)
(213,734)
(204,307)
1
1
3
3
41,850
38,662
31,160
27,825
1,152
1,171
(2,940)
(3,076)
40,062
36,757
29,372
25,920
6
(3,676)
(3,832)
25,696
22,088
7
7
9
9
9
9
—
—
—
(7,964)
165
(7,799)
25,696
14,289
21,526
12,874
4,170
1,415
25,696
14,289
23.54p
23.41p
20.31p
20.10p
21.03p
20.91p
12.65p
12.52p
Financial statements Consolidated statement of comprehensive income
For the year ended 31 December 2016
Profit for the year
Other comprehensive income/(expense):
Which will be subsequently reclassified to the Income Statement:
Cash flow hedges:
– losses arising in the year
– reclassification to the Income Statement
Increase/(decrease) in deferred tax asset in respect of cash flow hedges
Which will not be subsequently reclassified to the Income Statement:
Actuarial gain/(loss) on defined benefit pension scheme
(Decrease)/increase in deferred tax asset in respect of defined benefit pension schemes
Other comprehensive income/(expense) for the year
Total comprehensive income for the year
Attributable to:
Owners of the Parent
Non-controlling interest
Total comprehensive income for the year
The accompanying accounting policies and notes form an integral part of these financial statements.
Note
2016
£’000
2015
£’000
25,696
14,289
19
19
19
24
20
(884)
643
39
(72)
559
(97)
3,676
(3,371)
(804)
675
2,670
(2,306)
28,366
11,983
24,196
10,568
4,170
1,415
28,366
11,983
Annual report and accounts 2016 101
Mears Group PLC
Financial statements Consolidated balance sheet
As at 31 December 2016
Assets
Non-current
Goodwill
Intangible assets
Property, plant and equipment
Pension and other employee benefits
Financial assets
Deferred tax asset
Current
Assets included in disposal group classified as held for sale
Inventories
Trade and other receivables
Financial assets
Cash at bank and in hand
Total assets
Equity
Equity attributable to the shareholders of Mears Group PLC
Called up share capital
Share premium account
Share-based payment reserve
Hedging reserve
Merger reserve
Retained earnings
Total equity attributable to the shareholders of Mears Group PLC
Non-controlling interest
Total equity
Liabilities
Non-current
Long-term borrowing and overdrafts
Pension and other employee benefits
Deferred tax liabilities
Financial liabilities
Other payables
Current
Liabilities included in disposal group classified as held for sale
Short-term borrowings and overdrafts
Trade and other payables
Financial liabilities
Current tax liabilities
Current liabilities
Total liabilities
Total equity and liabilities
Note
2016
£’000
2015
£’000
10
11
12
24
17
20
7
14
15
17
19
21
19
19
24
20
17
18
7
19
16
17
193,712
25,913
20,265
15,992
677
5,704
193,058
31,851
18,436
8,272
—
6,584
262,263
258,201
— 13,255
9,021
146,879
—
68,612
11,234
157,181
839
52,904
222,158
237,767
484,421
495,968
1,026
58,320
1,975
(774)
46,214
92,555
1,019
58,124
1,651
(572)
46,214
86,438
199,316
(642)
192,874
(1,246)
198,674
191,628
60,000
7,498
7,120
612
15,950
91,180
57,500
4,224
6,970
368
15,396
84,458
— 13,255
10,290
194,103
510
1,724
5,278
187,264
478
1,547
194,567
219,882
285,747
304,340
484,421
495,968
The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf on 27 March 2017.
D J Miles
Director
A C M Smith
Director
Company number: 03232863
The accompanying accounting policies and notes form an integral part of these financial statements.
102
Mears Group PLC
Annual report and accounts 2016
Financial statements
Consolidated cash flow statement
For the year ended 31 December 2016
Operating activities
Result for the year before tax
Adjustments
Change in inventories
Change in trade and other receivables
Change in trade and other payables
Cash inflow from operating activities of continuing operations before taxation
Taxes paid
Net cash inflow from operating activities of continuing operations
Net cash outflow from operating activities of discontinued operations
Net cash inflow from operating activities
Investing activities
Additions to property, plant and equipment
Additions to other intangible assets
Proceeds from disposals of property, plant and equipment
Acquisition of subsidiary undertakings, net of cash
Loans made to other entities (non-controlled)
Interest received
Net cash outflow from investing activities
Financing activities
Proceeds from share issue
Discharge of finance lease liability
Interest paid
Dividends paid – Mears Group shareholders
Dividends paid – non-controlling interests
Net cash outflow from financing activities
Cash and cash equivalents, beginning of year
Net decrease in cash and cash equivalents
Cash and cash equivalents, end of year
Cash and cash equivalents comprises the following:
– cash at bank and in hand
– borrowings and overdrafts
Cash and cash equivalents
Cash conversion key performance indicator
Cash inflow from operating activities of continuing operations
EBITDA for continuing operations
Conversion
Note
2016
£’000
2015
£’000
22
29,372
20,438
(2,213)
(8,793)
(4,289)
25,920
19,887
(553)
6,668
(7,458)
34,515
44,464
(4,877)
(5,888)
29,638
38,576
(3,925)
(4,503)
25,713
34,073
(10,029)
(2,904)
2
(4,297)
(2,978)
86
(10,019)
(17,590)
(211)
35
—
158
(23,126)
(24,621)
202
(661)
1,418
(545)
(2,822)
(2,764)
(11,483)
(10,445)
(1,019)
(128)
(15,783)
(12,464)
822
3,834
(13,196)
(3,012)
(12,374)
822
52,904
68,612
(65,278)
(67,790)
(12,374)
822
34,515
49,260
44,464
44,940
70.1%
98.9%
The accompanying accounting policies and notes form an integral part of these financial statements.
Annual report and accounts 2016 103
Mears Group PLC
Financial statements Consolidated statement of changes in equity
For the year ended 31 December 2016
At 1 January 2015
Net result for the year
Other comprehensive income/(expense)
Total comprehensive income for the year
Deferred tax on share-based payments
Issue of shares
Share option charges
Exercise of share options
On acquisition
Transactions with non-controlling interests
Dividends
At 1 January 2016
Net result for the year
Other comprehensive income
Total comprehensive income for the year
Deferred tax on share-based payments
Issue of shares
Share option charges
On disposal
Transactions with non-controlling interests
Dividends
Attributable to equity shareholders of the Company
Share
capital
£’000
Share
premium
account
£’000
Share-
based
payment
reserve
£’000
Hedging
reserve
£’000
Merger
reserve
£’000
Retained
earnings
£’000
Non-
controlling
interest
£’000
Total
equity
£’000
1,011
56,714
1,653
(962)
46,214
92,179
(2,347)
194,462
—
—
—
—
8
—
—
—
—
—
—
—
—
—
1,410
—
—
—
—
—
—
—
—
—
—
771
(773)
—
—
—
—
390
390
—
—
—
—
—
—
—
— 12,874
1,415
14,289
—
(2,696)
—
(2,306)
— 10,178
1,415
11,983
—
—
—
—
—
—
(552)
—
—
773
—
(5,695)
— (10,445)
—
—
—
—
282
(468)
(128)
(552)
1,418
771
—
282
(6,163)
(10,573)
1,019
58,124
1,651
(572)
46,214
86,438
(1,246)
191,628
—
—
—
—
7
—
—
—
—
—
—
—
—
196
—
—
—
—
—
—
—
—
—
324
—
—
—
—
(202)
(202)
—
—
—
—
—
—
— 21,526
4,170
25,696
—
2,872
—
2,670
— 24,398
4,170
28,366
—
—
—
—
—
(635)
—
—
—
(6,163)
—
—
—
(2,570)
23
(635)
203
324
(2,570)
(6,140)
— (11,483)
(1,019)
(12,502)
At 31 December 2016
1,026
58,320
1,975
(774)
46,214
92,555
(642)
198,674
The accompanying accounting policies and notes form an integral part of these financial statements.
104
Mears Group PLC
Annual report and accounts 2016
Financial statements Notes to the financial statements – Group
For the year ended 31 December 2016
1. Segment reporting
Segment information is presented in respect of the Group’s operating segments. Segments are determined by reference to the internal
reports reviewed by the Board.
The Group had two operating segments during the year:
→ Housing – services within this sector comprise a full housing management service predominantly to Local Authorities and other
Registered Social Landlords; and
→ Care – services within this sector comprise personal care services to people in their own homes.
All of the Group’s activities are carried out within the United Kingdom and the Group’s principal reporting to its chief operating decision
maker is not segmented by geography.
The principal financial measures used by the chief operating decision maker and the Board to review the performance of the operating
segments are that of revenue growth and operating margins in both the core divisions of Housing and Care. The operating result utilised
within the key performance measures is stated before amortisation of acquisition intangibles and costs relating to the long-term
incentive plans.
Operating segments
Revenue
Housing
£’000
2016
Care
£’000
Total
£’000
Housing
£’000
2015
Care
£’000
Total
£’000
787,530
152,570
940,100
735,129
146,010
881,139
Operating result pre amortisation of acquisition intangibles
and long-term incentive plans
Operating margin pre amortisation of acquisition intangibles
and long-term incentive plans
44,057
(1,199)
42,858
42,413
(1,601)
40,812
5.60%
(0.79%)
4.56%
5.77%
(1.10%)
4.63%
Long-term incentive plans
(1,008)
— (1,008)
(2,150)
—
(2,150)
Operating result pre amortisation of acquisition intangibles
43,049
(1,199)
41,850
40,263
(1,601)
38,662
Amortisation of acquisition intangibles
Operating result
Net finance costs
Tax expense
Profit for the year from continuing activities
(10,690)
31,160
(1,788)
(3,676)
25,696
(10,837)
27,825
(1,905)
(3,832)
22,088
All revenue and all non-current assets arise within the United Kingdom. All of the revenue reported is external to the Group. No revenue
in respect of a single customer comprises more than 10% of the total revenue reported.
Annual report and accounts 2016 105
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
1. Segment reporting continued
In addition, the following disclosures have been provided in respect of segmental analysis required by IFRS 8 ‘Operating Segments’:
Housing
£’000
2016
Care
£’000
Total
£’000
Housing
£’000
2015
Care
£’000
Total
£’000
348,066
136,355
484,421
359,578
136,390
495,968
(214,339)
(71,408)
(285,747)
(237,689)
(66,651)
(304,340)
6,553
4,066
6,878
1,837
872
1,507
3,812
—
7,425
5,573
10,690
1,837
5,388
3,710
6,707
1,314
829
1,253
4,130
—
6,217
4,963
10,837
1,314
Operating segments
Segment assets
Segment liabilities
Property, plant and equipment additions
Depreciation
Amortisation of acquisition intangibles
Amortisation of other intangibles
2. Operating costs
Operating costs, relating to continuing activities, include:
Share-based payments
Long-term incentives
Depreciation
Amortisation of acquisition intangibles
Amortisation of other intangibles
Loss on disposal of property, plant and equipment
Hire of plant and machinery
Other operating lease rentals
Fees payable for audit and non-audit services during the year were as follows:
Fees payable to the auditor for the audit of the Group’s financial statements
Other fees payable to the auditor in respect of:
– auditing of accounts of subsidiary undertakings pursuant to legislation
– taxation advice fees
– audit related advisory fees
– accreditation related assurance fees
Total auditor’s remuneration
2016
£’000
324
684
5,573
2015
£’000
771
1,379
4,963
10,690
10,837
1,837
1,314
48
45
5,450
5,727
112,940
65,461
2016
£’000
60
331
—
8
45
444
2015
£’000
60
331
21
8
—
420
During 2016, Mears was delighted to retain its accreditation with Investors in People (IIP). This followed a four-week assessment
programme which involved external assessors visiting 16 branches and interviewing around 300 employees. IIP in the South of England
is delivered by Grant Thornton under licence from the UK Commission for Employment and Skills. Whilst Mears played no part in the
selection of Grant Thornton as its external assessor, the fee of £0.05m was paid to Grant Thornton for this assessment and is included
within accreditation related assurance services. The Group has a strict policy of prohibiting the external auditor from carrying out non-audit
services in order to safeguard audit objectivity and independence.
106
Mears Group PLC
Annual report and accounts 2016
Financial statements 3. Finance income and finance costs
Interest charge on overdrafts and short-term loans
Interest charge on hedged items (effective hedges)
Other interest
Finance costs on bank loans, overdrafts and finance leases
Interest charge on defined benefit obligation
Unwinding of discounting
Total finance costs
Interest income resulting from short-term bank deposits
Interest income resulting from defined benefit asset
Unwinding of discounting
Other interest income
Finance income
Net finance charge
Gains and losses on hedged items recognised in other comprehensive income
Losses arising in the year
Reclassification to the Income Statement
Changes in mark-to-market of interest rate swaps (effective hedges)
4. Employees
Staff costs during the year were as follows:
Wages and salaries
Social security costs
Other pension costs
2016
£’000
2015
£’000
(2,134)
(2,136)
(643)
(26)
(559)
(4)
(2,803)
(2,699)
(137)
—
(252)
(125)
(2,940)
(3,076)
19
1,085
40
8
16
964
49
142
1,152
1,171
(1,788)
(1,905)
(884)
643
241
(72)
559
487
2016
£’000
2015
£’000
299,684
291,542
25,785
22,310
9,292
9,859
334,761
323,711
Annual report and accounts 2016 107
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
4. Employees continued
The average number of employees of the Group during the year was:
Site workers
Carers
Office and management
Remuneration in respect of Directors was as follows:
Emoluments
Gains made on the exercise of share options
Pension contributions to personal pension schemes
2016
Number
2015
Number
3,897
8,531
3,291
3,900
7,318
3,110
15,719
14,328
2016
£’000
1,334
1,795
195
3,324
2015
£’000
1,323
—
195
1,518
During the year contributions were paid to personal pension schemes for four Directors (2015: four).
During the year three Directors (2015: none) exercised share options.
5. Share-based employee remuneration
As at 31 December 2016 the Group maintained seven share-based payment schemes for employee remuneration.
Details of the share options outstanding are as follows:
Outstanding at 1 January
Granted
Forfeited/lapsed
Exercised
Outstanding at 31 December
2016
2015
Weighted
average
exercise
price
p
255
—
356
33
300
Number
‘000
3,102
—
(488)
(621)
1,993
Weighted
average
exercise
price
p
223
330
394
176
255
Number
‘000
2,994
1,462
(550)
(804)
3,102
The weighted average share price at the date of exercise for share options exercised during the period was 405p. At 31 December 2016,
0.4m options had vested and were still exercisable at prices between 1p and 300p. These options had a weighted average exercise price
of 74p and a weighted average remaining contractual life of one year.
The fair values of options granted were determined using the Black Scholes option pricing model. Significant inputs into the calculation
include the market price at the date of grant and exercise prices. Furthermore, the calculation takes into account the future dividend
yield, the share price volatility rate and the risk-free interest rate.
108
Mears Group PLC
Annual report and accounts 2016
Financial statements
5. Share-based employee remuneration continued
The underlying expected share price volatility was determined by reference to historical data. The Company expects the volatility of its
share price to reduce as it matures. The risk-free interest rate was determined by the implied yield available on a zero-coupon Government
bond at the date of grant. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to
satisfy service conditions. In the case of the SAYE scheme the expected forfeitures take account of the requirement to save throughout
the life of the scheme. There were no options granted during the year and 0.5m options lapsed during the year. The market price at
31 December 2016 was 456p and the range during 2016 was 353p to 483p.
All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options.
The Group recognised the following expenses related to share-based payments:
Giving rise to share-based payment reserve:
– SAYE
– Share Plan
Giving rise to liabilities:
– MIP
2016
£’000
2015
£’000
324
—
684
1,008
113
658
1,379
2,150
In total, £0.3m of employee remuneration expense that gave rise to additional share-based payment reserves has been included in the
Consolidated Income Statement for 2016 (2015: £0.8m). In total, £0.7m (2015: £1.4m) of liabilities were recognised due to cash-settled
share-based payment transactions.
Approved share option plan
Options are exercisable at a price equal to the average quoted market price of the Company’s shares on the three dealing days prior to
the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant,
the options expire. Options are forfeited if the employee leaves Mears before the options vest. All options issued under this plan have
vested or were forfeited.
Unapproved share option plan
Options are exercisable at nominal value. The vesting period is three years. If the options remain unexercised after a period of ten years
from the date of grant, the options expire. Options are forfeited if the employee leaves Mears before the options vest. With the introduction
of the LTIP in 2008, the Remuneration Committee has decided that no further awards will be made under the unapproved share option
plan. All options issued under this plan have vested or were forfeited.
Save As You Earn (SAYE) scheme
Options are available to all employees. Options are granted for a period of three years. Options are exercisable at a price based on the
quoted market price of the Company’s shares at the time of invitation, discounted by up to 20%. Options are forfeited if the employee
leaves Mears Group before the options vest which impacts on the number of options expected to vest. If an employee stops saving but
continues in employment, this is treated as a cancellation which results in an acceleration of the share-based payment charge.
Special Incentive Plan 2007 (SIP)
The SIP was introduced in 2007 to reward the then Chief Executive Officer, Bob Holt, with premium priced options linked to long-term
performance. The terms and conditions were subsequently amended on 3 July 2009. If the options remain unexercised after a period
of ten years from the date of grant, the options expire. There was a single award and no further awards will be made under this plan. All
options issued under this plan have vested.
Annual report and accounts 2016 109
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
5. Share-based employee remuneration continued
The Mears Group PLC Long-term Incentive Plan (LTIP)
The LTIP was introduced in October 2008 following shareholder approval. The award of options is offered to a small number of key
senior management. The principal terms of the LTIP are detailed below:
Principal terms of LTIP
Number of options
Exercise price
Performance period
Maximum award limit under the plan will be 200% of salary p.a.
1p
3 years
Performance conditions
There are two performance targets attaching to the LTIP Award.
Expiry conditions
Options are forfeited if the employee leaves the Group before the options have vested.
75% of the LTIP Award will relate to an EPS growth target. The other 25% of the LTIP Award relates
to the Company’s TSR against the return of the FTSE All-Share Support Services Sector.
All options issued under this plan have vested or were forfeited.
Management Incentive Plan (MIP)
The MIP was introduced in June 2013 following shareholder approval. The award of options is offered to a small number of key senior
management. The MIP is a share-based payment plan which is settled through a combination of cash and shares. Further details are provided
on page 73 of the Remuneration Report.
6. Tax expense
Tax recognised in the Income Statement
United Kingdom corporation tax
Adjustment in respect of previous periods
Total current tax recognised in Income Statement
Deferred taxation charge:
– on defined benefit pension obligations
– on share-based payments
– on accelerated capital allowances
– on amortisation of acquisition intangibles
– on short-term temporary timing differences
– on corporate tax losses
– impact of change in statutory tax rates
Adjustment in respect of previous periods
Total deferred taxation recognised in Income Statement
Total tax expense recognised in Income Statement on continuing operations
Total tax credit recognised in Income Statement on discontinued operations
Total tax expense recognised in Income Statement
110
Mears Group PLC
Annual report and accounts 2016
2016
£’000
5,672
(972)
2015
£’000
5,783
(642)
4,700
5,141
146
(65)
194
133
(151)
(232)
(2,066)
(2,130)
277
617
(19)
(108)
(276)
1,609
—
(262)
(1,024)
(1,309)
3,676
—
3,832
(165)
3,676
3,667
Financial statements 6. Tax expense continued
Tax recognised in the Income Statement continued
The charge for the year can be reconciled to the result for the year as follows:
Result for the year before tax
Result for the year multiplied by standard rate of corporation tax in the United Kingdom for the period of 20.0%
(2015: 20.25%)
Effect of:
– expenses not deductible for tax purposes
– income not subject to tax
– tax relief on exercise of share options
– statutory tax rate changes
– temporary timing differences not previously recognised in deferred tax
– tax losses not previously recognised in deferred tax
– adjustment in respect of prior periods
Actual tax expense
2016
£’000
2015
£’000
29,372
17,956
5,874
3,636
563
(885)
(463)
(19)
(15)
(299)
(1,080)
1,412
—
(397)
—
(20)
(60)
(904)
3,676
3,667
Deferred tax is recognised on both temporary and permanent differences between the treatment of items for tax and accounting purposes.
Deferred tax on the amortisation of acquisition intangibles is a permanent difference and arises because no tax relief is due on this
kind of amortisation.
Tax losses generated in previous years which are expected to be utilised against future profits are recognised as a deferred tax asset
and a subsequent charge arises as those losses are utilised. The majority of the charge of £0.6m (2015: charge of £1.6m) represents
losses associated with previous acquisitions which were utilised in the year.
No deferred tax asset is recognised in respect of losses of £31.3m (2015: £32.9m) across several entities in the Group as it is not
expected that they will be eligible to be utilised against profits in the future.
Deferred tax is also recognised on short-term temporary timing differences, primarily relating to provisions. These differences are
expected to reverse in the following year and arise because tax relief is only available when the costs are incurred.
Capital allowances represent tax relief on the acquisition of property, plant and equipment and are spread over several years at rates
set by legislation. These differ from depreciation which is an estimate of the use of an item of property, plant and equipment over its
useful life. Deferred tax is recognised on the difference between the remaining value of such an asset for tax purposes and its carrying
value in the accounts.
The following tax has been charged to other comprehensive income or equity during the year:
Deferred tax recognised in other comprehensive income
– on defined benefit pension obligations
– on cash flow hedges
Total deferred tax recognised in other comprehensive income
Deferred tax recognised directly in equity
Deferred tax charge:
– on share-based payments
Total deferred tax recognised in equity
Total tax
Total current tax
Total deferred tax
2016
£’000
2015
£’000
804
(39)
765
(675)
97
(578)
(635)
(635)
(552)
(552)
4,700
4,976
(894)
(2,439)
Mears Group PLC
Annual report and accounts 2016
111
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
7. Discontinued activities
On 21 November 2013, the Group completed the disposal of the entire share capital of Haydon Mechanical and Electrical Limited
(‘Haydon UK’). As part of that disposal, the Group retained the beneficial interest in 49% of the share capital of an investment in
a company registered in the United Arab Emirates, Haydon Mechanical and Electrical Company LLC (‘Haydon LLC’). This beneficial
interest was retained due to a number of performance guarantees in place at the time of the disposal which unravel as underlying
contracts complete. During the period the Group reduced its interest to 1% of the share capital, completing a disposal of 48% for a
nominal consideration. Upon the remaining guarantees being satisfied and the outstanding debtor settled, it is the intention of the
Group to transfer the remaining share to the local management.
As at 31 December 2016, the Group has performance guarantees of £13.7m outstanding and these are anticipated to reduce to £9.4m
and £nil by December 2017 and 2018 respectively. These performance guarantees are disclosed as contingent liabilities in note 27.
At 31 December 2015, a balance of £2.0m was due from Haydon Mechanical & Electrical Limited to the Group. During the period the
Group fully provided against this balance. The provision of £2.0m has been reported as a loss from discontinued activities. In addition,
the Group paid £0.6m in respect of an indemnity provided under the share purchase agreement. The cost of £0.6m has been reported
as a loss from discontinued activities and a cash outflow from discontinued activities.
The results of Haydon LLC up until the point of disposal, which have been aggregated into a single line within the Consolidated Income
Statement, comprise sales revenue of £8.3m (2015: £38.5m), costs of sales of £5.2m (2015: £44.1m), administrative expenses of £0.6m
(2015: £3.3m) and a tax credit of £nil (2015: £0.2m), equating to a profit on discontinued activities of £2.6m (2015: £6.9m loss). All of this
profit has been attributed to the non-controlling interest.
At 31 December 2015, a balance of £nil was due from Haydon LLC to the Group. During the period, the Group provided additional
financial support to Haydon LLC of £3.4m to fund ongoing losses in the company so as to mitigate its risk in respect of the performance
guarantees. This is reported as a cash outflow from discontinued operations. The Directors consider this balance to be recoverable.
8. Dividends
The following dividends were paid on ordinary shares in the year:
Final 2015 dividend of 7.90p (2015: final 2014 dividend of 7.15p) per share
Interim 2016 dividend of 3.30p (2015: interim 2015 dividend of 3.10p) per share
2016
£’000
8,099
3,384
2015
£’000
7,286
3,159
11,483
10,445
The proposed final 2016 dividend of 8.40p per share has not been included within the consolidated financial statements as no obligation
existed at 31 December 2016.
112
Mears Group PLC
Annual report and accounts 2016
Financial statements 9. Earnings per share
Earnings per share
Effect of amortisation of acquisition intangibles
Effect of full tax adjustment
Normalised earnings per share
Earnings per share
Effect of amortisation of acquisition intangibles
Effect of full tax adjustment
Normalised earnings per share
Basic (continuing)
Basic (discontinued)
2016
p
23.54
10.44
(3.45)
2015
p
20.31
10.65
(2.73)
2016
p
2015
p
(2.51)
(7.66)
—
—
—
—
Basic (continuing
and discontinued)
2016
p
21.03
10.44
(3.45)
2015
p
12.65
10.65
(2.73)
30.53
28.23
(2.51)
(7.66)
28.02
20.57
Diluted (continuing)
Diluted (discontinued)
2016
p
23.41
10.39
(3.44)
2015
p
20.10
10.54
(2.70)
2016
p
2015
p
(2.50)
(7.58)
—
—
—
—
Diluted (continuing
and discontinued)
2016
p
20.91
10.39
(3.44)
2015
p
12.52
10.54
(2.70)
30.36
27.94
(2.50)
(7.58)
27.86
20.36
A normalised EPS is disclosed in order to show performance undistorted by amortisation of intangibles. The Group defines normalised
earnings as excluding the amortisation of acquisition intangibles and exceptional costs and adjusted to reflect a full tax charge. The profit
attributable to shareholders before and after adjustments for both basic and diluted EPS is:
Normalised (continuing)
Normalised (discontinued)
Normalised (continuing
and discontinued)
Profit/(loss) attributable to shareholders:
– amortisation of acquisition intangibles
– full tax adjustment
Normalised earnings
2015
£’000
12,874
10,837
2016
£’000
2015
£’000
2016
£’000
2015
£’000
2016
£’000
24,096
10,690
20,673
10,837
(3,535)
(2,784)
(2,570)
(7,799)
21,526
—
—
— 10,690
—
(3,535)
(2,784)
31,251
28,726
(2,570)
(7,799)
28,681
20,927
Annual report and accounts 2016 113
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
9. Earnings per share continued
The calculation of EPS is based on a weighted average of ordinary shares in issue during the year. The diluted EPS is based on a weighted
average of ordinary shares calculated in accordance with IAS 33 ‘Earnings Per Share’, which assumes that all dilutive options will be exercised.
The additional normalised basic and diluted EPS use the same weighted average number of shares as the basic and diluted EPS.
Weighted average number of shares in issue:
– dilutive effect of share options
Weighted average number of shares for calculating diluted earnings per share
10. Goodwill
Gross carrying amount
At 1 January 2015
Additions on acquisition
At 1 January 2016
Revisions
At 31 December 2016
Accumulated impairment losses
2016
Million
2015
Million
102.35
101.77
0.57
1.06
102.92
102.83
Goodwill
arising on
consolidation
£’000
Purchased
goodwill
£’000
Total
£’000
191,597
1,055
192,652
654
406
192,003
—
1,055
406
193,058
—
654
193,306
406
193,712
At 1 January 2015, at 1 January 2016 and at 31 December 2016
—
—
—
Carrying amount
At 31 December 2016
At 31 December 2015
193,306
406
193,712
192,652
406
193,058
Goodwill on consolidation arises on the excess of cost of acquisition over the fair value of the net assets acquired on purchase of a company.
Purchased goodwill arises on the excess of cost of acquisition over the fair value of the net assets acquired on the purchase of the trade
and assets of a business by the Group.
Revisions to goodwill additions in prior years relate to liabilities not accrued at the time of the acquisition. These revisions are not
considered sufficiently material to warrant restatement of the prior year balances.
Goodwill is not amortised but is reviewed for impairment on an annual basis or more frequently if there are any indications that goodwill
may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units (CGUs) according to the
level at which management monitors that goodwill. Goodwill is carried at cost less accumulated impairment losses.
114
Mears Group PLC
Annual report and accounts 2016
Financial statements 10. Goodwill continued
The carrying value of goodwill is allocated to the following CGUs:
Housing
Care
Goodwill
arising on
consolidation
£’000
Purchased
goodwill
£’000
Total
£’000
93,655
99,651
406
94,061
— 99,651
193,306
406
193,712
An asset is impaired if its carrying value exceeds the unit’s recoverable amount which is based upon value in use. At 31 December 2016
impairment reviews were performed by comparing the carrying value with the value in use for the CGUs to which goodwill has been allocated.
The Housing CGU’s value in use is calculated from the Board-approved one-year budgeted cash flows and extrapolated cash flows for
the next four years discounted at a post-tax discount rate of 8.0% over a five-year period with a terminal value. The impairment reviews
incorporated a terminal growth assumption of 2.0%, in line with the UK long-term growth rate.
The Care CGU’s value in use is calculated from a detailed business plan deriving cash flows over a five-year review period, discounted at
a post-tax discount rate of 8.3% over a five-year period with a terminal value. The impairment review incorporated a terminal growth assumption
of 2.5%, which, whilst marginally higher than the UK long-term growth rate of 2.0%, is supported by the underlying demographics
underpinning strong organic growth in adult social care.
The estimated growth rates are based on knowledge of the individual CGU’s sector and market and represent management’s base level
expectations for future growth, dependent on the CGU. Changes to revenue and direct costs are based on past experience and expectation
of future changes within the markets of the CGUs. All CGUs have the same access to the Group’s Treasury function and borrowing
arrangements to finance their operations.
The rates used were as follows:
Housing
Care
Post-tax
discount
rate
8.00%
8.30%
Pre-tax
discount
rate
9.10%
9.47%
Volume
growth
rate
(years 1-5)
5.00%
2.91%
Terminal
growth
rate
2.00%
2.50%
Housing
The contracts awarded within the social housing area are significant in size and the contract terms typically average six years in duration.
The record of Mears in retaining contracts on expiry is typically over 90%.
Budgeted operating profits during the budget period are estimated by reference to the operating margin achieved in the period leading
up to the start of the budget period, flexed for known changes in either the pricing mechanism or the cost base at a contract level.
There is no inclusion of any anticipated efficiency improvements which have not been formally committed to before the year end.
The Directors consider that reasonably possible changes in these key assumptions would not cause a CGU’s carrying amount to exceed
its recoverable amount.
Annual report and accounts 2016 115
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
10. Goodwill continued
Care
Management recognises that there remain significant difficulties within the homecare market, although the sector has seen some
improvements over the last twelve months. The introduction of the National Living Wage proved a significant boost for providers, with
a large number of Local Authorities materially increasing their charge rates, recognising that much of the cost increase in recent years
has been absorbed by care providers. Providers have typically passed these rate increases onto their carers in full, adding some stability
in a the sector where recruitment and retention represent a significant constraint. The care market in Scotland went further, with all
Local Authorities adopting the Scottish Living Wage, a minimum pay rate of £8.25 per hour versus the statutory National Living Wage
rate of £7.20.
Notwithstanding the improvements, market conditions remain challenging. The Directors note that, given these pressures, a number
of competitors are withdrawing from the homecare market, which reflects the difficult conditions but could in part also provide some
opportunity. Mears has increased carer pay rates significantly over the last three years, which has reduced margin but improved Mears’
operating position. The Group continues to see significant new contract opportunities as well as opportunities to increase volumes of work
with existing clients. Whilst there are still examples of poor commissioning practices, the Directors are confident there are sufficient
new bidding opportunities to deliver against the Group’s growth forecast.
As part of the annual impairment testing, management performed an extensive business planning process which involved a detailed review,
on a contract-by-contract basis, of charge rates and carer pay rates. The process allowed management to appraise the performance
of branches against objectives set, and further increased understanding of the main drivers behind negative carer recruitment and retention
performance. Carer pay rates continue to be the principal barrier to successful recruitment and retention, but there are a number
of factors around culture, working practices and recognition which impact upon maintaining a stable workforce.
The business plan identified a number of key factors, which are built in to the value-in-use calculation:
→ Mears has become increasingly selective, targeting those contracts where the pricing, longevity and spend certainty allow Mears to
deliver a high quality service at sustainable margins. During the year, Mears was successful in maintaining its historical contract win rates,
achieving this while securing an average charge rate over 25% higher than those rates tendered in 2015. As a result, management
has made what is considered to be a conservative assumption, modelling an annual increase of 6,000 hours per week, which will
be achieved through new contract bidding. This is well below the actual outcome achieved in 2016.
→ Recruitment and retention of quality care workers continue to be challenging. Retention methods implemented following the 2015
business planning process have been successful, resulting in reduced carer churn rates. However, recruitment remains challenging
and this is expected to continue during the short term, whilst our whole contract portfolio aligns with our new contract bidding strategy.
Mears recognises that traditional localised recruitment plays a vital role, aiding recruitment from the existing carer workforce pool.
In an attempt to encourage new talent to the care at home market, Mears is utilising innovative recruitment tools to ensure breadth of
coverage in attracting new care workers to the sector. Mears’ internal recruitment plan anticipates modest growth during the medium
and long term which, on average, equates to three additional carers per year per branch; this represents an increase of 300 carers
per year on an existing workforce of 8,000 carers which is considered realistic. However, conservatively, the business plan underpinning
the impairment review has stripped out this expected increase and assumes no growth as a result of improved recruitment
and retention practices.
→ Mears is committed to leading the way with carer pay rates; the increase in the National Living Wage in April will further increase
direct costs from 1 April 2017. Management will look to maintain a significant differential between Mears pay rates and the National
Living Wage to ensure it remains the employer of choice in the homecare sector. Mears had a successful contract negotiation period
following the initial introduction of the National Living Wage in April 2016, during which an average charge increase of 7% was secured.
Given the Government has provided a clear indication of its intention to increase the National Living Wage to £9.00 per hour in 2020,
the Directors have assumed an increase in carer pay rates of 5.0% per annum. The Directors are confident that charge rate increases
will be received from clients to match the increase in the cost base. The percentage increase assumed for charge rates matches that
of carer pay rates in each year throughout the business plan.
116
Mears Group PLC
Annual report and accounts 2016
Financial statements 10. Goodwill continued
Care continued
Management considers that the Care value-in-use calculation is most sensitive to changes in the terminal growth rate, discount rate
and EBITA margin. The table below shows the sensitivity of the headroom (£m) to simultaneous changes in the discount rate and the
long-term growth rate.
Long-term growth rate
1.3%
1.7%
2.1%
2.5%
2.9%
3.3%
3.7%
11. Other intangible assets
Gross carrying amount
At 1 January 2015
Acquired on acquisition
Additions
At 1 January 2016
Revisions
Additions
At 31 December 2016
Accumulated amortisation
At 1 January 2015
Amortisation charge for period
At 1 January 2016
Amortisation charge for period
At 31 December 2016
Carrying amount
At 31 December 2016
At 31 December 2015
7.1%
14.5
23.7
32.9
43.6
56.6
72.3
91.6
7.5%
4.9
12.3
20.6
29.6
40.1
52.7
68.0
Discount rate
7.9%
(3.6)
3.3
9.9
17.5
26.3
36.6
48.9
8.3%
8.7%
9.1%
9.5%
(11.0)
(5.0)
0.7
7.1
14.5
23.1
33.1
(17.7)
(12.4)
(7.5)
(1.9)
4.4
11.6
20.0
(23.6)
(18.9)
(14.7)
(9.9)
(4.5)
1.7
8.7
(29.0)
(24.8)
(21.0)
(16.9)
(12.2)
(6.9)
(0.9)
Acquisition intangibles
Other intangibles
Client
relationships
£’000
Order
book
£’000
acquisition Development
expenditure
intangibles
£’000
£’000
Intellectual
property
£’000
Total
Total
other
intangibles
£’000
Total
intangibles
£’000
71,761
19,360
91,121
7,355
377
—
5,272
5,649
—
—
—
2,978
224
—
—
7,579
98,700
—
2,978
5,649
2,978
72,138
24,632
96,770
10,333
224
10,557
107,327
—
—
3,685
3,685
—
—
—
2,904
—
—
—
2,904
3,685
2,904
72,138
28,317
100,455
13,237
224
13,461
113,916
41,352
17,812
7,679
3,158
49,031
20,970
7,313
3,377
59,164
10,837
70,001
10,690
56,344
24,347
80,691
15,794
3,970
19,764
23,107
3,662
26,769
3,937
1,314
5,251
1,837
7,088
6,149
5,082
224
—
224
—
224
—
—
4,161
1,314
5,475
1,837
63,325
12,151
75,476
12,527
7,312
88,003
6,149
25,913
5,082
31,851
Annual report and accounts 2016 117
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
11. Other intangible assets continued
Revisions to acquisition intangibles additions in prior years relate to liabilities not accrued at the time of the acquisition. These revisions
are not considered sufficiently material to warrant restatement of the prior year balances.
Development expenditure is an internally developed intangible asset and relates largely to the development of the Group’s Housing job
management system, the Group’s Care management system and the UK Planning Portal website. Development expenditure is amortised over
its useful economic life of 5.0 years. The weighted average remaining economic life of the asset is 3.0 years (2015: 3.5 years).
Intellectual property is amortised over its useful economic life, typically 5.0 years.
Amortisation of development expenditure is included within other administrative expenses. Amortisation of acquisition intangibles
is presented separately.
The value placed on the order book is based upon the cash flow projections over the contracts in place when a business is acquired.
Due to uncertainties in trying to forecast revenues beyond the contract term, the Directors have taken a measure of conservatism and
value contracts over the contractual term only. The value of the order book is amortised over its remaining life.
The value placed on the customer relationships is based upon the non-contractual expected cash inflows. These cash flow projections
assume a customer attrition rate of 5% based upon three-year historic trends.
12. Property, plant and equipment
Freehold
property
£’000
Leasehold
improvements
£’000
Plant and
machinery
£’000
Fixtures,
fittings and
equipment
£’000
Motor
vehicles
£’000
Total
£’000
691
10,007
3,289
33,527
1,361
48,875
—
97
—
—
2,319
(68)
—
136
(444)
7,299
3,665
(40)
39
—
(11)
7,338
6,217
(563)
788
12,258
2,981
44,451
1,389
61,867
—
—
—
—
1,777
(82)
—
113
54
5,535
—
—
54
7,425
(204)
(3,370)
(94)
(3,750)
788
13,953
2,890
46,670
1,295
65,596
—
—
—
—
—
—
—
—
—
788
788
6,786
1,807
23,147
1,255
32,995
—
996
(25)
—
372
(360)
5,894
3,538
(38)
11
57
(9)
5,905
4,963
(432)
7,757
1,819
32,541
1,314
43,431
—
1,202
(82)
8,877
5,076
4,501
—
310
26
4,040
—
21
26
5,573
(204)
(3,319)
(94)
(3,699)
1,925
33,288
1,241
45,331
965
13,382
1,162
11,910
54
75
20,265
18,436
Gross carrying amount
At 1 January 2015
Acquired on acquisition
Additions
Disposals
At 1 January 2016
Acquired on acquisition
Additions
Disposals
At 31 December 2016
Depreciation
At 1 January 2015
Acquired on acquisition
Provided in the year
Eliminated on disposals
At 1 January 2016
Acquired on acquisition
Provided in the year
Eliminated on disposals
At 31 December 2016
Carrying amount
At 31 December 2016
At 31 December 2015
118
Mears Group PLC
Annual report and accounts 2016
Financial statements 13. Investments
The subsidiary undertakings within the Group at 31 December 2016 are shown below:
3c Asset Management Limited
Ardmore Homecare Limited
Careforce Group Plc
Careforce Services Limited
Coulter Estates Limited
Electrical Contracting Services (UK) Limited
Energy Insurance Services Limited
Evolve Housing Limited
Heather Housing Limited
Heatherpark Community Services Limited
Helcim Group Limited
Helcim Homes Limited
ILS Group Limited
ILS Trustees Limited
Independent Living Services (ILS) Limited
Insitu Care Limited
Jackson Lloyd Limited
Laidlaw Scott Limited
Let to Birmingham Limited
Manchester Working Limited
Mears 24/7 LLP
Mears Building Contractors Limited
Mears Building Services Limited
Mears Care (Holdings) Limited
Mears Care (Northern Ireland) Limited
Mears Care (Scotland) Limited
Mears Care Limited
Mears Community Care Agency Limited
Mears Decorating Services Limited
Mears Energy Limited
Mears Estates Limited
Mears Facility Management Limited
Mears Home Improvement Limited
Mears Homecare Limited
Mears Homes Limited
Mears Housing Management Limited
Proportion
held
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
80%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Country of registration
England and Wales
England and Wales
England and Wales
England and Wales
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
Scotland
England and Wales
England and Wales
Scotland
Scotland
Scotland
England and Wales
England and Wales
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Northern Ireland
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Nature of business
Maintenance services
Dormant
Dormant
Dormant
Provision of care
Dormant
Insurance services
Dormant
Housing management services
Provision of care
Dormant
Dormant
Dormant
Dormant
Provision of care
Dormant
Dormant
Dormant
Housing management services
Maintenance services
Call centre services
Dormant
Dormant
Intermediate holding company
Provision of care
Provision of care
Provision of care
Dormant
Dormant
Dormant
Grounds maintenance
Dormant
Maintenance services
Provision of care
Dormant
Intermediate holding company
Annual report and accounts 2016 119
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
13. Investments continued
Mears Insurance Company Limited
Mears Learning Limited
Mears Lifetime Homes Limited
Mears Limited
Mears Mechanical & Electrical Limited
Mears Modular Homes Limited
Mears New Homes Limited
Mears Scotland (Housing) Limited
Mears Scotland (Services) Limited
Mears Scotland LLP
Mears Social Housing Limited
Mears Wales Limited
Mears Window and Door Maintenance Limited
Morrison Facilities Services Limited
Nurseplus Limited
O&T Developments Limited
Omega Housing Limited
Omega Lettings Limited
Planning Portal Limited
Plexus UK (First Project) Limited
Plexus UK (Systems) Limited
PortalPlanQuest Limited
Potton Road Management Company Limited
Powersave Limited
PS Business Services Limited
PS Payroll Services Limited
R Carter and Son (Painting Contractors) Limited
Robert Hawkins (Contractors) Limited
Scion Group Limited
Scion Property Services Limited
Scion Technical Services Limited
Supporta Limited
Supporta Services Limited
Tando Homes Limited
Tando Property Services Limited
Terraquest Group Limited
Terraquest Limited
Terraquest Solutions Limited
West Haddon Management Company Limited
Zenon Property Services Limited
Proportion
held
99.99%
90%
100%
100%
100%
100%
90%
100%
66.67%
66.67%
100%
100%
100%
100%
100%
75%
100%
100%
75%
100%
100%
75%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
75%
75%
100%
100%
100%
90%
100%
Country of registration
Guernsey
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Scotland
Scotland
Scotland
England and Wales
England and Wales
England and Wales
Scotland
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Scotland
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
England and Wales
Nature of business
Insurance services
Training provider
Dormant
Maintenance services
Dormant
Dormant
House building
Dormant
Maintenance services
Maintenance services
Dormant
Dormant
Dormant
Maintenance services
Provision of care
Housing management services
Housing registered provider
Housing management services
Dormant
Housing registered provider
Dormant
Professional services
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Maintenance services
Dormant
Dormant
Housing management services
Housing management services
Dormant
Dormant
Professional services
Dormant
Maintenance services
All subsidiary undertakings with the exception of Manchester Working Limited and Omega Housing Limited prepare accounts to
31 December. Manchester Working Limited prepares accounts to 31 March in line with the minority shareholder. Omega Housing Limited
prepares accounts to 31 March in line with its historical accounting reference date.
120
Mears Group PLC
Annual report and accounts 2016
Financial statements 13. Investments continued
At 1 January 2016 the Group reassessed the level of influence it held over Mears 24/7 LLP and concluded that the threshold for control
had been met. In accordance with IFRS 10, the Group has accounted for this entity as a subsidiary from that date.
The Group includes two subsidiaries, Mears Scotland LLP and Manchester Working Limited, with material non-controlling interests.
The table below sets out selected financial information in respect of those subsidiaries:
Revenue and profits
Revenue
Expenses and taxation
Profit for the year
Other comprehensive expense
Total comprehensive income
Profit/(loss) for the year allocated to non-controlling interests
Total comprehensive expense allocated to non-controlling interests
Net assets
Non-current assets
Current assets
Current liabilities
Total assets less total liabilities
Equity shareholders’ funds
Non-controlling interests
Total equity
2016
£’000
2015
£’000
88,192
84,452
(85,400)
(83,473)
2,792
—
2,792
804
—
979
—
979
(273)
—
266
295
25,333
24,187
(27,719)
(29,394)
(2,120)
(4,912)
(729)
(1,391)
(2,717)
(2,195)
(2,120)
(4,912)
The Group held investments in the following joint ventures at 31 December 2016:
Asert LLP
More Homes Bromley LLP
YourMK LLP
Proportion
held
50%
50%
50%
Country of registration
England and Wales
England and Wales
England and Wales
Nature of business
Dormant
Housing management services
Maintenance services
Annual report and accounts 2016 121
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
13. Investments continued
The following UK subsidiaries will take advantage of the audit exemption set out within Section 479A of the Companies Act 2006
for the year ending 31 December 2016:
3c Asset Management Limited
Coulter Estates Limited
Heatherpark Community Services Limited
ILS Group Limited
Independent Living Services (ILS) Limited
Let to Birmingham Limited
Mears Care (Holdings) Limited
Mears Estates Limited
Mears Home Improvement Limited
Mears Housing Management Limited
Scion Group Limited
Scion Technical Services Limited
Zenon Property Services Limited
14. Inventories
Materials and consumables
Work in progress
Registration number
02859913
SC148145
SC314108
SC285635
SC184499
08757503
03689426
03720903
03716517
04726480
03905442
03671450
07448134
2016
£’000
5,243
5,991
11,234
2015
£’000
4,979
4,042
9,021
The Group consumed inventories totalling £695.2m during the year (2015: £649.0m). No items are being carried at fair value less costs
to sell (2015: £nil).
15. Trade and other receivables
Current assets:
– trade receivables
– amounts recoverable on non-construction contracts
– prepayments and accrued income
Total trade and other receivables
2016
£’000
2015
£’000
49,086
98,405
9,690
47,364
90,627
8,888
157,181
146,879
Trade receivables are normally due within 30 to 60 days and do not bear any effective interest rate. All trade receivables and accrued
income are subject to credit risk exposure. Housing customers are typically Local Authorities and Housing Associations where credit
risk is minimal. Care customers are typically Local Authorities and NHS Trusts where credit risk is minimal.
The ageing analysis of trade receivables is as follows:
Neither impaired nor past due
Less than three months past due but not impaired
More than three months past due but not impaired
Total trade and other receivables
122
Mears Group PLC
Annual report and accounts 2016
2016
£’000
2015
£’000
46,032
40,869
1,904
1,150
4,008
2,487
49,086
47,364
Financial statements 16. Trade and other payables
Trade payables
Accruals and deferred income
Social security and other taxes
Payments on account for non-construction contract work
Finance lease liabilities
Other creditors
2016
£’000
2015
£’000
111,490
100,385
45,571
20,896
54,945
23,669
19
113
140
386
9,175
14,578
187,264
194,103
The fair value of trade payables has not been disclosed as, due to their short duration, management considers the carrying amounts
recognised in the Balance Sheet to be a reasonable approximation of their fair value.
Included in other creditors is £5.0m (2015: £10.5m) relating to contingent consideration on acquisitions.
17. Financial assets and liabilities
Current assets:
– diesel hedge
Non-current assets:
– diesel hedge
Total financial assets
Current liabilities:
– interest rate swaps
Non-current liabilities:
– interest rate swaps
Total financial liabilities
18. Long-term other liabilities
Other creditors
2016
£’000
839
677
1,516
2015
£’000
—
—
—
478
510
612
1,090
368
878
2016
£’000
2015
£’000
15,950
15,396
Included in other creditors is £5.3m (2015: £10.4m) relating to contingent consideration on acquisitions and £6.2m relating to a forward
purchase agreement in respect of 25% of Tando Property Services Limited, Tando Homes Limited and O&T Developments Limited.
Annual report and accounts 2016 123
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
19. Financial instruments
The Group uses a limited number of financial instruments comprising cash and liquid resources, borrowings, interest rate swaps and
various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial
instruments is to finance the Group’s operations. The Group seeks to finance its operations through a combination of retained earnings
and borrowings and investing surplus cash on deposit. The Group uses financial instruments to manage the interest rate risks arising
from its operations and sources of finance but has no interests in the trade of financial instruments.
Categories of financial instruments
Financial assets
Fair value (level 2)
Diesel hedge – ineffective
Amortised cost
Trade receivables
Amounts recoverable on contracts
Cash at bank and in hand
Financial liabilities
Fair value (level 2)
Interest rate swaps – effective
Fair value (level 3)
Deferred and contingent consideration in respect of acquisitions
Amortised cost
Bank borrowings and overdrafts
Trade payables
Accruals and deferred income
Other creditors
2016
£’000
2015
£’000
1,516
—
49,086
98,405
52,904
47,364
90,627
68,612
201,911
206,603
(1,090)
(878)
(16,457)
(20,861)
(65,278)
(67,790)
(111,490)
(100,385)
(44,055)
(54,945)
(8,668)
(9,113)
(247,038)
(253,972)
(45,127)
(47,369)
The IFRS 13 hierarchy level categorisation relates to the extent the fair value can be determined by reference to comparable market
values. The classifications range from level 1, where instruments are quoted on an active market, through to level 3, where the
assumptions used to arrive at fair value do not have comparable market data.
The fair values of diesel hedges and interest rate swaps have been calculated by a third party expert discounting estimated future cash
flows on the basis of market expectations of future interest rates and the wholesale price of diesel (level 2).
The amount of contingent consideration payable is generally determined by future expected profits of the acquired businesses.
The fair values of contingent consideration have been calculated by the Directors by reference to expected future income and expenditure
in respect of the acquired businesses.
There have been no transfers between levels during the year.
Fair value information
The fair value of the Group’s financial assets and liabilities is as disclosed above and approximates to the book value.
Financial risk management
The Group’s activities expose it to a variety of financial risks: market risk (including interest rate risk and price risk); credit risk; and
liquidity risk. The main risks faced by the Group relate to the availability of funds to meet business needs and the risk of credit default
by customers. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to
minimise potential adverse effects on the Group’s financial performance.
Risk management is carried out under policies and guidelines approved by the Board of Directors.
124
Mears Group PLC
Annual report and accounts 2016
Financial statements 19. Financial instruments continued
Borrowing facilities
The Group’s borrowing facilities are drawn on as required to manage its cash needs. Banking facilities are reviewed regularly
and extended and replaced in advance of their expiry.
The Group had total borrowing facilities of £140.0m with Barclays Bank PLC and HSBC Bank plc, of which £65.0m was utilised
at 31 December 2016.
The facilities comprise a committed four-year £130.0m revolving credit facility and an unsecured overdraft facility of £10.0m.
The undrawn amounts at 31 December 2016 were a £65.0m revolving credit facility and an overdraft facility of £10.0m.
Interest rate risk management
The Group finances its operations through a mixture of retained profits and bank borrowings from major banking institutions at floating
rates of interest based on LIBOR. The Group’s exposure to interest rate fluctuations on borrowings is managed through the use of interest
rate swaps; hence the fixed rate borrowings relate to floating rate loans where the interest rate has been fixed by a hedging arrangement.
The fair value of interest rate exposure on financial liabilities of the Group as at 31 December 2016 was:
Financial liabilities – 2016
Financial liabilities – 2015
Interest rate
Fixed
£’000
Floating
£’000
Zero
£’000
Total
£’000
30,000
35,248
10,294
75,542
57,500
10,290
20,861
88,651
The Group’s policy is to accept a degree of interest rate risk, provided the effects of the various potential changes in rates remain within
certain prescribed parameters.
Accordingly, at 31 December 2016 the Group had hedged the first £30.0m of the £140.0m total borrowing facilities by entering into an
interest rate swap arrangement with Barclays Bank PLC. This consists of one £30.0m swap contract expiring in August 2018, with quarterly
maturity, matching the underlying facility.
The maturity of the interest rate swap contracts is as follows:
Within one year
One to two years
Two to five years
More than five years
2016
2015
Nominal
amount
hedged
£’000
Average
applicable
interest
rates
%
Nominal
amount
hedged
£’000
Average
applicable
interest
rates
%
—
— 27,500
1.92%
30,000
1.85%
—
—
—
—
— 30,000
1.85%
—
—
—
The Group has also entered into a further five interest rate swap arrangements with HSBC Bank PLC, three £10.0m swap contracts with
a deferred start date of January 2017 expiring December 2020 at an applicable interest rate of 0.84% and two £15.0m swap contracts
with a deferred start date of August 2018 expiring August 2021 at an applicable interest rate of 0.96%.
Effective interest rates
Interest rate swaps with fair value liabilities of £1.1m (2015: £0.9m) and average remaining lives of three years and seven months have
been accounted for in financial liabilities.
The Group’s overall average cost of debt, including effective interest rate swaps, is 2.6% as at 31 December 2016 (2015: 3.0%). Excluding
these swaps the average is 1.9% (2015: 2.1%).
Cash flow hedging reserve
The cash flow hedging reserve comprises all gains and losses arising from the valuation of interest swap contracts which are effective
hedges and mature after the year end. These are valued on a mark-to-market basis, accounted for through the Consolidated Statement
of Comprehensive Income and recycled through the Consolidated Income Statement when the hedged item affects the Consolidated
Income Statement.
Annual report and accounts 2016 125
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
19. Financial instruments continued
Cash flow hedging reserve continued
Movements during the year were:
At 1 January 2015
Amounts transferred to the Consolidated Income Statement
Revaluations during the year
Deferred tax movement
At 1 January 2016
Amounts transferred to the Consolidated Income Statement
Revaluations during the year
Deferred tax movement
At 31 December 2016
£’000
(962)
559
(72)
(97)
(572)
643
(884)
39
(774)
At 31 December 2016 the Group had minimal exposure to movements in interest rates as the remaining interest rate risk was offset
by the Group’s cash and short-term deposits.
If the interest rates had been 0.5% higher or lower and all other variables were held constant, the Group’s profit before taxation
for the year ended 31 December 2016 and reserves would decrease or increase, respectively, by £0.2m (2015: £0.1m).
Liquidity risk management
The Group seeks to manage liquidity risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash
assets safely and profitably.
Management monitors rolling forecasts of the Group’s liquidity reserve (comprising undrawn borrowing facilities and cash and cash
equivalents) on the basis of expected cash flows. This is generally carried out at a local level in the operating companies of the Group
in accordance with the practice and limits set by the Group. These limits vary by location and take into account the liquidity and nature
of the market in which the entity operates.
The quantum of committed borrowing facilities of the Group is regularly reviewed and is designed to exceed forecasted peak gross debt
levels. For short-term working capital purposes, the Group utilises bank overdrafts as required. These facilities are regularly reviewed
and are renegotiated ahead of their expiry date.
The table below shows the maturity profile of the Group’s financial liabilities:
Within
1 year
£’000
1–2
years
£’000
2–5
years
£’000
Over 5
years
£’000
Total
£’000
5,278
— 60,000
159,720
4,493
5,000
11,457
—
—
— 65,278
— 164,213
— 16,457
478
375
226
11
1,090
2016
Non-derivative financial liabilities
Bank borrowings
Trade and other payables
Deferred and contingent consideration in respect of acquisitions
Derivative financial liabilities
Interest rate swaps – effective
2015
Non-derivative financial liabilities
Bank borrowings
Trade and other payables
10,290
159,465
4,978
— 57,500
—
—
— 67,790
— 164,443
— 20,861
Deferred and contingent consideration in respect of acquisitions
10,443
10,418
Derivative financial liabilities
Interest rate swaps – effective
510
210
158
—
878
The Group has disclosed core bank borrowings of £60.0m as due in two to five years. Whilst the amounts borrowed could be repaid each
quarter, the Group’s intention is to align core bank borrowings with its interest rate swaps.
126
Mears Group PLC
Annual report and accounts 2016
Financial statements 19. Financial instruments continued
Credit risk management
The Group’s credit risk is primarily attributable to its trade receivables, amounts recoverable on contracts and work in progress.
Trade receivables are normally due within 30 to 60 days. Trade and other receivables included in the Balance Sheet are stated net of a
bad debt provision which has been estimated by management following a review of individual receivable accounts. There is no Group-wide
rate of provision and provision made for debts that are overdue is based on prior default experience and known factors at the balance
sheet date. Receivables are written off against the bad debt provision when management considers that the debt is no longer recoverable.
Housing customers are typically Local Authorities and Housing Associations. Care customers are typically Local Authorities and the NHS.
The nature of both of these customers means that credit risk is minimal. Other trade receivables contain no specific concentration of credit
risk as the amounts recognised represent a large number of receivables from various customers.
The Group continually monitors the position of major customers and incorporates this information into its credit risk controls.
External credit ratings are obtained where appropriate.
Details of the ageing of trade receivables are shown in note 15.
Deferred and contingent consideration
The table below shows the movements in deferred and contingent consideration:
At 1 January 2015
Increase due to new acquisitions in the year
Paid in respect of acquisitions
Released on reassessment
Unwinding of discounting
At 1 January 2016
Increase due to forward purchase agreement
Paid in respect of acquisitions
Released on reassessment
At 31 December 2016
Total
£’000
21,045
123
(7)
(425)
125
20,861
6,163
(10,019)
(548)
16,457
Contingent consideration represents an estimate of future consideration likely to be payable in respect of acquisitions. Contingent
consideration is discounted for the likelihood of payment and for the time value of money. Contingent consideration becomes payable
based upon the profitability of acquired businesses or, in the case of one specific acquisition, the utilisation of certain timing differences
in respect of corporation tax. The fair value of contingent consideration is estimated by forecasting future profits and utilising the
forecast to determine the likely contingent consideration payable.
Information as to the likely timing of payments in respect of these provisions’ financial liabilities is provided earlier within this note.
Annual report and accounts 2016 127
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
19. Financial instruments continued
Capital management
The Group’s objectives when managing capital are:
→ to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders
and benefits for other stakeholders;
→ to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk; and
→ to maintain an optimal capital structure to reduce the cost of capital.
The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in
light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital
structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell
assets to reduce debt.
The capital structure of the Group consists of net debt as disclosed below and equity as disclosed in the Consolidated Statement
of Changes in Equity.
Cash and cash equivalents is comprised as follows:
– cash at bank and in hand
– bank borrowings and overdrafts
Cash and cash equivalents
20. Deferred taxation
Deferred tax is calculated on temporary differences under the liability method.
Deferred tax asset
The following deferred tax assets were recognised by the Group as at 31 December 2016:
2016
£’000
2015
£’000
52,904
68,612
(65,278)
(67,790)
(12,374)
822
Pension Share-based
payments
scheme
£’000
£’000
Cash flow
hedges
£’000
Tax
losses
£’000
Short-term
temporary
differences
£’000
1,675
1,311
257
4,358
—
(1,598)
—
—
972
178
759
—
—
2,760
(588)
1,909
(230)
—
—
—
—
—
—
—
(97)
160
—
—
(160)
Total
£’000
8,573
178
(697)
(552)
(918)
6,584
(681)
(635)
436
—
2,172
1,679
5,704
—
(9)
—
(821)
845
72
—
596
1,513
—
151
(552)
—
910
65
(635)
—
340
At 1 January 2015
Acquired on acquisition
(Debit)/credit to Consolidated Income Statement
Debit to Consolidated Statement of Changes in Equity
Debit to Consolidated Statement of Comprehensive Income
At 1 January 2016
Credit/(debit) to Consolidated Income Statement
Debit to Consolidated Statement of Changes in Equity
Credit/(debit) to Consolidated Statement of Comprehensive Income
At 31 December 2016
128
Mears Group PLC
Annual report and accounts 2016
Financial statements 20. Deferred taxation continued
Deferred tax asset continued
In accordance with IFRS 2 ‘Share-based Payments’, the Group has recognised an expense for the consumption of employee services
received as consideration for share options granted. A tax deduction will not arise until the options are exercised. The tax deduction in
future periods is dependent upon the Company’s share price at the date of exercise. The estimated future tax deduction is based on the
options’ intrinsic value at the balance sheet date.
The cumulative amount credited to the Consolidated Income Statement is limited to the tax effect of the associated cumulative
share-based payment expense. The excess has been credited directly to equity. This is presented in the Consolidated Statement
of Comprehensive Income.
In addition to those recognised on the previous page, unused tax losses totalling £31.3m (2015: £32.9m) have not been recognised
as the Directors do not consider that it is probable that they will be recovered.
The following deferred tax liabilities were recognised by the Group as at 31 December 2016:
Deferred tax liabilities
At 1 January 2015
Acquired on acquisition
Debit/(credit) to Consolidated Income Statement
Credit to Consolidated Statement of Comprehensive Income
At 1 January 2016
Acquired on acquisition
Debit/(credit) to Consolidated Income Statement
Debit to Consolidated Statement of Comprehensive Income
At 31 December 2016
Pension
scheme
£’000
3,026
—
124
(1,496)
1,654
—
73
1,400
3,127
Acquisition
intangibles
£’000
Cash flow
hedges
£’000
6,392
1,054
(2,130)
—
5,316
654
(2,066)
—
3,904
—
—
—
—
—
—
—
89
89
Total
£’000
9,418
1,054
(2,006)
(1,496)
6,970
654
(1,993)
1,489
7,120
Intangible assets acquired as part of a business combination are capitalised at fair value at the date of the acquisition and amortised
over their useful economic lives. The UK tax regime calculates tax using the individual financial statements of the members of the
Group and not the consolidated accounts. Hence, the tax base of acquisition intangible assets is £nil. The estimated tax effect of this
£nil tax base is accounted for as a deferred tax liability which is released over the period of amortisation of the associated acquisition
intangible asset.
Annual report and accounts 2016 129
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
21. Share capital and reserves
Classes of reserves
Share capital represents the nominal value of shares that have been issued.
Share premium represents the difference between the nominal value of shares issued and the total consideration received.
Share-based payment reserve represents employee remuneration which is credited to the share-based payment reserve until the related
share options are exercised. Upon exercise the share-based payment reserve is transferred to retained earnings.
The cash flow hedging reserve comprises all gains and losses arising from the valuation of interest swap contracts which are effective
hedges and mature after the year end. These are valued on a mark-to-market basis, accounted for through the Statement of Comprehensive
Income and recycled through the Consolidated Income Statement when the hedged item affects the Consolidated Income Statement.
The merger reserve relates to the difference between the nominal value and total consideration in respect of acquisitions, where
the Company was entitled to the merger relief offered by the Companies Act.
Share capital
Allotted, called up and fully paid
At 1 January 101,938,335 (2015: 101,134,142) ordinary shares of 1p each
Issue of 621,464 (2015: 804,193) shares on exercise of share options
At 31 December 102,559,799 (2015: 101,938,335) ordinary shares of 1p each
2016
£’000
2015
£’000
1,019
1,011
7
8
1,026
1,019
During the year 621,464 (2015: 804,193) ordinary 1p shares were issued in respect of share options exercised. The difference between
the nominal value of £0.007m and the total consideration of £0.2m has been credited to the share premium account.
22. Notes to the Consolidated Cash Flow Statement
The following non-operating cash flow adjustments have been made to the result for the year before tax:
Depreciation
Loss on disposal of property, plant and equipment
Amortisation
Share-based payments
IAS 19 pension movement
Finance income
Finance cost
Total
2016
£’000
2015
£’000
5,573
4,963
48
45
12,527
12,151
324
(770)
(67)
771
(660)
(158)
2,803
2,775
20,438
19,887
130
Mears Group PLC
Annual report and accounts 2016
Financial statements 23. Acquisitions
On 1 January 2016 the Group reassessed the level of influence it held over Mears 24/7 LLP and concluded that the threshold for control
had been met and therefore, in accordance with IFRS 10, the Group has accounted for this entity as a subsidiary from that date.
The effect of this reassessment is an increase in trade assets of £0.8m and an increase in trade payables of £0.7m. In the period ended
31 December 2016, the acquisition contributed revenue of £3.0m and an operating profit of £0.1m.
Analysis of net outflow in respect of the purchase of the subsidiary undertakings:
Cash payments in respect of prior year acquisitions
Total
£’000
10,019
24. Pensions
Defined contribution schemes
The Group operates a defined contribution Group personal pension scheme for the benefit of certain employees. The Group contributes
to personal pension schemes of certain Directors and senior employees. The Group operates a stakeholder pension plan available to all
employees. During the year, the Group contributed £2.3m (2015: £2.3m) to these schemes.
IAS 19 ‘Employee Benefits’
The Group contributes to 35 (2015: 32) principal defined benefit schemes on behalf of a number of employees which require
contributions to be made to separately administered funds.
These pension schemes are operated on behalf of Mears Limited, Mears Care Limited, Morrison Facilities Services Limited and their
subsidiary undertakings. The assets of the schemes are administered by trustees in funds independent from the assets of the Group.
In certain cases, the Group will participate under Admitted Body status in the Local Government Pension Scheme. The Group will
contribute for a finite period up until the end of the particular contract. The Group is required to pay regular contributions as detailed in
the scheme’s schedule of contributions. In some cases these contributions are capped and any excess can be recovered from the body
from which the employees originally transferred. Where the Group has a contractual right to recover the costs of making good any
deficit in the scheme from the Group’s client, the fair value of that asset has been recognised within the Group’s share of the scheme
assets and disclosed on page 132. Certain judgements around the value of this asset have been made and are discussed in the
judgements and estimates disclosure within the accounting policies.
The disclosures in respect of the two (2015: two) Group defined benefit schemes and the 33 (2015: 30) other defined benefit schemes
in this note have been aggregated.
Costs and liabilities of the schemes are based on actuarial valuations. The latest full actuarial valuations for the schemes were
updated to 31 December 2016 by qualified independent actuaries using the projected unit method.
The principal actuarial assumptions at the balance sheet date are as follows:
Rate of increase of salaries – first year
Rate of increase of salaries – second year
Rate of increase of salaries – long term
Rate of increase for pensions in payment – based on CPI with a cap of 5%
Rate of increase for pensions in payment – based on RPI with a cap of 5%
Rate of increase for pensions in payment – based on CPI with a cap of 3%
Rate of increase for pensions in payment – based on RPI with a cap of 3%
Discount rate
Retail prices inflation
Consumer prices inflation
Life expectancy for a 65-year-old male
Life expectancy for a 65-year-old female
2016
2015
1.00%
1.00%
3.35%
2.45%
3.25%
2.10%
2.55%
3.05%
3.35%
2.45%
1.00%
1.00%
3.30%
2.40%
3.20%
2.10%
2.55%
3.95%
3.30%
2.40%
23.9 years
22.4 years
26.4 years
24.7 years
Annual report and accounts 2016 131
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
24. Pensions continued
IAS 19 ‘Employee Benefits’ continued
The amounts recognised in the Consolidated Balance Sheet and major categories of plan assets are:
Equities – quoted
Equities – unquoted
Bonds – quoted
Bonds – unquoted
Guarantee
Property – quoted
Property – unquoted
Cash
Group
schemes
£’000
2016
Other
schemes
£’000
Total
£’000
Group
schemes
£’000
2015
Other
schemes
£’000
Total
£’000
36,470
236,932
273,402
39,997
184,989
224,986
— 20,368
20,368
— 24,047
24,047
88,412
77,900
166,312
64,989
62,591
127,580
—
7,932
— 18,587
2,004
10,201
— 15,884
22,643
34,887
7,932
18,587
12,205
15,884
57,530
—
7,663
7,663
— 11,223
11,223
—
122
11,404
6,010
16,671
39,496
6,010
16,793
50,900
Group’s estimated asset share
149,529
422,691
572,220
116,512
352,690
469,202
Present value of funded scheme liabilities
(137,721)
(410,258)
(547,979)
(111,327)
(333,839)
(445,166)
Funded status
11,808
12,433
24,241
5,185
18,851
24,036
Scheme surpluses not recognised as assets
— (15,747)
(15,747)
— (19,988)
(19,988)
Pension asset/(liability)
11,808
(3,314)
8,494
5,185
(1,137)
4,048
The amounts recognised in the Income Statement are as follows:
Current service cost
Past service cost
Settlement and curtailment
Administration costs
Total operating charge
Net interest
Group
schemes
£’000
2016
Other
schemes
£’000
Total
£’000
Group
schemes
£’000
2015
Other
schemes
£’000
Total
£’000
2,062
4,370
6,432
2,143
5,521
7,664
—
—
196
70
169
114
70
169
310
—
—
197
39
—
119
39
—
316
2,258
(697)
4,723
(251)
6,981
(948)
2,340
(421)
5,679
(291)
8,019
(712)
Total charged to the result for the year
1,561
4,472
6,033
1,919
5,388
7,307
132
Mears Group PLC
Annual report and accounts 2016
Financial statements 24. Pensions continued
IAS 19 ‘Employee Benefits’ continued
Cumulative actuarial gains and losses recognised in equity are as follows:
On TUPE transfer of employees
Group
schemes
£’000
2016
Other
schemes
£’000
—
—
Total
£’000
—
Return on plan assets below that recorded in net interest
27,129
59,020
86,149
Actuarial gain/(loss) arising from changes in demographic assumptions
1,355
—
1,355
Actuarial (loss)/gain arising from changes in financial assumptions
(24,475)
(66,308)
(90,783)
Group
schemes
£’000
2015
Other
schemes
£’000
Total
£’000
—
(223)
(223)
(4,984)
(9,311)
3,800
5,193
(7,406)
(12,390)
(155)
(9,466)
11,167
14,967
819
6,012
—
(2,271)
(2,271)
Actuarial gain arising from liability experience
Effects of limitation of recognisable surplus
Total gains and losses recognised in equity
At 1 January
Total at 31 December
1,000
—
1,714
4,241
2,714
4,241
5,009
(1,333)
3,676
(10,738)
(5,602)
(16,340)
(5,302)
(5,436)
1,931
(3,371)
(7,533)
(12,969)
(5,729)
(6,935)
(12,664)
(10,738)
(5,602)
(16,340)
Changes in the present value of the defined benefit obligations are as follows:
Present value of obligations at 1 January
111,327
333,839
445,166
106,710
331,666
438,376
Group
schemes
£’000
2016
Other
schemes
£’000
Total
£’000
Group
schemes
£’000
2015
Other
schemes
£’000
Total
£’000
Current service cost
Past service cost
Scheme administration costs
Interest on obligations
Plan participants’ contributions
Benefits paid
Contract transfer
Settlements
2,062
4,370
6,432
2,143
5,521
7,664
—
—
70
45
70
45
—
—
39
55
39
55
4,355
13,152
17,507
4,027
12,703
16,730
392
1,608
2,000
426
2,007
2,433
(2,535)
(7,202)
(9,737)
(2,297)
(6,663)
(8,960)
—
—
—
(218)
—
(218)
—
—
342
—
155
342
—
9,466
Actuarial (gain)/loss arising from changes in demographic assumptions
(1,355)
— (1,355)
9,311
Actuarial loss/(gain) arising from changes in financial assumptions
24,475
66,308
90,783
(3,800)
(11,167)
(14,967)
Actuarial gain arising from liability experience
(1,000)
(1,714)
(2,714)
(5,193)
(819)
(6,012)
Present value of obligations at 31 December
137,721
410,258
547,979
111,327
333,839
445,166
Annual report and accounts 2016 133
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
24. Pensions continued
IAS 19 ‘Employee Benefits’ continued
Changes in the fair value of the plan assets are as follows:
Group
schemes
£’000
2016
Other
schemes
£’000
Total
£’000
Group
schemes
£’000
2015
Other
schemes
£’000
Total
£’000
Fair value of plan assets at 1 January
116,512
352,690
469,202
115,818
347,034
462,852
Expected return on plan assets
Employer’s contributions
Plan participants’ contributions
Benefits paid
Scheme administration costs
Contract transfer
Settlements
5,052
3,175
392
13,403
18,455
3,628
1,608
6,803
2,000
4,448
3,298
426
12,994
17,442
4,669
2,007
7,967
2,433
(2,535)
(7,202)
(9,737)
(2,297)
(6,663)
(8,960)
(196)
—
—
(69)
—
(387)
(265)
—
(387)
(197)
—
—
(64)
119
—
(261)
119
—
Return on plan assets above/(below) that recorded in net interest
27,129
59,020
86,149
(4,984)
(7,406)
(12,390)
Fair value of plan assets at 31 December
149,529
422,691
572,220
116,512
352,690
469,202
History of experience gains and losses is as follows:
Fair value of scheme assets
Net present value of defined benefit obligations
Net surplus
Experience adjustments arising on scheme assets
Amount
Percentage of scheme assets
Experience adjustments arising on scheme liabilities
Amount
Percentage of scheme liabilities
Fair value of scheme assets
Net present value of defined benefit obligations
Net surplus
Asset value not recognised as surplus
Net deficit
Experience adjustments arising on scheme assets
Amount
Percentage of scheme assets
Experience adjustments arising on scheme liabilities
Amount
Percentage of scheme liabilities
134
Mears Group PLC
Annual report and accounts 2016
Group schemes
2016
£’000
2015
£’000
2014
£’000
2013
£’000
2012
£’000
149,529
116,512
115,818
98,910
89,737
(137,721)
(111,327)
(106,710)
(88,195)
(79,336)
11,808
5,185
9,108
10,715
10,401
27,129
18.1%
(4,984)
10,624
(4.3%)
9.2%
3,796
3.8%
695
0.8%
(1,000)
(0.7%)
(5,193)
(4.7%)
(910)
(0.9%)
(932)
(1.1%)
—
—
Other schemes
2016
£’000
2015
£’000
2014
£’000
2013
£’000
2012
£’000
422,691
352,690
347,034
324,723
286,328
(410,258)
(333,839)
(331,666)
(295,641)
(260,689)
12,433
18,851
15,368
29,082
25,639
(15,747)
(19,988)
(17,717)
(31,173)
(27,758)
(3,314)
(1,137)
(2,349)
(2,091)
(2,119)
59,020
14.0%
(7,406)
22,125
25,805
(2.1%)
6.4%
7.9%
(1,714)
(0.4%)
(819)
(0.2%)
(9,828)
(3.0%)
(518)
(0.2%)
3,991
1.4%
143
0.1%
Financial statements 24. Pensions continued
IAS 19 ‘Employee Benefits’ continued
Funding arrangements are agreed for each of the Group’s defined benefit pension schemes with their respective trustees. The employer’s
contributions expected to be paid during the financial year ending 31 December 2017 amount to £6.6m.
Each of the schemes manage risks through a variety of methods and strategies to limit downside in falls in equity markets, movement
in inflation and movement in interest rates.
The Group’s defined benefit obligation is sensitive to changes in certain key assumptions. The sensitivity analysis below shows how
a reasonably possible increase or decrease in a particular assumption, in isolation, results in an increase or decrease in the present
value of the defined benefit obligation as at 31 December 2016.
Rate of inflation – decrease/increase by 0.1%
Rate of increase in salaries – decrease/increase by 0.1%
Discount rate – decrease/increase by 0.1%
Life expectancy – decrease/increase by 1 year
25. Operating lease commitments
Non-cancellable operating lease rentals payable were as follows:
Payable
Within one year
Between two and five years
After more than five years
Decrease
£’000
Increase
£’000
(2,362)
(274)
4,509
(5,871)
2,902
321
(3,869)
(6,631)
Land and buildings
Other
2016
£’000
2015
£’000
2016
£’000
2015
£’000
44,917
22,404
11,541
2,641
6,864
3,090
15,456
28,249
—
11,557
17,136
—
78,862
12,595
43,705
28,693
Operating lease payments represent rentals payable by the Group for certain of its office properties and housing management residential
properties, the hire of vehicles and the hire of other equipment. These leases have durations ranging from one to 15 years. No arrangements
have been entered into in respect of contingent rental payments.
26. Capital commitments
The acquisition of Omega included an interest in 50% of the share capital of three jointly owned companies. During 2015 the Group
increased its holding to 75% and agreed a forward purchase agreement to acquire the remaining 25% for consideration of £6.1m in
January 2018.
The Group had no capital commitments at 31 December 2016 or at 31 December 2015.
27. Contingent liabilities
The Group has guaranteed that it will complete certain Group contracts that it has commenced. At 31 December 2016 these guarantees
amounted to £25.4m (2015: £22.4m).
As detailed in note 7, the Group has a facility in place guaranteeing the performance of a number of M&E projects in Haydon Mechanical
and Electrical Company LLC. The guarantees will fall away as the underlying contracts are completed and the associated guarantees
released. As at 31 December 2016, guarantees amounted to £13.7m (2015: £15.4m).
The Group had no other contingent liabilities at 31 December 2016 or at 31 December 2015.
Annual report and accounts 2016 135
Mears Group PLC
Financial statements Notes to the financial statements – Group continued
For the year ended 31 December 2016
28. Related party transactions
Identity of related parties
The Group has a related party relationship with its pension schemes, its subsidiaries and its Directors.
Pension schemes
Details of contributions to pension schemes are set out in note 24 to the financial statements.
Subsidiaries
The Group has a central treasury arrangement in which all subsidiaries participate. The Directors do not consider it meaningful to set
out details of transfers made in respect of this treasury arrangement between companies, nor do they consider it meaningful to set out
details of interest or dividend payments made within the Group.
Transactions with key management personnel
The Group has identified key management personnel as the Directors of Mears Group PLC.
Key management personnel held the following percentage of voting shares in Mears Group PLC:
Directors
Key management personnel’s compensation is as follows:
Salaries including social security costs
Contributions to defined contribution pension schemes
Share-based payments
2016
%
0.4
2015
%
0.4
2016
£’000
2015
£’000
1,762
1,513
195
150
195
150
2,107
1,858
Further details of Directors’ remuneration are disclosed within the Remuneration Report.
Transactions with other related parties
During the year the Group made a loan to YourMK LLP, an entity in which the Group is a 50% member, totalling £0.2m (2015: £nil).
At 31 December 2016, the Group was owed £0.2m (2015: £nil) by YourMK LLP.
136
Mears Group PLC
Annual report and accounts 2016
Financial statements Principal accounting policies – Company
Statement of compliance
Mears Group PLC is a public limited company incorporated in England and Wales. Its registered office is 1390 Montpellier Court,
Gloucester Business Park, Brockworth, Gloucester GL3 4AH.
Basis of preparation
The financial statements have been prepared in accordance with applicable United Kingdom accounting standards, including FRS 102
and the Companies Act 2006. The financial statements have been prepared on the historical cost basis except for the modification to
a fair value basis for certain financial instruments specified in the accounting policies below. The financial statements are presented
in Sterling.
The Company has taken advantage of the exemption in Section 408 of the Companies Act from disclosing its individual profit and loss account.
The Company has taken advantage of the reduced disclosures for subsidiaries and the ultimate parent provided for in FRS 102
and has therefore not provided a Statement of Cash Flows or certain disclosures in respect of share-based payments.
The principal accounting policies of the Company are set out below. These policies have been applied consistently to all the years
presented, unless otherwise stated.
Goodwill
Goodwill representing the reallocation of amounts previously classed as investments upon the hive-across of trade and assets
is capitalised and amortised on a straight-line basis over its estimated useful economic life.
Share-based employee remuneration
All share-based payment arrangements that were granted after 7 November 2002 are recognised in the financial statements.
The Group operates equity-settled and cash-settled share-based remuneration plans for its employees. All employee services received
in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference
to the fair value of the share options awarded. Their value is determined at the date of grant and is not subsequently remeasured unless
the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using the Black Scholes
option pricing model and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected
and actual forfeitures during the vesting period.
Share-based remuneration in respect of employees of the Company is ultimately recognised as an expense in the profit and loss account.
For equity-settled share-based payments there is a corresponding credit to the share-based payment reserve; for cash-settled share-based
payments the Company recognises a liability at the balance sheet date. The Company operates share-based remuneration plans for
employees of subsidiaries using the Company’s equity instruments. The fair value of the compensation given in respect of these share-based
compensation plans less payments received from subsidiaries in respect of those share-based payments is recognised as a
capital contribution.
Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value
of the shares issued are allocated to share capital with any excess being recorded as share premium.
Deferred taxation
Deferred tax is recognised on all timing differences where the transactions or events that give the Company an obligation to pay more
tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised
where it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax and laws that have been enacted
or substantively enacted by the balance sheet date.
Annual report and accounts 2016 137
Mears Group PLC
Financial statements Principal accounting policies – Company continued
Retirement benefits
i) Defined contribution pension scheme
The pension costs charged against profits are the contributions payable to individual policies in respect of the accounting period.
ii) Defined benefit pensions
The Company contributes to defined benefit schemes which require contributions to be made to separately administered funds.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually
dependent on one or more factors such as age, years of service and salary. The legal obligations for any benefits from this kind of pension
plan remain with the Group, even if plan assets for funding the defined benefit plan have been set aside.
Scheme liabilities are measured using the projected unit funding method, applying the principal actuarial assumptions at the balance
sheet date. Assets are measured at market value. The asset that is recognised is restricted to the amount by which the service cost is
expected, over the lifetime of the scheme, to exceed funding contributions payable in respect of accruing benefits.
Actuarial gains and losses are taken to the Statement of Comprehensive Income as incurred. For this purpose, actuarial gains and
losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences
between the previous actuarial assumptions and what has actually occurred.
Other movements in the net surplus or deficit are recognised in the profit and loss account, including the current service cost, any past
service cost and the effect of curtailments or settlements. The interest costs less the expected return on assets are also charged to the
Income Statement. The amount charged to the Income Statement in respect of these plans is included within operating costs.
The Company’s contributions to the schemes are paid in accordance with the rules of the schemes and the recommendations of the actuary.
Financial instruments
Financial assets and liabilities are recognised in the Balance Sheet when the Company becomes party to the contractual provisions
of the instrument. The principal financial assets and liabilities of the Company are as follows:
Financial assets
Basic financial assets, including trade and other receivables, amounts due to Group companies and cash and cash equivalents, are
initially recognised at transaction price, unless the arrangement constitutes a financing transaction, where the transaction is measured
at the present value of the future receipts discounted at a market rate of interest.
Such assets are subsequently carried at amortised cost using the effective interest method.
At the end of each reporting period financial assets measured at amortised cost are assessed for objective evidence of impairment.
If an asset is impaired the impairment loss is the difference between the carrying amount and the present value of the estimated cash
flows discounted at the asset’s original effective interest rate. The impairment loss is recognised in profit or loss.
Financial assets are derecognised when (a) the contractual rights to the cash flows from the asset expire or are settled, or (b)
substantially all the risks and rewards of the ownership of the asset are transferred to another party, or (c) despite having retained
some significant risks and rewards of ownership, control of the asset has been transferred to another party which has the practical
ability to unilaterally sell the asset to an unrelated third party without imposing additional restrictions.
Cash and cash equivalents include cash at bank and in hand and bank deposits available with no notice or less than three months’
notice from inception that are subject to an insignificant risk of changes in value. Bank overdrafts are presented as current liabilities
to the extent that there is no right of offset with cash balances.
138
Mears Group PLC
Annual report and accounts 2016
Financial statements Financial instruments continued
Financial liabilities
Basic financial liabilities, including trade and other payables, and amounts payable to Group companies that are classified as debt,
are initially recognised at transaction price, unless the arrangement constitutes a financing transaction, where the debt instrument
is measured at the present value of the future receipts discounted at a market rate of interest.
Bank borrowings are non-basic financial liabilities and are initially recognised at fair value, being the present value of future payments
discounted at a market rate of interest. Bank borrowings are remeasured at fair value.
Derivatives, including interest rate swaps, are not basic financial instruments.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at
their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate,
unless they are included in a hedging arrangement.
Financial liabilities are derecognised when the liability is extinguished, that is when the contractual obligation is discharged or
cancelled or expires.
Offsetting
Financial assets and liabilities are offset and the net amounts presented in the financial statements when there is a legally
enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or to realise the asset and settle
the liability simultaneously.
Hedge accounting for interest rate swaps
The Company applies hedge accounting for transactions entered into to manage the cash flow exposures of borrowings. Interest rate
swaps are held to manage the interest rate exposures and are designated as cash flow hedges of floating rate borrowings.
Changes in the fair values of derivatives designated as cash flow hedges, and which are effective, are recognised directly in equity.
Any ineffectiveness in the hedging relationship (being the excess of the cumulative change in fair value of the hedging instrument
since inception of the hedge over the cumulative change in the fair value of the hedged item since inception of the hedge) is recognised
in the Income Statement.
The gain or loss recognised in other comprehensive income is reclassified to the Income Statement when the hedge relationship ends.
Hedge accounting is discontinued when the hedging instrument expires or no longer meets the hedging criteria, the forecast transaction
is no longer highly probable, the hedged debt instrument is derecognised or the hedging instrument is terminated.
Annual report and accounts 2016 139
Mears Group PLC
Financial statements Parent Company balance sheet
As at 31 December 2016
Non-current assets
Intangible assets: goodwill
Investments
Current assets
Debtors
Cash at bank and in hand
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Provisions for liabilities
Pension liability
Capital and reserves
Called up share capital
Share premium account
Share-based payment reserve
Hedging reserve
Profit and loss account
Shareholders’ funds
Note
2016
£’000
2015
£’000
5
6
—
—
58,467
58,467
58,467
58,467
7
139,155
135,827
—
—
139,155
135,827
8
(27,021)
(32,879)
112,134
102,948
170,601
161,415
9
(60,686)
(57,961)
14
(4,184)
(3,087)
105,731
100,367
11
1,026
1,019
58,320
58,124
1,975
(774)
1,651
(572)
45,184
40,145
105,731
100,367
The Parent Company has taken advantage of Section 408 of the Companies Act 2006 and has not included its own profit and loss
account in these financial statements. The Group profit for the year includes a profit of £18.2m (2015: £12.9m) which is dealt with in the
financial statements of the Company.
The financial statements were approved by the Board of Directors on 27 March 2017.
D J Miles
Director
A C M Smith
Director
Company number: 03232863
The accompanying accounting policies and notes form an integral part of these financial statements.
140
Mears Group PLC
Annual report and accounts 2016
Financial statements
Parent Company statement of changes in equity
For the year ended 31 December 2016
At 1 January 2015
Net result for the year
Other comprehensive income
Total comprehensive income for the year
Issue of shares
Share option charges
Exercise of share options
Dividends
At 1 January 2016
Net result for the year
Other comprehensive expense
Total comprehensive (expense)/income for the year
Issue of shares
Share option charges
Dividends
At 31 December 2016
Share
capital
£’000
Share
premium
account
£’000
Share-
based
payment
reserve
£’000
Hedging
reserve
£’000
Retained
earnings
£’000
Total
£’000
1,011
56,714
1,653
(962)
35,213
93,629
—
—
—
8
—
—
—
—
—
—
1,410
—
—
—
—
—
—
—
771
(773)
—
— 12,862
12,862
390
390
—
—
—
1,742
2,132
14,604
14,994
—
—
773
1,418
771
—
— (10,445)
(10,445)
1,019
58,124
1,651
(572)
40,145
100,367
—
—
—
7
—
—
—
—
—
196
—
—
—
—
—
—
324
—
— 18,238
18,238
(202)
(1,716)
(1,918)
(202)
16,522
16,320
—
—
—
—
203
324
— (11,483)
(11,483)
1,026
58,320
1,975
(774)
45,184
105,731
The accompanying accounting policies and notes form an integral part of these financial statements.
Annual report and accounts 2016 141
Mears Group PLC
Financial statements Notes to the financial statements – Company
For the year ended 31 December 2016
1. Result for the financial year
This result for the year is stated after charging auditor’s remuneration of £60,000 relating to audit services.
2. Directors and employees
Employee benefits expense
All staff costs relate to Directors. Staff costs during the year were as follows:
Wages and salaries
Social security costs
Other pension costs
The average number of employees of the Company during the year was:
Management
2016
£’000
2015
£’000
1,334
1,323
428
182
190
195
1,944
1,708
2016
Number
2015
Number
9
8
3. Share-based employee remuneration
As at 31 December 2016 the Group maintained seven share-based payment schemes for employee remuneration. The details of each
scheme are included within note 5 to the consolidated financial statements.
All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options.
In total, £0.2m of employee remuneration expense has been included in the Company’s profit and loss account for 2016 (2015: £0.2m),
which gave rise to additional paid-in capital.
4. Dividends
The following dividends were paid on ordinary shares in the year:
Final 2015 dividend of 7.90p (2015: final 2014 dividend of 7.15p) per share
Interim 2016 dividend of 3.30p (2015: interim 2015 dividend of 3.10p) per share
2016
£’000
8,099
3,384
2015
£’000
7,286
3,159
11,483
10,445
The proposed final 2016 dividend of 8.40p per share has not been included within the financial statements as no obligation existed
at 31 December 2016.
5. Goodwill
Cost
At 1 January 2016 and at 31 December 2016
Amortisation
At 1 January 2016 and at 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
142
Mears Group PLC
Annual report and accounts 2016
Goodwill
£’000
6,196
6,196
—
—
Financial statements
6. Fixed asset investments
Cost
At 1 January 2016 and at 31 December 2016
Investment
in subsidiary
undertakings
£’000
58,467
Details of the subsidiary undertakings of the Company are shown in note 13 to the consolidated financial statements.
7. Debtors
Amounts owed by Group undertakings
Prepayments and accrued income
Other receivables
Corporation tax asset
Deferred tax asset
Diesel hedge
2016
£’000
2015
£’000
135,620
131,951
1,073
—
—
946
1,516
810
2,000
12
1,054
—
139,155
135,827
The deferred tax asset above of £0.9m (2015: £1.1m) is due after more than one year. The recoverability of the deferred tax asset is
dependent on future taxable profits. The Company expects to realise sufficient profits to enable the deferred tax asset to be recovered.
8. Creditors: amounts falling due within one year
Bank loan
Bank overdraft
Interest rate swaps
Accruals
Corporation tax
Other payables
9. Creditors: amounts falling due in more than one year
Bank borrowings
Contingent consideration
Interest rate swaps
2016
£’000
5,000
19,146
478
1,623
708
66
2015
£’000
10,000
20,801
510
1,548
—
20
27,021
32,879
2016
£’000
2015
£’000
60,000
57,500
74
612
93
368
60,686
57,961
The Company has disclosed core bank borrowings of £60.0m as due in two to five years. Whilst the amounts borrowed could be repaid
each quarter, the Company’s intention is to align core bank borrowings with its interest rate swaps.
Included in other creditors is £0.1m (2015: £0.1m) relating to deferred consideration on acquisitions.
Annual report and accounts 2016 143
Mears Group PLC
Financial statements Notes to the financial statements – Company continued
For the year ended 31 December 2016
10. Financial instruments
The Company has the following financial instruments:
Financial assets that are debt instruments measured at amortised cost:
– other receivables
Financial assets that are measured at fair value through profit and loss:
– diesel hedge
Financial liabilities that are measured at fair value through profit and loss:
– bank borrowings
Financial liabilities that are measured at fair value through other comprehensive income:
– interest rate swaps
Financial liabilities that are measured at amortised cost:
– accruals
– other payables
Other financial liabilities that are measured at fair value:
– contingent consideration
2016
£’000
2015
£’000
—
2,000
1,516
—
(65,000)
(67,500)
(1,090)
(878)
(1,623)
(1,548)
(66)
(20)
(1,689)
(1,568)
(74)
(93)
There have been no changes during the period or cumulatively in the fair value of bank borrowings attributable to changes in the credit
risk of the instrument. The change attributable to changes in own credit risk is not material due to the short life of individual drawdowns
within bank borrowings. The difference between the carrying amount and the amount expected to be paid at maturity is not material
due to the short life of individual drawdowns within bank borrowings.
The Company pays a margin over and above LIBOR on bank borrowings. The margin is based on the ratio of Group consolidated net
borrowings to Group consolidated adjusted EBITDA and could have varied between 1.2% and 2.2% during the year.
The Company has entered into interest rate swaps to receive interest at LIBOR and pay interest at fixed rates. At 31 December 2016,
this consists of one £30.0m swap contract expiring in August 2018 with a fixed interest rate of 1.85%. The swap has quarterly maturity
matching the underlying debt. The Company has also entered into three commodity price hedges in respect of the wholesale price
of diesel covering the purchase of 6m litres of diesel per annum.
These instruments are used to mitigate the Company’s exposure to any interest rate movements and diesel price movements. The fair
value of the interest rate swaps is a liability of £1.1m (2015: £0.9m). The fair value of the commodity price hedge is an asset of £1.5m
(2015: £nil).
During 2016, a hedging loss of £0.9m (2015: £0.07m) was recognised in other comprehensive income for changes in the fair value
of the interest rate swap and £0.6m (2015: £0.6m) was reclassified from the hedge reserve to profit and loss.
The Company has also entered into a further five interest rate swap arrangements with HSBC Bank PLC, three £10.0m swap contracts
with a deferred start date of January 2017 expiring December 2020 at an applicable interest rate of 0.84% and two £15.0m swap
contracts with a deferred start date of August 2018 expiring August 2021 at an applicable interest rate of 0.96%.
The Company seeks to manage liquidity risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash
assets safely and profitably.
Management monitors rolling forecasts of the Group and Company’s liquidity reserve (comprising undrawn borrowing facilities and
cash and cash equivalents) on the basis of expected cash flows. The quantum of committed borrowing facilities of the Group and Company
is regularly reviewed and is designed to exceed forecasted peak gross debt levels. For short-term working capital purposes, the Group
and Company utilise bank overdrafts as required. These facilities are regularly reviewed and are renegotiated ahead of their expiry date.
144
Mears Group PLC
Annual report and accounts 2016
Financial statements 11. Share capital and reserves
Allotted, called up and fully paid
At 1 January 101,938,335 (2015: 101,134,142) ordinary shares of 1p each
Issue of 621,464 (2015: 804,193) shares on exercise of share options
At 31 December 102,559,799 (2015: 101,938,335) ordinary shares of 1p each
2016
£’000
2015
£’000
1,019
7
1,026
1,011
8
1,019
During the year, 621,464 (2015: 804,193) ordinary 1p shares were issued in respect of share options exercised. The difference between
the nominal value of £0.007m and the total consideration of £0.2m has been credited to the share premium account.
Classes of reserves
Share capital represents the nominal value of shares that have been issued.
Share premium represents the difference between the nominal value of shares issued and the total consideration received.
Share-based payment reserve represents employee remuneration which is credited to the share-based payment reserve until the
related share options are exercised. Upon exercise the share-based payment reserve is transferred to retained earnings.
The cash flow hedging reserve comprises all gains and losses arising from the valuation of interest swap contracts which are effective
hedges and mature after the year end. These are valued on a mark-to-market basis, are accounted for through the Statement of
Comprehensive Income and recycled through the Income Statement when the hedged item affects the Income Statement.
12. Capital commitments
The Company had no capital commitments at 31 December 2016 or at 31 December 2015.
13. Contingent liabilities
The Company has guaranteed that it will complete certain Group contracts that its subsidiaries have commenced. At 31 December 2016
these guarantees amounted to £25.4m (2015: £22.4m).
As detailed in note 7 of the Group financial statements, the Company has a facility in place guaranteeing the performance of a number
of M&E projects in Haydon Mechanical and Electrical Company LLC. The guarantees will fall away as the underlying contracts are
completed and the associated guarantees released. As at 31 December 2016, guarantees amounted to £13.7m (2015: £15.4m).
The Company had no other contingent liabilities at 31 December 2016 or at 31 December 2015.
14. Pensions
Defined contribution schemes
The Company contributes to personal pension schemes of the Directors.
Defined benefit scheme
The Company operates a defined benefit pension scheme for the benefit of certain employees of its subsidiary companies.
The assets of the schemes are administered by trustees in a fund independent from the assets of the Company.
Costs and liabilities of the scheme are based on actuarial valuations. The actuarial valuations were reviewed and updated
to 31 December 2016 by a qualified independent actuary using the projected unit method.
The principal actuarial assumptions at the balance sheet date are as follows:
Rate of increase of salaries – first year
Rate of increase of salaries – second year
Rate of increase of salaries – long term
Rate of increase for pensions in payment – based on RPI with a cap of 5%
Rate of increase for pensions in payment – based on RPI with a cap of 3%
Discount rate
Retail prices inflation
Consumer prices inflation
Life expectancy for a 65-year-old male
Life expectancy for a 65-year-old female
2016
2015
1.00%
1.00%
3.35%
3.25%
2.55%
3.05%
3.35%
2.45%
1.00%
1.00%
3.30%
3.20%
2.55%
3.95%
3.30%
2.40%
22.4 years
22.6 years
24.5 years
24.7 years
Annual report and accounts 2016 145
Mears Group PLC
Financial statements Notes to the financial statements – Company continued
For the year ended 31 December 2016
14. Pensions continued
Defined benefit scheme continued
The amounts recognised in the Parent Company Balance Sheet and major categories of plan assets as a percentage of total plan
assets are:
2016
£’000
5,004
9,470
2,679
2015
£’000
11,341
2,790
705
17,153
14,836
(21,337)
(17,923)
(4,184)
(3,087)
795
617
(3,389)
(2,470)
2016
£’000
67
(42)
—
25
101
126
2015
£’000
140
42
—
182
183
365
2016
£’000
2015
£’000
17,923
19,771
67
—
700
12
(412)
(232)
3,509
140
—
747
27
(451)
(389)
(656)
(230)
(1,266)
21,337
17,923
Equities
Bonds
Cash
Group’s estimated asset share
Present value of funded scheme liabilities
Funded status
Related deferred tax asset
Pension liability
The amounts recognised in the profit and loss account are as follows:
Current service cost
Administration cost
Past service cost
Total operating charge
Net interest
Total charged to the result for the year
Changes in the present value of the defined benefit obligations are as follows:
Present value of obligations at 1 January
Current service cost
Past service cost
Interest on obligations
Plan participants’ contributions
Benefits paid
Actuarial gain arising from changes in demographic assumptions
Actuarial gain/(loss) arising from changes in financial assumptions
Actuarial loss arising from liability experience
Present value of obligations at 31 December
146
Mears Group PLC
Annual report and accounts 2016
Financial statements 14. Pensions continued
Defined benefit scheme continued
Changes in the fair value of the plan assets are as follows:
Fair value of plan assets at 1 January
Expected return on plan assets
Administration costs
Employer’s contributions
Plan participants’ contributions
Benefits paid
Return on plan assets above that recorded in net interest
Fair value of plan assets at 31 December
The movements in the net pension liability and the amount recognised in the Balance Sheet are as follows:
Deficit in schemes at 1 January
Current service cost
Past service cost
Administration costs
Contributions
Other finance income
Actuarial gain arising from changes in demographic assumptions
Actuarial (loss)/gain arising from changes in financial assumptions
Actuarial loss arising from liability experience
Return on plan assets above that recorded in net interest
Deficit in schemes at 31 December
2016
£’000
2015
£’000
14,836
13,748
599
42
564
(42)
1,057
1,124
12
(412)
1,019
27
(451)
(134)
17,153
14,836
2016
£’000
2015
£’000
(3,087)
(6,023)
(67)
—
42
1,057
(101)
232
(3,509)
230
1,019
(140)
—
(42)
1,124
(183)
389
656
1,266
(134)
(4,184)
(3,087)
The employer’s contributions expected to be paid during the financial year ending 31 December 2017 amount to £1.1m.
15. Related party transactions
Identity of related parties
The Group has a related party relationship with its pension schemes, its subsidiaries and its Directors.
Pension schemes
Details of contributions to pension schemes are set out in note 14 to the financial statements.
Subsidiaries
The Group has a central treasury arrangement in which all subsidiaries participate. The Directors do not consider it meaningful to set
out details of transfers made in respect of this treasury arrangement between companies, nor do they consider it meaningful to set out
details of interest or dividend payments made within the Group.
Transactions with key management personnel
The Group has identified key management personnel as the Directors of Mears Group PLC. Details of transactions are disclosed in note 28
to the consolidated financial statements.
Annual report and accounts 2016 147
Mears Group PLC
Financial statements Five-year record (unaudited)
Income Statement
Revenue by business segment
Housing
Care
Continuing activities
Discontinued activities
Total sales revenue
Gross profit
2016
£’000
2015
£’000
2014
£’000
2013
£’000
2012
£’000
787,530
735,129
714,733
742,479
504,686
152,570
146,010
124,007
123,095
112,550
940,100
881,139
838,740
865,574
617,236
—
—
— 32,632
62,289
940,100
881,139
834,740
898,206
679,525
244,894
232,132
225,041
227,960
184,305
Operating profit before acquisition intangible amortisation and exceptional costs
41,850
38,662
42,995
38,392
31,161
Exceptional items
Operating profit
Profit for the year before tax
PBT before acquisition intangible amortisation and exceptional costs
—
31,160
29,372
40,062
—
27,825
25,920
36,757
— (25,493)
(2,877)
30,667
29,677
42,005
2,039
277
36,630
20,323
18,199
29,037
Earnings per share
Basic
Diluted
Normalised
Dividends per share
Balance Sheet
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Total equity
23.54p
23.41p
30.36p
20.31p
20.10p
27.94p
25.03p
24.65p
32.20p
(1.21)p
19.61p
(1.17)p
18.85p
28.06p
25.60p
11.70p
11.00p
10.00p
8.80p
8.00p
2016
£’000
2015
£’000
2014
£’000
2013
£’000
2012
£’000
262,263
258,201
268,818
233,960
225,964
222,158
237,767
217,718
241,697
249,719
(194,567)
(219,882)
(190,040)
(222,506)
(231,934)
(91,180)
(84,458)
(102,034)
(72,850)
(74,931)
198,674
191,628
194,462
180,301
168,818
Cash and cash equivalents, end of year
(12,374)
822
3,834
(448)
(12,384)
148
Mears Group PLC
Annual report and accounts 2016
Financial statements Shareholder and corporate information
Financial calendar
Annual General Meeting
7 June 2017
Record date for final dividend
16 June 2017
Dividend warrants posted
to shareholders
6 July 2017
Interim results announced
15 August 2017
Registered office
1390 Montpellier Court
Gloucester Business Park
Brockworth
Gloucester GL3 4AH
Tel: 01452 634600
www.mearsgroup.co.uk
Company registration number
3232863
Company Secretary
Ben Westran
1390 Montpellier Court
Gloucester Business Park
Brockworth
Gloucester GL3 4AH
Tel: 01452 634600
Bankers
Barclays Bank PLC
Wales and South West
Corporate Banking
4th Floor, Bridgewater House
Counterslip
Finzels Reach
Bristol BS1 6BX
Tel: 0800 285 1152
HSBC Bank plc
West & Wales
Corporate Banking Centre
3 Rivergate
Temple Quay
Bristol BS1 6ER
Tel: 0845 583 9796
Design Portfolio is committed to planting
trees for every corporate communications
project, in association with Trees for Cities.
Solicitors
BPE
St James’ House
St James’ Square
Cheltenham GL50 3PR
Tel: 01242 224433
Mishcon de Reya LLP
Africa House
70 Kingsway
London WC2B 6AH
Tel: 020 3321 7000
Travers Smith
10 Snow Hill
London EC1A 2AL
Tel: 020 7295 3000
Auditor
Grant Thornton UK LLP
Registered Auditor
Chartered Accountants
Hartwell House
55–61 Victoria Street
Bristol BS1 6FT
Tel: 0117 305 7600
Financial adviser
Investec Bank PLC
2 Gresham Street
London EC2V 7QP
Tel: 020 7597 2000
Registrar
Neville Registrars Ltd
Neville House
18 Laurel Lane
Halesowen
West Midlands B63 3DA
Tel: 0121 585 1131
Joint corporate brokers
Liberum Capital Limited
Ropemaker Place, Level 12
25 Ropemaker Street
London EC2Y 9LY
Tel: 020 7418 8900
Peel Hunt
Moor House
20 London Wall
London EC2Y 5ET
Tel: 020 7418 8900
Investor relations
Buchanan
107 Cheapside
London EC2V 6DN
Tel: 020 7466 5000
Internet
The Group operates a website which
can be found at www.mearsgroup.co.uk.
This site is regularly updated to provide
information about the Group. In particular
all of the Group’s press releases and
announcements can be found on the site.
Registrar
Any enquiries concerning your
shareholding should be addressed to the
Company’s registrar. The registrar should
be notified promptly of any change in a
shareholder’s address or other details.
Investor relations
Requests for further copies of the Annual
Report and Accounts, or other investor
relations enquiries, should be addressed
to the registered office.
The Group’s commitment to environmental issues is reflected in this Annual Report
which has been printed on Cocoon Offset which is made from 100% post-consumer
fibres, FSC® certified and PCF (Process Chlorine Free). Printed in the UK by Pureprint
Group using their environmental printing technology, and vegetable inks were used
throughout. Pureprint Group is a CarbonNeutral® company. Both manufacturing mill and
the printer are registered to the Environmental Management System ISO14001 and are
Forest Stewardship Council® (FSC) chain-of-custody certified.
Annual report and accounts 2016 149
Mears Group PLC
Shareholder information
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Mears Group PLC
1390 Montpellier Court
Gloucester Business Park
Brockworth
Gloucester GL3 4AH
Tel: 01452 634 600
www.mearsgroup.co.uk