Mears Group Annual Report 2018

FY2018 Annual Report · Mears Group

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Transforming housing
with care

Mears Group PLC
Annual Report and Accounts 2018

Introduction

Mears is a leader in the housing and care
markets in the UK. Our range of housing
services has expanded from maintenance
into resident management, creating new
affordable homes and running the national
Planning Portal. Our domiciliary care
services run increasingly in tandem with
our housing services, helping create new
solutions for the more vulnerable.
In 2018, we employed over 11,000 staff.

Our key strengths

Differentiated service delivery
In order for customers to recommend us, we must deliver
excellent service. We randomly conduct over 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 lead the way with social value in the markets
where we operate, delivering meaningful outcomes
through positive community engagement projects and
effective measurement.

Contents

Transforming housing with care

Strategic report
1 Highlights
2 Our business at a glance
4
10 Chairman’s statement
12 Chief Executive Officer’s review
22 Year of achievement
24 Listening to our stakeholders
26 Our market drivers
30 Our business model
32 Our strategy
34 Key performance indicators
38 Risk management
41 Principal risks and uncertainties
43 Business planning and financial viability
45 Financial review
54 Social value and impact

Introduction to corporate governance

Corporate governance
64
66 Board of Directors
68 Corporate governance report
74 Report of Nomination Committee
76 Report of Audit Committee
81 Report of Remuneration Committee
82 Remuneration policy
88 Annual remuneration report 2018
94 Report of the Directors
96 Statement of Directors’ responsibilities
97

Independent auditor’s report

Financial statements
105 Principal accounting policies – Group
115 Consolidated income statement
116 Consolidated statement of
comprehensive income
117 Consolidated balance sheet
118 Consolidated cash flow statement
119 Consolidated statement of changes

in equity

120 Notes to financial statements – Group
149 Principal accounting policies – Company
152 Parent Company balance sheet
153 Parent Company statement of changes

in equity

154 Notes to financial statements – Company

Shareholder information
159 Five-year record (unaudited)
160 Shareholder and corporate information

Strategic report
Highlights

Strategic developments and
positive earnings progress

Financial

Group revenue

Adjusted Group operating profit

Dividend per share

£869.8m

-3.4%

m
1
0
4
9
£

m
2
0
0
9
£

m
8
9
6
8
£

£40.8m

+4.1%

m
9
1
4
£

m
2
9
3
£

m
8
0
4
£

12.40p

+3.3%

p
0
7
1
1

p
0
0
2
1

p
0
4
2
1

Normalised diluted
earnings per share

29.06p

+3.8%

p
6
3
0
3

p
5
0
8
2

p
6
0
9
2

6
1
0
2

7
1
0
2

8
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

Strategic highlights

Asylum Accommodation and Support Contract win

High levels of customer satisfaction and continued
social value leadership

Continued improvement in profitability and stability
in care

Housing Green Paper post the Grenfell tragedy
creates opportunity

Mitie property services Housing acquisition

Mears well positioned for new Ministry of Defence
tender opportunity

Alternative performance measures (APM)
APM

Definition

Adjusted Group operating profit
and margin %

Adjusted operating profit and margin is based upon operating profit before the amortisation of acquisition
intangibles and exceptional items.

Normalised diluted earnings
per share (EPS)

Normalised EPS utilises an earnings figure before the amortisation of acquisition intangibles and exceptional
items. Earnings are also adjusted to reflect a full tax charge at the headline tax rate. The headline tax adjustment
typically reduces EPS but it is felt that this measure better allows for the assessment of operational performance,
the analysis of trends over time, the comparison of different businesses and the projection of future performance.

Strategic reportCorporate governanceFinancial statementsShareholder informationMears Group PLC Annual Report and Accounts 2018

Strategic report
Our business at a glance

We are specialists in providing housing
solutions and we understand the needs of our
service users, many of whom are vulnerable

Housing…

…with Care

What we do

Mears has a single minded focus on the housing market and delivering services
to the residents of these homes. We operate within the affordable housing
sector, which is an area that will see continued investment given the significant
housing shortage and the rising number of people who are regarded as
statutorily homeless.

Our services
Our core services are in the maintenance and management of homes.
Increasingly we operate an intelligent approach to maintenance, using
technology and experience to operate preventative maintenance programmes
that reduce levels of emergency repairs. As regards management, we collect
rent and ensure homes are managed and maintained to a decent standard.
Our particular focus is in providing sustainable alternatives to homelessness,
helping reduce the rising problems created by the housing shortage in the UK.
Through our running of the national Planning Portal, we help enable planning
decisions to be made based upon ensuring the right information is available
for Councils to make an informed decision.

Our customers
We work predominantly with Central Government and Local Government, in
the delivery of housing services. These are through often long-term contracts.
We equally recognise that the residents of the homes that we manage and
or maintain, are customers, and we take pride in the high levels of customer
satisfaction that we achieve.

What we do

Domiciliary care is one of the key services provided to the elderly and
disabled residents of social housing properties. The provision of quality
housing is recognised as an important driver in lowering the pressures
on hospital admissions and social care. While the market has seen under-
investment for many years, there are signs that this is starting to change and
Mears housing, with care positioning, makes us well positioned for the future.

Our services
We provided regulated personal care services in people’s homes, through our
teams of care staff. The aim is to help often elderly and frail individuals maintain
their dignity and independence. Increasingly we support a growing number of
specialist accommodation units, such as extra care facilities, which enable care
to be given within a safe and supportive environment. We don’t however operate
any services within our Care homes.

Our customers
We are commissioned by Local Councils and NHS Trusts to provide domiciliary
care services. We only deliver care where we are confident that the charge rates
paid are high enough to ensure the quality of service that our customers are right
to expect.

Mears Group PLC Annual Report and Accounts 2018Long-term drivers

The shortage of housing in the UK has made
investment in housing both a political and an
economic priority. More recently, the Social
Housing Green Paper and the Grenfell tragedy
have put greater focus on tenant engagement
and safety. As such, we anticipate rising
investment in our markets and a greater
attention to the quality of delivery.

Housing revenue

Housing operating profit

Housing operating margin

m
5
7
8
7
£

m
1
6
6
7
£

m
2
3
5
7
£

m
1
4
4
£

m
5
9
3
£

m
6
7
3
£

%
6
5

%
2
5

%
0
5

6
1
0
2

7
1
0
2

8
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

Long-term drivers

Demographic change is the key long-term
driver, given the ageing population of the UK.
The Government has delayed its decision
making on how the rising cost of care will
be funded over the long term but has again
committed to a Green Paper in 2019.

Care revenue

Care operating profit

Care operating margin

m
6
2
5
1
£

m
1
4
3
1
£

m
6
6
1
1
£

m
8
3
£

%
2
3

m
5
0
£

m
)
2
1
(
£

%
4
0

%
)
8
0
(

Read more on pages 41–42

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information
Strategic report
Key performance indicators

Measuring our progress

Non-Financial

‘Excellent’ service rating
(Housing)

Customer complaints
(Housing)

Carer churn
(Care)

New contract success

(Housing)

Order book

(Group)

In order for customers to recommend us, we
must deliver excellent service. We randomly
conduct around 80,000 customer surveys
per year.

Incidents resulting from poor service result in
a complaint. We are committed to dealing with
all complaints on an individual basis.

The carer churn figure is calculated as the
total number of leavers during the year as a
proportion of the average carer headcount.

Results from the year

93%

%
1
9

%
2
9

%
3
9

0.25%

%
0
3
0

46%

%
8
5

%
4
5

%
7
2
0

%
5
2
0

%
4
4

%
2
4

%
6
4

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

We are delighted that our service delivery has
remained at a high level. Strong performance
will ensure competitiveness as we continue to
be ranked above our peers. Our target for 2019
is to do even better.

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.

The main challenge in Care remains the
sourcing and retention of sufficient care
workers of good quality and this is an area
that continues to receive significant attention.
The carer churn measure increasing is very
disappointing but we have already put in place
actions to improve this.

How we performed

2018 target

92%

How we performed

2018 target

<0.27%

How we performed

2018 target

30%

Outperformance

Underperformance

Outperformance

2019 target

<0.25%

2019 target

40%

2019 target

>93%

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Contract success is measured by results of

Our order book provides us good visibility of

tender by contract value. We typically tender

those revenues secured for future periods.

around £1bn of new opportunities each year.

It is helpful that we have long-term contracts

The average contract length is around six

that allow us to plan with confidence, in the

years. In order to achieve our organic growth

knowledge that we have significant revenues

forecasts, we monitor the proportion of new

already contracted. It is also positive for all our

contracts secured as a proportion of total

stakeholders, providing stability to our supply

chain, funders and, most importantly, for

recruiting and motivating our workforce.

tendered works.

Results from the year

40%

Results from the year

£3.2bn

The Housing Maintenance division’s new bid

The order book increases as the Group

conversion rate was below historical norms.

secures new works and reduces as revenues

We are not worried by this. There has been no

are delivered. It will be challenging to grow the

lack of good quality opportunities to bid and

order book in 2019 given the timing of new

we are pleased with the quality of our tender

bids, but we are delighted to have grown the

submissions. Positively, we secured three

order book so strongly in 2018 and we would

regions of the new Asylum contract, valued

also hope to see an increase in 2020 when the

at £1bn over the ten-year term. Given its size,

MoD tender process reaches its conclusion.

this has skewed the new contract success

rate. We are pleased to have delivered against

target, but equally realise we must perform

better in 2019.

How we performed

2018 target

33%

2019 target

33%

How we performed

2018 target

£2.6bn

2019 target

£2.7bn

Mears Group PLC Annual Report and Accounts 2018

‘Excellent’ service rating

(Housing)

Customer complaints

(Housing)

Carer churn

(Care)

New contract success
(Housing)

Order book
(Group)

Business development

Contract success is measured by results of
tender by contract value. We typically tender
around £1bn 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.

Our order book provides us good visibility of
those revenues secured for future periods.
It is helpful that we have long-term contracts
that allow us to plan with confidence, in the
knowledge that we have significant revenues
already contracted. It is also positive for all our
stakeholders, providing stability to our supply
chain, funders and, most importantly, for
recruiting and motivating our workforce.

Results from the year

40%

%
9
4

%
5
3

%
9
3

%
0
4

Results from the year

£3.2bn

n
b
5
3
£

n
b
3
3
£

n
b
2
3
£

n
b
1
3
£

n
b
6
2
£

%
6
1

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

The Housing Maintenance division’s new bid
conversion rate was below historical norms.
We are not worried by this. There has been no
lack of good quality opportunities to bid and
we are pleased with the quality of our tender
submissions. Positively, we secured three
regions of the new Asylum contract, valued
at £1bn over the ten-year term. Given its size,
this has skewed the new contract success
rate. We are pleased to have delivered against
target, but equally realise we must perform
better in 2019.

The order book increases as the Group
secures new works and reduces as revenues
are delivered. It will be challenging to grow the
order book in 2019 given the timing of new
bids, but we are delighted to have grown the
order book so strongly in 2018 and we would
also hope to see an increase in 2020 when the
MoD tender process reaches its conclusion.

How we performed

2018 target

33%

How we performed

2018 target

£2.6bn

Outperformance

Underperformance

Outperformance

2019 target

33%

2019 target

£2.7bn

In order for customers to recommend us, we

Incidents resulting from poor service result in

The carer churn figure is calculated as the

must deliver excellent service. We randomly

conduct around 80,000 customer surveys

a complaint. We are committed to dealing with

total number of leavers during the year as a

all complaints on an individual basis.

proportion of the average carer headcount.

per year.

Results from the year

93%

0.25%

46%

We are delighted that our service delivery has

We are committed to providing our colleagues

The main challenge in Care remains the

remained at a high level. Strong performance

with the skills and equipment to deliver great

sourcing and retention of sufficient care

will ensure competitiveness as we continue to

service. We seek to identify trends in order to

workers of good quality and this is an area

be ranked above our peers. Our target for 2019

improve our overall service quality.

that continues to receive significant attention.

is to do even better.

The carer churn measure increasing is very

disappointing but we have already put in place

actions to improve this.

How we performed

2018 target

92%

2019 target

>93%

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How we performed

2018 target

<0.27%

2019 target

<0.25%

How we performed

2018 target

30%

2019 target

40%

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information

Strategic report
Key performance indicators continued

Financial performance

Revenue growth
(Housing)

Adjusted operating margin
(Group)

Average net debt
(Group)

Growth in normalised diluted EPS

Accident frequency rate

(Group)

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.

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.

Good working capital management remains
a cornerstone of the business. The Group’s IT
systems are designed to deal with the challenges
of high volume and low value activities.
This is particularly relevant to the Group’s core
Maintenance, Management and Care activities.
The Group has utilised debt to find acquisitions
over the last five years of circa £60m which is
reflected in the increasing average net debt

Normalised earnings are stated before

Providing our employees with a safe working

exceptional costs and exclude the

amortisation of acquisition intangibles

together with an adjustment to reflect

a full tax charge.

environment remains paramount. Our accident

frequency rate (AFR) is calculated as the

number of reportable incidents (by both

employees, service users and third parties)

divided by the number of hours worked,

multiplied by 100,000.

Results from the year

-2%

4.7%

Results from the year

£113m

Results from the year

0.22

%
7

%
5
5

%
6
4

%
7
4

%
4
4

m
3
1
1
£

m
4
9
£

m
5
8
£

m
4
7
£

m
7
6
£

%
1

%
4
-

%
3
-

%
2
-

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

The revenue for the year is slightly lower
than our expectation. In Maintenance, some
revenues expected to be delivered in 2018
were re-phased and will be delivered in 2019.
Our Development activities experienced a
challenging last quarter, with a significant
slowdown in sales activity impacting
negatively on both revenues and working
capital. With the acquisition of MPS together
with the mobilisation of the Asylum contract,
growth expectations for 2019 are high.

The Housing division contributed an operating
margin of 5.0%, with second half margin
reporting a small reduction following the
acquisition of MPS and costs expensed in
respect of the Asylum mobilisation. However,
Care margins increased to 3.3% (2017: 0.4%)
reflecting the continued focus on service delivery
and sustainable margins rather than revenue
growth. The blended margin fell short of target,
but did show an increase on the prior year which
is pleasing. The 2019 target is set lower reflecting
the decision to refocus the Development
activities, combined with the new Asylum
contract which is expected to break even in 2019.

In 2019, we will refocus our capital allocation
on those areas with the lowest working
capital requirement and the Board will take
active steps to reduce debt over 2019 and
2020. The release of cash from the unwinding
of Development may be phased over time,
so it is prudent to assume that 2020 may
show a more significant reduction in net
debt than 2019.

How we performed

2018 target

How we performed

2018 target

>5.2%

How we performed

2018 target

£110m

Underperformance

2019 target

15%

2019 target

4.5%

2019 target

£105m

Normalised diluted earnings per share of

We are proud of our record in this area and

29.06p (2017: 28.05p) reflected the increase

we continue to invest in our health and safety

in profits, increasing by 4%. The target for

training, which is delivered through our in-

2019 has been set to maintain earnings at this

house registered training provider. We place

level to reflect the expected loss in respect

emphasis upon all accidents and near misses,

of refocusing the Development activities

however trivial, being reported and properly

and the break-even forecast for the new

captured, which naturally impacts negatively

Asylum contract.

on this measure. Much of this increase relates

to an improved reporting regime. Whilst we

have fallen short of our stretch target, our

accident rates are already at very low levels

for our sector. However we will continue to

strive to deliver further improvements to this

How we performed

2018 target

>5%

2019 target

critical area.

2018 target

0.16

2019 target

0.21

+3% (before impact of IFRS 16)

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Mears Group PLC Annual Report and Accounts 2018

Revenue growth

(Housing)

Adjusted operating margin

(Group)

Average net debt

(Group)

Growth in normalised diluted EPS
(Group)

Accident frequency rate
(Group)

Health and safety

Normalised earnings are stated before
exceptional costs and exclude the
amortisation of acquisition intangibles
together with an adjustment to reflect
a full tax charge.

Providing our employees with a safe working
environment remains paramount. Our accident
frequency rate (AFR) is calculated as the
number of reportable incidents (by both
employees, service users and third parties)
divided by the number of hours worked,
multiplied by 100,000.

Results from the year

%
5
1

%
9

%
3
1
-

%
4

%
8
-

0.22

3
2
0

7
1
0

6
1
0

2
2
0

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

Normalised diluted earnings per share of
29.06p (2017: 28.05p) reflected the increase
in profits, increasing by 4%. The target for
2019 has been set to maintain earnings at this
level to reflect the expected loss in respect
of refocusing the Development activities
and the break-even forecast for the new
Asylum contract.

We are proud of our record in this area and
we continue to invest in our health and safety
training, which is delivered through our in-
house registered training provider. We place
emphasis upon all accidents and near misses,
however trivial, being reported and properly
captured, which naturally impacts negatively
on this measure. Much of this increase relates
to an improved reporting regime. Whilst we
have fallen short of our stretch target, our
accident rates are already at very low levels
for our sector. However we will continue to
strive to deliver further improvements to this
critical area.

How we performed

2018 target

>5%

2018 target

0.16

Underperformance

2019 target

+3% (before impact of IFRS 16)
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2019 target

0.21

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Revenue represents the amounts due for

Operating margin is the KPI used to measure

Good working capital management remains

services provided during the year. In order

and understand the profitability of our

a cornerstone of the business. The Group’s IT

to measure organic growth, we deduct

activities. This KPI is used to continually

systems are designed to deal with the challenges

incremental revenue arising from acquisitions.

monitor our costs to ensure services are being

of high volume and low value activities.

We believe that organic growth gives a better

delivered efficiently.

indication of business performance, as it is a

purer aggregation of market growth, success

in new contract bidding and contract retention.

-2%

4.7%

This is particularly relevant to the Group’s core

Maintenance, Management and Care activities.

The Group has utilised debt to find acquisitions

over the last five years of circa £60m which is

reflected in the increasing average net debt

Results from the year

£113m

The revenue for the year is slightly lower

The Housing division contributed an operating

In 2019, we will refocus our capital allocation

than our expectation. In Maintenance, some

margin of 5.0%, with second half margin

on those areas with the lowest working

revenues expected to be delivered in 2018

reporting a small reduction following the

capital requirement and the Board will take

were re-phased and will be delivered in 2019.

acquisition of MPS and costs expensed in

active steps to reduce debt over 2019 and

Our Development activities experienced a

respect of the Asylum mobilisation. However,

2020. The release of cash from the unwinding

challenging last quarter, with a significant

Care margins increased to 3.3% (2017: 0.4%)

of Development may be phased over time,

slowdown in sales activity impacting

reflecting the continued focus on service delivery

so it is prudent to assume that 2020 may

negatively on both revenues and working

and sustainable margins rather than revenue

show a more significant reduction in net

capital. With the acquisition of MPS together

growth. The blended margin fell short of target,

debt than 2019.

with the mobilisation of the Asylum contract,

but did show an increase on the prior year which

growth expectations for 2019 are high.

is pleasing. The 2019 target is set lower reflecting

the decision to refocus the Development

activities, combined with the new Asylum

contract which is expected to break even in 2019.

How we performed

2018 target

2019 target

15%

How we performed

2018 target

>5.2%

2019 target

4.5%

How we performed

2018 target

£110m

2019 target

£105m

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information

Strategic report
Risk management

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

The Board

Audit Committee

Nomination
Committee

Remuneration
Committee

The Chief
Executive Officer

Compliance Commitee

Operational and
financial governance

First line
of defence

Second line
of defence

Third line
of defence

Senior Management
Team

Operational
management

Central support
functions

Risk management
function
(including internal audit
and external advisers)

Mears Group PLC Annual Report and Accounts 2018The 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.

The Board
The Board has overall responsibility for determining
the nature and extent of risk it is willing to accept 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.

Compliance Committee
Created in 2017 as a sub-committee of the Audit Committee,
its purpose is to continue to increase the Board’s focus on
health and safety strategy and performance, regulatory
compliance and related risk management and provide
a closer link between the Board and the operations.

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.

Risk management approach
The Group’s approach to risk management is targeted
towards 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.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Risk management continued

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 impact,
i.e. potential severity. This severity can be measured using life and limb, financial, 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.

Reputation

IT and data

Health and safety

Key

Gross risk
Net risk

People

IT and data

Reputation

People

Health and safety

e
c
n
e
r
r
u
c
c
o
f
o
d
o
o
h

i
l

e
k

Low

Moderate

Serious

Critical

Severity of impact

ReadmoreintheCorporate
governancesectiononpage69

ReadmoreintheReportofthe
AuditCommitteeonpage77

Mears Group PLC Annual Report and Accounts 2018

Strategic report
Principal risks and uncertainties

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 the 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 through
internal communications.

Increased gross risk exposure

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 the significant commercial
value attributable to the Mears brand.
Our success in securing larger and more
complex contracts, such as the new Asylum
contract, increases the risk of reputational
damage in the event of failure.

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.

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

~ Carer churn

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Principal risks and uncertainties continued

People

Definition
The Group employs over 10,000 people
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 are 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 churn

Health and safety

Definition
Prevention of injury or loss of life for both
employees and customers is of utmost
importance. In addition, it is vital to maintain
the confidence our customers and clients
have in our business.

KPIs associated with risk:
~ Accident frequency rates

~ 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.

No change

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.

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

~ At the senior end of the business, we have

requirements.

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.

~ Expansion of apprenticeships.

Mitigation
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.

~ We have robust processes for inducting new
staff to ensure the importance of health and
safety is emphasised together with detailed
method statements for working safely.

~ Creation of a Compliance Committee to

monitor and oversee health and safety strategy
and performance, regulatory compliance and
risk management.

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.

~ General Data Protection Regulation (GDPR)

steering group.

~ We regularly undertake employee surveys

to gauge employee satisfaction and
engagement, and any barriers to high level
performance.

No change

Closer review of buildings safety compliance
(post Grenfell) in higher risk areas, e.g. Housing
Management.

~ Regular HSE training and updates are held,
predominantly delivered by the in-house
training function.

~ Independent review of health and safety

cases by insurers where recommendations
of change are implemented.

~ Internal health and safety auditing takes place

using third party validation.

~ A Group health and safety strategy and plan

are produced annually.

Increased gross risk exposure

Information security penetration is externally
tested to recommend improvements which are
then implemented.

~ Data Security Committee in place to monitor
and review both physical data security and IT
data security.

~ GDPR implementation plan and steering group.

Mears Group PLC Annual Report and Accounts 2018Strategic report
Business planning and financial viability

Business planning
and financial viability

In accordance with provision 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, being a blend of an average contract length of six
years in Housing and three years in Care. 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.

The Board considered its key risks. The principal risks are
set out on pages 41 and 42 and the most relevant of these
risks on 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;

~ 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
reputational 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 to invoicing our
customers and collecting cash.

A financial model has been built on a contract-by-contract
basis for the next 12 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 were
set at levels which were broadly in-line with the current
run rates. 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.

Three scenarios were modelled:

~ Scenario 1: As reported in detail in the Annual Report,
the Group has been awarded a contract in respect
of Asylum Accommodation and Support Services.
The contract is large in size, in excess of £100m per
annum. Whilst this award is of significant strategic
importance to the Group, in the event of any failure in
mobilisation, service delivery or pricing, this contract
could impact negatively on both reputation and financial
viability. A key assumption underpinning the contract
pricing relates to occupancy rates; the tender model
assumed the requirement for around 4,500 properties,
accommodating 15,000 service users. This scenario
assumes a significant deterioration in occupancy rate,
resulting in an increase in the number of properties
required by circa 30%, at an additional cost of around
£19.5m per annum. The additional cost flows directly
to operating profit although the model assumes that no
steps are taken to either drive operational improvement
or take other mitigating steps.

~ Scenario 2: This scenario takes a negative stance in
respect of Housing Maintenance contract renewals.
As detailed within the Annual Report, 2020 and 2021 will
experience a high level of existing contracts coming up
for re-bid. The annualised value of these re-bids, over the
course of two years, is circa £225m. The Group has a
solid track-record of re-securing work on re-bid. For the
purposes of considering the viability of the Group, the
model has assumed that all material contracts that
come up for re-bid over this 24-month period are lost.
This loss of revenue results in a reduction in Housing
gross margin and an under-recovery in central support
overhead, resulting in a reduction in net profit margin
from 5.0% to 4.6% in year 5 of the model.

~ Scenario 3: a combination of both scenario 1 and 2.
The combination of both significant loss in margin
from scenario 1 and reduced revenues and operating
leverage triggered in the event of scenario 2, the
combined scenario results in a profit margin reduced
from 5.0% to 2.6%.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Business planning and financial viability continued

All 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
but not entirely realistic. Whilst the Group’s operations are
entirely based in the UK, the large network of branches
reduces the risk of serious business interruption through
a single failure. In addition, the Group has a broad spread
of customers – the largest single client is now 10% of
Group revenues, being the Asylum contract. All scenarios
have provided comfort that, while significant, the loss of a
major client would not impact on the Group’s wider viability.
The Group’s existing debt facilities run to November 2022.
The future viability review extends narrowly beyond this
date and therefore assumes that there will be sufficient
appetite from our existing or new funders to provide the
required level of funding on similar terms. The Group’s
average daily net debt in 2018 was circa £113m. In all three
cases, it is forecast that the Group would have delivered
a reduction in its debt level at renewal compared with
the balance today, and it could be in a position to seek a
reduction in the facilities required at renewal.

The Board also considered the impact of Brexit on the
business and does not envisage any significant negative
effect impacting on the Group’s viability for the period
under review.

The Board is mindful that there has been a significant
increase in the fines that can be levied upon companies
for non-compliance in areas such as health and safety,
and data protection. Fines are discretionary based on the
nature, gravity and culpability of the company but fines are
applied based upon a percentage of Group revenue. In a
low margin business such as Mears, any single fine could
have a significant and disproportionate impact on retained
profits. The Board took the view, however, that, whilst such
an event could be damaging, it would not ultimately impact
on the long-term viability of the Group. Both health and
safety, and IT and data feature high on the Group’s risk
register and we continually review our mitigating actions to
ensure that we minimise our residual risk.

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 would continue in operation and would be able to
continue to meet liabilities as they fell due over the five-year
period of business planning.

Mears Group PLC Annual Report and Accounts 2018Strategic report
Financial review

The Directors are taking a number
of active steps to progressively
reduce debt

This section provides further key information in respect
of the financial performance and financial position of the
Group to the extent not already covered within the Chief
Executive review.

Alternative performance measures (APM)
APMs used by the Group are detailed below to provide
a reconciliation for each non-IFRS measure to its IFRS
equivalent and an explanation as to why management
considers the APM to provide a better understanding as to
the Group’s underlying performance. The APMs are used
externally to meet investor requirements and also used
when reporting financial performance internally.

The Group defines normalised results as excluding the
amortisation of acquisition intangibles and exceptional
costs and adjusted to reflect a full tax charge and uses
these results are used for reporting all profit and EPS
measures. This aids consistency when comparing with
historical results and enables performance to be evaluated
before non-recurring items. Investors typically require
results to be reported before the amortisation of acquired
intangibles and the Group’s adjusted earnings measure
reflects this.

Full tax
charge
£’000

Amortisation
of acquired
intangibles
£’000

Exceptional
£’000

Statutory
(all activities)
£’000

869,843
(662,825)

207,018

–
–

–

(5,657)

(176,268)

(5,657)

30,750

–
–

1,154
(3,473)

–
–

–

(4,434)

–
–

(4,434)

(5,657)

28,431

–

1,315

(3,606)

(4,434)

(4,342)

24,825

(4.25p)
(4.22p)

(4.16p)
(4.13p)

23.05p
22.91p

Andrew C M Smith
Finance Director

29.06p
Normalised
diluted EPS

22.91p
Statutory
diluted EPS

2018

Sales revenue
Cost of sales

Gross profit

Total administrative costs

Operating profit

Finance income
Finance costs

Profit for the year before tax

Tax expense

Profit for the year

Earnings per share
Basic
Diluted

Normalised
result for year
£’000

869,843
(662,825)

207,018

(166,177)

40,841

1,154
(3,473)

38,522

(7,231)

31,291

29.24p
29.06p

–
–

–

–
–

–

2,310

2.22p
2.20p

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Financial review continued

£22.5m
Initial consideration
for MPS acquisition

£11.1m
Final Deferred
consideration
in respect of
Omega acquisition

2017

Sales revenue
Cost of sales

Gross profit

Total administrative costs

Operating profit

Finance income
Finance costs

Profit for the year before tax

Exceptional items

Tax expense

Profit / (loss) for the year

Earnings per share
Basic
Diluted

Normalised
result for year
£’000

Full tax charge
£’000

Amortisation
of acquired
intangible
£’000

Statutory
(continuing
activities)
£’000

Statutory
(discontinued
activities)
£’000

Statutory
(all activities)
£’000

900,184
(676,482)

223,702

(184,551)

39,151

751
(2,780)

37,122

(6,682)

30,440

28.29p
28.05p

–
–

–

–
–

–

2,367

2.31p
2.28p

–
–

–

900,184
(676,482)

223,702

(10,638)

(195,189)

(10,638)

28,513

–
–

751
(2,780)

(10,638)

26,484

–
–

–

–
–

–

900,184
(676,482)

223,702

(195,189)

28,513

751
(2,780)

26,484

–

(16,500)

–

(10,638)

(4,315)

22,169

3,176

(13,324)

(10.32p)
(10.23p)

20.28p
20.10p

(12.93)
(12.81)

(1,139)

8,845

7.35p
7.29p

Acquisitions
(i) Certain business assets and contracts from the
property services division of Mitie
In November 2018, Mears completed the acquisition of
certain business assets and contracts from the property
maintenance business of Mitie, with the acquired business
branded as MPS Housing (‘MPS’), as detailed in the Chief
Executive Review. The initial cash consideration was £22.5m
and was funded through an issue of approximately 6.8m new
ordinary shares. The business was acquired on a cash free,
debt free basis, with a target net asset value, based on the
sellers’ accounting policies, of £12.3m.

Whilst the acquisition was a share transaction, there
was a business transfer into a newly incorporated
vehicle immediately prior to completion. This transaction
structure added a layer of complexity but positively
reduced the Group’s exposure to risks associated with
share capital transactions, such as pensions, taxation and
legacy activities.

The fair value of the net assets acquired, based upon Mears
accounting policies and reflecting a level of conservatism,
is estimated to be £7.1m and after recognising intangible
assets of £17.4m and deferred tax of £3.3m, goodwill of
£3.3m was recorded. Given the proximity of the acquisition
to the year end, the Directors have not concluded their
assessment of the assets and liabilities acquired and this
estimate remains provisional and will be finalised during
2019. Inevitably there will be both positive and negative
variances as judgements and estimates are revised in light
of changing circumstances.

Contingent consideration is payable in 2021, up to a
maximum of £12.5m, based upon a multiple of three times
applied to the total net profits generated by the acquired
business during the 24 months following completion,
and after deducting the initial consideration of £22.5m.
Based upon the forecasts prepared for the earn-out period,
the Directors have estimated that further consideration will
be payable of £2.0m and which would become payable
in 2021.

(ii) Omega Group of companies
In January 2018, deferred consideration of £11.1m was
paid in full and final settlement of all deferred consideration
relating to the 2014 acquisition of Omega.

Exceptional items
Exceptional items are items which are considered outside
normal operations. They are material to the results of the
Group either through their size or nature. These items
have been disclosed separately on the face of the Income
Statement to provide a better understanding as to the
underlying performance of the Group.

Restructuring costs
Non-trading legal costs

2018
£m

3.6
2.1

5.7

2017
£m

–
–

–

The Group has carried out a review of its central support
structures to ensure they reflect the changing nature of
the business and that they are efficient and deliver value.
The review identified annualised savings of approximately
£5.0m and these have been secured in the year. The costs
associated with this restructure of £3.5m have been
accounted for within exceptional items.

Mears Group PLC Annual Report and Accounts 2018£4.4m
Acquisition
intangible
amortisation

£2.3m
Net finance charges

The legal costs relate to two matters. Firstly, the Group
committed to enter into a lease on a property in the
course of construction. The property required completion
by September 2018. Mears has incurred litigation costs
of £1.8m as the construction of the property was not
complete by the contractual date and is not compliant with
fire safety regulations leaving the Group no option but to
defend its position robustly. The Group will not compromise
the safety of tenants for any reason. The Directors are very
confident as to a successful outcome to this litigation and
a proportion of these fees would be recoverable in such
an event. Given the size of this single item, and the unique
circumstances of the matter in dispute, the Directors
believe it should be accounted for as an exceptional item.
Costs of £0.4m relating to the acquisition of MPS are also
included as exceptional on the basis they are non-trading.

Amortisation of acquisition intangibles

Carrying value at 1 January
Revisions / disposals
Recognised on acquisitions during

the year
Amortisation

Carrying value at 31 December

2018
£m

9.6
–

18.0
(4.4)

23.2

2017
£m

19.8
0.4

–
(10.6)

9.6

A charge for amortisation of acquisition intangibles of
£4.4m (2017: £10.6m) arose in the year. The charge
has reduced significantly on the prior year reflecting
few acquisitions over the last three-year period and
the subsequent reduction in carrying value of acquired
intangibles. The acquisition of MPS in late 2018 will result in
an increase in amortisation in 2019 to 2021. The remaining
unamortised value of £23.2m (2017: £9.6m), predominantly
relating to order book and customer relationships, will be
written off over their estimated lives.

Net finance charge

Finance costs
Finance income
Pension income

2018
£m

(3.5)
0.4
0.8

(2.3)

2017
£m

(2.8)
0.3
0.5

(2.0)

A net finance charge of £2.3m has been recognised in the
year (2017: £2.0m). The finance cost in respect of bank
borrowings was £3.5m (2017: £2.8m), reflecting a higher
level of average debt.

The Group held two interest rate swaps covering 2018.
The first, which ran throughout the year, fixed a rate of
0.84% on £40.0m of borrowings and expires in December
2020. The second, which commenced in August 2018, fixed
a rate of 0.96% on £30.0m of borrowings. The remaining
debt bore a variable LIBOR rate. The Group pays a margin
of 120–220bps over and above LIBOR, subject to a
ratchet mechanism.

The net finance costs also includes a net credit generated
from defined benefit pension accounting of £0.8m
(2017: £0.5m).

Tax expense

Current tax on continuing
activities recognised in
income statement

Deferred tax on continuing
activities recognised in
income statement

Current tax on discontinued
activities recognised in
income statement

Total tax expenses recognised in

income statement

Profit before tax and

amortisation of acquired
intangibles

Profit before tax on continuing

activities

Effective current tax rate
on continuing activities

2018
£m

2017
£m

(1.2)

5.3

4.8

–

3.6

38.5

28.4

(1.0)

(3.2)

1.1

37.1

26.5

(4.1%)

20.1%

Taxes paid / (received)

(0.7)

3.8

The headline UK corporation tax rate for the year was 19.0%
(2017: 19.3%). The total tax charge for the year relating to
continuing operations was £3.6m (2017: £4.3m) resulting
in an effective total tax rate of 12.7% (2017: 16.3%). The key
reconciling items to the headline rate were the utilisation of
brought forward losses where the deferred tax impact had
not previously been recognised, an annual corporation tax
deduction in respect of share options and adjustments in
respect of the prior year estimated tax charge. The current
tax credit for the year on continuing operations was £1.2m
(2017: £5.3m charge), which represents an effective tax
rate of (4.1%) (2017: 20.1%). The current tax credit was
generated through the impact of IFRS 15, resulting in a
large credit in the current year, offset against the unwinding
of the deferred tax balance recognised on transition to the
new standard.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Financial review continued

Mears does not engage in inappropriate or aggressive tax
planning arrangements. Where appropriate, the Group
takes advantage of available statutory tax reliefs. The tax
position in any transaction is aligned with the commercial
reality and any tax planning undertaken is consistent with
the spirit as well as the letter of tax law. In situations where
material uncertainty exists around a given tax position,
the Group engages with expert advisers and, where
appropriate, advance clearance is sought from HMRC
in order to establish the most appropriate treatment.

We value our low risk assessment from HMRC and will
continue to work to maintain this status through continual
review of our controls and processes.

Discontinued activities
The results for the previous year reported a loss from
discontinued activities of £16.5m. This was in relation
to the Mechanical and Electrical division which was
the subject of a disposal in 2013 and included an entity
operating in the United Arab Emirates (UAE). As part of
that disposal, the Group ultimately retained a beneficial
interest in 1% of the share capital of this UAE Company
due to the Group still carrying a number of performance
guarantees, which unwind as the underlying contracts
reach the end of their defects liability period. In 2017,
a number of the performance guarantees were called,
and the Group made a provision against the outstanding
performance guarantees.

A balance is owed by the UAE company to the Group in
excess of £14m however this balance is fully provided
against. During the year, the Group has incurred cash costs
of £1.7m in respect of the costs of litigation associated
with the performance guarantees. The Group is carrying
a remaining provision of £2.2m in respect of the two
outstanding performance guarantees, amounting to
£3.9m, resulting in a residual contingent liability of £1.7m.
Mears does not believe that there is any justification for
the guarantee holders making a call on these guarantees,
given that the contracts to which they are attached were
concluded several years ago. However Mears is also
mindful of the challenges in managing this process in
a country that follows very different legal and business
practices. Mears believes the current position is sufficiently
conservative, however if both bonds were to be called,
and in the event that Mears recovered none of the debtor
balance owed, this would result in a further loss to be
recognised of £1.7m. This provision of £2.2m is reported
within other creditors. The £1.7m is disclosed as a
contingent liability.

Earnings per share (EPS)

Diluted earnings per share*
Normalised diluted earnings

2018
p

2017
p

Change
%

22.91

20.10

+14%

per share*

29.06

28.05

+4%

*Continuing activities

The weighted average number of shares for EPS purposes
was 105.1m (2017: 104.0m). The increase is predominantly
due to the issue of c. 6.8 million shares in November 2018
in relation to the acquisition of MPS, the effect of which is
pro-rated for the part-year following issue.

The statutory diluted EPS measure allows for the potential
dilutive impact of outstanding share options and reflects
the exceptional loss reported in through discontinued
activities. The normalised diluted EPS increased by 4%
to 29.06p (2017: 28.05p). Normalised earnings are based
upon continuing activities before the amortisation of
acquisition intangibles together with an adjustment to
reflect a full tax charge of 19.0% (2017: 19.3%). 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.

Cash flow and net debt
As referenced in the Chief Executive Review, the Board
recognises that operating cash performance is an area
which requires improvement. When the business was
simply Housing Maintenance and Care, cash movements
were relatively predictable and whilst the focus on the
cash balance on any single day was perhaps simplistic,
nevertheless the position at the interim and year end date
was viewed as a key performance metric.

As the business has evolved, this single day position
has become less appropriate and relevant. The Housing
Development activities do not generate uniform cash flows
and the timing of payments can also have a significant
impact upon the period end metric. Accordingly, this is why
the Group has consistently ensured that its daily average
debt measure is also disclosed. The average daily net
debt will be used as the primary performance measure
going forwards.

The average daily net debt for the year, excluding the
property acquisition facility, was £113.2m, narrowly
behind the target of £110.0m set at the start of the year.
The net debt at the year end was £65.9m (2017: £25.8m).
The property acquisition debt at the year end was £15.0m
(2017: £13.9m), with an average balance of £24.0m
(2017: £1.2m) in the year.

£113.2m
Daily average
net debt

£65.9m
Net debt at
31 December 2018

Mears Group PLC Annual Report and Accounts 2018£210.3m
Net Assets

£0.7m
Corporation tax
inflow following
adaption of IFRS15

Mears has always fostered a strong ‘cash culture’, whereby
the Group operations understand that invoicing and cash
collection are intrinsically linked and that works are not
complete until the sales cycle is completed. While the
headline cash metrics in recent periods have not been
as good as the business would like, our core activities
continue to utilise working capital at relatively low levels.
It is pleasing that the average receivables outstanding
through 2018 showed a reduction in the three high
volume activities of Maintenance, Management and Care.

This demonstrates our operations have good controls and
robust disciplines, supported by IT systems. As discussed
in the Chief Executive Review, the working capital absorbed
within the Development activity has been a challenge in
the year with average receivables increasing to £21.2m
(2017: £9.5m). The Development receivables balance
outstanding at 31 December 2018 was £33.3m which was
much of the cause for the average debt being narrowly
higher than target and the cash flow generated from
operating activities being low.

2018 – 12-month average

2017 – 12-month average

Receivables
£m

Payables
£m

Net working
capital
£m

Receivables
£m

Payables
£m

Net working
capital
£m

123.2
21.0
21.2
19.0

184.4

(104.2)
(19.3)
(5.6)
(5.4)

(134.5)

19.0
1.7
15.6
13.6

49.9

125.7
21.6
9.5
21.7

178.5

(116.4)
(21.0)
(2.7)
(8.3)

(148.5)

9.3
0.5
6.7
13.5

30.0

Maintenance
Management
Development
Care

Total

A summary of the consolidated cash flow is detailed below together with explanations in respect of the major movements:

Operating profit
Amortisation of acquisition intangibles
Depreciation and amortisation

EBITDA
Other adjustments
Change in inventories
Change in operating receivables
Change in operating payables

Cash inflow from operating activities
Taxes paid
Cash outflow from discontinued operations
Capital expenditure
Purchase of subsidiary undertakings
Issue of shares
Dividends
Interest received / (paid)
Other financing and investing activities

Change in net debt
Opening net debt

Closing net debt

2018
£m

30.8
4.4
8.2

43.4
0.6
(11.0)
(13.9)
(17.5)

1.6
0.7
(1.6)
(10.8)
(37.8)
22.1
(13.1)
(3.2)
2.0

(40.1)
(25.8)

(65.9)

2017
£m

28.5
10.6
8.3

47.4
(0.1)
(7.5)
(0.1)
(11.0)

28.7
(3.8)
(9.4)
(9.2)
(5.0)
1.9
(12.7)
(2.2)
(1.6)

(13.4)
(12.4)

(25.8)

Note

4
5
6
7
8
9

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Financial review continued

The major movements in the year are:
1. Depreciation of £5.8m, amortisation of other intangible
assets of £2.4m and share based payments of £0.6m.

2. The outflow in respect of inventories is entirely
due to working capital absorbed in Housing
Development activities.

3. The change in operating payables reflects both the
changing sales mix and good payment practices.

4. Relates to the corporation tax deduction in respect
of IFRS 15, resulting in a refund of corporation tax
previously paid.

5. Legal and other professional costs incurred in the
year in relation to the discontinued M&E activity
based in the UAE. There was no impact to the income
statement. Due to release of a provision attached to
performance guarantee.

6. Tangible fixed asset additions of £8.7m (2017: £8.1m)
and IT development costs of £3.1m (2017: £3.7m)
however the cash flow statement only reports the cash
flows attached to this expenditure and therefore differs
from the balance sheet additions which are recognised
on an accruals basis.

7. Initial consideration of £22.5m in respect of the

acquisition of MPS and deferred consideration of
£11.1m in respect of Omega.

8. Primarily the equity placing associated with the

acquisition of MPS; £22.5m was raised less costs
and a small number of share options exercised during
the period.

9. The £12.5m paid to Mears shareholders and £0.6m paid

in respect of non-controlling interests.

10. Property assets held for resale, loans to other entities,

and discharges of finance lease liabilities.

Balance sheet
A summary of the Group Balance Sheet is detailed below together with explanations in respect of the most significant
balances and the major movements:

Reported
2018
£m

MPS
acquisition
£m

Pre-MPS
2018
£m

2017 as
restated
£m

Adjustments
for IFRS
9 & 15
£m

2017 as
reported
£m

Goodwill and intangible assets
Property, plant and equipment
Inventories
Trade receivables
Property assets held for resale
Trade payables
Operating net debt
Property acquisition facility
Deferred consideration
Other payables
Net pension
Taxation

Net assets

228.6
25.0
29.8
178.2
12.4
(180.4)
(65.9)
(15.0)
(2.0)
(12.4)
13.6
(1.6)

210.3

(21.5)
(0.3)
—
(37.6)
—
27.7
2.8
—
2.0
—
—
3.4

(23.5)

207.1
24.7
29.8
140.6
12.4
(152.7)
(63.1)
(15.0)
0.0
(12.4)
13.6
1.8

186.8

210.9
22.0
18.7
122.0
13.9
(167.8)
(25.8)
(13.9)
(11.1)
(10.6)
22.3
3.3

183.9

—
—
—
(31.6)
—
—
—
—
—
—
—
6.0

(25.6)

210.9
22.0
18.7
153.6
13.9
(167.8)
(25.8)
(13.9)
(11.1)
(10.6)
22.3
(2.7)

209.6

Note

1
2
3
3
5
4

5
6
7
8

The major movements in the year were:
1. The carrying value of goodwill of £197.1m

(2017: £193.6m) 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 carrying value of the Care
asset and anticipated future value that will be delivered
by the Care division has been low over a number of
years. The increase in goodwill during the period relates
to the acquisition of MPS.

2. Group capital expenditure of £8.7m (2017: £8.1m)

includes an addition during the year of £3.6m (2017: £nil)
relating to the development of 70 modular homes which
are currently under construction which, upon completion,
will be used to deliver a homelessness solution within

our Housing Management activities. The homes are
expected to be completed in November 2019 at a
total cost of £5.8m. Mears is looking for a long term
funder to acquire these properties upon completion.
A further £2.0m is expected to be capitalised during
2019. Excluding the investment in modular homes,
the remaining expenditure of £5.1m (2017: £8.1m)
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.
The low level of investment in 2018 reflects a quiet
period of new contract mobilisations.

Mears Group PLC Annual Report and Accounts 2018£20.6m
taxes incurred and
paid to HMRC

£95.6m
taxes collected and
paid to HMRC

In addition, intangible assets includes the capitalisation
of expenditure incurred on developing our in-house
IT platform. Additions in the year amounted to
£3.1m (2017: £3.7m) with a carrying value of £8.4m
(2017: £7.7m), which is amortised over five years.
Having made significant investment in our IT systems
over a number of years, we are starting to see a
reduction in our development expenditure moving
forward and this is reflected in the 2018 amounts.

The majority of plant utilised by our operational teams
is subject to short-term hire arrangements and motor
vehicles are subject to operating leases, 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, will impact upon this treatment as
discussed below.

3. Trade receivables and inventories increased to

£208.0m (2017: £172.3m). This predominantly relates
to an increase in working capital associated with the
Housing Development activities which accounts for an
increase of £20.7m. The IFRS15 adjustment resulted in
a reduction of £31.4m whilst balances acquired on the
acquisition of MPS resulted in an increase of £37.6m

4. Trade payables reported an increase to £180.4m
(2017: £167.8m), however the acquisition of MPS
brought a balance of £27.7m. As such, there was an
underlying reduction in payables by £16.2m reflecting
changing sales mix and good payment practice.

5. The Group has secured a property acquisition credit
facility of £30m to acquire and build portfolios for
resale. At 31 December 2018, assets held for resale
utilising this facility amounted to £12.4m (2017: £13.9m).
At 31 December 2018, the associated draw-down for
these acquisitions was £15.0m (2017: £13.9m), funding
both these assets for re-sale together with also part-
funding the modular homes included within fixed assets
as discussed above.

6. In January 2018, deferred consideration of £11.1m
was paid in full and final settlement of all deferred
consideration relating to the acquisition of Omega
in 2014. The balance at 31 December 2018 relates
to the contingent consideration in respect of the
acquisition of MPS and, subject to performance,
would be due for settlement in 2021.

7. Other payables predominantly relates to provision for

expected losses in relation to the insurance captive which
manages the Group’s insurance risks. Finance lease
liabilities are also included within this category.

8. The Group participates in two principal Group pension

schemes (2017: two) together with a further 28
(2017: 28) individual defined benefit schemes where
the Group has received Admitted Body status in a Local
Government Pension Scheme (LGPS).

The Group holds a number of pension arrangements with
Local Government Pension Schemes. The accounting
treatment for these schemes follows the guidelines
set for defined benefit schemes. This does not present
the commercial reality for a number of our LGPS
arrangements, where the Group holds back-to-back
indemnities from its clients in respect of both its exposure
to changes in pension contribution rates and to future
deficit risk. These have been identified in the table below
as ‘limited risk’. For the remaining LGPS arrangements
where the Group does not benefit from indemnities,
the risks attaching to these schemes matches the time
horizon of the underlying contract which, whilst not
removing all risks, does reduce the period over which
a deficit can arise. This second category has been
identified in the table below as ‘medium term’. The Group
schemes are typical defined benefit arrangements
where the Group is ultimately responsible for any deficit
resulting from movements in discount rates, interest
rates, mortality rates and investment performance.
This last category has been classified as ‘long-term’.

Number of schemes
Assets £m
Liabilities £m

Net surplus/(deficit) £m

Group
schemes
(no indemnity)
long-term

LGPS
schemes
(no indemnity)
medium-term

LGPS
(indemnified)
limited-risk

2
152.9
(136.5)

16.4

13
62.1
(64.9)

(2.8)

15
217.5
(217.5)

–

Total

30
432.5
(418.9)

13.6

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Financial review continued

Changes to accounting standards
IFRS 9 ‘Financial Instruments’
In respect of IFRS 9, Mears does not hold complex
financial instruments and the impact of this standard on
its hedging instruments is not material. However, included
within financial assets are trade and other receivables.
From 1 January 2018, Mears is required to recognise a loss
allowance for expected credit losses on these financial
assets. The new standard states that if the credit risk on a
financial instrument has significantly increased since initial
recognition, the loss allowance must be measured using
the lifetime expected credit loss.

Given the significant majority of our invoicing is to public
sector clients, assessed to have a very low credit risk,
expected credit losses to this customer type are deemed
to be negligible. However, Mears provides regulated
services to private individuals in both its Housing and Care
businesses and, as such, services cannot immediately
be withdrawn when the Group becomes aware of an
increased credit risk. Mears has both a moral and legal
obligation to continue to provide services whilst alternative
arrangements are being made for these service users.

The difference between the previous carrying amount
and the carrying amount at the beginning of the reporting
period under IFRS 9 is recognised as an adjustment to the
opening balance of equity. The impact of this change at
1 January 2018 is a reduction in the opening balance of
equity of £2.3m.

IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 changes the timing of recognising revenue and
costs in respect of certain long-term contracts. In the
case of the large majority of our contracts, the accounting
methodology will be unchanged. Mears has typically looked
to recognise revenue and cost at the individual works order
level, whether that be a singular maintenance order or care
visit. This has ensured that the valuation of working capital
balances is straightforward and contains fewer areas of
significant judgment.

However, there are a small number of arrangements where
the Group has accounted for multiple service contracts by
treating them as a single supply of a service. This occurs
where local contract mechanics were not easily aligned
with the commercial framework of the contract. The new
accounting standard requires Mears to allocate the total
transaction price to each distinct performance obligation.
In addition, a number of contracts include variable
consideration, where revenue and profit are linked to the
achievement of performance targets and milestones.
The new standard requires more detailed analysis
in determining the appropriate timing of recognising
this revenue.

IFRS 15 has been applied using the modified retrospective
approach on transition which results in an adjustment to
the opening balance of equity at 1 January 2018 and no
restatement of the prior period. The impact of this change
in 2018 will see a reduction in the opening balance of
equity of £23.9m. The change to IFRS 15 has no impact
on the lifetime profitability of the contracts and there are
no cash flow impacts, although the change will drive better
alignment between the timing of profit recognition and
its associated cash flow. Moving forward, it is expected
to have a positive impact in respect of operating profit
from 2018 through to 2027, as performance obligations
are satisfied. The impact of adopting IFRS 15 has been
to increase the operating result for 2018 by £0.9m.

IFRS 16 ‘Leases’
The new leasing standard, IFRS 16 Leases, is effective from
1 January 2019 and will have a significant impact on the
Group’s Balance Sheet, principally due to the use of leased
vehicles and residential property for the operational delivery
of Housing Maintenance and Housing Management.
The standard provides a single lessee accounting model,
requiring lessees to recognise assets and liabilities for all
leases unless the lease term is under 12 months or the
underlying asset is of a low value.

The Group will use the modified retrospective transition
method on adoption. Under this method, the asset is
calculated as if IFRS 16 had always been applied, however
the liability is calculated as if all leases start on 1 January
2019, which will result in no change to comparative
numbers but an adjustment within the reserves of
the Group.

Under IFRS 16, a lessee will recognise its right to use a
leased asset and a lease liability representing its obligation
to make lease payments. The depreciation cost of the
newly recognised ‘right of use’ lease asset will be charged
to profit within administrative costs, whilst the interest cost
of the newly recognised lease liability will be charged to net
finance costs. On the basis that depreciation is required
to be charged on a straight-line basis, whilst the interest
element is charged on a reducing balance basis, this results
in a higher charge being applied to the income statement
in the early years of a lease, with this impact reversing over
the later years. The profit impact over the life of a lease is
neutral and IFRS 16 has no cash impact.

The Group is in the process of finalising its work in applying
the new requirements of IFRS 16. As a result, it is possible
that there may be changes to estimates and judgement
used in applying this new standard. These will be finalised
prior to the release of the Group’s 2019 interim results later
in the year.

£13.6m
pension net surplus

£25.6m
opening reserves
adjustment resulting
from adoption of
IFRS 9 and 15

Mears Group PLC Annual Report and Accounts 2018The current estimate of the impact of IFRS 16 to the Group,
at the point of transition, is detailed below:

1. From a balance sheet perspective, the transitional

adjustment will see a right of use asset recognised of
c.£118m, and an associated lease liability of c.£125m,
being the present value of future lease payments.
The net liability being recognised on transition results
in an adjustment to opening reserves.

2. In terms of the income statement, and based on the

existing business at the date of transition, the impact will
be an increase to EBITDA by in the region of £35.0m per
year, as the operating lease charge previously applied is
replaced by a depreciation charge applied on a straight
line basis to the right of use asset. The impact to PBT is
expected to be broadly neutral as leases reach maturity,
however the impact is not linear due to increased lease
liability interest cost in earlier years of leases, and this
will result in a small reduction in profit in 2019 with this
impact unwinding in later periods.

The adoption of IFRS 16 is particularly relevant to the
Group’s new AASC contract which will see the Group enter
into around 4,500 residential property leases. It is not
possible to estimate the balance sheet impact without an
accurate assessment of the mix of lease lengths. However,
as detailed above, the impact of IFRS 16 on profits from
a contract of this nature is that profit generated in the
early years of the contract will be reduced by a higher
interest cost. However IFRS 16 should not be considered in
isolation. Securing good quality properties, cost effectively
over the long-term is a key element of delivering operational
outperformance and increasing the financial return.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Social value and impact

Delivering social
value in practice

Our strategy
For us, social value is not something
we simply pay lip service to. It is part
of our DNA, completely embedded in
everything we do. We work in some of
the most socially deprived areas of the
country and we feel a strong sense of
responsibility towards finding ways to
improve the long-term prospects of the
people who live in these communities
that make a real and positive difference
to people’s lives.

Highlights
2018: A year of growth
We have been recognised as an organisation which is
delivering on the social responsibility agenda, but we
are never content to rest. During 2018, we increased
the number of social value projects we are engaged
in by 10% and continued to develop our strategy and
framework to ensure social value is truly embedded
in the Mears culture.

At a strategic level, we see social value as part of the
‘Red Thread’ that binds Mears employees together
and defines the values and behaviours we exhibit as
we go about our daily work. Our employees set high
standards, focusing not just on providing customer
service excellence but also on acting as role models.
We believe that these values are not predicated by
academic achievement or social position, but instead
are influenced by attitude, character and the strong
work ethic of our teams.

This is translated into practical action which delivers
outcomes through a framework of approaches to
effectively engage with communities on the ground
and robust mechanisms for measuring the social
impact that is created.

Our goals
Our work continues to be aligned to our four Mears’ Social
Value Priorities:

1. Fair for all

Reducing prejudice, improving
understanding of differences,
supporting social inclusion

2. Championing local

Improving the wellbeing of
people and the communities
we serve

3. Creating chances

Providing career, skills and
employment opportunities

4. Healthy planet

Making a positive contribution
to our planet

Mears Group PLC Annual Report and Accounts 2018Our governance
How do we ensure we continue to do the right things?
To drive social value throughout the business, we continue
to operate our Social Value Board, which is endorsed and
chaired by our Executive Management Team. Our Social
Value Board ensures we take a strategic approach to
corporate social responsibility and embed it into every area
of our business. The board is endorsed by three external
experts whose role it is to challenge us to drive forward our
social value agenda and to hold us to account.

Meet our Social Value Board external experts

Richard Kennedy
Richard is chair of the board
for Social Value UK and co-chair
of Social Value International.

Keith Edwards
Keith is the lead associate for
the Housing Quality Network
in Wales and author of several
reports for local authorities,
national bodies and the Welsh
Government, and previously
Director of the Chartered
Institute of Housing (CIH)
Cymru for 14 years.

Barry Malki
Barry is Head of Communities
for HACT, an innovation agency
supporting the housing sector.
Outside of this he serves on the
boards of several youth charities
and acts as a speaker for Save
the Children.

Going forward
Focus areas for the Social Value Board in 2018 and beyond:

~ Ensuring measurement continues to be relevant and

real. Measuring the right things within the social value
framework is key, to drive outcomes and impacts that
are real and long lasting.

~ Making a real impact through the Group brand, to
reinforce Mears as a leading socially responsible
business. 2019 will see us building on this through a
series of national theme campaigns developed with
the members, demonstrating the overarching work
of the Group on employability, wellbeing, diversity
and inclusion.

Mears Group is an organisation which
truly understands the importance
of the social value they create both
through their core business and
community activities. In my opinion
this will future proof the business for
shareholders, customers, and the
communities in which Mears operates.

In my book we need to take a longer-
term view and make sure that what we
do has a positive impact on people and
communities. I think Mears gets this
and that’s why I am pleased to be part
of the Social Value Board.

I hope that by working with Mears as
part of its Social Value Board, we can
steer the business to maximise the
benefits to the communities in which
it operates.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationHealth and safety

working environment.

Mears operates a full health and safety

training programme. We fully monitor accident

frequency rates and have a proud record on

safety within our workplaces and contracts.

Our policies include:

~ reducing accidents by 10% per year;

~ implementing a behavioural safety and

change programme; and

~ increasing near miss reporting.

Strategic report
Social value and impact continued

Non-financial statement
We aim to comply with the Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act of 2006.
The below table and information it refers to is intended to help stakeholders understand our position on key non-financial matters.

Commitments

Community commitment

Environmental matters

Human rights, anti-
corruption and anti-bribery

Employees

We want to be a great place to work and to place our colleagues at the very heart

We aim to be industry leaders in creating a safe

Our policies include:

~ modern slavery and
human trafficking;

~ preventing engagement

of child labour;

~ whistleblowing policy;
~ anti-bribery; and
~ gender equality.

of what we do.

Our policies include:

~ whistleblowing;

~ family friendly;

~ safeguarding;

~ equality, diversity and inclusion; and

~ approach to labour standards compliance.

Mears is proud of our Social
Mobility Champion status,
creating opportunities and
enabling people to develop
new skills in some of the most
disadvantaged and marginalised
communities in the UK.

We are committed to ensuring
that there is no modern slavery
or human trafficking in our
supply chains or in any part of
our business. We are committed
to acting ethically and with
integrity in all our business
relationships, and implementing
and enforcing effective systems
and controls.

Mears aims to be a great place to work and we have recently been awarded a place in the 25

In 2018 we reduced Accidents Rates by over 10%

Best Big Companies to Work For in conjunction with the Sunday Times. We are accredited

and achieved the RoSPA Highly Commended

as an Investor in People and have been awarded Diversity Network Accreditation.

Industry Sector Award (16 consecutive Golds),

Our employees are at the heart of our business and we provide staff benefits, a

commitment to a transparent pay policy and a commitment to training and development.

Red Thread

Wearing the Mears badge carries a lot of responsibility. All Mears colleagues are bound by

a common set of behaviours. We call this the Red Thread. It is in our DNA and it helps us

achieve more as individuals, as a team, and as a company.

~ Motivation: There are no limits; we can all reach our personal goals and aspirations.

Individually and collectively we can deliver the services our customers expect a little bit

better every day.

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 to landfill of over 95%.

Over the year we have carried out over 50,000

hours of training to ensure we continue our

commitment to improving the skills and

awareness of all employees.

~ Empowerment: Great leaders are not born; they grow. We urge employees to take the

We continue to improve our working practices

initiative, take ownership and take responsibility, and support them every step of the way.

and monitoring regimes to ensure that we

~ Customer focus: It is very simple; we are here to serve. The success of Mears is built

on 360-degree service and appreciating that the needs of clients and customers are

complex and multi-dimensional.

continue to improve and look at additional ways

in which to create a safer and environmentally

friendly environment for all of our employees

~ Role models: Everyone who represents the Company is expected to lead by example,

and partners to work.

whether they are looking after vulnerable people or making sure the homes of elderly

tenants are properly maintained.

~ High standards: We set industry-wide standards and encourage everyone to work hard,

present themselves well and keep raising the bar. If we do, success is guaranteed.

In 2019 we will continue to challenge our

standards and look to continuously improve the

safety environment for all of our employees.

Policies and
diligence

Status

We have a clear social value plan
with four strategic priorities:

1. Fair for all: Reducing
prejudice, improving
understanding of differences,
supporting social inclusion.
2. Championing local: Improving
the wellbeing of people and
the communities we serve.

3. Creating chances:

Providing career, skills and
employment opportunities.

4. Healthy planet: Making a
positive contribution to
our planet.

We have a Social Value Board
with independent Directors.

In 2018 we generated in excess
of £24m in social value.

Mears Group has been
recognised for its outstanding
environmental, social and
governance practices by gaining
a place in the FTSE4Good Index
– which places Mears in the top
9% of companies in the index
which measures commitment
to environmental, social and
governance practices.

Mears recognises and is
fully committed to reduce its
impact on the environment.

We are determined to minimise
our carbon footprint and
minimise waste to landfill.

We have a commitment to
reduce landfill by 5% per year
and to achieve or exceed a
diversion rate of waste from
landfill of 95%.

Our policies include:

~ delivering environmental

supply chain.

~ fleet environmental policy.
~ environmental reporting.

We have set environmental
targets to reduce our waste to
landfill each year and we are
currently achieving over 95%.
Our water/effluent discharge is
only though our offices and on-
site colleagues. Mears Group
PLC does not release water by
any other source.

In 2018 we recycled 31,698
tonnes of waste, a diversion
from landfill of 95.88%.

Mears Group has full
visibility of its waste disposal
processes across the
whole company, including
our subcontractors.

Description of
principal risks and
impact of business
activity

Non-financial
key performance
indicators

Business model

Readmoreonpages30–31

Mears Group PLC Annual Report and Accounts 2018Non-financial statement

We aim to comply with the Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act of 2006.

The below table and information it refers to is intended to help stakeholders understand our position on key non-financial matters.

Policies and

diligence

We have a clear social value plan

Mears recognises and is

Our policies include:

with four strategic priorities:

fully committed to reduce its

1. Fair for all: Reducing

prejudice, improving

impact on the environment.

~ modern slavery and

human trafficking;

We are determined to minimise

~ preventing engagement

understanding of differences,

our carbon footprint and

of child labour;

supporting social inclusion.

minimise waste to landfill.

~ whistleblowing policy;

~ anti-bribery; and

~ gender equality.

2. Championing local: Improving

the wellbeing of people and

the communities we serve.

3. Creating chances:

Providing career, skills and

employment opportunities.

4. Healthy planet: Making a

positive contribution to

our planet.

We have a Social Value Board

with independent Directors.

We have a commitment to

reduce landfill by 5% per year

and to achieve or exceed a

diversion rate of waste from

landfill of 95%.

Our policies include:

~ delivering environmental

supply chain.

~ fleet environmental policy.

~ environmental reporting.

In 2018 we generated in excess

We have set environmental

Mears is proud of our Social

of £24m in social value.

targets to reduce our waste to

Mobility Champion status,

Mears Group has been

recognised for its outstanding

environmental, social and

governance practices by gaining

a place in the FTSE4Good Index

– which places Mears in the top

9% of companies in the index

landfill each year and we are

creating opportunities and

currently achieving over 95%.

enabling people to develop

Our water/effluent discharge is

new skills in some of the most

only though our offices and on-

disadvantaged and marginalised

site colleagues. Mears Group

communities in the UK.

PLC does not release water by

any other source.

We are committed to ensuring

that there is no modern slavery

which measures commitment

In 2018 we recycled 31,698

or human trafficking in our

to environmental, social and

tonnes of waste, a diversion

supply chains or in any part of

governance practices.

from landfill of 95.88%.

our business. We are committed

Mears Group has full

visibility of its waste disposal

processes across the

whole company, including

our subcontractors.

to acting ethically and with

integrity in all our business

relationships, and implementing

and enforcing effective systems

and controls.

Status

Description of

principal risks and

impact of business

activity

Non-financial

key performance

indicators

Business model

Readmoreonpages30–31

Commitments

Community commitment

Environmental matters

Human rights, anti-

Employees

Health and safety

corruption and anti-bribery

We want to be a great place to work and to place our colleagues at the very heart
of what we do.

We aim to be industry leaders in creating a safe
working environment.

Our policies include:

~ whistleblowing;
~ family friendly;
~ safeguarding;
~ equality, diversity and inclusion; and
~ approach to labour standards compliance.

Mears operates a full health and safety
training programme. We fully monitor accident
frequency rates and have a proud record on
safety within our workplaces and contracts.

Our policies include:

~ reducing accidents by 10% per year;
~ implementing a behavioural safety and

change programme; and

~ increasing near miss reporting.

Mears aims to be a great place to work and we have recently been awarded a place in the 25
Best Big Companies to Work For in conjunction with the Sunday Times. We are accredited
as an Investor in People and have been awarded Diversity Network Accreditation.

Our employees are at the heart of our business and we provide staff benefits, a
commitment to a transparent pay policy and a commitment to training and development.

Red Thread
Wearing the Mears badge carries a lot of responsibility. All Mears colleagues are bound by
a common set of behaviours. We call this the Red Thread. It is in our DNA and it helps us
achieve more as individuals, as a team, and as a company.

~ Motivation: There are no limits; we can all reach our personal goals and aspirations.

Individually and collectively we can deliver the services our customers expect a little bit
better every day.

~ Empowerment: Great leaders are not born; they grow. We urge employees to take the

initiative, take ownership and take responsibility, and support them every step of the way.

~ Customer focus: It is very simple; we are here to serve. The success of Mears is built
on 360-degree service and appreciating that the needs of clients and customers are
complex and multi-dimensional.

~ Role models: Everyone who represents the Company is expected to lead by example,
whether they are looking after vulnerable people or making sure the homes of elderly
tenants are properly maintained.

~ High standards: We set industry-wide standards and encourage everyone to work hard,

present themselves well and keep raising the bar. If we do, success is guaranteed.

In 2018 we reduced Accidents Rates by over 10%
and achieved the RoSPA Highly Commended
Industry Sector Award (16 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 to landfill of over 95%.

Over the year we have carried out over 50,000
hours of training to ensure we continue our
commitment to improving the skills and
awareness of all employees.

We continue to improve our working practices
and monitoring regimes to ensure that we
continue to improve and look at additional ways
in which to create a safer and environmentally
friendly environment for all of our employees
and partners to work.

In 2019 we will continue to challenge our
standards and look to continuously improve the
safety environment for all of our employees.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationStrategic report
Social value and impact continued

Felix Road charity

Delivering social value in practice
Mears Foundation
The Mears Foundation is chaired by Bob Holt, former
Chairman of Mears Group PLC, with committed support
from nominated board members from across the business.
It was established to help improve the lives of young people,
vulnerable groups, the elderly and those with significant
health issues, in the UK and abroad, through practical
help, support and intervention. It aims to provide support
through volunteering and hands on help for nominated
causes, not just financial support. This year, teams across
the Group have been taking part in a variety of events,
specifically focusing on social isolation.

Making a difference: Who has benefitted?
Silver Surfer Computer Club
This club supports service users to develop basic computer
and internet skills to enable them to surf the net, shop
online, access social networks, hobbies and interests and
support groups.

The idea came about when a member of staff purchased
a laptop for his 82 year old father. He realised that there
was no support available to help him learn the basics
of how to use the computer or the internet. Our staff
member provided the support himself, helping his father
become proficient, even develop a following on Facebook!
Seeing the impact this has had on his father’s life, the
staff member wanted to provide the same benefit to other
residents of Mears’ extra care schemes.

The project aims to utilise the skills of the Mears IT team
to provide a helpline which provides basic IT advice and
support. Longer term, it hopes to work in collaboration
with a charity such as Alzheimer’s Society to develop the
use of assistive technology to try and help people with
memory loss.

iPads for Young Bristol
Mears Foundation delivered iPads for Young Bristol,
a youth-driven charity working in the city.

Party time for Meet and Mingle, Stowmarket
The Mears Foundation generously donated £500 to
the Mears Care, Stowmarket’s Meet and Mingle group.
This group was set up to help with social isolation in the
local community; over the last few years day centres
have been closing so this group has been a big asset
to the community.

Felix Road charity
The Mears Foundation delivered a cheque to the Felix
Road charity to support its adventure playground project.
The charity opens the playground for children to use for free
and runs self-defence and martial arts classes for children
and adults.

Social value at Mears
Nothing demonstrates the way we are delivering social
value like the real stories of how our work is impacting
people and communities on the ground. The following
pages describe our approach and tell just some of the
stories of how we are delivering social value under each
of our four priority areas.

Mears Group PLC Annual Report and Accounts 2018Reducing prejudice, improving understanding
of differences, supporting social inclusion

Our commitment and approach to diversity and inclusion:
Addressing the shortage of women in trades
A staggering 99% of tradespeople are male; this does not
look set to change any time soon with low numbers of
women taking up apprenticeships in this area. At Mears
we are working to address the issue, along with our
social housing partners, through our Tradeswomen
into Maintenance project which is working with women
to identify the barriers to getting and retaining jobs in
Repairs and Maintenance, raise awareness about the
opportunities available to women in the sector, and
support women already employed in trades roles.

Gender diversity table

2017

Board
Senior Manager
Employee

2018

Board
Senior Manager
Employee

Male

8
24
5,222

Male

8
26
4,789

Female

3
7
6,353

Female

3
8
5,304

Sarah’s story
Sarah Bull is an apprentice plumber working for Celtic
Horizons, in partnership with United Welsh.

“I’ve always enjoyed manual work and plumbing, but I
never thought it was possible because I had never seen a
woman plumber,” she said.

“I attended college, working towards level 1 and instantly
loved everything about plumbing. While completing level
2, I was lucky enough to get an apprenticeship with Celtic
Horizons. While at Celtic Horizons, I have also had the
opportunity to be a Tradeswoman Ambassador for the
Tradeswomen into Maintenance project.”

I’ve always enjoyed manual work and
plumbing, but I never thought it was
possible because I had never seen a
woman plumber.

Sarah Bull
Apprentice plumber

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Strategic report
Social value and impact continued

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Inclusive Culture Pledge marks Mears’ commitment
to prioritise diversity and inclusion
Mears is a committed member of leading companies
from the energy, transport, engineering and creative
sectors in taking the Inclusive Culture Pledge, overseen
by leading diversity consultancy EW Group.

We work in some of the most diverse communities in the
UK and we believe we are stronger in every way when our
workforce fully reflects those communities. The pledge
helps us to focus on five areas of diversity and inclusion
development: leadership, people, data, brand and future,
providing a framework to build on the work we are already
doing to improve equality and diversity across the business.
2018 saw a business-wide training focus on all managers
and senior colleagues attending a diversity and inclusion
training and awareness course.

Gary Jackson, Group Director of Communications &
Customer Success, said, “We are a national Social
Mobility Champion and, as such, we have a responsibility
to support and promote good practice in diversity
and inclusion, which is a fundamental enabler to
greater social mobility. Over the next 12 months, we
are building on the work of 2018 to make colleagues
further aware and actively involved in helping to improve
diversity and inclusion through every level of our work.
Our accreditation reports from 2018 will provide an ideal
opportunity for us to build on our good practice, while
challenging us to do more where we need to.”

Mears supports Alzheimer’s Society Dementia-Friendly
Housing Charter
Mears has signed up to the Dementia-Friendly Housing
Charter. This charter seeks to make the housing sector
– including housing organisations, corporate bodies and
sector professionals – aware of the challenges of living
with dementia so that it can improve home environments
for people with the condition.

Gary Jackson, Group Director of Communications
& Customer Success, said, “By becoming a more
dementia-friendly provider, we will be able to support
and help people to stay in the setting of their choice
for as long as possible, and by understanding the
condition, we can make a huge difference to people
living with dementia and their quality of life.”

YourMK team volunteering to support Mind
During the summer, colleagues from YourMK – our
regeneration partnership with Milton Keynes Council
– spent the day volunteering alongside residents
and staff from the local branch of Mind to make
improvements to a community garden.

The mental health charity uses the garden each week
to run wellbeing and support sessions for a group of
local people, but the garden needed some TLC to get
it ready for the autumn. Colleagues from Mears’ Gas
Planning and Customer Success teams went along
to prune, dig, paint and gravel areas of the garden,
working hard to get it in top shape for the local group.

The interest YourMK has shown
in volunteering with the group has
given them a great sense of pride.
The help offered has made the
group feel valued and recognised.
It has enabled the larger jobs to be
completed and we can now look
forward to planning the garden
for next year.

Sue Varley
Group leader

YourMK team
volunteering to
support MIND

Mears Group PLC Annual Report and Accounts 2018

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Improving the wellbeing of people and the
communities we serve

We work closely with our partners and clients to identify
local social value projects to get involved in
This local approach makes all the difference. Through the
development of branch social value plans, we can push
the boundaries to deliver real impact, enabling individuals
and the communities in which we operate to flourish
and thrive.

Food-wise classes in Lambeth
Wellbeing is a key focus, so a recent project to deliver
food budgeting, cooking and nutrition classes in Lambeth
was a great success, with groups coming together to
learn some key skills to support their lifestyle, making
healthy meals for only £1.00.

Art sessions are a hit with young and old
A new project running at Blaise Weston Court in Bristol is
using art to bridge the generation gap between members
of the local community.

Since it started in October, the Paint Pals project has been
bringing together the older residents of the care scheme
and young people from Torwood House School each
month to work together to produce beautiful works of art.

The project was started with a £1,500 grant from the
Bristol Ageing Better Community Kick-Start Fund.
Members of the Blaise Weston Social Club applied for the
money, which will pay for a year of monthly art sessions,
culminating in an exhibition of the works later this year.
Beyond this, the group hopes to find additional funds to
continue the project into the future.

Bridging the generation gap

Learning key skills

Supporting the homeless in Glasgow
Our Glasgow branch decided to help and support
the homeless people in Glasgow for many reasons.
But one event really brought it to life for us.

James’s story
James, one of our carers working in Glasgow, was
supporting a wheelchair service user one day when
he found himself in a situation in a busy Glasgow
street where the wheel had come off the wheelchair
and he was struggling to get help.

The service user himself was unable to help because of
his lack of mobility and the pair watched as numerous
people just passed by. This was very distressing for
James as he knew he was not able to fix the chair alone
and if they were to remain in this situation, the service
user would have been at risk of harm.

Then one person did stop; a young homeless man
who came over and helped James re-align the wheel
on the wheelchair and then walked the pair to the
taxi rank to ensure that no further help was needed.
He even offered James the £5 note he was carrying
to help pay for the taxi fare to take the service user
home. James thanked him but declined the offer
of money.

This made us all think: why had only the vulnerable
homeless person stopped? And what could we do as
a branch to help repay the kindness of this person?

So, we decided to support two small local charities
that work with people who are homeless: All 2
together now and H4TH (Help for the Homeless).

Fundraising, donated clothing, sleeping bags and
toiletries poured in from the teams to help support the
two charities and the people of Glasgow.

Over 100 winter survival packs, which will help people
living on the streets to get through the Scottish winter
were purchased from donations and fund raising.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information

Strategic report
Social value and impact continued

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Providing career, skills and employment
opportunities

Chief Executive Officer David Miles says there are clear
business benefits for investing in apprentices.

Creating chances
Mears works in some of the most marginalised
communities in the UK. We recognise that we can make
a positive difference by creating chances for learning
and career development, providing individuals in those
communities with entry routes into employment.

Over the last 12 months, Mears has developed and
implemented programmes to upskill the existing Mears
workforce as well as individuals living in the local
community who are not employed by Mears.

Heather Hughes, Head of Training and Development,
said, “I am delighted to see Mears has made a difference
to peoples’ lives and provided new opportunities; it’s an
incredibly worthwhile investment.

“Our training facilities and resources have been used
by various stakeholders in local communities for wide-
ranging apprenticeships and other courses, enabling
so many people to progress. It has been great to see
the diversity of programmes we have on offer, and the
innovative work to address the under-representation
of women in construction.”

“It’s a great way of growing our own talent within the
business,” he says. “Our apprentices bring fresh ideas
and enthusiasm and keep our qualified staff up to date
with modern technology and practices. The result
is a highly skilled, loyal workforce, trained to work in
the Mears way. Ultimately, that helps us to deliver the
very best service to our customers”. David goes on to
explain that Mears’ drive for running apprenticeship
programmes is not confined to business outcomes:

We work in some of the most
marginalised communities in the
country. At the heart of everything
we do is the desire to make a positive
difference in those communities.
Giving people the opportunity to
learn a skill and build a career is
a great way to do that.

David Miles
Chief Executive Officer

Mears Group PLC Annual Report and Accounts 2018

2018 announcements from the Minister for the
Cabinet Office say the Act will be extended to ensure
that all Government departments explicitly evaluate
social value when commissioning services, as
opposed to considering social value when awarding
Central Government contracts. This provides
a positive indicator for later extension to Local
Government contracts and the public sector to follow.

The Social Housing Green Paper provided a sound
platform for the voice and engagement of residents
to come back to the fore, in shaping and responding
to service in their communities – again, a further
positive move to progressing the social value agenda.

Mears is excited by these positive indicators and has
already started to put plans into place to actively and
continually deliver more impact, at a national and
local level, through our social value activities.

We are proud of our reputation as a company that
makes a POSITIVE difference; enabling individuals
and communities to flourish and thrive.

Together we really can make Mears a
better business.

We work closely with our suppliers,
who see this as a great opportunity
to collaboratively invest for the
improvement of our communities.
We have a commitment to
continuously increase the number
of local SME subcontractors on
our approved list, ensuring that
a proportion of contract spend
remains within the local economy
by supporting increased revenue
generation and increasing
employment opportunities.

Ian Watson
Procurement Director

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Skilled workforce trained to work in the Mears way

Making a positive contribution
to our planet

Mears is responsible for the maintenance of 15% of all
social housing in the UK – more than 700,000 homes.
We visit more than 30,000 people several times a week to
deliver care and support in their homes. We recognise we
have a big responsibility to minimise the environmental
impact of our activities. For an organisation of our size,
even small changes can deliver big impacts.

Mears’ approach to positively impact supply chain
environmental value
Delivering social value with our supply partners
At Mears, we believe we are more effective in delivering
social value where we can share resources, skills,
experience and financial support with our supply partners.
To ensure a consistent approach throughout our supply
chain, we expect our suppliers to have or adopt similar
business principles to our own. Our suppliers are required
to acknowledge the significance of social, environmental
and ethical matters in their conduct and must have
a commitment to working towards improving quality
standards and performance in these areas.

Above all, we expect suppliers to be able to demonstrate
compliance with all the UK, EU and international
legislation that applies to business operations from
modern slavery, anti-bribery and health, safety and
wellbeing laws to product specific regulations.

Social value: what is the future agenda focus?
Whilst the Public Services (Social Value) Act 2012 is
making a difference, with a greater proportion of public
sector procurement spend being shaped by the Act and
increased focus from organisations to support individuals,
local communities and economies, more can be done.

The strategic report from pages 1 to pages 63 was approved by the board and signed on its behalf by:

D J Miles
Chief Executive Officer
22 March 2019

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information

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64
Introduction to
corporate governance

66
Board of Directors

68
Corporate governance report

73
Shareholders engagement

74
Effectiveness:
Report of the Nomination Committee

76
Accountability:
Report of the Audit Committee

81
Report of the
Remuneration Committee

82
Remuneration policy

88
Annual remuneration report 2018

94
Report of the Directors

96
Statement of Directors’
responsibilities

97
Independent auditor’s report

Mears Group PLC Annual Report and Accounts 2018

Corporate governance
Introduction to corporate governance

An effective culture
of governance

Kieran Murphy
Chairman

Dear shareholder,
On behalf of the Board, I am pleased to present my
first corporate governance report for the year ended
31 December 2018. As in previous years, we report against
the UK Corporate Governance Code (the ‘Code’) issued
by the Financial Reporting Council (FRC). I am pleased to
confirm that during 2018 we have fully complied with the
provisions of the Code.

Effectiveness
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
2018 and into the future. The Board utilises the Group’s
established governance framework, based upon the Code,
to support the operation of good governance practices
throughout the Mears business.

In accordance with the Code, the performance of the
Board, its Committees and individual Directors is evaluated
on an annual basis, with the 2017 evaluation being
externally facilitated.

In June 2018, the Company became
one of the first listed companies
in the UK to appoint an Employee
Director, Amanda Hillerby, clearly
underlining the Company’s
commitment to progressive business
practice and corporate governance.

Changes to the Board
At the 2018 Annual General Meeting (AGM), the Board
said farewell to Peter Dicks, Non-Executive Director.
Having reached nine years’ service, Peter did not stand
for re-election.

In July 2018, as part of the continuing evolution of the
Board, the then Chairman, Bob Holt, indicated his intention
to the Board not to stand for re-election at the 2019 AGM.
The Board commenced a considered, competitive and
structured process for the recruitment of the new Chairman
and I was delighted to be offered the position during
December 2018. I would like to place on record my thanks
to Bob Holt, who joined the Group in 1995 shortly before
its flotation for his many years of service.

Engage our workforce
In June 2018, the Company became one of the first listed
companies in the UK to appoint an Employee Director,
Amanda Hillerby, clearly underlining the Company’s
commitment to progressive business practice and
corporate governance. Mears understands the vital role
that our workforce plays in the success of the Group.

Succession
Under the Code, succession planning is one of the
most important roles vested in non-executive directors.
Your Board recognises this role wholeheartedly and this
has been clearly demonstrated in recent years with your
Board evolving steadily, reflecting the development of both
the Company and its key operating markets, and bringing
valuable relevant sector experience and knowledge to
the Board.

The evolution and succession within the Mears
boardroom has been a continuous process and one
which the Company intends to continue in line with the
Group’s development.

Shareholder engagement
The Board continued to engage with shareholders
in an open and meaningful way throughout 2018.
Since my appointment, I have met with each of our major
shareholders to understand their views and concerns.
I have also been present at a Capital Markets Day, attended
by all our major shareholders, hosted by the Chief Executive
Officer. I hope shareholders take the opportunity to meet
other Board members at the 2019 AGM.

K Murphy
Chairman
kieran.murphy@mearsgroup.co.uk
22 March 2019

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Board of Directors

The right skills and experience
to deliver our strategy

Mears Group PLC Annual Report and Accounts 20189. Elizabeth F Corrado
Non-Executive Director
Age: 53
Tenure: 1 year
Skills and experience:
Elizabeth was until recently an Executive
Director of the Power to Change charitable
trust, with a focus on creating innovative
projects in housing and energy, enabling
investment into UK communities at scale
and generating both financial and social
returns for investors and local communities.
Liz previously held senior positions in
investment banking providing advice and
structured finance to both the Government
and a range of business sectors.
Principal external appointments:
None

10. Amanda L Hillerby
Employee Nominated
Non-Executive Director
Age: 30
Tenure: 9 months
Skills and experience:
Amanda has worked for the Group since
2011, commencing her career on the Group’s
graduate management programme during
which she worked across all areas of the
business including Care, Housing and Central
Support. Amanda is currently delivering a
national role of Quality Manager within the
Care division.
Principal external appointments:
None

11. Ben Westran
Company Secretary
Age: 42
Tenure: 15 years
(4 years as Company Secretary)
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.
Principal external appointments:
None

1. Kieran Murphy
Non-Executive Chairman
Age: 60
Tenure: 3 months
Skills and experience:
Kieran has spent much of his career working in
finance, holding senior positions. At Kleinwort
Benson, he built a market-leading corporate
finance advisory business in the building and
construction sector and became a member
of the bank’s Investment Bank Management
Committee. More recently, at Gleacher
Shacklock, the boutique corporate finance
advisory firm, Kieran extended his advisory
work into the business services sector.
Principal external appointments:
Aliaxis SA.
Ordnance Survey
University of London

2. David J Miles
Chief Executive Officer
Age: 53
Tenure: 22 years (12 years on the Board)
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

3. Andrew C M Smith
Finance Director
Age: 46
Tenure: 19 years (12 years on the Board)
Skills and experience:
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

4. Jason Burt
Non-Executive Director
Age: 53
Tenure: 2 years
Skills and experience:
Jason was a senior partner at Plexus Law and
has 32 years experience of defending complex
regulatory prosecutions and employers’ and
public liability claims, bringing significant
experience in the area of health and safety.
Jason chairs a Health, Safety and Environment
core group (Compliance Committee),
driving good working and health and safety
practices into the Group’s governance
structures. Jason is also a member of the
Audit Committee.
Principal external appointments:
None

5. Roy Irwin
Non-Executive Deputy Chairman
Age: 64
Tenure: 2 years
Skills and experience:
Roy has significant experience in the social
housing sector, having lately been Chief
Inspector of 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 Regulator
of Social Housing.
Principal external appointments:
None

6. Julia Unwin CBE
Non-Executive Director
Age: 62
Tenure: 3 years
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
Financial Reporting Council

7. Alan Long
Executive Director
Age: 56
Tenure: 13 years (9 years on the Board)
Skills and experience:
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

8. Geraint Davies CBE
Non-Executive Director
Age: 64
Tenure: 3 years
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

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate 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.

Corporate governance framework
As a Board we aim to be sector leaders in our
standards of corporate governance across
the business.
The governance framework extends to operational activities,
as outlined in the risk management process on pages 38 to 42.

Leadership and effectiveness

Our Board

Role and responsibilities

~ Develop proposals on strategy and deliver value

to shareholders and stakeholders.

~ Monitor management activity and performance

against targets.

~ Provide constructive challenge to management.
~ Set parameters for promoting and engaging the interest

of shareholders and investors.

~ Ensure satisfactory dialogue with shareholders

takes place.

Matters reserved for the Board’s decision

~ Group strategy, business objectives, long-range plans

and annual budgets.

~ Annual and interim results approval.
~ Material acquisitions, disposals and contract

bidding approval.

~ Major changes to internal controls, risk management

or financial reporting policies and procedures.

~ Changes to advisers.
~ Setting the risk appetite of the Group.
~ Changes to capital and management structure.
~ Succession planning for the Board and senior management.
~ Board appointments and independence.
~ Appointment, termination and remuneration of Directors

and the Company Secretary.

Mears Group PLC Annual Report and Accounts 2018The 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.
~ Is responsible for designing a rigorous annual evaluation of the performance of the Board

and individual Directors.

The Board

Audit Committee

Remuneration
Committee

Nomination
Committee

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.

~ 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.
~ 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
pages 74 to 78

Read the Report of the
Remuneration Committee
on pages 79 to 91

Read the Report of the
Nomination Committee
on pages 72 and 73

Read the Review
of operations on
pages 16 to 21

Divisional Boards

Key objective
Carries out activities delegated by the Board, including:
~ Day-to-day operational management of the business.
~ Monitoring service delivery performance measures and driving improvements.
~ Financial performance reviews and comparison to forecasts and updated forecasts.
~ Business development activity not subject to Board approval.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Corporate governance report continued
Leadership

Board composition and meetings in 2018

Governance framework
Our governance framework supports the development of good governance practices throughout the Group. No one individual has unfettered powers
of decision. The Board works closely with the Executive team which ensures Board behaviours and culture are effectively communicated and
embedded within the Group. Regular updates are received from the Executive Directors in order to keep the Non-Executive Board members informed
of how the business is progressing.

Potential

Attended

Responsibilities include:

Role

Chairman

Kieran Murphy

Bob Holt

~ Promoting a culture of challenge, debate, openness and support.

~ Leadership of the Board and ensuring its effectiveness.

~ Ensuring Directors allocate sufficient time to the Company to discharge their responsibilities effectively.

~ Effective communication between the Board, the sub-committees and its key stakeholders.

~ Ensuring the Board demonstrates culture, values and behaviours of the Group.

~ Ensuring the Board presents a fair, balanced and understandable assessment of the position and

prospects of the Group.

~ Being the principal conduit between the Chairman, Non-Executive Directors and shareholders.

~ Leading the annual performance evaluation of the Chairman, including collecting the views of the

Executive Directors.

~ Providing a sounding board for the Chairman.

Senior Independent Director

Peter Dicks

Julia Unwin

Independent Non-Executive Directors

Jason Burt

Roy Irwin

Julia Unwin

Geraint Davies

Elizabeth Corrado

~ Promoting the highest standards of integrity, probity and corporate governance throughout the Group

and the Board.

~ Constructively challenging decisions proposed by the Executive Directors.

~ Assisting in developing proposals on strategy.

~ Contributing to the performance evaluation of the Chairman.

~ Briefing the Board on decisions made and key issues from each Committee Chair.

Non-Independent Non-Executive Directors

Amanda Hillerby

~ Promoting the highest standards of integrity and probity.

~ Assisting in developing proposals on strategy.

~ Ensuring that the Board receives full, open and honest insight and views from its workforce on how

strategic initiatives are being implemented.

~ Helping to provide the wider workforce with a better understanding of how the Board operates.

Executive Directors

David Miles
Chief Executive
Officer

Andrew Smith
Group Finance
Director

Alan Long
Group Executive
Director

~ Managing the day-to-day running of the business in line with the strategy and objectives set by the Board.

~ Ensuring the Board is supplied with sufficient and appropriate information on a timely basis.

~ Leading the business within the scope set by the Board.

~ Developing strategy and setting objectives to meet the Group strategy.

~ Managing the Group’s operation to ensure it meets the risk appetite set by the Board.

~ Supporting the Chief Executive Officer in developing strategy and meeting objectives.

~ Establishing strong control processes.

~ Managing the treasury activities in accordance with the credit risk appetite set by the Board.

~ Supporting the Chief Executive Officer with investor relations.

~ Leading the development of talent within the finance function.

~ Supporting the Chief Executive Officer in developing strategy and meeting objectives.

~ Supporting the Chief Executive Officer in managing external communications and investor relations.

~ Setting the Group social value policies and procedures.

~ Leading the operational leadership and development function of the Group.

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 Board considers all 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.

Mears Group PLC Annual Report and Accounts 2018Activities of the Board during the year

Board discussion during 2018 to deliver strategic priorities

Strategy

~ Discussed performance of both

operating segments.

~ Discussed strategy to ensure the

Group is well placed as the market
evolves, with particular focus in
interdependencies between Housing
and Care.

Deliver
our strategic
priorities

Deepening our client relationships
in both Care and Housing

Financial performance

~ Approval of 2018 budget
~ Reviewed performance by

business segment.

~ Approval of 2017 Annual Report

and dividend.

~ Approval of announcement of final

results for 2017.

Increasing quality leadership

Developing our people

Corporate governance
and risk management

~ Reviewed and considered

matters discussed at Audit
Committee meetings.

~ Selection and appointment of new

Non-Executive Directors.

~ Reviewed statutory policies such
as tax strategy, anti-slavery,
and gender pay policy and
disclosure requirement.

~ Reviewed risk register and associated

mitigation strategy.

Values and ethics

~ Reinforcing the Red Thread principles

which set out the behaviours
and values underpinning the
Group’s culture.

~ Review of output from employee

satisfaction survey.

Read about our strategic priorities
on pages 32 and 33

Stakeholder engagement

~ Engaged with private shareholders

at AGM.

~ Reviewed and considered investor

feedback following final and interim
results investor roadshows.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate 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 the Executive Management team.

Director information, induction and development
It is a key responsibility of the Chairman to ensure all Non-Executive
Directors receive appropriate training and development to ensure they
can discharge their duties to the Board and the Committees to the best
of their ability. Non-Executive Directors are fully engaged with their
ongoing development, which is discussed when each Non-Executive
Director has their annual individual meeting with the Chairman.

All Directors have access to the Company Secretary, who is responsible
for all Board compliance requirements, to ensure they are updated on
all legislative developments. In addition to this, the Company Secretary
ensures the Board agenda and papers are provided at least seven
days in advance of the meeting. Minutes and actions from previous
meetings are distributed on a timely basis. As per the Board policies
and procedures, any Non-Executive Director may, on request through
the Company Secretary, meet with any member of staff in the Group.
Non-Executive Directors are able to request the support of an
independent adviser from the Company Secretary.

The quality and timeliness of information provided by the Company
Secretary was included as part of the Board evaluation. The findings
were that information was thorough and relevant, and in all instances
provided suitably in advance.

There were no new appointments during the year. However, since
the year end, Non-Executive Chairman, Kieran Murphy, received an
individual induction, which included meetings with senior management,
advisers and shareholders. Kieran also attended the Group’s annual
conference which provided access to a cross-section of the colleagues.

Board appraisal
Performance evaluation of the Board, its Committees and individual
Directors takes place on an annual basis. Every three years, the
review is externally facilitated with the last external review being 2017.
Board performance evaluation was externally facilitated. Each Board
member provided feedback and key observations on the Board’s
effectiveness as well as suggestions for further enhancement.
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. In addition, the performance of the Chairman is
evaluated by the Senior Independent Director, having collected the views
of the other Directors.

Independence of Non-Executive Directors and re-election of Directors
The Board adopts the principles of the Code regarding tenure of the
board, and seeks to strike an appropriate balance between continuity of
experience and refreshment. Rigorous review is applied in assessing the
continuous independence of Directors having served for over nine years,
with attention to ensuring that they remain independent in character and
judgement, and continue to present an objective constructive challenge.
In respect of Peter Dicks, the Board recognises that independence
cannot be determined arbitrarily on the basis of a set period of time.
The Board concluded that Peter Dicks remained independent for the
report period.

To promote best practice 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. The AGM papers include an accompanying
statement as to why the Board believes each Non-Executive Director
should be re-elected.

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.

Mears Group PLC Annual Report and Accounts 2018Shareholder 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 communication
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 Company has
also looked to hold additional investor days during the year to ensure
that they are better informed of market and Company developments.
A Capital Markets Day in June 2018 covered ‘The changing nature of
affordable housing in the UK’. A further day in February 2019 provided
background information on the Asylum Accommodation and Support
Services Contract (ASSC) award and the Mitie Property Services
acquisition (MPS).

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 communication with shareholders and other investors,
where necessary, is discussed at Board Meetings. Feedback from this
years’ shareholder dialogue included the following:

~ Shareholders are generally supportive of the progress made by the

Group in respect of Housing Maintenance and Management.
~ There is a range of differing views in respect of Care but a large
number of shareholders are negative in respect of this area,
given challenges of recruitment and retention together with risks
to reputation.

~ Shareholders have been critical of the Group’s financial performance,

in particular the reliability of forecasts and cash generation.

~ Views on succession planning and a feeling that there is less reliance

on the Group Chief Executive Officer.

The Group also has regular dialogue with its banking partners, valuing
the close relationship with Barclays and HSBC.

J Unwin
Senior Independent Non-Executive Director
julia.unwin@mearsgroup.co.uk
22 March 2019

Q1 2018
Investor meetings prior to the close period.

Following release of final results for 2017, investor roadshow
spanning six days, meeting with both ‘buy’ and ‘sell’ sides.

Q2 2018
Regular update meetings with existing and
prospective shareholders.

AGM held in June 2018, providing an opportunity to meet a
number of private investors.

Capital Markets Day held in June 2018 to focus on ‘The changing
nature of Affordable Housing in the UK’.

Q3 2018
Following release of interim results for 2018, investor roadshow
spanning five days, meeting with both ‘buy’ and ‘sell’ side.

Q4 2018
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.

Total shareholdings over 1.5%

82.5m
74.6%

PrimeStone Capital
Shareholder Value Management
Majedie Asset Management
Artemis Investment Management
Heronbridge Investment Management
Fidelity Management & Research
Legal & General Investment Management
Dimensional Fund Advisors
Columbia Threadneedle Investments
Close Asset Management
Montanaro Asset Management
M&G Investment Management
Slater Investments

15.0m 13.6%
12.8m 11.6%
10.5m 9.5%
7.1%
7.9m
6.5%
7.2m
4.8%
5.3m
4.6%
5.1m
4.3%
4.7m
3.9%
4.3m
2.3%
2.6m
2.2%
2.5m
2.2%
2.4m
2.0%
2.2m

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Report of the Nomination Committee

J Unwin
Nomination Committee Chairman

Meeting attendance

J Unwin

R Holt

K Murphy

A Hillerby (Non-independent, in attendance)

Key
Attended Absent

During the first quarter of 2018, the Group advertised internally for
an Employee Director. The Board understands the vital role that our
workforce plays in the success of the Group. The Board believes that
this role will ensure that the Board receives full, open and honest insight
and views from its workforce on how strategic initiatives are being
implemented and will provide the workforce with a better understanding
of how the Board operates. The interview process was very proactive,
with applicants delivering presentations to the panel. In June 2018,
Amanda Hillerby was appointed to the Board. Mears is one of the
first listed companies to take this bold step. I firmly believe that better
employee representation can improve the quality of decision making.
The benefits of listening to employees and engaging them in both
consultation and decision making are already widely recognised.

In July 2018, as part of the continuing evolution of the Board, the
Chairman, Bob Holt, indicated his intention to the Board not to stand
for re-election at the 2019 AGM. The Board commenced a rigorous
appointment process utilising the expertise of an external recruitment
consultant and open advertising. The external recruitment consultants
used have no connection with the Company. The external recruitment
consultant assisted with short-listing candidates. Following this rigorous
process, Kieran Murphy was appointed to the Board in January 2019.

–

We have considered the culture of the Board and the Group as a whole
during our discussions this year. The Mears culture is articulated in the
Social value section of the Strategic Report, which can be found on pages
52 to 61. The Nomination Committee plays a vital role in embedding
a positive culture throughout the Group. This is done by ensuring our
succession planning and appointment processes identify candidates
who demonstrate our vision, values and desired culture. This will continue
to be an area of focus for the Nomination Committee going forward.

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.

Mears Group PLC Annual Report and Accounts 2018

Activities during the year
~ Reviewed Board effectiveness, Board governance, Executive and
Non-Executive Director succession and deliberation of person
requirements for the appointments to the Board.

~ Carried out appointment process for Employee Director.
~ Carried out a rigorous appointment process to appoint a

replacement for Bob Holt; recommended to the Board the
appointment of Kieran Murphy as the new Non-Executive Chairman.

~ Recommended to the Board that all Directors stand for re-election.
~ Reviewed the performance of the Committee against its terms

of reference.

~ Reviewed and discussed the internal leadership and development

programme to ensure its appropriateness for succession to
the Board.

Diversity
We have a number of active diversity initiatives across the Group,
including the Tradeswomen into Maintenance project and our social
mobility focus, as mentioned in the Chairman’s introduction to
corporate governance.

The Committee receives updates on all diversity initiatives, and monitors
the level of engagement and investment. The Executive Directors are
challenged by the Nomination Committee to ensure that these diversity
initiatives remain high profile.

The appointments in 2018 have increased the diversity of our Board
in terms of gender and experience. I am delighted that the Board
now comprises 30% female Directors, which falls broadly in line with
the recommendation of the Hampton-Alexander Review to target
33% female board representation by 2020. Notwithstanding this,
the Committee follows a rigorous appointment process which the
Committee feels is free from bias.

Director induction
Following Board approval, a tailored induction programme is developed
between the Committee and the Group’s insourced leadership and
development team.

The terms and conditions of each appointment of Non-Executive
Directors are made available on request of the Company Secretary,
and are available for inspection at the AGM.

J Unwin
Nomination Committee Chairman
julia.unwin@mearsgroup.co.uk
22 March 2019

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Report of the Audit Committee
Accountability

G Davies
Audit Committee Chairman

Meeting attendance

G Davies

J Burt

E Corrado

Key
Attended Absent

This report sets out how the Committee has fulfilled
its responsibilities during the year. This report also
sets out, in relation to financial reporting matters, the
significant issues that were considered and how they
were addressed.

A new committee dealing with health, safety and environmental risks
has been formed. This Compliance Committee is a sub-committee
of the Audit Committee and is chaired by Jason Burt. With his
detailed knowledge of the factors which cause and drive regulatory
prosecutions and employers’ and public liability claims he is ideal for
the role. The extent to which the full integration of health, safety and
environmental risks are now embedded in the governance structures
of the Group is highlighted by the members of the Compliance
Committee who include: the Group’s Chief Executive Officer, Chief
Risk Officer, Health and Safety Director and Health and Safety
Solicitor. The Compliance Committee has detailed terms of reference
which include:

~ to review and monitor the Group’s policies in relation to health, safety

and environmental (HSE) matters;

~ to review HSE risks and risk assessments on the Group risk register

and mitigation actions and controls related thereto including
subcontractor controls and related procurement; and

~ to review Group buildings compliance and safety including fire and

other risks.

I have continued to have a number of detailed review meetings with the
Chief Risk Officer.

In relation to financial reporting the two primary significant judgements
remain the carrying value of Care goodwill and revenue recognition.
Both of these continue to have a high level of materiality and carry
a significant level of judgement. In reaching its conclusions the
Committee has had very detailed discussions with management and
gained assurance from the detailed procedures carried out by the
external auditor, Grant Thornton UK LLP.

A third key judgement is the assumptions surrounding the defined
benefit pension valuations. Despite the valuations being prepared by
independent actuaries the Committee is very aware that, in a volatile
economic environment, assumptions around bond rates and discount
rates are less predictable and small movements in these assumptions
can result in a material change to the carrying value of assets and
liabilities in a reporting period. Given the requirement that the Annual
Report is fair, balanced, concise and understandable, the Committee
supports the analysis prepared by the Finance Director on pages 45
to 51 which enables stakeholders to understand the differing risks
associated with our LGPS and non-LGPS pension schemes and the
impact of gender equalisation.

In relation to risk management and internal controls, the Chief Risk
Officer manages an extended internal audit team whose annual plan
is based on the Group risk register and is approved by the Committee.
The 2018 Annual Internal Audit Report, presented to the Committee for
approval in February 2019, included more coverage than ever before.
I was particularly pleased to note the extent to which management has
responded positively and quickly to the system changes suggested by
the internal audit work.

Mears Group PLC Annual Report and Accounts 2018

During the year, the audit engagement was tendered. Following a
rigorous process which is discussed in greater detail later in this
report, the Audit Committee chose Grant Thornton UK LLP to retain
the audit, which was ratified by the AGM. As Grant Thornton UK LLP
was reappointed the Audit Committee has reviewed the independence
regulations and recommended to the Board that the audit be retendered
for the years beginning 1 January 2022 at which time Grant Thornton
UK LLP will not be invited to retender. The Committee will continue
to review the independence and effectiveness of its external audit on
an annual basis. The review process includes reviewing the external
auditor’s plan, and subsequent reports and discussion by the Committee
of the appropriateness of audit procedures and processes.

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 2018 accounts, and how these were addressed, were:

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.

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.

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 2023 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 13 to
the financial statements on pages 128 to 130. 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 13 to
the financial statements. 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 with carrying value, has reduced and the Audit
Committee is mindful that there is still significant uncertainty in the Care
sector and the key assumptions could change and materially impact on
the carrying value of the Care business.

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:

~ The Committee reviewed the disclosure in the notes to the

financial statements.

~ This area represented a prime area of audit focus and Grant

Thornton UK LLP provided detailed feedback to the Committee.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Report of the Audit Committee continued
Accountability continued

Revenue recognition
The Audit Committee reviewed in detail the impact of the new
accounting standard, IFRS 15, which came into effect on 1 January
2018 and will impact on the timing of recognising revenue and costs on
a small number of contracts, whilst being mindful that the comparative
figures continue to be prepared using accounting policies under IAS 18.
The key changes are as follows:

~ Previously IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’

allowed contracts with a variety of services to be combined in certain
circumstances in determining the percentage of completion of those
multi-service contracts. Disaggregating these contracts to determine
the satisfaction of performance obligations, as detailed above,
significantly changes the timing of revenue recognition. £19.1m of
the reduction in the opening balance of equity at 1 January 2018
relates to the disaggregation of contracts previously combined.
The total transaction price of these contracts does not change under
IFRS 15.

~ The Group’s assessment of variable consideration revenue

recognition under IFRS 15 is detailed above. The judgement applied
under IFRS 15 more closely aligns timing of revenue recognition with
cash inflows where the contractual mechanism contains uncertainty.
Previously, the Group utilised expected value calculations in
determining the variable consideration revenue to be recognised.
£4.8m of the reduction in the opening balance of equity at 1 January
2018 relates to the Group’s application of IFRS 15 in relation to
variable consideration.

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 UK LLP tested these systems during its audit
fieldwork and provided feedback to the Committee on this crucial
area; and 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 UK LLP’s comments can be seen on page 98.
Grant Thornton UK LLP also carried out a detailed review of the
impact of the adoption of IFRS 15.

The acquisition of MPS Housing and MPM Revenue recognition
In November 2018, the group acquired the entire share capital of
MPS Housing Limited and Mitie Property Management Limited.
This acquisition has had a material impact on the financial statements,
resulting in the recognition of goodwill and intangible assets of
£21.5 million. The goodwill measured at the acquisition date is the fair
value of the consideration, including the estimated value of contingent
consideration, less the net recognised amount of identifiable assets
acquired and liabilities assumed. The Committee was also mindful of
the proximity of the acquisition to the year end which was considered to
add further risk. Although the estimates are provisional for 2018 and will
be finalised during the course of 2019, significant judgement is required
in deriving the value assigned to contingent consideration and the
identifiable assets.

The Audit Committee addressed this area of judgement in the
following ways:

~ obtaining an understanding of the acquisition through review of legal
agreements and discussion with management. The Committee
took comfort from the fact that the acquired activities are very
similar in nature to the Group’s core activities, and management
have been shown over many years to a high level of expertise in this
area. This was reflected in a good understanding of the underlying
contracts and the bases for valuing unbilled works;

~ considering the assumptions set by management in respect of

discount rate, customer attrition and long term growth rate through
the sales pipeline. These are the most sensitive assumptions
which impact upon both the estimated value of the contingent
consideration and the recognition of acquired intangibles; and

~ this area represented a prime area of external audit focus and Grant
Thornton UK LLP provided detailed feedback to the Committee.

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.
~ Salary and pension increases.

Details of the particular estimates used are included in the pensions
note (note 29) to the financial statements on pages 144 to 147.

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.

Mears Group PLC Annual Report and Accounts 2018The 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 PricewaterhouseCoopers
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 26) to the financial statements on pages 144
to 147 and the Committee concurred with the analysis provided on
pages 47 and 50 of the Financial Review in respect of defined benefit
scheme pension obligations.

~ 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, including an assessment of gender equalisation.

New standards and interpretations not yet applied
The Group is required to disclose information on standards that are
in issue, not yet effective that have not been early adopted in the
financial statements.

The Committee has met with management to discuss management’s
interpretation and proposed implementation of IFRS 16 ‘Leases’.
Following these discussions, the Committee reviewed the disclosures
within Principal Accounting Policies on pages 105 and 114.

The Committee satisfied itself of the appropriateness of the disclosures
after the discussions with management and the review of the
disclosures by the external auditor.

Internal controls 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 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 controls 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.

In addition, the Audit Committee has a new sub-committee, the
Compliance Committee. An overview of the terms of reference of
this Committee is included within the Audit Committee Chairman’s
introduction; the Compliance Committee reports to the Audit Committee
under these terms of reference.

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;
• a comprehensive financial reporting system within which 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.

~ 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.

The Board has reviewed these procedures and considers them
appropriate given the nature of the Group’s operations. The Chief Risk
Officer and the Finance Director presented a report on the robustness
of the internal controls for the year and an internal audit plan for 2019.
The Committee has concluded that the system of internal controls 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 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,

including the work of the Compliance Committee.

In 2014 a detailed 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 as envisaged in the
2016 Annual Report; KPMG, as outsourced internal audit resource,
carried out an updated review of centralised controls and processes.
Management has accepted recommendations from the 2017
updated review.

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.

External audit related services
As noted in the Annual Report last year and approved by shareholders at
the AGM last June the audit was tendered during the year. Two ‘Big Four’
firms and the incumbents, Grant Thornton UK LLP, having confirmed
their interest in tendering, were contacted in January 2018 and invited
to meet key personnel including the Group Finance Director, the Chief
Risk Officer and myself as Chair of the Audit Committee during February
and March. The firms were asked for their written submissions in April
2018 with their fee proposals provided separately in a sealed envelope.
The fee proposals were only opened after the Audit Committee had
scored and ranked the quality of the written proposals and subsequent
presentations and interviews, so that the focus of the Audit Committee
was on the quality of the submissions being presented.

The Audit Committee determined the key criteria for the appointment
would include: audit professional scepticism and challenge of the
executive; business understanding and sector knowledge; seniority and
experience of the audit team to be deployed; transitional planning where
applicable; the depth of involvement of the proposed Senior Statutory
Auditor; and detailed confirmation of the independence of the both the
firm and the individual working directly on the audit.

After the presentations and interviews the Audit Committee chose Grant
Thornton UK LLP to retain the audit based on the overall highest scores.
The fee proposal was then reviewed, which did not alter our view.
The Audit Committee then recommended Grant Thornton UK LLP to the
Board which confirmed its appointment, which was ratified by the AGM.

As Grant Thornton UK LLP was reappointed the Audit Committee has
reviewed the independence regulations and recommended to the Board
that the audit be retendered for the years beginning 1 January 2022 at
which time Grant Thornton UK LLP will not be invited to retender.

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 UK LLP;
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 UK LLP possesses a
detailed knowledge of the structure of the business or an understanding
of the markets that the Group operates in. No non-audit services were
provided by Grant Thornton UK LLP during 2018.

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.

G Davies
Audit Committee Chairman
geraint.davies@mearsgroup.co.uk
22 March 2019

Mears Group PLC Annual Report and Accounts 2018Corporate governance
Report of the Remuneration Committee

R Irwin
Remuneration Committee Chairman

Meeting attendance

R Irwin

J Unwin

K Murphy

P Dicks

A Hillerby (Non-independent, in attendance)

Key
Attended Absent

Dear shareholder,
I am pleased to deliver my first report since taking over as
Committee Chairman.

The Directors’ remuneration policy report sets out the Company’s
remuneration policy for Directors. This policy was subject to a binding
vote at the 2017 AGM and will remain unchanged for a period of at least
three years. For completeness, the policy is detailed in full within this
Annual Report.

The Annual Report on Remuneration sets out payments and awards
made to the Directors and details the link between Company performance
and remuneration for the 2018 financial year. This report, together with
this letter, is subject to an advisory shareholder vote at the 2019 AGM.

You will have read earlier in the Annual Report that 2018 has been a
solid year, The financial results were satisfactory although shareholders
have been critical around the cash flow, and the working capital
absorbed in areas such as Housing Development. The Group did
register significant success in the period in securing three regions of
the Asylum Accommodation and Support Contract. The contract is
valued at £1bn over the ten-year term and was the key sales target for
the year. Another highlight was completing the acquisition of certain
business assets from the property maintenance business of Mitie.
The transaction took several months to complete, and the final valuation
and deal structure is credit to the Executive team.

–

The Directors’ achievement against their key performance indicators
is detailed on pages 34 to 37. The Committee, in reviewing the
performance of the business, concluded that no award should be
made under the EIP in respect of 2018, a view with which the Executive
Directors agreed.

I am mindful that the Directors’ remuneration policy is not delivering the
desired outcomes in terms of motivation, retention and alignment in the
interests of senior management with shareholders. It is my intention
to commence dialogue during 2019 to ensure that we have a revised
remuneration policy before the start of 2020, which will be ratified
through a binding vote at the 2020 AGM.

The Remuneration Committee is acutely aware of the sensitivity around
increasing pay levels in excess of the general workforce. In this regard
we have broadened the Committee terms of reference and strengthened
its membership through the inclusion of our new Chairman Kieran
Murphy and also, from last autumn, our Employee Director Amanda
Hillerby. The Executive team is also mindful of the pay structure of the
wider workforce, and has emphasised its desire to ensure that, where
possible, resources are targeted to those at the lower end of the pay
scale. No pay increases are proposed for the Executive team for the
coming year.

I hope 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.

R Irwin
Remuneration Committee Chairman
roy.irwin@mearsgroup.co.uk
22 March 2019

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information

Corporate governance
Remuneration policy

Directors’ remuneration policy

Remuneration policy and philosophy

Remuneration policy

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.

A proportion of each Executive’s total compensation should be linked to
performance related pay and the provision of equity.

How is this achieved?

~ 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.

~ 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.

Performance measures
and assessment

Not applicable.

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

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
Statement of implementation
of remuneration policy, in the
following financial year, the
salaries for that year for each
of the Executive Directors.

Other benefits

To provide benefits
that are valued by
the recipient and
are appropriately
competitive.

Pension

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.

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.

Mears Group PLC Annual Report and Accounts 2018Maximum opportunity

Performance measures
and assessment

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 2019 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 89
and 90.

The EIP contains malus (up to date
of vesting) and clawback (two years
post vesting) provisions.

Not applicable.

Under the SIP, Sharesave Plan
and CSOP, the maximum
amount is equal to the
regulatory limits set from time
to time.

Objective and
link to strategy

Operation

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 2019, are set out on
page 90.

All-employee share plans

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 (Save As You Earn).

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.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Remuneration policy continued

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.

Committee discretions
The Committee will operate the EIP according to the plan 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:

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 earnings 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.

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.

~ 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.

~ 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 a 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.

Illustrations of application of remuneration policy
For illustrative purposes we set out below how the policy would operate
at three levels of performance:

~ Minimum performance includes only fixed pay (salary, benefits

and pension).

~ On-target performance includes Part A of the EIP and 60% of Part B

of the EIP.

~ Maximum performance includes the maximum opportunity under

the EIP.

Fixed pay is base salary for 2019 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 2019 in line with the relevant policy.

Mears Group PLC Annual Report and Accounts 2018Approach 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 policy table on pages 80 and 81).

D J Miles
Remuneration (£’000)

1,400

1,200

1,000

800

600

400

200

63%
£774

57%
£619

43%
£455

t
e
g
r
a
t
-
n
O

37%
£455

m
u
m
i
x
a
M

Annual incentives
Fixed

m 100%
£455
u
m
n
M

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 the policy table on page 84 for
more details):

A C M Smith
Remuneration (£’000)

~ 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.
~ 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.

1,400

1,200

1,000

800

600

400

200

58%
£413

42%
£303

t
e
g
r
a
t
-
n
O

63%
£516

m
u
m
i
x
a
M

37%
£303

100%
£303

Annual incentives
Fixed

m
u
m
n
M

A Long
Remuneration (£’000)

1,400

1,200

1,000

800

600

400

200

m
u
m
n
M

57%
£338

43%
£254

t
e
g
r
a
t
-
n
O

62%
£422

38%
£254

m
u
m
i
x
a
M

100%
£254

Annual incentives
Fixed

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Remuneration policy continued

Service contracts and payment for loss of office

Director

Executive

D J Miles
A C M Smith
A Long

Chairman/Non-Executive

K Murphy
G Davies
J Unwin
J Burt
R Irwin
E Corrado
A Hillerby

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 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.

Objective and
link to strategy

Operation

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.

Date of contract/letter of appointment

Notice period by Company or Director

June 2008
June 2008
August 2009

January 2019
October 2015
January 2016
February 2017
February 2017
September 2017
June 2018

Twelve months
Twelve months
Twelve months

Six months
Six months
Six months
Six months
Six months
Six months
Three months

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.

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.

Performance measures
and assessment

Non-Executive Director fees are
not performance related.

Non-Executive Directors do
not receive any variable
remuneration element.

Maximum opportunity

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.

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 90.

Mears Group PLC Annual Report and Accounts 2018Consideration 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 made to the remuneration policy in 2017.

The Company will continue to monitor shareholder comments and
retain an open dialogue as necessary.

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 Group
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.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Annual remuneration report 2018

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

2018
2017

Salary

387
369

258
250

211
205

Taxable
benefits

Pension

Annual
incentives

Total
remuneration

10
19

6
7

11
12

58
55

39
37

32
31

–
–

455
443

303
294

254
248

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.

Year

2018
2017

Salary

220
233

Taxable
benefits

–
14

Pension

–
38

70
60

70
42

70
58

55
14

29
–

–
–

35
60

–
20

–
–

2
–

–
–

Annual
incentives

Total
remuneration

–
–

220
285

70
60

70
42

70
58

55
14

31
–

–
–

35
60

–
20

Chairman and Non-Executive Director (£’000)

R Holt

G Davies

J Unwin

R Irwin

J Burt

E Corrado

A Hillerby

K Murphy

P F Dicks

M G Rogers

D L Hosein

Mears Group PLC Annual Report and Accounts 2018Additional details in respect of single total figure table (audited)
The performance measures and targets for the EIP for the year ended 31 December 2018 are detailed below. Despite the fact that a number
of performance targets were met, the Executive team requested that no awards are made under the EIP in respect of the 2018 financial year.

Description

Weighting

Calculation

40%

~ Growth in diluted EPS.

Targets

Threshold:

Earnings per
share (EPS)

Return on capital
employed (ROCE)

~ Diluted EPS is stated before exceptional costs and

~ 8% EPS growth leads to 20% maximum

amortisation of acquisition intangibles and is adjusted
for a normalised tax charge from 1 January 2018 to
31 December 2018.

~ Base figure of 30.36p to be used.

contribution.

Maximum:

~ 13% EPS growth leads to 100% maximum

contribution.

~ Straight-line contribution between 8% and 13%.

20%

~ Operating profit divided by capital employed.

Threshold:

~ Operating profit is stated before acquisition intangible

~ 15% ROCE leads to 20% maximum contribution.

amortisation and exceptional costs.

Maximum:

~ Capital employed is defined as total assets less current
liabilities less all balances relating to bank borrowings
and overdrafts classified within non-current liabilities
at 31 December 2018.

~ 20% ROCE leads to 100% maximum contribution.

~ Straight-line contribution between 15% and 20%.

EBITDA cash
conversion

20%

~ Cash inflow from operating activities as a proportion

Threshold:

of EBITDA measured at 31 December 2018.

~ 80% cash conversion leads to 20% maximum

Customer
satisfaction

10%

~ The measure is the percentage of customers who rate

our service as ‘excellent’.

~ This output is generated from around 80,000 customer

surveys carried out during 2018.

contribution.

Maximum:

~ 100% cash conversion leads to 100% maximum

contribution.

~ Straight-line contribution between 80% and 100%.

~ A level of customer service ‘excellent’ rating
of 90% must be achieved in order to deliver
a maximum contribution.

Health and safety 10%

~ The measure is accident frequency rate (AFR). It is

~ An AFR below 0.25 must be achieved in order

calculated as the number of reportable incidents divided
by the number of hours worked, multiplied by 100,000.

to deliver a maximum contribution.

The actual performance achievement is summarised below:

Performance measures

EPS growth
ROCE
EBITDA to cash conversion
Customer service – ‘excellent’ rating
AFR

Actual

4%
17%
4%
93%
0.22

% of target
satisfied

0%
45%
0%
100%
100%

The Remuneration Committee and the Executive team have agreed that no awards will be made under the EIP in respect of the 2018 financial year.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Annual remuneration report 2018 continued

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
K Murphy
G Davies
J Unwin
J Burt
R Irwin
E Corrado
A Hillerby

Number of
beneficially
owned shares

175,020
110,000
36,230
–
2,500
–
–
–
–
–

Share interests

Vested but
unexercised

Options

164,729
69,333
56,727
–
–
–
–
–
–
–

Total
interests held
at year end

339,749
179,333
92,957
–
2,500
–
–
–
–
–

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 Services sector
over the last nine years. The index is the most relevant to compare the Group’s performance against its peers.

800

700

600

500

400

300

200

100

Jan 2009

Jan 2010

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

Jan 2016

Jan 2017

Jan 2018

Jan 2019

Mears

FTSE All-Share Support Services Index

FTSE All-Share Index

Mears Group PLC Annual Report and Accounts 2018
The table below shows the Chief Executive Officer’s remuneration package over the past nine years, together with incentive payout/vesting as
compared to the maximum opportunity.

Year

2018
2017
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)

455
443
436
436
412
825
409
384
270
600
1,095

–
–
–
–
–
–
–
–
–
–
100%

–
–
–
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
D J Miles
D J Miles
R Holt
R Holt

Percentage change in Chief Executive Officer’s remuneration (unaudited)
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

Salary
entitlement

–
1.3%

Remuneration

Benefits

–
–

Bonus/
incentives

–
–

The Chief Executive Officer’s basic salary equates to 10.3 times the pay of the average administrative employee, normalised to reflect a 60 hour
working week. On a similar basis, the Chief Executive Officer’s pay equates to 15.8 times the lowest paid worker. This will reduce to 15.1 times
following the pay increases to be applied in April 2019.

Relative importance of spend on pay (unaudited)
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

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

Disbursements
from profit in
financial year
2018
£’000

Disbursements
from profit
in previous
financial year
2017
£’000

1,628
12,539
38,522

1,634
12,219
37,122

2019
£

386,817
257,912
211,019

2018
£

386,817
257,912
211,019

%
change

–
+2%
+4%

%
change

0%
0%
0%

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Annual remuneration report 2018 continued

Pension
Details of pension contributions for the year ended 31 December 2019 are set out below:

Executive Director

D J Miles
A C M Smith
A Long

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 2019:

Part A – Deferred share award
(% of salary)

100%

Part B – Performance share award
(% of salary)

100%

For the 2019 EIP, the performance share award threshold level of vesting is 20% for each measure. The measures and weightings are set out below:

Condition

EPS
ROCE
EBITDA cash conversion
Other

Customer satisfaction
Health and safety

In setting targets, the Committee takes into 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

Payout range
(threshold to
maximum
opportunity)

20%–100%
20%–100%
20%–100%
20%–100%
20%–100%

Weighting

40%
40%

20%

2019

2018

160,000
50,000
15,000
5,000

220,000
50,000
15,000
5,000

%
change

-27%
0%
0%
0%

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.

Mears Group PLC Annual Report and Accounts 2018Annual 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.

~ 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 on the efforts of key individuals and that they
should be fairly rewarded for their efforts and contributions in making Mears the success it is.

Statement of voting at general meeting
The table below shows the historical voting outcomes in respect of the remuneration policy and Annual Remuneration Report.

Item

To approve the Annual Report on Remuneration

Votes
for

77,588,906

Votes
against

5,532,133

Votes
withheld

4,000

The total number of ordinary shares eligible to vote at the 2018 AGM was 103,621,576. Every shareholder has one vote for every ordinary share held.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Report of the Directors

The Directors present their report together with the
consolidated financial statements for the year ended
31 December 2018.

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.

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 2017 of 8.55p per share was paid in
July 2018. An interim dividend in respect of 2018 of 3.55p was paid
to shareholders in November 2018. The Directors recommend a final
dividend of 8.85p per share for payment on 4 July 2019 to shareholders
on the Register of Members on 14 June 2019. This has not been
included within the consolidated financial statements as no obligation
existed at 31 December 2018.

Corporate governance
Details of the Group’s corporate governance are set out on pages 66
to 71.

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 34
to 37.

Directors
The present membership of the Board is set out with the biographical
detail on pages 64 and 65.

In line with current practice, all of the Directors will retire and, being
eligible, offer themselves for re-election at the AGM in May 2019.
Any person appointed by the Directors must retire at the next AGM but
will be eligible for re-election at that meeting.

The beneficial interests of the Directors in the shares of the Company
at 31 December 2018 are detailed within the Remuneration Report on
page 88.

The process governing the appointment and replacement of Directors
is detailed within the Report of the Nomination Committee on pages 72
and 73.

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 2018 Annual General Meeting (AGM) held in June 2018 authorised:

~ the Directors to allot shares within defined limits. The Companies
Act 2006 requires directors to seek this authority and, following
changes to Financial Services Authority (FSA) rules and institutional
guidelines, the authority was limited to one third of the issued share
capital, a total of £345,405 plus an additional one third of issued
share capital of £345,405 that can only be used for a rights issue or
similar fundraising;

~ the Directors to issue shares for cash on a non-preemptive basis.
This authority was limited to 10% of the issued share capital of
£103,620 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
2018 Notice of AGM. Shareholders are also referred to the 2019 Notice
of AGM, which contains similar provisions in respect of the Company’s
equity share capital as detailed below.

AGM
The 2019 AGM will be held on 31 May 2019 at 9.30am and a formal
Notice of Meeting and Form of Proxy will be issued in advance.
The ordinary business to be conducted will include the reappointment
of all Directors.

Principal risks and uncertainties
Risk is an accepted part of doing business. The Group’s financial
risk management is based on sound economic objectives and good
corporate practice. The Board has overall responsibility for risk
management and internal controls 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 40 to 42. Details of
financial risk management and exposure to price risk, credit risk and
liquidity risk are given in note 24 to the financial statements.

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.

Mears Group PLC Annual Report and Accounts 2018Payment 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 55 days (2017: 60 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
26 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 27 February 2019 the Company has been notified of, or is aware of,
the shareholders holding 1.5% or more of the issued share capital of the
Company, as detailed in the table below.

Fund manager

City

Shares (m)

PrimeStone Capital
Shareholder Value Management
Majedie Asset Management
Artemis Investment

Management

Heronbridge Investment

Management

London
Frankfurt
London
Edinburgh,
London
Bath

Fidelity Management & Research
Legal & General Investment

Boston
London

Management

Dimensional Fund Advisors
Columbia Threadneedle

Investments

Close Asset Management
Montanaro Asset Management
M&G Investment Management
Slater Investments

London
London

London
London
London
London

15.0
12.8
10.5
7.9

7.2

5.3
5.1

4.7
4.3

2.6
2.5
2.4
2.2

% IC

13.6%
11.6%
9.5%
7.1%

6.5%

4.8%
4.6%

4.3%
3.9%

2.3%
2.2%
2.2%
2.0%

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.

GHG emissions
The Group’s carbon emissions data for the year is provided below.
Scope 1 emissions, which are generated from owned or controlled
sources such as vehicles, have reduced while Scope 2 emissions, which
are from the generation of purchased energy, have increased. This is
as a result of the change in mix between traditional maintenance work,
which naturally requires significant vehicle usage and management
of properties, which consume electricity. There has also been an
overall reduction as a result of more efficient working practices across
the Group.

These figures have been generated from independently provided
reports of carbon emissions or energy usage from a variety of sources
and, where necessary, energy usage has been converted into carbon
emissions using the 2018 dataset provided by the Department for
Environment, Food & Rural Affairs.

Scope

Scope 1
Scope 2

Units

Tonnes CO2e
Tonnes CO2e

Scope 1 and Scope 2

intensity tonnes CO2e/£m Revenue

2017

19069
1482

2017

22.83

2018

17437
2008

2018

22.36

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 reappointment 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
22 March 2019

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Statement of Directors’ responsibilities
In respect of the Directors’ Report and financial statements

To the best of our knowledge:

~ the financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company and the
undertakings included in the consolidation taken as a whole; and
~ the 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, is 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 £65.9m at 31 December 2018. The core debt
required to satisfy the day-to-day requirements of the business is in
the region of £120m. This represents significant headroom against the
£155m unsecured revolving credit facility, with an additional accordion
mechanism allowing the facility to be increased to a maximum of £45m,
maturing in November 2022.

After reviewing the Group 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
22 March 2019

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
101 ‘Reduced Disclosure Framework’. Under company law the Directors
must not approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs 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’s and Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and 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.

Mears Group PLC Annual Report and Accounts 2018Corporate governance
Independent auditor’s report
To the members of Mears Group PLC

Our opinion on the financial statements is unmodified
We have audited the financial statements of Mears Group PLC (the
‘parent company’) and its subsidiaries (the ‘group’) for the year
ended 31 December 2018, which comprise the Consolidated income
statement, the Consolidated statement of comprehensive income, the
Consolidated balance sheet, the Consolidated cash flow statement,
the Consolidated statements of changes in equity, the parent company
balance sheet, the parent company statement of changes in equity and
notes to the financial statements, including a summary of significant
accounting policies. The financial reporting framework that has been
applied in the preparation of the group financial statements is applicable
law and International Financial Reporting Standards (IFRSs) as adopted
by the European Union. The financial reporting framework that has been
applied in the preparation of the parent company financial statements
is applicable law and United Kingdom Accounting Standards, including
Financial Reporting Standard 102 ‘The Financial Reporting Standard
applicable in the UK and Republic of Ireland’ (United Kingdom Generally
Accepted Accounting Practice).

~ the directors’ statement set out on page 96 of the financial

statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting in preparing the
financial statements and the directors’ identification of any material
uncertainties to the group and the parent company’s ability to
continue to do so over a period of at least twelve months from the
date of approval of the financial statements;

~ whether the directors’ statement relating to going concern required
under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit; or

~ the directors’ explanation set out on pages 43–44 of 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.

In our opinion:

Overview of our audit approach

~ 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 2018
and of the group’s profit for the year then ended;

~ the group financial statements have been properly prepared in
accordance with IFRSs as adopted by the European Union;
~ the parent company financial statements have been properly

prepared in accordance with United Kingdom Generally Accepted
Accounting Practice; and

~ the financial statements have been prepared in accordance with the
requirements of the Companies Act 2006 and, as regards the group
financial statements, Article 4 of the IAS Regulation.

Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the ‘Auditor’s responsibilities
for the audit of the financial statements’ section of our report. We are
independent of the group and the parent company in accordance with
the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the FRC’s Ethical Standard as applied
to listed public interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that
the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.

Conclusions relating to principal risks, going concern
and viability statement
We have nothing to report in respect of the following information in the
annual report, in relation to which the ISAs (UK) require us to report to
you whether we have anything material to add or draw attention to:

~ the disclosures in the annual report set out on pages 38–42 that

describe the principal risks and explain how they are being managed
or mitigated;

~ the directors’ confirmation set out on page 40 of 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;

~ We determined materiality for the audit of
the financial statements as a whole to be
£2.0 million;

~ Key audit matters were identified as

revenue recognition (including contract
accounting, contract assets and contract
accruals), goodwill impairment, defined
benefit pension schemes and acquisition
accounting (including valuation of goodwill
and intangibles); and

~ We performed full scope audit procedures

on the financial information of six
companies and specific audit procedures
over certain balances and transactions at
four further companies to gain sufficient,
appropriate audit evidence over all material
balances at both divisional and group levels.
We performed analytical procedures on the
financial information on the remaining thirty
three companies in the group.

Key audit matters
Key audit matters are those matters that, in our professional judgment,
were of most significance in our audit of the financial statements of
the current period and include the most significant assessed risks of
material misstatement (whether or not due to fraud) that we identified.
These matters included those that had the greatest effect on: the overall
audit strategy; the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in
the context of our audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion
on these matters.

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationCorporate governance
Independent auditor’s report continued
To the members of Mears Group PLC

Key Audit Matter – Group

How the matter was addressed in the audit – Group

Revenue recognition (including contract
accounting, contract assets and contract accruals)

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. The group adopted International Financial
Reporting Standard (IFRS) 15) ‘Revenue from
Contracts with Customers’ for the financial year
ended 31 December 2018.

Determining the amount of revenue to be recognised
requires management to make significant
judgements and estimates in the application of
the new IFRS, the stage of completion of certain
contracts and the recoverability of work-in-progress,
mobilisation costs and contract assets.

We therefore identified revenue recognition,
including contract accounting, contract assets
and contract accruals, as a significant risk, which
was one of the most significant assessed risks of
material misstatement.

Our audit work included, but was not restricted to:

~ assessing whether the accounting policies adopted by the directors are in accordance
with the requirements of IFRS 15, and whether management accounted for revenue in
accordance with the accounting policies, including the accounting and disclosure for the
transition to the new IFRS;

~ testing key controls, where applicable, over the recognition of revenue and the allocation

of costs to the contracts, covering invoicing and cost approvals and for the Care business
unit to timesheet authorisation;

~ selecting contracts by reference to materiality and other risk factors including loss making
contracts, contracts with significant aged contract assets and receivables balances or
significant increases in these balances, contracts with disputes, and contracts relating to
site locations we visited during the year;

~ selecting a further sample of revenue transactions, contract assets and contract accruals

balances, to ensure coverage across the group;

~ assessing, for the selected items and samples, whether the revenue recognised is
in accordance with the group’s accounting policies by agreeing details to contract
terms, support for costs on which the revenue is derived, 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, actual performance
against previous estimates and discussions with key contract accounting personnel;

~ investigating the recoverability of contract assets 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 value reports and correspondence with customers, and
examining the group’s historical experience of recovery;

~ identifying contracts that were at risk of incurring future losses during the remaining life of
the contract. This included assessing all potentially onerous contracts in the prior year, but
also any that had incurred significant losses during 2018; and

~ examining such contracts 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.

The group’s accounting policy on revenue recognition is shown in ‘Principal accounting
policies – group’ to the financial statements on pages 108–109 and related disclosures are
included in note 1. The Audit Committee identified revenue recognition as a primary area of
judgement in its report on page 78 where the Audit Committee also described the action that
it has taken to address this issue.

Key observations
Based on our audit work, we did not identify any material misstatement in the revenue
recognised in the year to 31 December 2018 or in the contract assets and contract accrual
balances as at that date.

Mears Group PLC Annual Report and Accounts 2018Goodwill impairment

Our audit work included, but was not restricted to:

The directors are required to make an annual
assessment to determine whether the carrying
value of goodwill of £196.7 million is impaired. Past
experience has indicated that there is significant
headroom in the goodwill balance relating to the
Social Housing division Cash Generating Unit (‘CGU’)
but limited headroom in the goodwill balance relating
to the Care division CGU, which accounts for £112.4
million of the carried goodwill.

The process for assessing whether an impairment
exists under Internal Accounting Standard (IAS) 36
‘Impairment of Assets’ is complex. Calculating 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 therefore identified the impairment review of
goodwill undertaken by management in relation to
the Care division as a significant risk, which was
one of the most significant assessed risks of
material misstatement.

~ assessing whether the accounting policies adopted by the directors are consistent with

the prior year and in accordance with the requirements of IAS 36;

~ 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
increase in carer hours, the new contract wins and the ability to pass on uplifts in payroll
costs to local authorities;

~ considering whether the market level assumptions used were appropriate and where
possible, benchmarking these assumptions against available industry data including
assessing these against the work done by an external expert;

~ performing sensitivity analysis on the various assumptions used for this model to consider

the headroom levels for various scenarios; and

~ testing the accuracy of management’s forecasting through a comparison of budget to

actual data and historical variance trends and investigating the cash flows for exceptional
or unusual items or assumptions.

The group’s accounting policy on impairment is shown in ‘Principal accounting policies –
group’ to the financial statements on page 107 and related disclosures are included in note 13.
The Audit Committee identified carrying value of goodwill as a primary area of judgement in
its report on page 77, where the Audit Committee also described the action that it has taken
to address this issue.

Key observations
Based on our audit work, we found the valuation methodologies and assumptions made in
management’s assessment of goodwill impairment were appropriate. We consider that the
group’s disclosure to be in accordance with IAS 36 and have found no material errors
in calculations.

Defined benefit pension schemes

Our audit work included, but was not restricted to:

The group operates a number of defined benefit
pension schemes and is admitted body of a number
of other defined benefit pension schemes. At
31 December 2018 the defined benefit pension
schemes had a combined net surplus of £20m, of
which £14m is recognised in the financial statements
as recoverable. The gross value of the pension assets
and obligations which form the net surplus amounted
to £439m and £419m respectively.

The measurement of the obligations in accordance
with IAS 19 ‘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.

We therefore identified the valuation of the defined
benefit pension schemes obligations as a significant
risk, which was one of the most significant assessed
risks of material misstatement.

~ assessing whether the accounting policies adopted by the directors are appropriate and

in accordance with the requirements of IAS 19;

~ 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 membership to underlying records;

~ directly confirming the existence and valuation of pension scheme assets with asset

managers for group schemes and analysing the movements on assets for admitted body
schemes; and

~ checking the treatment of Guaranteed Minimum Pension (GMP) service cost and ensuring

this has been accounted and disclosed for correctly.

The group’s accounting policy on defined benefit pensions is shown in ‘Principal accounting
policies – group’ to the financial statements on page 110 and related disclosures are included
in note 29 The Audit Committee identified defined benefit pension valuation as a primary area
of judgement in its report on page 78, where the Audit Committee also described the action
that it has taken to address this issue.

Key observations
Based on our audit work, we found the actuarial assumptions used for the defined benefit
pension schemes to be reasonable. We consider that the group’s disclosure appropriately
describes the significant degree of inherent uncertainty in the assumptions and estimates
and the potential impact on future periods of revisions to these estimates. We found no
material errors in calculations.

Our audit work included, but was not restricted to:

~ assessing whether the accounting policies adopted by the directors are in accordance

with the requirements of IAS 38;

~ obtaining an understanding of the acquisition through review of legal agreements and

discussion with management of both Mears and the acquired companies;

~ re-performing management’s calculation of the fair value of the consideration, including
the estimated value of the deferred consideration transferred less the net recognised
amount of identifiable assets acquired and liabilities assumed, ensuring this is in
accordance with the requirements of IFRS 3 “Business Combinations”;

~ using our internal valuation expert to evaluate and assess the assumptions used, including
discount rates, growth rates and forecast future trading performance, in the calculation of
the fair value of the intangibles recognised;

~ testing the accuracy of the data used in the intangibles valuation by agreeing data to

pertinent supporting documentation such as long-term growth forecasts;

~ testing significant fair value adjustments made to the assets and liabilities acquired, and
challenging management’s assumptions in the value in use assigned to certain assets;
and

~ assessing the adequacy of disclosures in respect of the acquisition to ensure these are

in accordance with IAS 38 and IFRS 3.

The group’s accounting policy on acquisition accounting is shown in ‘Principal accounting
policies – group’ to the financial statements on pages 105–106 and related disclosures are
included in note 28.

Key observations
Based on our audit work, we found that the assumptions and judgements used in
management’s accounting treatment of the Mitie acquisition were reasonable. We also
note that the valuation of goodwill and intangibles is not materially misstated. We found
no material errors in the underlying calculations.

Acquisition accounting (including valuation of
goodwill and intangibles)

During the year the group acquired the entire share
capital of MPS Housing Limited and Mitie Property
Management Limited. This acquisition has had
a material impact on the financial statements,
resulting in the recognition of goodwill and intangible
assets on consolidation of £20.7 million into the
group.

The group measures goodwill at the acquisition date
as being the fair value of consideration, including
the estimated value of deferred consideration,
transferred less the net recognised amount of
identifiable assets acquired and liabilities assumed.
Goodwill of £3.3 million was recognised as a result
of the acquisition of MPS Housing Limited and Mitie
Property Management Limited.

Under IAS 38 ‘Intangible Assets’, intangible assets
acquired in a business combination are deemed
to have a cost to the group equal to their fair value
at the acquisition date. Intangible assets of £17.4
million were recognised as a result of the acquisition.
These intangibles were valued, based on discounted
cash flow forecasts prepared by management,
which require judgement by the Directors around
key assumptions such as revenue growth, discount
rates, customer attrition and long term growth rates.

On initial recognition, the assets and liabilities
acquired in a business combination are included in
the consolidated balance sheet at their fair values,
which are also used as the basis for subsequent
measurement in accordance with the group
accounting policies. Determining the fair value of
certain assets and liabilities requires judgement to
be exercised by the Directors, particularly in respect
of estimating the value in use of assets acquired
and capturing contingent liabilities not previously
recognised in the financial statements.

Due to the significant financial statement impact of
the acquisition, as well as the high level of estimation
required in determining the appropriate accounting
treatment, we therefore identified acquisition
accounting, including valuation of goodwill and
intangibles, as a significant risk, which was one
of the most significant assessed risks of
material misstatement.

We did not identify any key audit matters relating to the audit of the financial statements of the parent company.

100

Mears Group PLC Annual Report and Accounts 2018Our application of 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.

Materiality was determined as follows:

Materiality measure

Group

Parent

Financial statements
as a whole

We determined materiality for the audit of the financial
statements as a whole to be £2.0 million.

We determined materiality for the audit of the parent
company financial statements to be £0.75 million.

Our determination of materiality included a consideration
of a number of benchmarks that we believe to be of
importance to the users of the financial statements,
most notably the group’s preliminary earnings before
interest, tax and amortisation. This benchmark is
considered particularly important due to the significant
level of user focus on this figure in assessing the group’s
performance.

The level of materiality however, was not determined
using a single particular benchmark as we considered
the financial statements in their entirety; therefore the
appropriate amount of materiality was determined
to be £2.0 million based on a review of the financial
statements, and this amount was evaluated for
appropriateness by reference to a range of key
benchmarks.

Materiality for the current year is higher than the level that
we determined for the year ended 31 December 2017
as a result of the increased adjusted earnings before
interest, tax and amortisation in the current year.

Our determination of materiality included a consideration
of a number of benchmarks that we believe to be of
importance to the users of the financial statements, most
notably the company’s total assets. This benchmark is
considered particularly important due to the principal
activity of the company being an investment holding
company.

The level of materiality however was not determined
using a single particular benchmark as we considered
the financial statements in their entirety; therefore the
appropriate amount of materiality was determined
to be £0.75 million based on a review of the financial
statements, and this amount was evaluated for
appropriateness by reference to a range of key
benchmarks.

Materiality for the current year is higher than the level that
we determined for the year ended 31 December 2017 as
a result of the increase in total assets of the company at
the year end.

Performance materiality
used to drive the extent
of our testing

Based on our risk assessment, including the group’s
overall control environment, we determined a performance
materiality of 75% of the financial statement materiality.

Based on our risk assessment, including the company’s
overall control environment, we determined a performance
materiality of 75% of the financial statement materiality.

Specific materiality

We determined a lower level of specific materiality for
certain areas such as directors' remuneration and related
party transactions.

Communication of
misstatements to the
audit committee

We communicate misstatements exceeding £0.1 million
and misstatements below that threshold that, in our view,
warrant reporting on qualitative grounds.

We communicate misstatements exceeding £0.038
million and misstatements below that threshold that,
in our view, warrant reporting on qualitative grounds.

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An overview of the scope of our audit
Our audit approach was a risk-based approach founded on a thorough
understanding of the group’s business, its environment and risk profile.
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 engagement
team based on a measure of materiality considered as a percentage
of total group assets, revenues and earnings 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; this approach is in line with our
approach used in the prior year.

The group’s companies vary significantly in size. We performed full
scope audits at six companies. Specific audit procedures over certain
balances and transactions were performed on a further four companies,
to give appropriate coverage of all material balances at both divisional
and levels. Together, the reporting units subject to audit procedures,
being full scope and specific procedures, were responsible for 92%
of the group ‘s revenues, 82% of the group ‘s earnings before, interest,
tax and amortisation and 50% of group ‘s total assets. We performed
analytical procedures over the remaining thirty three companies.

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. 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.

In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the
financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required
to determine whether there is a material misstatement in the financial
statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to
report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our
responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of
the other information where we conclude that those items meet the
following conditions:

~ Fair, balanced and understandable set out on page 96 – the directors
consider the annual report and financial statements taken as a whole
is fair, balanced and understandable and provides the information
necessary for shareholders to assess the group’s performance,
business model and strategy, is materially inconsistent with our
knowledge obtained in the audit; or

~ Audit committee reporting set out on pages 76 to 80 – the section
describing the work of the audit committee does appropriately
address matters communicated by us to the audit committee; or

~ Directors’ statement of compliance with the UK Corporate

Governance Code set out on page 64 – the parts of the directors’
statement required under the Listing Rules relating to the company’s
compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with
Listing Rule 9.8.10R(2) do properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.

Our opinion on other matters prescribed by the Companies Act 2006
is unmodified
In our opinion, based on the work undertaken in the course of the audit:

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 information given in the strategic report and the report of the
directors for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
~ the strategic report and the report of the directors have been
prepared in accordance with applicable legal requirements.

Other information
The directors are responsible for the other information. The other
information comprises the information included in the annual report
and accounts, other than the financial statements and our auditor’s
report thereon. Our opinion on the financial statements does not
cover the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of assurance
conclusion thereon.

Matters on which we are required to report under the
Companies Act 2006
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 report of the directors.

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Mears Group PLC Annual Report and Accounts 2018Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation
to which the Companies Act 2006 requires us to report to you if, in
our opinion:

~ adequate accounting records have not been kept by the parent

company, or returns adequate for our audit have not been received
from branches not visited by us; or

~ the parent company financial statements and the part of the

directors’ remuneration report to be audited are not in agreement
with the accounting records and returns; or

~ certain disclosures of directors’ remuneration specified by law are

not made; or

~ we have not received all the information and explanations we require

for our audit.

Responsibilities of directors for the financial statements
As explained more fully in the statement of directors’ responsibilities
set out on page 96, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true
and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for
assessing the group’s and the parent company’s ability to continue
as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent company
or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the
financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that
includes our opinion.

Reasonable assurance is a high level of assurance, but is not
a guarantee that an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these
financial statements.

We are responsible for obtaining reasonable assurance that the financial
statements taken as a whole are free from material misstatement,
whether caused by fraud or error. Owing to the inherent limitations of
an audit, there is an unavoidable risk that material misstatements of
the financial statements may not be detected, even though the audit
is properly planned and performed in accordance with the ISAs (UK).
Our audit approach is a risk-based approach and is explained more fully
in the ‘An overview of the scope of our audit’ section of our audit report.

We identified areas of laws and regulations that could reasonably be
expected to have a material effect on the financial statements from our
general commercial and sector experience and through discussion with
the directors and other management (as required by auditing standards),
and from inspection of the group’s regulatory correspondence and
discussed with the directors and other management the policies
and procedures regarding compliance with laws and regulations.
We communicated identified laws and regulations throughout our team
and remained alert to any indications of non-compliance throughout the
audit. This included communication from the group to component audit
teams of relevant laws and regulations identified at group level.

The potential effect of these laws and regulations on the financial
statements varies considerably.

The group is subject to laws and regulations that directly affect the
financial statements including financial reporting legislation (including
related companies legislation), distributable profits legislation and
taxation legislation and we assessed the extent of compliance with
these laws and regulations as part of our procedures on the related
financial statement items.

The group is subject to many other laws and regulations, we did not
identify any others where the consequences of non-compliance
alone could have a material effect on amounts or disclosures in the
financial statements.

Owing to the inherent limitations of an audit, there is an unavoidable
risk that we may not have detected some material misstatements
in the financial statements, even though we have properly planned
and performed our audit in accordance with auditing standards.
For example, the further removed non-compliance with laws and
regulations (irregularities) is from the events and transactions reflected
in the financial statements, the less likely the inherently limited
procedures required by auditing standards would identify it. In addition,
as with any audit, there remained a higher risk of non-detection of
irregularities, as these may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal controls.
We are not responsible for preventing non-compliance and cannot be
expected to detect non-compliance with all laws and regulations.

A further description of our responsibilities for the audit of the financial
statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part
of our auditor’s report.

Other matters which we are required to address
Following the recommendation of the audit committee, we were
appointed by the Audit Committee in 1996 to audit the financial
statements for the year ending 31 December 1996 and subsequent
financial periods.

103

The period of total uninterrupted engagement is twenty two years,
covering the years ending 31 December 1996 to 31 December
2018. Following the recommendation of the audit committee, we
were appointed by the board of the directors in 2017 to audit the
financial statements for the years ending 31 December 2017 to
31 December 2021.

The non-audit services prohibited by the FRC’s Ethical Standard were
not provided to the group or the parent company and we remain
independent of the group and the parent company in conducting
our audit.

Our audit opinion is consistent with the additional report to the
audit committee.

Use of our report
This report is made solely to the company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company’s members as a body, for
our audit work, for this report, or for the opinions we have formed.

Rebecca Eagle
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
Birmingham
22 March 2019

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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 consolidated financial statements comply with
Article 4 of the EU International Accounting Standards (IAS) Regulation. The financial statements are prepared under the historical cost convention
as modified by the revaluation of derivative financial instruments and share-based payments.

The most significant changes in accounting policies from the previous year were the introduction of IFRS 15 ‘Revenue from Contracts with
Customers’ and IFRS 9 ‘Financial Instruments’ for which the impact of introduction has been disclosed in note 3. The accounting policies remain
otherwise unchanged from the previous year except for the modification of a number of standards with effect from 1 January 2018. Changes include
Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2) and Annual Improvements 2014–2016 (which
made amendments to IFRS 1 and IAS 28). The adoption of these amendments had no material effect on the Group’s financial statements.

The preparation of financial statements in conformity with UK Generally Accepted Accounting Practice (UK GAAP) 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 112 to 113.

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 38 to 42.

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 2018.
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.

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 IFRS 9
in the Consolidated Income Statement.

Costs relating to acquisitions in the year have been expensed.

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Principal accounting policies – Group continued

Business combinations continued
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 Consolidated 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

– 2% p.a., straight line

Leasehold improvements

– over the period of the lease, straight line

Plant and machinery

– 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 Consolidated Income Statement.

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.

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Mears Group PLC Annual Report and Accounts 2018Intangible assets continued
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

– over the period of the order book, typically three years

Client relationships

– over the period expected to benefit, typically five years

Development expenditure

– over four to five years, straight line

Intellectual property

– 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
Consolidated Income Statement on calculating a gain or loss on disposal.

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 Consolidated Income Statement for the amount by which the asset’s 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.

Assets held for sale
Assets held for sale are recognised at the lower of their carrying amount and their fair value less costs to sell and separately presented on the face
of the balance sheet. These assets are expected to be held for a limited duration prior to being sold.

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 speculative construction projects where a customer has not yet been identified. 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.

Contract assets
Contract assets are included in trade and other receivables and represent revenue recognised in excess of the total of payments on account and
amounts invoiced.

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Principal accounting policies – Group continued

Trade receivables
Trade receivables represent amounts due from customers in respect of invoice. They are initially measured at their transaction price and
subsequently remeasured at amortised cost.

Retention assets represent amounts held by customers for a period following payment of invoices, to cover any potential defects in the work.
Retention assets are included in trade receivables and are therefore initially measured at their transaction price.

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 Consolidated Income Statement, any related tax generated is recognised as a component
of tax expense in the Consolidated 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.

Revenue
IFRS 15 ‘Revenue from Contracts with Customers’ replaces the previous measurement standards IAS 18 ‘Revenue’ and IAS 11 ‘Construction
Contracts’. IFRS 15 has been applied using the modified retrospective approach on transition which results in an adjustment to the opening balance
of equity at 1 January 2018 and no restatement of the prior period. The scope of the transitional adjustment is all contracts with customers which
span the 1 January 2018 transition date. For the comparative period, the financial statements are reported under the aforementioned accounting
standards, IAS 18 and IAS 11.

IFRS 15 provides a single, principles-based, five-step model to be applied to all sales contracts as outlined below. It is based on the transfer of control
of goods and services to customers and replaces the separate models for goods, services and construction assets. The detail below sets out the
principal types of contract and how the revenue is recognised in accordance with IFRS 15.

The Group’s contract portfolio has been assessed by operating segment. The contracts with customers in Housing have a wide variation of goods
and services being provided to customers with differing performance obligations and levels of complexity. Within Housing, IFRS 15 does not apply
to lease contracts within the scope of IAS 17 ‘Leases’. In Care, there is a single performance obligation within all contracts and the segment follows
a single revenue recognition methodology. None of the Group’s contracts are considered to have a significant financing component.

Housing
Schedule of rates (SOR) contracts
These contracts are primarily for repairs and maintenance services. Revenue is derived using a fixed pricing schedule, which allows each job to
be identified and valued. This pricing schedule is referred to as the SOR, which determines the transaction price. Each work order represents a
performance obligation and as the customer controls the asset being enhanced through the works, the performance obligation is satisfied over time.
The stage of completion of the work order is assessed and an appropriate proportion of the expected transaction price recognised in revenue.

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Mears Group PLC Annual Report and Accounts 2018Revenue continued
Housing continued
Lump sum contracts
Lump sum contracts may involve delivering a range of goods and services, typically repairs, maintenance and capital works; however, there is a
single fixed lump sum payment per period which represents the transaction price. The obligation within a lump sum contract is deemed to be being
available to deliver the goods and services in the scope of the contract, not the actual performance of the individual works orders themselves.
Therefore revenue will be recognised on a straight-line basis as performance obligations are being met over time.

Contracting
For contracting projects, the contract states the scope and specification of the construction works to be carried out, for a fixed price. Mears is
continuously satisfying this single performance obligation as cost is incurred, determining progress against the performance obligation on an input
basis. The customer controls the site or output as the work is being performed on it and therefore revenue is recognised over time where there is an
enforceable right to payment for works completed to date and the work completed does note create an asset with an alternative use to the Group.
An assessment is made of costs incurred to date and the costs required to complete the project. If a project is not deemed to be profitable, the
unavoidable costs of fulfilling the contract are provided for immediately. This category also includes construction contracts where an end customer
has not yet been identified and the revenue is recognised at a point in time, rather than over time.

Variable consideration
The Group’s Housing revenue includes elements of variable consideration. Where there is uncertainty in the measurement of variable consideration,
at both the start of the contract and subsequently, management will consider the facts and circumstances of the contract in determining either
the most likely amount of variable consideration when the outcome is binary, or the expected value based on a range of possible considerations.
Included within this assessment will be the extent to which there is a high probability that a significant reversal in variable consideration revenues will
not occur once the uncertainty is subsequently resolved. This assessment will include consideration of the following factors: the total amount of the
variable consideration; the proportion of consideration susceptible to judgements of customers or third parties; the length of time expected before
resolution of the uncertainty; and the Group’s previous experience of similar contracts.

Rental income
Where the Group is acting as principal, lessor operating lease revenue is recognised in revenue on a straight-line basis over the tenancy in accordance
with IAS 17 ‘Leases’, which will be replaced by IFRS 16 ‘Leases’ from 1 January 2019.

Where the Group is providing a management service, Mears recognises revenue as an agent (the net management fee) on a straight-line basis.
Where significant initial costs are required to make good the housing to perform Housing Management activities, the costs directly attributable to
the initial upgrade will be recognised as costs incurred to fulfil a contract and held within current assets, to the extent that it is determined that costs
are recoverable.

Care
The stand-alone selling prices for providing care are overtly stated in the contract, and the method of application of the rate of charge is on a unit
of time basis, usually expressed as a rate per visit. Revenue will be recognised in respect of this single performance obligation, by reference to the
chargeable rate and time for completed care visits in the period.

From time to time, care contracts with customers include a fixed fee per period for performing a consistent scope of care. For these contract types,
the revenue recognition is consistent with lump sum contracts above.

There is a shift towards rewarding providers of care on the basis of achievement of specific outputs achieved and moving away from the traditional
input-based, per-hour measurement. Care outputs are either achieved or not achieved and are determined by service user. Revenue will be
recognised when the specific performance obligation has been satisfied.

Segment reporting
Segment information is presented in respect of the Group’s operating segments based on the format that the Group reports to its chief operating
decision maker.

The Group considers that the chief operating decision maker comprises 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.

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Principal accounting policies – Group continued

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 to 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.

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 Consolidated Income Statement and to the Consolidated Statement of Comprehensive Income to match the movement in pension
assets and liabilities.

Actuarial gains and losses are taken to the Consolidated 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 Consolidated 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 Consolidated Income Statement. The amount
charged to the Consolidated Income Statement in respect of these plans is included within operating costs.

The Group’s contributions to the scheme are paid in accordance with the rules of the scheme and the recommendations of the scheme 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 Save As You Earn (SAYE) plans, employees are required to contribute towards
the plan. This non-vesting condition is taken into account in calculating the fair value of the option at the grant date.

All share-based remuneration is ultimately recognised as an expense in the Consolidated 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.

110

Mears Group PLC Annual Report and Accounts 2018Leases
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.

Financial instruments
Financial assets and liabilities are recognised in the Consolidated 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, loans and receivables
From 1 January 2018, the assets generated from goods or services transferred to customers are now presented as either receivables or contract
assets, in accordance with IFRS 15. The assessment of impairment of receivables or contract assets from 1 January 2018 is in accordance with
IFRS 9 ‘Financial Instruments’.

All of Mears’ cash flows from customers are solely payments of principal and interest, and do not contain a significant financing component.
Financial assets generated from all of the Group’s revenue streams are therefore initially measured at their fair value, which is considered to be their
transaction price (as defined in IFRS 15) and are subsequently remeasured at amortised cost.

Under IFRS 9, Mears will now recognise a loss allowance for expected credit losses (ECL) on financial assets subsequently measured at amortised
cost using the ‘simplified approach’. 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.

Trade receivables, contract assets 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 contract assets 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
Consolidated Income Statement.

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. The Group considers its revolving credit facility to be an integral part of its cash management. During the year, the
Comprehensive Statement of Cash Flows has been re-presented to show this separately from cash and cash equivalents. This has resulted in a net
increase in revolving credit facility of £43.2m (2017 decrease: £14.7m) being added to cash movements on financing activities in the Comprehensive
Statement of Cash Flows and a commensurate adjustment to cash movement for the year, resulting in a cash and cash equivalents figure of £27.9m
(2017: £24.8m). A memo has been added to the Comprehensive Statement of Cash Flows to show cash and cash equivalents and the rolling credit
facility in total.

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 Consolidated 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 costs’ in the Consolidated 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.

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 income 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 Consolidated Income Statement.

111

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationFinancial statements
Principal accounting policies – Group continued

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
Consolidated 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 Consolidated Income Statement at the same time as the hedged
transaction. The ineffective part of any gain or loss is recognised in the Consolidated 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 Consolidated 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 Consolidated 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 2006.

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.

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.

112

Mears Group PLC Annual Report and Accounts 2018Use of judgements and estimates continued
Critical judgements in applying the Group’s accounting policies
Revenue recognition
Previously IAS 18 ‘Revenue’ and IAS 11 ‘Construction Contracts’ allowed contracts with a variety of services to be combined in certain circumstances
in determining the percentage of completion of those multi-service contracts. Under this standard, revenue was recorded to reflect the expected
profit margin on the contract based on the overall stage of completion. Disaggregating these contracts to determine the satisfaction of performance
obligations, as detailed above, significantly changes the timing of revenue recognition, as in many contracts, stage of completion is now assessed
at the individual job level. £19.1m of the reduction in the opening balance of equity at 1 January 2018 relates to the disaggregation of contracts
previously combined. The total transaction price of these contracts does not change under IFRS 15.

The Group’s assessment of variable consideration revenue recognition under IFRS 15 is detailed above. The judgement applied under IFRS 15 more
closely aligns timing of revenue recognition with cash inflows where the contractual mechanism contains uncertainty. Previously, the Group utilised
expected value calculations in determining the variable consideration revenue to be recognised. £4.8m of the reduction in the opening balance of
equity at 1 January 2018 relates to the Group’s application of IFRS 15 in relation to variable consideration. The total amount of variable consideration
will not change under IFRS 15.

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
Contract recoverability
Determining future contract profitability requires estimates of future revenues and costs to complete. In making these assessments there is a degree
of inherent uncertainty. The Group utilises the appropriate expertise in determining these estimates and has well-established internal controls to
assess and review the expected outcome.

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 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 13.

Defined benefit assets
Scheme assets for LGPS have been estimated by rolling forward the published asset position from the previous year using market index returns over
the period. This is considered to provide a good estimate of the actual scheme assets and the values will be updated to actuals each time a triennial
valuation takes place.

Defined benefit liabilities
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. Sensitivity analysis for these key estimates is included in note 29.

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.

113

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationFinancial statements
Principal accounting policies – Group continued

New standards and interpretations not yet applied
IFRS 16 ‘Leases’
IFRS 16 replaces the existing leasing accounting guidance, which includes IAS 17 ‘Leases’ and IFRIC 4 ‘Determining Whether an Arrangement
Contains a Lease’. The standard is effective for periods beginning on or after 1 January 2019.

The standard requires lessees to account for most contracts using an on-balance sheet model, with the distinction between operating and finance
leases being removed. There is no change to the revenue recognition methodology for lessor operating leases.

The standard provides certain exemptions from recognising leases on the balance sheet, including where the asset is of low value or the lease term is
12 months or less. In addition, the standard makes changes to the definition of a lease to focus on, amongst other things, which party has the right to
direct the use of the asset.

Under the new standard, the Group will be required to recognise right of use lease assets and lease liabilities on the balance sheet. The right of use
asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment
losses, adjusted for any remeasurement of the lease liability. Liabilities are measured based on the present value of future lease payments over the
lease term. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others.

The recognition of the depreciation of right of use lease assets and interest on lease liabilities over the lease term will have no overall impact on profit
before tax over the life of the lease; however, the result in any individual year will be impacted and the change in presentation of costs will likely be
material to the Group’s key financial metrics. Under IAS 17, the charge is booked in full to operating profit. Metrics which will therefore be affected will
include operating profit and operating margin, interest and interest cover, Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and
operating cash flow.

Furthermore, the principal amount of cash paid and interest in the cash flow statement will be presented separately as a financing activity.
Operating lease payments under IAS 17 would have been presented as operating cash flows. There will be no overall net cash flow impact.

The Group will use the modified retrospective transition method on adoption. Under this method, the asset is calculated as if IFRS 16 had always
been applied; however, the liability is calculated as if all leases start on 1 January 2019, which will result in no change to comparative numbers but an
adjustment within the reserves of the Group.

The impact of IFRS 16 to the Group, at the point of transition is detailed on page 51 in the Financial Review.

Information on the undiscounted amount of the Group’s operating lease commitments under IAS 17 ‘Leases’, the current leasing standard, is
disclosed in the Group’s annual financial statements. The leases substantially relate to property leases used to perform Housing activities as an
operating lease lessor, and vehicle leases used in performing Housing activities.

Other new standards and amendments
A number of other standards have been modified. These include IFRIC 23 ‘Uncertainty over Income Tax Treatments’, Plan Amendment, Curtailment
or Settlement (Amendments to IAS 19) and Annual Improvements to IFRS standards 2015–2017 (various standards). None of these amendments are
expected to have a material effect on the Group’s financial statements.

114

Mears Group PLC Annual Report and Accounts 2018Financial statements
Consolidated income statement
For the year ended 31 December 2018

Continuing operations
Sales revenue
Cost of sales

Gross profit

Other administrative expenses
Exceptional costs
Amortisation of acquisition intangibles

Total administrative costs

Operating profit before exceptional costs and amortisation of acquisition intangibles

Operating profit
Finance income
Finance costs

Profit for the year before tax, exceptional costs and amortisation of acquisition intangibles

Profit for the year before tax
Tax expense

Profit for the year from continuing operations

Discontinued operations
Exceptional 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.

Note

8
14

2
5
5

10
9

12
12

2018
£’000

2017
£’000

869,843
(662,825)

900,184
(676,482)

207,018

223,702

(166,177)
(5,657)
(4,434)

(184,551)
–
(10,638)

(176,268)

(195,189)

40,841

30,750
1,154
(3,473)

38,522

28,431
(3,606)

24,825

–
–

–

24,825

24,064
761

24,825

23.05p
22.91p

39,151

28,513
751
(2,780)

37,122

26,484
(4,315)

22,169

(16,500)
3,176

(13,324)

8,845

7,582
1,263

8,845

20.28p
20.10p

7.35p
7.29p

115

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationFinancial statements
Consolidated statement of comprehensive income
For the year ended 31 December 2018

Profit for the year

Other comprehensive income/(expense):
Which will be subsequently reclassified to the Consolidated Income Statement:

Cash flow hedges:
~ losses arising in the year
~ reclassification to the Consolidated Income Statement
Decrease in deferred tax asset in respect of cash flow hedges

Which will not be subsequently reclassified to the Consolidated Income Statement:

Actuarial (loss)/gain on defined benefit pension scheme
Increase/(decrease) in deferred tax asset in respect of defined benefit pension schemes

Other comprehensive (expense)/income 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

2018
£’000

24,825

2017
£’000

8,845

24
24
25

29
25

–
325
(45)

(9,431)
1,792

(7,359)

17,466

16,705
761

17,466

(54)
645
(143)

13,879
(2,637)

11,690

20,535

19,272
1,263

20,535

116

Mears Group PLC Annual Report and Accounts 2018Financial statements
Consolidated balance sheet
As at 31 December 2018

Assets
Non-current
Goodwill
Intangible assets
Property, plant and equipment
Pension and other employee benefits
Deferred tax asset

Current
Assets classified as held for sale
Inventories
Trade and other receivables
Current tax 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
Borrowings related to assets classified as held for sale
Short-term borrowing and overdrafts
Trade and other payables
Financial liabilities

Current liabilities

Total liabilities

Total equity and liabilities

Note

2018
£’000

2017
£’000

13
14
15
29
25

17
18
20

24
29
25
22
23

21
22

197,073
31,570
24,956
17,368
5,500

193,642
17,266
22,037
27,308
4,314

276,467

264,567

12,442
29,751
178,194
609
27,876

248,872

525,339

1,105
82,224
2,021
(46)
46,214
79,189

210,707
(427)

210,280

78,780
3,802
7,710
15
7,478

97,785

15,000
15,000
187,233
41

217,274

315,059

13,941
18,705
153,912
111
24,770

211,439

476,006

1,036
60,204
1,469
(326)
46,214
100,897

209,494
96

209,590

50,559
4,966
7,098
79
5,036

67,738

13,941
–
184,484
253

198,678

266,416

525,339

476,006

The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf on 22 March 2019.

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.

117

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationFinancial statements
Consolidated cash flow statement
For the year ended 31 December 2018

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
Net cash inflow/(outflow) in respect of property for resale
Acquisition of subsidiary undertakings
Net cash acquired with subsidiary undertakings
Sale of subsidiary undertaking
Net cash disposed of with subsidiary
Loans made to other entities (non-controlled)
Interest received

Net cash outflow from investing activities

Financing activities
Proceeds from share issue
Receipts from borrowings related to assets classified as held for sale
Acquisition of non-controlling interests
Net movement in revolving credit facility
Discharge of finance lease liability
Interest paid
Dividends paid – Mears Group shareholders
Dividends paid – non-controlling interests

Net cash inflow/(outflow) from financing activities

Cash and cash equivalents, beginning of year
Net increase/(decrease) in cash and cash equivalents

Cash and cash equivalents, end of year

Note

2018
£’000

2017
£’000

28,431
15,641
(11,045)
(13,948)
(17,490)

1,589
665

2,254
(1,610)

644

(7,667)
(3,089)
144
1,499
(27,500)
(4,185)
–
(26)
(139)
389

(40,574)

22,089
1,059
(6,163)
43,221
(479)
(3,602)
(12,539)
(550)

43,036

24,770
3,106

27,876

26,484
21,148
(7,471)
(109)
(11,381)

28,671
(3,776)

24,895
(9,354)

15,541

(5,572)
(3,661)
204
(13,941)
(5,000)
–
1,582
(1,234)
(232)
351

(27,503)

1,894
13,941
–
(14,719)
(1,954)
(2,591)
(12,218)
(525)

(16,172)

52,904
(28,134)

24,770

The Group considers its revolving credit facility to be an integral part of its cash management:
~ cash at bank and in hand
~ revolving credit facility

Cash and cash equivalents, including revolving credit facility

27,876
(93,780)

(65,904)

24,770
(50,559)

(25,789)

The accompanying accounting policies and notes form an integral part of these financial statements.

118

Mears Group PLC Annual Report and Accounts 2018Retained
earnings
£’000

92,555

7,582
11,242

Non-
controlling
interest
£’000

Total
equity
£’000

(642)

198,674

1,263
–

8,845
11,690

18,824

1,263

20,535

Financial statements
Consolidated statement of changes in equity
For the year ended 31 December 2018

Attributable to equity shareholders of the Company

At 1 January 2017

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
Share option exercises
Dividends

Share
capital
£’000

1,026

–
–

–

–
10
–
–
–

Share
premium
account
£’000

58,320

–
–

–

–
1,884
–
–
–

At 1 January 2018

1,036

60,204

Impact of change in
accounting policies
Adjusted balance at 1 January
2018
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
Changes in non controlling
interests
Dividends

–

1,036
–
–

–

–
69
–

–
–

–

60,204
–
–

–

–
22,020
–

–
–

Share-
based
payment
reserve
£’000

1,975

–
–

–

–
–
826
(1,332)
–

1,469

–

1,469
–
–

–

–
–
552

–
–

Hedging
reserve
£’000

(774)

–
448

448

–
–
–
–
–

Merger
reserve
£’000

46,214

–
–

–

–
–
–
–
–

–

(326)
–
280

280

–
–
–

–
–

46,214
–
–

–

–
–
–

–
–

At 31 December 2018

1,105

82,224

2,021

(46)

46,214

The accompanying accounting policies and notes form an integral part of these financial statements.

(326)

46,214

100,897

–

(26,342)

404
–
–
1,332
(12,218)

74,555
24,064
(7,639)

16,425

14
–
–

734
(12,539)

79,189

–
–
–
–
(525)

–

96
761
–

761

–
–
–

404
1,894
826
–
(12,743)

209,590

(26,342)

183,248
24,825
(7,359)

17,466

14
22,089
552

(734)
(550)

(427)

–
(13,089)

210,280

119

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationFinancial statements
Notes to the financial statements – Group
For the year ended 31 December 2018

1. Revenue
The Group’s revenue disaggregated by pattern of revenue recognition is as follows:

Schedule of rates contracts
Contracting and variable consideration
Lump sum contracts
Rental income
Care services

2018
£’000

235,738
236,625
173,272
107,595
116,613

2017
£’000

213,292
251,920
183,314
117,595
134,063

869,843

900,184

All of the above categories fall exclusively within the Housing segment with the exception of Care services, which falls exclusively within the
Care segment.

A total of £0.3m of revenue was recognised in respect of the balance of contract liabilities at 1 January 2018 (2017: £nil).

Schedule of rates and care service revenue is typically invoiced between one and 30 days from completion of the performance obligation.
Contracting and variable consideration revenue is typically invoiced based on the stage of completion of the overall contract. Lump sum revenue
is typically invoiced monthly in arrears. Rental income is typically invoiced monthly in advance. Payment terms for revenue invoiced are typically
30 to 60 days from the date of invoice.

2. 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 those 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

Operating result before exceptional costs, amortisation of
acquisition intangibles and long-term incentive plans

Operating margin before exceptional costs amortisation of
acquisition intangibles and long-term incentive plans

Long-term incentive plans

Operating result before exceptional costs and
amortisation of acquisition intangibles
Exceptional costs
Amortisation of acquisition intangibles
Operating profit
Net finance costs
Tax expense

Profit for the year from continuing activities

Housing
£’000

2018

Care
£’000

Total
£’000

Housing
£’000

2017

Care
£’000

Total
£’000

753,230

116,613

869,843

766,121

134,063

900,184

37,627

3,766

41,393

39,478

499

39,977

5.00%

(552)

3.23%

–

37,075

3,766

5.15%

(826)

0.37%

–

38,652

499

4.76%

(552)

40,841
(5,657)
(4,434)
30,750
(2,319)
(3,606)

24,825

4.44%

(826)

39,151
–
(10,638)
28,513
(2,029)
(4,315)

22,169

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 8% of the total revenue reported.

120

Mears Group PLC Annual Report and Accounts 20182. Segment reporting continued
In addition, the following disclosures have been provided in respect of segmental analysis required by IFRS 8 ‘Operating Segments’:

Operating segments

Segment assets
Segment liabilities
Property, plant and equipment additions
Depreciation
Amortisation of acquisition intangibles
Amortisation of other intangibles

Housing
£’000

402,148
(277,620)
8,059
5,146
3,738
2,409

2018

Care
£’000

123,191
(37,439)
642
658
696
–

Total
£’000

525,339
(315,059)
8,701
5,804
4,434
2,409

Housing
£’000

350,902
(203,334)
7,517
5,304
7,606
2,130

2017

Care
£’000

125,104
(63,082)
604
801
3,032
–

Total
£’000

476,006
(266,416)
8,121
6,105
10,638
2,130

3. Changes in accounting policies
As detailed in the principal accounting policies, there have been two significant mandatory accounting changes which apply from 1 January 2018:
the adoption of IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 9 ‘Financial Instruments’. The impact to retained earnings as a result
of these changes is detailed below:

Retained earnings as previously stated at 31 December 2017
Impact of restatement on Trade and other receivables (IFRS 15)
Impact of restatement on Deferred tax asset (IFRS 15)
Impact of restatement on Trade and other receivables (IFRS 9)
Impact of restatement on Deferred tax asset (IFRS 9)

Retained earnings as restated at 1 January 2018

The impact to the debtor provision is detailed below:

Debtor provision under IAS 39 as previously stated at 31 December 2017
Reversal of debtor provision under IAS 39
Recognition of debtor provision under IFRS 9

Debtor provision under IFRS 9 as restated at 1 January 2018

The effect of the application of IFRS 15 and IFRS 9 on the year ended 31 December 2018 is detailed below:

Retained
earnings
£’000

100,897
(29,537)
5,611
(2,818)
402

74,555

Debtor
provision
£’000

6,710
(6,710)
9,528

9,528

Consolidated income statement for the year ended 31 December 2018
Sales revenue
Other administrative expenses
Tax expense
Consolidated balance sheet as at 31 December 2018
Deferred tax asset
Trade and other receivables
Retained earnings
Consolidated statement of cash flows as at 31 December 2018
Results for the year before tax
Change in trade and other receivables

As would have
been reported
under old
accounting
standards
£’000

Impact of
IFRS 15
£’000

Impact of
IFRS 9
£’000

As reported
under new
accounting
standards
£’000

868,965
(116,395)
(3,398)

5,475
209,454
110,424

27,335
(9,322)

878
–
(167)

–
(28,659)
(28,659)

878
(878)

–
218
(41)

869,843
(166,177)
(3,606)

25
(2,601)
(2,576)

5,500
178,194
79,189

218
(218)

28,431
(10,418)

The change to IFRS 15 has no impact on the lifetime profitability of the contracts and there are no cash flow impacts. The impact of this standard
has been to increase the operating result for 2018 by £0.9m. Moving forward, it is expected to have a positive impact in respect of operating profit
as performance obligations are met.

The impact of IFRS 9 has been to increase the operating result for 2018 by £0.2m. Moving forward, this new standard is likely to result in an earlier
recognition of credit loss, resulting in an impairment in trade receivables and contract assets. Based on the current activities of the Group, it is
unlikely that this impairment would be material in any single year.

121

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information2018
£’000

552
5,804
4,434
2,409
44
37
4,948
105,822

2017
£’000

826
6,105
10,638
2,130
(961)
24
5,266
110,658

2018
£’000

325
9

389

2018
£’000

(3,039)
(325)
(2)

(3,366)
(77)
(30)

(3,473)

35
773
–
346

1,154

(2,319)

–
325

325

2017
£’000

265
9

339

2017
£’000

(2,017)
(645)
(4)

(2,666)
(114)
–

(2,780)

20
440
40
251

751

(2,029)

(54)
645

591

4. Operating costs
Operating costs, relating to continuing activities, include the following:

Share-based payments
Depreciation
Amortisation of acquisition intangibles
Amortisation of other intangibles
Loss/(profit) on disposal of subsidiary
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
~ other audit related fees

Total auditor’s remuneration

5. 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 Consolidated Income Statement

Changes in mark-to-market of interest rate swaps (effective hedges)

122

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 20186. Employees
Staff costs during the year were as follows:

Wages and salaries
Social security costs
Other pension costs

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

2018
£’000

233,877
20,975
9,532

2017
£’000

272,794
23,806
8,627

264,384

305,227

2018
£’000

3,382
4,558
2,642

2017
£’000

3,638
5,980
2,962

10,582

12,580

2018
£’000

1,507
–
121

1,628

2017
£’000

1,389
1,148
161

2,698

During the year contributions were paid to personal pension schemes for three Directors (2017: four).

During the year no Directors (2017: four) exercised share options.

7. Share-based employee remuneration
As at 31 December 2018 the Group maintained six 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

2018

2017

Weighted
average
exercise
price
p

287
237
323
297

265

Number
’000

2,938
530
(583)
(133)

2,752

Weighted
average
exercise
price
p

256
317
326
193

287

Number
’000

2,555
1,619
(229)
(1,007)

2,938

The weighted average share price at the date of exercise for share options exercised during the period was 3.47p. At 31 December 2018, 0.3m options
had vested and were still exercisable at prices between 1p and 266p. These options had a weighted average exercise price of 230p and a weighted
average remaining contractual life of 1.4 years.

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.

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 0.5m options
granted during the year and 0.6m options that lapsed during the year. The market price at 31 December 2018 was 335p and the range during 2018
was 274p to 440p.

123

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information7. Share-based employee remuneration continued
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
~ MIP
Giving rise to liabilities:
~ MIP

2018
£’000

2017
£’000

307
245
–

–

552

295
71
460

–

826

All-employee share incentive 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 Company Share Option Plan (CSOP)
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 CSOP. 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.

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, subject to achieving performance conditions. No options have been issued under this plan since 2010 and all options have vested.

Management Incentive Plan (MIP)
The MIP was introduced in 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. No further issues will be made under this plan
and the remaining options vest in 2019.

Executive Incentive Plan (EIP)
The EIP was introduced in June 2017 following shareholder approval. The award of options is offered to key senior management subject
to performance conditions as detailed on page 87 of the Remuneration Report.

8. Exceptional costs
Exceptional costs incurred in the period which are considered non-trading or non-recurring in nature are detailed below:

Costs of restructure
Costs of acquisition
Exceptional legal costs

2018
£’000

3,584
524
1,549

5,657

2017
£’000

–
–
–

–

The costs of restructure relate to the rationalisation of the Group’s central services and largely comprise non-recurring staff costs.

The costs of acquisition relate to the acquisition of MPM Housing Limited and MPS Housing Limited, as detailed in note 28.

Exceptional legal costs were incurred in respect of a property lease. Given the size of this item and unique circumstance of the dispute, the Directors
believe this should be treated as an exceptional item to better reflect the underlying financial performance.

124

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 20189. Tax expense
Tax recognised in the Consolidated Income Statement

United Kingdom corporation tax
Adjustment in respect of previous periods

Total current tax recognised in Consolidated 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
~ impact of transition to new accounting standards
Adjustment in respect of previous periods

Total deferred taxation recognised in Consolidated Income Statement

Total tax expense recognised in Consolidated Income Statement on continuing operations
Total tax credit recognised in Consolidated Income Statement on discontinued operations

Total tax expense recognised in Consolidated Income Statement

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 19.0%
(2017: 19.3%)
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

2018
£’000

(893)
(270)

(1,163)

124
(116)
88
(843)
(224)
(60)
–
5,990
(190)

4,769

3,606
–

3,606

2017
£’000

5,341
(18)

5,323

(6)
240
(153)
(1,888)
247
1,122
(168)
–
(402)

(1,008)

4,315
(3,176)

1,139

2018
£’000

28,431

2017
£’000

9,984

5,402

1,922

260
(159)
(24)
–
203
(1,616)
(460)

3,606

167
(133)
(170)
(168)
(33)
(26)
(420)

1,139

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.

The transition to IFRS 15 and IFRS 9 at the start of the current period resulted in an opening deferred tax balance. The £6.0m deferred tax charge
in respect of transition to new accounting standards is as a result of this opening deferred tax balance unwinding during 2018.

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. No deferred tax asset is recognised in respect of losses of £28.4m (2017: £34.2m) 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.

125

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information9. Tax expense continued
The following tax has been charged to other comprehensive income or equity during the year:

Deferred tax (credit)/charge recognised in other comprehensive income
~ on defined benefit pension obligations
~ on cash flow hedges

Total deferred tax (credit)/charge recognised in other comprehensive income

Deferred tax recognised directly in equity
Deferred tax credit:
~ on share-based payments

Total deferred tax recognised in equity

Total tax
Total current tax
Total deferred tax

2018
£’000

(1,792)
45

(1,747)

(14)

(1,163)
3,008

2017
£’000

2,637
143

2,780

(404)

2,147
1,368

10. Discontinued activities
The Group previously completed the disposal of its Mechanical and Electrical division which included an entity operating in the United Arab Emirates
(‘Haydon LLC’). As part of that disposal, the Group ultimately retained the beneficial interest in 1% of the share capital of this UAE company due to the
Group still carrying a number of performance guarantees in place at the time of the disposal, which unravel as the underlying contracts reach the end
of their defects liability period.

During the year, the Group has incurred cash costs of £1.6m in respect of costs of litigation associated with the performance guarantees. The Group
is carrying a remaining provision of £2.2m in respect of the two outstanding performance guarantees amounting to £3.9m, resulting in a residual
contingent liability of £1.7m. Mears does not believe that there is any justification for the guarantee holders making a call on these guarantees, given
that the contracts to which they are attached were concluded several years ago. The Directors believe the current position is sufficiently conservative,
however if both bonds were to be called, and in the event that Mears recovered none of the debtor balance owed, this would result in a further loss to
be recognised of £1.7m. This provision of £2.2m is reported within other creditors. The £1.7m is disclosed as a contingent liability.

11. Dividends
The following dividends were paid on ordinary shares in the year:

Final 2017 dividend of 8.55p (2017: final 2016 dividend of 8.40p) per share
Interim 2018 dividend of 3.55p (2017: interim 2017 dividend of 3.45p) per share

2018
£’000

8,860
3,679

2017
£’000

8,651
3,567

12,539

12,218

The proposed final 2018 dividend of 8.85p per share has not been included within the consolidated financial statements as no obligation existed at
31 December 2018.

126

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201812. Earnings per share

Earnings per share
Effect of amortisation of acquisition intangibles
Effect of full tax adjustment
Effect of exceptional costs

Normalised earnings per share

Earnings per share
Effect of amortisation of acquisition intangibles
Effect of full tax adjustment
Effect of exceptional costs

Normalised earnings per share

Basic (continuing)

Basic (discontinued)

Basic (continuing
and discontinued)

2018
p

23.05
4.25
(2.22)
4.16

29.24

2017
p

20.28
10.32
(2.31)
–

28.29

2018
p

–
–
–
–

–

2017
p

(12.93)
–
(0.19)
13.12

–

2018
p

23.05
4.25
(2.22)
4.16

29.24

2017
p

7.35
10.32
(2.50)
13.12

28.29

Diluted (continuing)

Diluted (discontinued)

Diluted (continuing
and discontinued)

2018
p

22.91
4.22
(2.20)
4.13

29.06

2017
p

20.10
10.23
(2.28)
–

28.05

2018
p

–
–
–
–

–

2017
p

(12.81)
–
(0.20)
13.01

–

2018
p

22.91
4.22
(2.20)
4.13

29.06

2017
p

7.29
10.23
(2.48)
13.01

28.05

A normalised EPS is disclosed in order to show performance undistorted by the amortisation of acquisition intangibles and exceptional costs.
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:

Profit/(loss) attributable to shareholders:
~ amortisation of acquisition intangibles
~ full tax adjustment
~ exceptional costs

Normalised earnings

Normalised (continuing)

Normalised (discontinued)

Normalised (continuing
and discontinued)

2018
£’000

24,064
4,434
(2,310)
4,342

30,530

2017
£’000

20,906
10,638
(2,367)
–

29,177

2018
£’000

–
–
–
–

–

2017
£’000

(13,324)
–
(206)
13,530

–

2018
£’000

24,064
4,434
(2,310)
4,342

30,530

2017
£’000

7,582
10,638
(2,573)
13,530

29,177

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

2018
Million

104.40
0.65

105.05

2017
Million

103.10
0.93

104.03

127

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information13. Goodwill

Gross carrying amount
At 1 January 2017
Disposal of subsidiary

At 1 January 2018
Additions on acquisition

At 31 December 2018

Accumulated impairment losses
At 1 January 2017, at 1 January 2018 and at 31 December 2018

Carrying amount
At 31 December 2018

At 31 December 2017

Goodwill
arising on
consolidation
£’000

Purchased
goodwill
£’000

193,306
(70)

193,236
2,916

196,152

–

196,152

193,236

406
–

406
515

921

–

921

406

Total
£’000

193,712
(70)

193,642
3,431

197,073

–

197,073

193,642

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.

Details of additions on acquisitions in the year are set out in note 28.

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.

The carrying value of goodwill is allocated to the following CGUs:

Housing
Care

Goodwill
arising on
consolidation
£’000

96,501
99,651

195,772

Purchased
goodwill
£’000

921
–

921

Total
£’000

97,422
99,651

197,073

An asset is impaired if its carrying value exceeds the unit’s recoverable amount, which is based on value in use. At 31 December 2018 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 8.5% over a five-year period with a terminal value. The impairment reviews incorporated a terminal
growth assumption of 1.7%, 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 8.5% 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 1.7%, 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. 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

128

Post-tax
discount
rate

8.50%
8.50%

Pre-tax
discount
rate

10.27%
10.27%

Volume
growth rate
(years 1–5)

3.00%
4.57%

Terminal
growth
rate

0.00%
2.50%

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201813. Goodwill continued
Housing
The contracts awarded within the Housing sector are significant in size and the contract terms typically average six years in duration. In addition,
Mears has a good track record in retaining contracts on expiry and typically retains over 80% of expiring contracts.

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.

Care
Management recognises that there remain significant difficulties within the homecare market, although the sector is increasingly attracting the
interests of the national media. The introduction of the National Living Wage in April 2016 proved a significant boost for providers, with a large
number of Local Authorities materially increasing their charge rates, recognising that too much of the cost increase in recent years had been
absorbed by care providers. This trend has continued with subsequent rises to the National Living Wage in 2017 and 2018. Providers have typically
passed these rate increases on to their carers in full, adding some stability in a sector where recruitment and retention represent a significant
constraint. Management is particularly pleased that all Local Authorities in Scotland, which covers around one third of the care activities, have
adopted the Scottish Living Wage, which as at 1 April 2019 increases to £9.00 per hour. This compares with the statutory National Living Wage
of £8.21 per hour.

Notwithstanding these improvements, market conditions remain challenging. The Directors note that, given these pressures, the number of national
providers is reducing, which reflects the difficult conditions but does provide opportunity for the Group, where customers are seeking to work with
a reputable national provider. The Group remains highly selective in bidding new contract opportunities but the pipeline for new contract bidding
remains healthy. Management will only bid where the contract pricing provides good visibility of profitability, including a clear mechanism for future
price increases and where there is a strategic opportunity to provide Housing services to the Local Authority client, either separately to a Care
contract, or incorporated within a Care contract. Management has noted a lack of competition in opportunities which combine Housing and Care
elements, where the customer is seeking a single contractor for the works. 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 financial performance at a contract level. A key driver around the
operational and financial success of each contract continues to be the recruitment and retention of care workers. Carer pay rates continue to be
the principal barrier to successful recruitment and retention, but in addition 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 continued to be highly selective, targeting those contracts where the pricing, longevity and spend certainty allow Mears to deliver a
high quality service at sustainable margins. In 2018, a win rate of 60% was achieved from new contract bidding, which is in line with historical
norms. Despite this, management has significantly reduced the Care growth forecast to equate to an increase of 2,000 hours per week, which
will be achieved through annual new contract bidding. This emphasises management’s desire to ensure new work won will enhance earnings.
~ Recruitment and retention of quality care workers continues to be challenging. The churn rate of care workers varies at a branch level, depending
on non-financial factors such as culture, working practices and recognition. However, the overall churn rate has remained at a constant level
between 40% and 50% for the last three years. Management has invested in retention activities to standardise best practices and will continue
this focus during 2019. However, recruitment remains challenging and this is expected to continue during the short term. 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. This, in turn, will allow branches to focus on their localised recruitment efforts. 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 250 carers per year on an existing workforce of 5,000 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 will further increase direct costs from 1 April
2019. Management’s desire is 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 and can attract new employees to the sector. The process of branch closures which followed the
introduction of the National Living Wage in April 2016 has resulted in a live contract portfolio that allows Mears to comfortably meet National
Living Wage requirements, whilst having clear margin visibility. The Government has confirmed an increase in the National Living Wage of 4.9%
from 1 April 2019. As a result, management has assumed an increase in carer pay rates of 4.9% per annum. Management is 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.

129

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information13. 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

1.9%
2.1%
2.3%
2.5%
2.7%
2.9%
3.1%

14. Other intangible assets

Gross carrying amount
At 1 January 2017
Revisions
Additions
Disposals

At 1 January 2018
Additions
Disposals

7.9%

18.9
22.9
25.8
30.3
35.2
40.4
46.1

8.1%

14.4
18.1
20.8
25.0
29.5
34.3
39.5

Discount rate

8.5%

6.3
9.5
11.8
15.4
19.2
23.3
27.8

8.3%

10.2
13.7
16.2
20.0
24.2
28.6
33.4

8.7%

2.6
5.6
7.7
11.1
14.6
18.4
22.5

8.9%

(0.9)
1.9
3.9
7.0
10.3
13.9
17.7

9.1%

(4.2)
(1.5)
0.3
3.2
6.3
9.6
13.1

Acquisition intangibles

Other intangibles

Client
relationships
£’000

72,138
459
–
–

72,597
–
–

Order
book
£’000

28,317
–
–
(350)

27,967
18,058
–

Total
acquisition
intangibles
£’000

100,455
459
–
(350)

100,564
18,058
–

At 31 December 2018

72,597

46,025

118,622

Accumulated amortisation
At 1 January 2017
Amortisation charge for period
Disposals

At 1 January 2018
Amortisation charge for period
Disposals

At 31 December 2018

Carrying amount
At 31 December 2018

At 31 December 2017

56,344
7,363
–

63,707
3,227
–

66,934

5,663

8,890

24,347
3,275
(350)

27,272
1,207
–

28,479

17,546

695

80,691
10,638
(350)

90,979
4,434
–

95,413

23,209

9,585

Development
expenditure
£’000

Intellectual
property
£’000

Total
other
intangibles
£’000

Total
intangibles
£’000

13,237
–
3,662
–

16,899
3,089
(12)

19,976

7,088
2,130
–

9,218
2,409
(12)

11,615

8,361

7,681

224
–
–
–

224
–
–

224

224
–
–

224

–

13,461
–
3,662
–

17,123
3,089
(12)

113,916
459
3,662
(350)

117,687
21,147
(12)

20,200

138,822

7,312
2,130
–

9,442
2,409
(12)

88,003
12,768
(350)

100,421
6,843
(12)

11,839

107,252

8,361

7,681

31,570

17,266

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 national 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 3.6 years (2017: 3.7 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 on 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 on the non-contractual expected cash inflows. These cash flow projections assume
a customer attrition rate of 5% based on three-year historical trends.

130

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201815. Property, plant and equipment

Gross carrying amount
At 1 January 2017
Additions
Disposals
Disposal of subsidiary

At 1 January 2018
Additions
Acquisition of subsidiary
Disposals
Disposal of subsidiary

At 31 December 2018

Depreciation
At 1 January 2017
Provided in the year
Eliminated on disposals
Disposal of subsidiary

At 1 January 2018
Provided in the year
Acquisition of subsidiary
Eliminated on disposals
Disposal of subsidiary

At 31 December 2018

Carrying amount
At 31 December 2018

At 31 December 2017

Freehold
property
£’000

Leasehold
improvements
£’000

Plant and
machinery
£’000

Fixtures,
fittings and
equipment
£’000

Motor vehicles
£’000

Assets
under
construction
£’000

788
–
–
–

788
–
254
(110)
–

932

–
20
–
–

20
5
7
(5)
–

905

768

13,953
2,107
–
–

16,060
2,366
–
–
(2)

18,424

8,877
1,188
–
–

10,065
1,170
–
–
–

11,235

7,189

5,995

2,890
99
–
–

2,989
286
–
(170)
–

3,105

1,925
280
–
–

2,205
229
–
(170)
–

2,264

841

784

46,670
5,915
(2,472)
(159)

49,954
2,456
–
(1,770)
(91)

1,295
–
(20)
–

1,275
–
–
(274)
–

50,549

1,001

33,288
4,606
(2,244)
(143)

35,507
4,388
–
(1,713)
(48)

38,134

12,415

14,447

1,241
11
(20)
–

1,232
12
–
(256)
–

988

–
–
–
–

–
3,593
–
–
–

3,593

–
–
–
–

–
–
–
–
–

–

3,593

–

Total
£’000

65,596
8,121
(2,492)
(159)

71,066
8,701
254
(2,324)
(93)

77,604

45,331
6,105
(2,264)
(143)

49,029
5,804
7
(2,144)
(48)

52,648

24,956

22,037

131

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information16. Investments
The subsidiary undertakings within the Group at 31 December 2018 are shown below:

Proportion
held

Country of registration

Nature of business

3c Asset Management Limited
Careforce Group Plc
Coulter Estates Limited
Electrical Contracting Services (UK) Limited
Evolve Housing Limited
Heatherpark Community Services Limited
Helcim Group Limited
Helcim Homes Limited
ILS Group Limited
ILS Trustees Limited
Independent Living Services (ILS) Limited
Jackson Lloyd Limited
Laidlaw Scott Limited
Let to Birmingham Limited
Manchester Working 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 Direct Limited
Mears Energy Limited
Mears Estates Limited
Mears Facility Management Limited
Mears Home Improvement Limited
Mears Homecare Limited
Mears Homes Limited
Mears Housing Limited
Mears Housing Management Limited
Mears Housing Management (Holdings) Limited
Mears Housing Portfolio (Holdings) Limited
Mears Housing Portfolio (London) Limited
Mears Housing Portfolio 1 Limited
Mears Housing Portfolio 2 Limited
Mears Housing Portfolio 3 Limited
Mears Housing Portfolio 4 Limited

100%
100%
100%
100%
50%
100%
100%
100%
100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
80%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

England and Wales
England and Wales
Scotland
England and Wales
England and Wales
Scotland
England and Wales
England and Wales
Scotland
Scotland
Scotland
England and Wales
Scotland
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
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

Maintenance services
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Provision of care
Dormant
Dormant
Housing management services
Maintenance services
Intermediate holding company
Dormant
Provision of care
Provision of care
Dormant
Dormant
Dormant
Dormant
Grounds maintenance
Dormant
Maintenance services
Provision of care
Dormant
Dormant
Housing management services
Intermediate holding company
Intermediate holding company
Property acquisition
Property acquisition
Property acquisition
Property acquisition
Property acquisition

132

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201816. Investments continued

Mears Insurance Company Limited
Mears Learning Limited
Mears 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
MHM Property Services Limited
MPM Housing Limited
MPS Housing Limited
Morrison Facilities Services Limited
Nurseplus Limited
O&T Developments Limited
Omega Housing Limited
Planning Portal Limited
Plexus UK (First Project) Limited
PortalPlanQuest Limited
Potton Road Management Company Limited
PS Business Services Limited
PS Payroll Services 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

Proportion
held

Country of registration

Nature of business

99.99%
90%
100%
100%
90%
100%
66.67%
66.67%
100%
100%
100%
100%
100%
100%
100%
100%
100%
75%
100%
75%
90%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

Guernsey
England and Wales
England and Wales
England and Wales
England and Wales
Scotland
Scotland
Scotland
England and Wales
England and Wales
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
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

Insurance services
Training provider
Maintenance services
Dormant
House building
Dormant
Maintenance services
Maintenance services
Dormant
Dormant
Maintenance services
Support services
Maintenance services
Maintenance services
Dormant
Housing management services
Housing registered provider
Dormant
Housing registered provider
Professional services
Dormant
Dormant
Dormant
Dormant
Dormant
Maintenance services
Dormant
Dormant
Housing management services
Housing management services
Dormant
Dormant
Professional services

All subsidiary undertakings with the exception of Evolve Housing Limited and Manchester Working Limited prepare accounts to 31 December.
Evolve Housing Limited prepares accounts to 30 June in line with its historical accounting reference date. Manchester Working Limited prepares
accounts to 31 March in line with the minority shareholder.

133

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information16. Investments continued
The Group includes the following five trading subsidiaries with non-controlling interests: Manchester Working Limited, Mears Learning Limited,
Mears New Homes Limited, Mears Scotland LLP and PortalPlanQuest Limited. 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 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
Non-current liabilities

Total assets less total liabilities

Equity shareholders’ funds
Non-controlling interests

Total equity

The Group held investments in the following joint ventures at 31 December 2018:

Asert LLP
Sapphire Homes London Limited
Sapphire Homes London No. 1 Limited
Sapphire Homes London No. 2 Limited
Sapphire Homes London No. 3 Limited
Sapphire Homes London No. 4 Limited
Sapphire Homes London No. 5 Limited
Sapphire Homes London No. 6 Limited
Talking Assets Limited
YourMK LLP

The carrying amount of the above joint ventures was £nil (2017: £nil).

2018
£’000

2017
£’000

112,612
(108,835)

121,392
(117,185)

3,777
–

3,777

761

–

314
58,633
(24,825)
(33,887)

235

662
(427)

235

4,207
–

4,207

1,263

–

1,469
41,019
(18,254)
(22,337)

1,897

1,801
96

1,897

Proportion
held

Country of registration

Nature of business

50%
50%
50%
50%
50%
50%
50%
50%
50%
50%

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

Dormant
Property acquisition
Property acquisition
Property acquisition
Dormant
Dormant
Dormant
Dormant
Dormant
Maintenance services

134

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201816. 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 ended
31 December 2018:

3c Asset Management Limited
Ardmore Home Care Limited
Coulter Estates Limited
Heatherpark Community Services Limited
ILS Group Limited
Independent Living Services (ILS) Limited
Jackson Lloyd Limited
Let to Birmingham Limited
Mears Care (Northern Ireland) Limited
Mears Community Care Agency Limited
Mears Estates Limited
Mears Home Improvement Limited
Mears Housing Management (Holdings) Limited
Mears Housing Portfolio (Holdings) Limited
Mears Housing Portfolio (London) Limited
Mears Housing Portfolio 1 Limited
Mears Housing Portfolio 2 Limited
Mears Housing Portfolio 3 Limited
Mears Housing Portfolio 4 Limited
MHM Property Services Limited
Nurseplus Limited
Scion Group Limited
Scion Technical Services Limited

17. Assets held for sale

Property held for sale

Registration
number

02859913
NI028313
SC148145
SC314108
SC285635
SC184499
00981979
08757503
NI035273
03485601
03720903
03716517
04726480
10908305
10953521
10953330
10952666
10953300
10952906
07448134
SC200513
03905442
03671450

2018
£’000

2017
£’000

12,442

13,941

During the year, the Group acquired, held and disposed of property assets that are classified as held for sale prior to their disposal to long-term
funding partners. These acquisitions were funded by a £15m (2017: £30m) rolling credit facility which is separate from the Group’s main facility.

18. Inventories

Materials and consumables
Work in progress

2018
£’000

5,951
23,800

29,751

2017
£’000

5,559
13,146

18,705

The Group consumed inventories totalling £662.8m during the year (2017: £676.5m). No items are being carried at fair value less costs to sell
(2017: £nil).

19. Construction contracts
Revenue of £39.1m (2017: £26.1m) relating to construction contracts has been included in the Consolidated Income Statement.

Contract costs incurred
Recognised gross profits
Recognised gross losses

Balances outstanding comprise:
~ due from customers for construction contract work

2018
£’000

34,557
4,542
–

39,099

2017
£’000

22,953
3,130
–

26,083

3,907

1,332

135

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information20. Trade and other receivables

Current assets:
~ trade receivables
~ contract assets on non-construction contracts
~ prepayments and accrued income

Total trade and other receivables

2018
£’000

2017
£’000

63,787
95,441
18,966

51,602
88,948
13,362

178,194

153,912

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

21. Trade and other payables

Trade payables
Accruals and contract liabilities
Social security and other taxes
Contract liabilities for non-construction contract work
Finance lease liabilities
Other creditors

2018
£’000

52,879
5,826
5,082

63,787

2018
£’000

100,664
59,373
20,348
613
376
5,859

2017
£’000

44,717
2,323
4,562

51,602

2017
£’000

103,432
45,905
18,425
326
304
16,092

187,233

184,484

Due to the short duration of trade payables, management considers the carrying amounts recognised in the Consolidated Balance Sheet to be
a reasonable approximation of their fair value.

Included in other creditors is £2.0m (2017: £nil) relating to contingent consideration on acquisitions, £nil (2017: £5.0m) relating to deferred
consideration on acquisitions and £nil (2017: £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.

22. Financial liabilities

Current liabilities:
~ interest rate swaps
Non-current liabilities:
~ interest rate swaps

Total financial liabilities

23. Long-term other liabilities

Finance lease liabilities
Other creditors

Other creditors

136

2018
£’000

2017
£’000

2018
£’000

892
6,586

7,478

253

332

2017
£’000

540
4,496

5,036

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201824. 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
Amortised cost
Trade receivables
Cash at bank and in hand

Financial liabilities
Fair value (level 2)
Interest rate swaps – effective
Fair value (level 3)
Deferred consideration in respect of acquisitions
Contingent consideration in respect of acquisitions
Amortised cost
Borrowings related to assets held for sale
Bank borrowings and overdrafts
Trade payables
Accruals and contract liabilities
Other creditors

2018
£’000

2017
£’000

63,787
27,876

91,663

51,602
24,770

76,372

(56)

(332)

–
(2,000)

(11,163)
–

(15,000)
(93,780)
(100,664)
(59,373)
(11,714)

(13,941)
(50,559)
(103,432)
(45,905)
(10,269)

(282,587)

(246,460)

(190,924)

(170,088)

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 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 (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.

137

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information24. 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 £185m with Barclays Bank PLC, HSBC Bank PLC and Lloyds Bank PLC, of which £110m was utilised at
31 December 2018.

The facilities comprise a committed four-year £130.0m revolving credit facility, a 364-day £15.0m loan and an unsecured overdraft facility of £10.0m.
The undrawn amounts at 31 December 2018 were a £65.0m revolving credit facility and an overdraft facility of £10.0m. In addition, the Group has a
property acquisition credit facility of £30m to acquire and build portfolios for resale. At 31 December 2018, assets held for resale utilising this facility
amounted to £12.4m (2017: 13.9m). At 31 December 2018, the associated draw-down for these acquisitions was £15.0m (2017: £13.9m), funding
both these assets for resale together with also part-funding the modular homes included within fixed assets.

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 2018 was:

Financial liabilities – 2018

Financial liabilities – 2017

Interest rate

Fixed
£’000

70,000

64,500

Floating
£’000

40,000

Zero
£’000

Total
£’000

–

110,000

–

11,163

75,663

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 2018 the Group had hedged the first £70.0m of the £185.0m total borrowing facilities by entering into interest rate
swap arrangements with Barclays Bank PLC and HSBC Bank PLC. The arrangement with Barclays Bank PLC consists of two £15.0m swap contracts
expiring in August 2021, with quarterly maturity, matching the underlying facility. The arrangement with HSBC Bank PLC consists of three swap
contracts totalling £40.0m expiring in December 2020, 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

2018

2017

Nominal
amount
hedged
£’000

Average
applicable
interest rates
%

Nominal
amount
hedged
£’000

Average
applicable
interest rates
%

–
40,000
30,000
–

–
0.84%
0.96%
–

30,000
–
40,000
–

1.85%
–
0.84%
–

Effective interest rates
Interest rate swaps with fair value liabilities of £0.1m (2017: £0.3m) and average remaining lives of two years and five months have been accounted
for in financial liabilities.

The Group’s overall average cost of debt, including effective interest rate swaps, is 2.5% as at 31 December 2018 (2017: 2.3%). Excluding these swaps
the average is 2.3% (2017: 1.6%).

138

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201824. Financial instruments continued
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.

Movements during the year were:

At 1 January 2017
Amounts transferred to the Consolidated Income Statement
Revaluations during the year
Deferred tax movement

At 1 January 2018
Amounts transferred to the Consolidated Income Statement
Revaluations during the year
Deferred tax movement

At 31 December 2018

£’000

(774)
645
(54)
(143)

(326)
325
–
(45)

(46)

At 31 December 2018 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 2018 and reserves would decrease or increase, respectively, by £0.4m (2017: £0.3m).

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 forecast 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:

2018
Non-derivative financial liabilities
Borrowings related to assets held for sale
Bank borrowings
Trade and other payables
Deferred and contingent consideration in respect of acquisitions
Derivative financial liabilities
Interest rate swaps – effective

2017
Non-derivative financial liabilities
Borrowings related to assets held for sale
Bank borrowings
Trade and other payables
Deferred and contingent consideration in respect of acquisitions
Derivative financial liabilities
Interest rate swaps – effective

Within 1 year
£’000

1–2 years
£’000

2–5 years
£’000

Over 5 years
£’000

Total
£’000

15,000
15,000
163,813
–

–
–
6,669
–

–
78,780
–
–

–

13,941
–
154,606
11,163

253

–
–
4,155
–

–
50,559
–
–

–
–
–
–

–

–
–
–
–

–

15,000
93,780
170,482
–

13,941
50,559
158,761
11,163

332

The Group has disclosed core bank borrowings of £80.0m 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.

139

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information24. Financial instruments continued
Credit risk management
The Group’s credit risk is primarily attributable to its trade receivables, contract assets and work in progress.

Trade receivables are normally due within 30 to 60 days. Trade and other receivables included in the Consolidated 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 NHS Trusts.
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 20.

Deferred and contingent consideration
The table below shows the movements in deferred and contingent consideration:

At 1 January 2017
Paid in respect of acquisitions
Released on reassessment

At 1 January 2018
Increase due to new acquisitions in the year
Paid in respect of acquisitions

At 31 December 2018

Deferred
£’000

Contingent
£’000

16,163
(5,000)
–

11,163
–
(11,163)

–

294
–
(294)

–
2,000
–

2,000

Total
£’000

16,457
(5,000)
(294)

11,163
2,000
(11,163)

2,000

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 on 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.

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.

The Group considers its revolving credit facility to be an integral part of its cash management:
~ cash at bank and in hand
~ revolving credit facility

Cash and cash equivalents, including revolving credit facility

2018
£’000

2017
£’000

27,876
(93,780)

(65,904)

24,770
(50,559)

(25,789)

140

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201825. Deferred taxation
Deferred tax is calculated on temporary differences under the liability method.

Deferred tax assets
The following deferred tax assets were recognised by the Group as at 31 December 2018:

At 1 January 2017
(Debit)/credit to Consolidated Income Statement
Debit to Consolidated Statement of Changes in Equity
(Debit)/credit to Consolidated Statement of
Comprehensive Income

At 1 January 2018
Impact of change in accounting policies

Adjusted balance at 1 January 2018

(Debit)/credit to Consolidated Income Statement
Debit to Consolidated Statement of Changes in Equity
(Debit)/credit to Consolidated Statement of
Comprehensive Income
Resulting from business combinations

At 31 December 2018

Pension
scheme
£’000

Share-based
payments
£’000

Cash flow
hedges
£’000

1,513
(84)
–

(397)

1,032
–

1,032

(66)
–

(243)
–

723

340
(267)
404

–

477
–

477

116
14

–
–

607

–
199
–

(143)

56
–

–
–

(45)
–

Short-term
temporary
differences
£’000

1,679
(87)
–

–

1,592
6,013

7,605

(5,853)
–

–
1,000

2,752

Tax losses
£’000

2,172
(1,015)
–

–

1,157
–

1,157

250
–

–
–

1,407

Total
£’000

5,704
(1,254)
404

(540)

4,314
6,013

10,327

(5,553)
14

(288)
1,000

5,500

In accordance with IFRS 2 ‘Share-based Payment’, 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 on 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, unused tax losses totalling £28.4m (2017: £34.2m) have not been recognised as the Directors do not consider that
it is probable that they will be recovered.

Deferred tax liabilities
The following deferred tax liabilities were recognised by the Group as at 31 December 2018:

At 1 January 2017
(Credit)/debit to Consolidated Income Statement
Debit to Consolidated Statement of Comprehensive Income

At 1 January 2018
(Credit)/debit to Consolidated Income Statement
Debit to Consolidated Statement of Comprehensive Income
Resulting from business combinations

At 31 December 2018

Pension
scheme
£’000

Acquisition
intangibles
£’000

Cash flow
hedges
£’000

3,127
(90)
2,240

5,277
58
(2,035)
–

3,300

3,904
(2,083)
–

1,821
(842)
–
3,431

4,410

89
(89)
–

–
–
–
–

–

Total
£’000

7,120
(2,262)
2,240

7,098
(784)
(2,035)
3,431

7,710

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.

141

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information26. 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 Consolidated 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 2006.

Share capital

Allotted, called up and fully paid
At 1 January 103,567,091 (2017: 102,559,799) ordinary shares of 1p each
Issue of 133,164 (2017: 1,007,292) shares on exercise of share options
Issue of 6,787,331 (2017: nil) shares as a placement

At 31 December 110,487,586 (2017: 103,567,091) ordinary shares of 1p each

2018
£’000

1,036
1
68

1,105

2017
£’000

1,026
10
–

1,036

During the year 133,164 (2017: 1,007,292) ordinary 1p shares were issued in respect of share options exercised. In addition, the Group raised funds
through a placement of 6,787,331 (2017: nil) ordinary 1p shares. The difference between the nominal value of £0.07m and the total consideration of
£22.02m has been credited to the share premium account.

27. 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:

2018
£’000

5,804
37
44
6,843
552
(655)
(389)
3,405

15,641

Finance
leases

113
2,685
(1,954)

844

903
(479)

2017
£’000

6,105
24
(961)
12,768
826
31
(351)
2,706

21,148

Total

65,391
2,685
(2,732)

65,344

903
43,801

Revolving
credit facility

Borrowings
relating to
assets held
for resale

65,278
–
(14,719)

50,559

–
43,221

93,780

–
–
13,941

13,941

–
1,059

15,000

1,268

110,048

Depreciation
Loss on disposal of property, plant and equipment
Profit on disposal of subsidiary
Amortisation
Share-based payments
IAS 19 pension movement
Finance income
Finance cost

Total

Movements in financing liabilities during the year are as follows:

At 1 January 2017
Inception of new finance leases
Cash inflows/(outflows)

At 1 January 2018

Inception of new finance leases
Cash inflows/(outflows)

At 31 December 2018

142

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201828. Acquisitions and disposals
On 30 November 2018 the Group acquired certain business assets and contracts from the Mitie property services division. The transaction was
facilitated via the purchase of the entire share capital of MPM Housing Limited and MPS Housing Limited for a total consideration of £22.5m.
In addition, contingent consideration of a maximum of £12.5m may become payable based on a multiple of profit before tax for the acquired
entities. The Directors have assessed the fair value of this contingent consideration as £2.0m. This is based on the present value of the expected
consideration to be paid calculated by reference to anticipated profits of the business over the next two years. It is primarily sensitive to changes
in those anticipated profits.

The acquisition was undertaken in order to strengthen the Group’s offering in its Housing segment. It provides access to new clients and has
significant synergies with the wider Group.

The effect of the acquisition of MPM and MPS is disclosed below.

Assets
Non-current
Property, plant and equipment
Deferred tax asset
Current
Trade receivables
Other receivables

Total assets

Liabilities
Current
Bank overdraft
Trade payables
Other payables

Total liabilities

Net assets acquired at fair value
Intangible assets recognised
Deferred tax recognised in respect of intangible assets

Goodwill

Satisfied by:
~ cash
~ contingent consideration

Total
£’000

248
1,000

32,175
7,278

40,701

(4,185)
(10,985)
(18.423)

(33,593)

7,108
17,392
(3,304)

21,196
3,304

24,500

22,500
2,000

24,500

In addition to the amounts noted above, the Group acquired £0.6m of liabilities in respect of a further acquisition. This other acquisition resulted
in £0.6m of intangibles capitalised, a £0.1m deferred tax liability and £0.1m of goodwill capitalised.

Intangible assets of £18.1m have been recognised in respect of these acquisitions. They represent the expected value to be derived from the existing
order books of the acquired businesses. The Directors consider that the value assigned to goodwill represents the benefits to the Group arising from
synergies with its existing business.

The trade receivables detailed above are disclosed net of provisions totalling £4.3m and therefore the gross contractual amounts receivable total
£36.5m. All the effects of these acquisitions on the Group’s assets and liabilities are disclosed as provisional due to the proximity of the acquisitions
to the balance sheet date.

In the period ended 31 December 2018, the acquisitions contributed revenue of £9.0m and a £0.5m operating loss before amortisation
of acquisition intangibles.

For the year ended 31 December 2018, had the acquisitions taken place on 1 January 2018, the combined Group full year revenue is estimated
at £998.3m and the combined Group profit for the year before taxation is estimated at £24.7m.

143

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information28. Acquisitions and disposals continued
Analysis of net outflow in respect of the purchase of the subsidiary undertakings:

Cash consideration
Net overdraft acquired with subsidiary undertakings
Net cash disposed of with subsidiary
Transactions with non-controlling interests
Cash payments in respect of prior year acquisitions

Total
£’000

(22,500)
(4,185)
(26)
(6,163)
(5,000)

(37,874)

On 1 January 2018 the Group reassessed the level of control it held over Mears 24/7 LLP and concluded that the threshold for control was no longer
being met. As a result, the Group has not consolidated the results of Mears 24/7 LLP from 1 January 2018 and net assets of £0.04m, including cash
of £0.03m, were derecognised. The Group ceased to be a partner on 12 September 2018.

On 4 January 2018, the Group acquired the remaining 25% of the share capital of O&T Developments Limited, Tando Property Services Limited and
Tando Homes Limited for a total consideration of £6.2m.

29. 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 £4.0m (2017: £3.0m) to these schemes.

IAS 19 ‘Employee Benefits’
The Group contributes to 30 (2017: 30) 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 pension assets. 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 (2017: two) Group defined benefit schemes and the 28 (2017: 28) 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 2018 by qualified independent actuaries using the projected unit funding 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

144

2018

2017

2.00%
3.15%
3.15%
2.20%
3.05%
1.90%
2.45%
2.95%
3.15%
2.15%
22.3 years
24.5 years

2.00%
2.00%
3.10%
2.25%
3.05%
1.95%
2.45%
2.70%
3.10%
2.20%
22.4 years
24.7 years

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201829. 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
Property – quoted
Property – unquoted
Cash

Group’s estimated asset share
Present value of funded scheme liabilities

Funded status

Guarantee
Scheme surpluses not recognised as assets

Group
schemes
£’000

29,567
–
93,562
–
4,352
–
25,391

152,872
(136,548)

16,324

–
–

2018

Other
schemes
£’000

153,190
13,927
58,113
2,106
6,215
5,875
29,348

Total
£’000

182,757
13,927
151,675
2,106
10,567
5,875
54,739

268,774
(282,368)

421,646
(418,916)

(13,594)

16,947
(6,111)

2,730

16,947
(6,111)

Group
schemes
£’000

54,481
–
74,412
–
4,258
–
24,174

157,325
(132,591)

24,734

–
–

2017

Other
schemes
£’000

202,333
21,669
67,850
2,418
6,258
13,562
31,437

345,527
(324,920)

20,607

7,026
(30,025)

Total
£’000

256,814
21,669
142,262
2,418
10,516
13,562
55,611

502,852
(457,511)

45,341

7,026
(30,025)

Pension asset/(liability)

16,324

(2,758)

13,566

24,734

(2,392)

22,342

The amounts recognised in the Consolidated Income Statement are as follows:

Current service cost
Past service cost
Settlement and curtailment
Administration costs

Total operating charge
Net interest

Total charged to the result for the year

Group
schemes
£’000

2,091
150
–
121

2,362
(730)

1,632

2018

Other
schemes
£’000

3,483
–
(234)
–

3,249
34

3,283

Total
£’000

5,574
150
(234)
121

5,611
(696)

4,915

Group
schemes
£’000

2,826
–
–
142

2,968
(246)

2,722

2017

Other
schemes
£’000

3,252
199
–
72

3,523
25

3,548

Total
£’000

6,078
199
–
214

6,491
(221)

6,270

Past service cost above includes a charge of £150,000 in respect of the Group’s estimate of the impact of GMP equalisation, following the recent
Lloyds Banking Group ruling.

Cumulative actuarial gains and losses recognised in equity are as follows:

On TUPE transfer of employees
Return on plan assets in excess of that recorded in
net interest
Actuarial gain/(loss) arising from changes in
demographic assumptions
Actuarial (loss)/gain arising from changes in
financial assumptions
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

Group
schemes
£’000

2018

Other
schemes
£’000

Total
£’000

Group
schemes
£’000

2017

Other
schemes
£’000

–

(21,303)

–

(373)

Total
£’000

(373)

(7,270)

(19,427)

(26,697)

3,942

(6,918)

(2,976)

(5,601)

221

(5,380)

15,686

1,082

16,768

7,197
(3,967)
–

(9,641)
6,807

(2,834)

17,293
(676)
24,102

210
(5,592)

(5,382)

24,490
(4,643)
24,102

(9,431)
1,215

(8,216)

(7,064)
(28)
–

12,536
(5,729)

6,807

(9,617)
31,447
(14,278)

1,343
(6,935)

(5,592)

(16,681)
31,419
(14,278)

13,879
(12,664)

1,215

145

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information29. Pensions continued
IAS 19 ‘Employee Benefits’ continued
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
Scheme administration costs
Interest on obligations
Plan participants’ contributions
Benefits paid
Contract transfer
Settlements
Actuarial gain arising from changes in
demographic assumptions
Actuarial loss arising from changes in financial assumptions
Actuarial loss/(gain) arising from liability experience

Group
schemes
£’000

132,591
2,241
–
–
3,560
321
(4,536)
–
–

5,601
(7,197)
3,967

2018

Other
schemes
£’000

324,920
3,483
–
–
7,499
1,064
(5,751)
(31,907)
(2,062)

(221)
(15,333)
676

Total
£’000

457,511
5,724
–
–
11,059
1,385
(10,287)
(31,907)
(2,062)

5,380
(22,530)
4,643

Group
schemes
£’000

137,721
2,826
–
–
4,148
374
(3,884)
–
–

(15,686)
7,064
28

2017

Other
schemes
£’000

410,258
3,252
199
22
9,052
1,136
(6,107)
(72,584)
–

(1,082)
12,221
(31,447)

Total
£’000

547,979
6,078
199
22
13,200
1,510
(9,991)
(72,584)
–

(16,768)
19,285
(31,419)

Present value of obligations at 31 December

136,548

282,368

418,916

132,591

324,920

457,511

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
Employer’s contributions
Plan participants’ contributions
Benefits paid
Scheme administration costs
Contract transfer
Settlements
Return on plan assets above/(below) that recorded in
net interest

Group
schemes
£’000

157,325
4,290
2,863
321
(4,536)
(121)
–
–

2018

Other
schemes
£’000

352,553
7,653
2,707
1,064
(5,751)
–
(53,210)
(1,828)

Total
£’000

509,878
11,943
5,570
1,385
(10,287)
(121)
(53,210)
(1,828)

Group
schemes
£’000

149,529
4,394
3,112
374
(3,884)
(142)
–
–

2017

Other
schemes
£’000

422,691
9,027
3,127
1,136
(6,107)
(50)
(72,957)
–

Total
£’000

572,220
13,421
6,239
1,510
(9,991)
(192)
(72,957)
–

(7,270)

(17,467)

(24,737)

3,942

(4,314)

(372)

Fair value of plan assets at 31 December

152,872

285,721

438,593

157,325

352,553

509,878

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

Group schemes

2018
£’000

2017
£’000

2016
£’000

2015
£’000

2014
£’000

152,872
(136,548)

157,325
(132,591)

149,529
(137,721)

116,512
(111,327)

115,818
(106,710)

16,324

24,734

11,808

5,185

9,108

(7,270)
(4.8%)

3,967
2.9%

3,942
2.5%

28
0.0%

27,129
18.1%

(1,000)
(0.7%)

(4,984)
(4.3%)

(5,193)
(4.7%)

10,624
9.2%

(910)
(0.9%)

146

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

2018
£’000

285,721
(282,368)

3,353
(6,111)

(2,758)

2017
£’000

352,553
(324,920)

27,633
(30,025)

(2,392)

(25,033)
(8.8%)

(4,314)
(1.2%)

676
0.2%

(31,447)
(9.7%)

Other schemes

2016
£’000

2015
£’000

2014
£’000

422,691
(410,258)

352,690
(333,839)

347,034
(331,666)

12,433
(15,747)

(3,314)

59,020
14.0%

(1,714)
(0.4%)

18,851
(19,988)

(1,137)

(7,406)
(2.1%)

(819)
(0.2%)

15,368
(17,717)

(2,349)

22,125
6.4%

(9,828)
(3.0%)

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 2019 amount to £5.4m.

Each of the schemes manages 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 2018.

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

30. 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

(1,552)
(139)
3,283
(5,704)

1,141
134
(3,058)
6,131

Land and buildings

Other

2018
£’000

2017
£’000

2018
£’000

2017
£’000

44,899
38,877
69,583

42,520
29,829
44,051

153,359

116,400

13,523
17,290
–

30,813

14,038
14,511
–

29,600

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.

31. Capital commitments
The Group had no capital commitments at 31 December 2018 or at 31 December 2017.

32. Contingent liabilities
The Group has guaranteed that it will complete certain Group contracts that it has commenced. At 31 December 2018 these guarantees amounted to
£18.7m (2017: £21.7m).

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 (‘Haydon LLC’). The guarantees will fall away as the final accounts are agreed and the associated guarantees released.
As at 31 December 2018, guarantees amounted to £3.9m (2017: £3.8m) and a balance of £2.2m has been provided for against this balance.

The Group had no other contingent liabilities at 31 December 2018 or at 31 December 2017.

147

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information33. 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 29 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

2018
%

0.3

2018
£’000

1,778
121
100

1,999

2017
%

0.4

2017
£’000

1,765
161
150

2,076

Further details of Directors’ remuneration are disclosed within the Remuneration Report.

Dividends totalling £0.04m (2017: £0.04m) were paid to Directors during the year.

Transactions with other related parties
During the year the Group made additional loans to YourMK LLP, an entity in which the Group is a 50% member, totalling £0.1m (2017: £0.2m).
At 31 December 2018, the Group was owed £0.5m (2017: £0.4m) by YourMK LLP.

148

Financial statementsNotes to the financial statements – Group continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 2018Financial 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 101 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 2006 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 101 and has therefore not
provided a cash flow statement 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 value. 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.

149

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationFinancial 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.

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 Consolidated Income
Statement. The amount charged to the Consolidated 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.

Investments
Investments in equity shares which are not publicly traded and where fair value cannot be measured reliably are measured at cost less impairment.
Dividends on equity securities are recognised in income when receivable.

Financial instruments
Financial assets and liabilities are recognised in the Consolidated 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 rate 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; (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.

150

Mears Group PLC Annual Report and Accounts 2018Retirement benefits 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 Consolidated
Income Statement.

The gain or loss recognised in other comprehensive income is reclassified to the Consolidated 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.

Critical judgements and key sources of estimation uncertainty
Critical judgements in applying the Company’s accounting policies and key sources of estimation uncertainty are disclosed in the Group’s accounting
policies on pages 112 to 113.

151

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationFinancial statements
Parent Company balance sheet
As at 31 December 2018

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

2018
£’000

–
58,123

58,123

2017
£’000

–
58,123

58,123

194,112
191

194,303
(38,848)

143,944
2,276

146,220
(5,141)

155,455

141,079

213,578
(78,795)

199,202
(50,079)

(1,044)

(2,574)

133,739

146,549

1,105
82,224
2,021
(46)
48,435

1,036
60,204
1,469
(326)
84,166

133,739

146,549

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 loss of £23.2m (2017 profit: £49.3m) which is dealt with in the financial statements
of the Company.

The financial statements were approved by the Board of Directors on 22 March 2019.

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.

152

Mears Group PLC Annual Report and Accounts 2018

Financial statements
Parent Company statement of changes in equity
For the year ended 31 December 2018

At 1 January 2017

Net result for the year
Other comprehensive expense

Total comprehensive (expense)/income for the year

Issue of shares
Share option charges
Share option exercises
Dividends

At 1 January 2018
Impact of change in accounting policies

Adjusted balance at 1 January 2018

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 2018

Share
capital
£’000

1,026

–
–

–

10
–
–
–

1,036
–

1,036

–
–

–

69
–
–

1,105

Share
premium
account
£’000

58,320

–
–

–

1,884
–
–
–

60,204
–

60,204

–
–

–

22,020
–
–

82,224

Share-
based
payment
reserve
£’000

1,975

–
–

–

–
826
(1,332)
–

1,469
–

1,469

–
–

–

–
552
–

Hedging
reserve
£’000

(774)

–
448

448

–
–
–
–

(326)
–

(326)

–
280

280

–
–
–

Retained
earnings
£’000

45,184

49,263
605

49,868

–
–
1,332
(12,218)

84,166
(443)

Total
equity
£’000

105,731

49,263
1,053

50,316

1,894
826
–
(12,218)

146,549
(443)

83,723

146,106

(23,239)
490

(23,239)
770

(22,749)

(22,469)

–
–
(12,539)

22,089
552
(12,539)

2,021

(46)

48,435

133,739

The accompanying accounting policies and notes form an integral part of these financial statements.

153

1. Result for the financial year
This result for the year is stated after charging auditor’s remuneration of £55,000 (2017: £65,000) relating to audit services.

2. Directors and employees
Employee benefits expense

Wages and salaries
Social security costs
Other pension costs

The average number of employees of the Company during the year was:

Management

Remuneration in respect of Directors was as follows:

Emoluments
Gains made on the exercise of share options
Pension contributions to personal pension schemes

2018
£’000

13,755
1,920
774

16,449

2017
£’000

17,891
2,477
795

21,163

2018
Number

339

2017
Number

411

2018
£’000

1,507
–
121

1,628

2017
£’000

1,389
1,148
161

2,698

During the year contributions were paid to personal pension schemes for three Directors (2017: four).

During the year no Directors (2017: three) exercised share options.

3. Share-based employee remuneration
As at 31 December 2018 the Group maintained six share-based payment schemes for employee remuneration. The details of each scheme are
included within note 7 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 2018 (2017: £0.2m), which gave
rise to additional paid-in capital.

4. Dividends
The following dividends were paid on ordinary shares in the year:

Final 2017 dividend of 8.55p (2017: final 2016 dividend of 8.40p) per share
Interim 2018 dividend of 3.55p (2017: interim 2017 dividend of 3.45p) per share

2018
£’000

8,860
3,679

2017
£’000

8,651
3,567

12,539

12,218

The proposed final 2018 dividend of 8.85p per share has not been included within the financial statements as no obligation existed at
31 December 2018.

5. Fixed asset investments

At 1 January 2018 and 31 December 2018

Investment
in subsidiary
undertakings
£’000

58,123

Details of the subsidiary undertakings of the Company are shown in note 16 to the consolidated financial statements.

154

Mears Group PLC Annual Report and Accounts 20186. Debtors

Amounts owed by Group undertakings
Other receivables
Deferred tax asset

2018
£’000

193,084
498
530

2017
£’000

142,531
868
545

194,112

143,944

The deferred tax asset above of £0.5m (2017: £0.5m) 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.

7. Creditors: amounts falling due within one year

Bank loan
Bank overdraft
Interest rate swaps
Accruals
Corporation tax
Other payables

8. Creditors: amounts falling due in more than one year

Bank borrowings
Contingent consideration
Interest rate swaps

2018
£’000

15,000
21,032
41
2,292
453
30

38,848

2018
£’000

78,780
–
15

78,795

2017
£’000

–
–
253
4,061
347
480

5,141

2017
£’000

50,000
–
79

50,079

The Company has disclosed core bank borrowings of £78.8m 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 £nil (2017: £nil) relating to deferred consideration on acquisitions.

9. Financial instruments
The Company has the following financial instruments:

Financial assets that are debt instruments measured at amortised cost:
~ other receivables

Financial liabilities that are measured at fair value through other comprehensive income:
~ interest rate swaps

Financial liabilities that are measured at amortised cost:
~ bank borrowings
~ accruals
~ other payables

2018
£’000

2017
£’000

–

(56)

(332)

(93,780)
(3,902)
(30)

(50,000)
(4,061)
(480)

(97,712)

(54,541)

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 draw-downs 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 draw-downs 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 2018, these consist of
two £15.0m swap contracts expiring in August 2021 with a fixed interest rate of 0.96%, one £20.0m swap contract expiring in December 2020 with a
fixed interest rate of 0.84% and two £10.0m swap contracts expiring in December 2020 with fixed interest rates of 0.84%. The swaps have quarterly
maturity matching the underlying debt.

155

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information9. Financial instruments continued
These instruments are used to mitigate the Company’s exposure to any interest rate movements. The fair value of the interest rate swaps is a liability
of £0.1m (2017: £0.3m).

During 2018, a hedging loss of £nil (2017: £0.1m) was recognised in other comprehensive income for changes in the fair value of the interest rate
swap and £0.3m (2017: £0.6m) was reclassified from the hedge reserve to profit and loss.

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 forecast 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.

10. Share capital and reserves

At 31 December 110,487,586 (2017: 103,567,091) ordinary shares of 1p each

2018
£’000

1,036
1
68

1,105

2017
£’000

1,026
10
–

1,036

During the year 133,164 (2017: 1,007,292) ordinary 1p shares were issued in respect of share options exercised. In addition, the Group raised funds
through a placement of 6,787,331 (2017: nil) ordinary 1p shares. The difference between the nominal value of £0.07m and the total consideration
of £22.02m 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.

11. Capital commitments
The Company had no capital commitments at 31 December 2018 or at 31 December 2017.

12. Contingent liabilities
The Company has guaranteed that it will complete certain Group contracts that its subsidiaries have commenced. At 31 December 2018 these
guarantees amounted to £18.7m (2017: £21.7m).

As detailed in note 7 to the Group financial statements, the Group has a facility in place guaranteeing the performance of a number of M&E projects
in Haydon Mechanical and Electrical Company LLC (‘Haydon LLC’). The guarantees will fall away as the final accounts are agreed and the associated
guarantees released. As at 31 December 2018, guarantees amounted to £3.9m (2017: £3.8m) and a balance of £2.2m has been provided for against
this balance.

The Company had no other contingent liabilities at 31 December 2018 or at 31 December 2017.

156

Financial statementsNotes to the financial statements – Company continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 201813. 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 2018
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

2018

2017

2.00%
3.15%
3.15%
3.05%
2.45%
2.95%
3.15%
2.15%
20.9 years
23.8 years

2.00%
2.00%
3.10%
3.05%
2.45%
2.80%
3.10%
2.20%
21.9 years
23.7 years

The amounts recognised in the Parent Company Balance Sheet and major categories of plan assets as a percentage of total plan assets are:

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

Total operating charge
Net interest

Total charged to the result for the year

Present value of obligations at 1 January
Current 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

2018
£’000

7,721
9,734
1,488

18,943
(19,987)

(1,044)
198
(846)

2018
£’000

36
–

36
58

2018
£’000

20,992
36
581
5
(502)
(430)
(574)
(121)

19,987

2017
£’000

9,860
7,718
840

18,418
(20,992)

(2,574)
489
(2,085)

2017
£’000

75
–

75
112

187

2017
£’000

21,337
75
643
10
(517)
(822)
355
(89)

20,992

157

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder information13. 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
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
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

2018
£’000

18,418
523
1,019
5
(502)
(520)

2017
£’000

17,153
531
1,050
10
(517)
191

18,943

18,418

2018
£’000

(2,574)
(36)
1,019
(58)
430
574
121
(520)

(1,044)

2017
£’000

(4,184)
(75)
1,050
(112)
822
(355)
89
191

(2,574)

The employer’s contributions expected to be paid during the financial year ending 31 December 2019 amount to £0.4m.

14. 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 13 to the financial statements.

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 33 to the
consolidated financial statements.

158

Financial statementsNotes to the financial statements – Company continuedFor the year ended 31 December 2018Mears Group PLC Annual Report and Accounts 2018Shareholder information
Five-year record (unaudited)

Consolidated Income Statement (continuing activities)

Revenue by business segment
Housing
Care

Continuing activities

Gross profit
Operating profit before acquisition intangible amortisation and exceptional
costs
Exceptional items
Operating profit
Profit for the year before tax
PBT before acquisition intangible amortisation and exceptional costs

Earnings per share
Basic
Diluted
Normalised

Dividends per share

Consolidated Balance Sheet

Non-current assets
Current assets
Current liabilities
Non-current liabilities

Total equity

2018
£’000

2017
£’000

2016
£’000

2015
£’000

2014
£’000

753,230
116,613

869,843

207,018

40,841
(5,657)
30,750
28,431
38,522

23.05p
22.91p
29.06p

12.40p

2018
£’000

276,467
248,872
(217,274)
(97,785)

766,121
134,063

900,184

223,702

39,151
–
28,513
26,484
37,122

20.28p
20.10p
28.05p

12.00p

787,530
152,570

940,100

244,894

41,850
–
31,160
29,372
40,062

23.54p
23.41p
30.36p

11.70p

735,129
146,010

881,139

232,132

38,662
–
27,825
25,920
36,757

20.31p
20.10p
27.94p

11.00p

714,733
124,007

838,740

225,041

42,995
–
30,667
29,677
42,005

25.03p
24.65p
32.20p

10.00p

2017
£’000

264,567
211,439
(198,678)
(67,738)

2017
£’000

262,263
222,158
(194,567)
(91,180)

2017
£’000

258,201
237,767
(219,882)
(84,458)

2017
£’000

268,818
217,718
(190,040)
(102,034)

210,280

209,590

198,674

191,628

194,462

Cash and cash equivalents, end of year

(65,904)

(25,789)

(12,374)

822

3,834

159

Mears Group PLC Annual Report and Accounts 2018Strategic reportCorporate governanceFinancial statementsShareholder informationJoint 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.

Shareholder information
Shareholder and corporate information

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
The Colmore Building
20 Colmore Circus
Birmingham B4 6AT

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

Financial calendar
Annual General Meeting
31 May 2019

Record date for final dividend
14 June 2019

Dividend warrants posted to shareholders
4 July 2019

Interim results announced
13 August 2019

Registered office
1390 Montpellier Court
Gloucester Business Park
Brockworth
Gloucester GL3 4AH

Tel: 01452 634600
www.mearsgroup.co.uk

Company registration number
03232863

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

160

Mears Group PLC Annual Report and Accounts 2018Consultancy, design and production
www.luminous.co.uk

Design and production

www.luminous.co.uk

Mears Group PLC
1390 Montpellier Court
Gloucester Business Park
Brockworth
Gloucester GL3 4AH

Tel: 01452 634 600