Norcros Plc Annual Report 2013

Plain-text annual report

Annual report and accounts 2013 About Norcros Focused on showers, taps, bathroom accessories, tiles and adhesives We have four complementary UK businesses: Triton Showers, Vado, Johnson Tiles and Norcros Adhesives as well as signiﬁcant operations in South Africa and interests in Australia. Our businesses have a long, successful track record of serving consumers, architects, designers, retailers and wholesalers. Our emphasis is on innovation, quality and service combined with a strong understanding of our customers’ needs. We invest signiﬁcantly and continuously in our people and processes. We are a substantial Group with consistent, high quality standards and considerable resources. We aim to use our strong brands, our innovative products and our leading market positions to drive investment returns and shareholder value. Our divisions UK South Africa Rest of the world Triton Market leader in the manufacture and marketing of showers with a strong position in UK electric and mixer shower markets. Also exports to Ireland and other overseas markets Tile Africa Tile Africa is our South African retailer of tiles, adhesives, sanitaryware and bathroom ﬁttings. The business operates from 35 showrooms located mainly in South Africa but also in Namibia and Botswana Johnson Tiles Australia Our business is an importer and distributor of tiles sourced primarily from Asia and Europe, including product sourced from Johnson Tiles in the UK. It currently has outlets in Melbourne, Sydney and Tasmania, each offering a wide choice of tiles, adhesives and related products Vado Vado is a leading manufacturer and global distributor of bathroom controls including taps, mixer showers, bathroom accessories and valves Johnson Tiles The UK market leading ceramic tile manufacturer and a market leader in the supply of both own manufactured and imported tiles Norcros Adhesives Manufacturer and supplier of adhesives, grouts, surface preparation and aftercare products for ﬁxing tiles, mosaics, natural stone and marble Johnson Tiles Johnson Tiles South Africa is the number two ceramic tile manufacturer in South Africa supplying the Tile Africa stores as well as other independent retailers, distributors and contractors TAL Our market leading adhesives business with manufacturing plants in Olifantsfontein, Durban and Cape Town. TAL not only supplies a wide range of product into the South African market, but also exports into sub-Saharan Africa Full review on pages 8 & 9 Full review on pages 10 & 11 Full review on pages 12 & 13 Highlights Fourth consecutive year of revenue and underlying operating proﬁt growth Group revenue increased by 5.2% to £210.7m (2012: £200.3m) Group underlying operating proﬁt of £13.0m (2012: £12.1m) was 7.4% higher than the prior year South Africa returned to proﬁt Vado acquisition on 31 March 2013 – ﬁrst step in a faster and focused growth strategy The Board is recommending that the ﬁnal dividend for the year be increased by 8.9% to 0.305p per share in addition to the interim dividend of 0.155p per share making a 9.5% increase on the previous year Revenue (£m) . 6 9 6 1 . 2 4 5 1 Underlying operating proﬁt (£m) Dividends per share (p) 1 . 6 9 1 . 3 0 0 2 . 7 0 1 2 £210.7m . 0 3 1 £13.0m 7 . 1 1 1 . 2 1 +5.2% 0 7 . 3 7 . +7.4% 2 4 0 . 6 3 0 . 6 4 0 . 0.46p +9.5% 09 10 11 12 13 09 10 11 12 13 l i n 09 l i n 10 11 12 13 Contents Our objectives and strategy Our long-term plan for growth and how we measure it pages 2 & 3 Our ﬁnancial performance Read a full review of our ﬁnancial year pages 14–17 How we deal with risk A comprehensive overview of our risk management procedures pages 18 & 19 Corporate responsibility See how we achieve our goals to be a responsible business pages 20 & 21 Review of the year IFC About Norcros 1 Highlights Group accounts 37 Independent auditors’ report 38 Consolidated income statement 2 Our objectives and strategy 38 Consolidated statement of comprehensive 4 8 Chairman’s statement Business review 14 Financial review Corporate governance 18 Operational risk management 20 Corporate social responsibility 22 Directors and officers 23 Advisers and company information 23 Financial calendar 24 Directors’ report 26 Corporate governance 30 Directors’ remuneration report 36 Statement of directors’ responsibilities income and expense 39 Consolidated balance sheet 40 Consolidated cash ﬂow statement 41 Consolidated statement of changes in equity 42 Notes to the group accounts Parent company accounts 66 Independent auditors’ report 67 Parent company balance sheet 68 Notes to the parent company accounts 71 Notice of annual general meeting 74 Explanatory notes Norcros plc Annual report and accounts 2013 1 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Overview Our objectives and strategy Pursue a faster and focused growth strategy to scale up the size of the Group organically and by acquisition. Norcros enjoys market leading positions and well established brands in showers, taps, bathroom accessories, tiles and adhesives. With its strong balance sheet and well invested businesses the Group is focused on enhancing shareholder value both by organic growth and through acquisition in the UK and internationally. Our strategy Pursue a faster and focused growth strategy to scale up the size of the Group organically and by acquisition Maintain investment in our strong brands and new product development Leverage revenue synergies within our portfolio of complementary businesses Target acquisitions in complementary markets with attractive returns on capital Continue to ensure high standards of corporate governance and responsibility Key strategic targets Double Group revenue by 2018 Maintain approximately 50% of Group revenue derived outside the UK Achieve a sustainable underlying return on capital employed of 12–15% Key performance indicators Revenue (£m) 1 . 6 9 1 . 3 0 0 2 . 6 9 6 1 . 2 4 5 1 Group revenue outside the UK (%) . 7 0 1 2 £210.7m . 4 8 4 . 8 8 4 . 6 9 4 . 0 9 4 . 0 8 4 48.0% +5.2% -1.0% 09 10 11 12 13 09 10 11 12 13 2 Norcros plc Annual report and accounts 2013 Acquisition of Vado In March 2013 we completed the acquisition of 100% of the share capital of Eurobath International Ltd trading as Vado. Vado is a leading manufacturer and global distributor of bathroom controls including taps, mixer showers, bathroom accessories and valves, with strong brands and a product offering positioned at the mid to high end segment of its target markets. Whilst UK revenue represents 55% of total revenue, one of the key strengths of Vado is its global distribution network which contributes the remaining 45% of total revenue. Vado exports to over 60 countries, most notably in the Middle East and Africa where it has a particularly strong presence. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S The Vado geo tap was selected for the Presidential Suite of the JW Marriott Marquis Hotel, Dubai, the world’s tallest hotel Underlying operating proﬁt (£m) Underlying return on capital employed (%) Dividends per share (p) . 0 3 1 £13.0m 1 . 2 1 7 . 1 1 . 5 2 1 3 . 2 1 . 6 2 1 12.6% 0 7 . 3 7 . +7.4% 7 7 . . 9 6 +0.3% 2 4 0 . 6 3 0 . 6 4 0 . 0.46p +9.5% 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 l i n l i n Norcros plc Annual report and accounts 2013 3 Overview Chairman’s statement With our leading brands and market positions, high quality and innovative products, strong customer relationships, talented people and successful self-help initiatives, together with the acquisition of Vado, the Board is conﬁdent that the Group is well placed to make further progress. Martin Towers Chairman Summary Fourth consecutive year of revenue and underlying operating proﬁt growth Group revenue increased by 5.2% to £210.7m (2012: £200.3m) Group underlying operating proﬁt of £13.0m (2012: £12.1m) was 7.4% higher than the prior year South Africa returned to proﬁt Vado acquisition on 31 March 2013 – ﬁrst step in a faster and focused growth strategy The Board is recommending that the ﬁnal dividend for the year be increased by 8.9% to 0.305p per share in addition to the interim dividend of 0.155p per share making a 9.5% increase on the previous year 4 Norcros plc Annual report and accounts 2013 During the year the Board has reviewed the Group’s strategy, and has concluded that a faster and focused growth strategy to scale up the size of the Group organically and by acquisition should be pursued. In what has been a challenging year, I am pleased to report another strong performance by Norcros in the year to 31 March 2013. The Group has achieved its fourth consecutive year of growth in both revenue and underlying operating proﬁt despite tough markets and signiﬁcant energy cost increases, with South Africa having returned to proﬁtability this year. During the year the Board has developed its strategy for the Group, which is to continue to grow through organic means but also through targeted acquisitions that complement the Group’s existing proﬁtable brands, product portfolio, and markets. The acquisition of Eurobath International Ltd. (“Vado”) in March 2013 is the ﬁrst step in implementing this vision, and the Board believes Vado is an excellent ﬁt with the Group and its strategy. With clear strategic vision and continued progress, the Group is in a strong ﬁnancial position as it enters a new and exciting phase of its development. Results and ﬁnancial position Group revenue for the year increased by 5.2% to £210.7m (2012: £200.3m) representing a 10.2% increase on a constant currency basis. Underlying operating proﬁt of £13.0m (2012: £12.1m) was 7.4% higher than prior year, with operating margins also ahead at 6.2% (2012: 6.0%). Underlying proﬁt before taxation was 9.3% higher at £11.7m (2012: £10.7m) driven by higher underlying operating proﬁts and lower ﬁnancing costs. An exceptional operating charge of £4.4m (2012: £nil) has been made in the year principally reﬂecting a £3.0m provision increase relating to our three remaining legacy property leases and Vado acquisition costs of £0.9m. Proﬁt before tax was 6.4% higher at £10.0m (2012: £9.4m), with higher underlying proﬁt before tax and non-cash interest credits offset by an increased exceptional charge. Basic underlying earnings per share were maintained at 1.9p (2012: 1.9p) with an increase in underlying proﬁt before tax offset by an increased effective tax rate on underlying proﬁt as the shelter from the Group’s tax losses reduced in the year. Basic earnings per share as reported were also maintained at 1.6p (2012: 1.6p). Net cash generated from operations was £6.6m (2012: £6.0m) and included a £7.7m increase in working capital primarily to support new business gained by Johnson Tiles UK with B&Q, whilst prior year net cash generated from operations was impacted by the £7.8m buyout of the Group’s legacy property lease obligation at Springwood Drive in May 2011. Capital expenditure at £6.7m (2012: £6.7m) included new sorting, packaging and palletising equipment in Johnson Tiles South Africa, continued investment in tooling for new product in Triton Showers, and the freehold purchase of a new store at Klerksdorp together with other store upgrades as part of the normal store improvement programme in our South African retailer, Tile Africa. This ongoing store improvement programme also gave rise to disposal proceeds of £2.5m (2012: £nil) in the year following the sale of certain freehold sites in Tile Africa. Closing net debt at £30.7m (2012: £17.8m) included the net cash outﬂow of £10.6m associated with the acquisition of Vado and increased working capital requirements in Johnson Tiles UK referred to earlier. Leverage as measured by net debt to EBITDA (including a full year of Vado EBITDA on a pro-forma basis) was 1.4 times, with all banking covenants met with appropriate headroom. Strategy During the year the Board has reviewed the Group’s strategy and has concluded that a faster and focused growth strategy to scale up the size of the Group organically and by acquisition should be pursued. The Board believes the implementation of this strategy will enhance shareholder value as well as rebalance the value of the Group as against its pension scheme liability. Organic growth will continue to be driven by capitalising on our leading market positions in the UK and South Africa. Our strategic initiatives will ensure we maintain the provision of innovative new product programmes, excellent customer service and investment in our brand portfolio. We will also reinforce our “designed and built in Britain” credentials as well as capture the growth opportunities in South Africa and sub-Saharan Africa, where medium term growth rates are likely to be higher than the more developed markets. We will continue to drive faster revenue growth in our existing export markets and develop new emerging export opportunities. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Norcros plc Annual report and accounts 2013 5 Overview Chairman’s statement continued Strategy continued The strengths and characteristics of our recently acquired Vado business perfectly dovetail with all these initiatives and we will seek to realise the exciting revenue synergies that Vado will bring to the Group. Acquisitions will be targeted at complementary market and industry segments exhibiting attractive returns on capital which are likely to be bathroom and kitchen products with exposure to commercial and speciﬁcation segments. The recent acquisition of Vado represents a ﬁrst step in this approach. The Board has set itself three strategic targets. These are to double Group revenue by 2018, to maintain revenue derived outside of the UK at approximately 50% of Group revenue, and to sustain an underlying return on capital employed of 12% to 15% over the economic cycle. Acquisition On 31 March 2013 the Group completed the acquisition of 100% of the share capital of Vado, a private family owned business, for an initial cash consideration of £11.0m plus debt and debt-like items assumed as part of the transaction of approximately £0.9m, and further payments of up to £4.1m in total depending upon the future ﬁnancial performance of Vado. The Board expects the acquisition to be earnings enhancing immediately. Vado is a leading UK-based manufacturer of taps, mixer showers, bathroom accessories and valves, with strong brands and a product offering positioned both in the UK and internationally at the mid to high end segment of its target markets. The acquisition is an important step in supporting and accelerating the Group’s growth strategy and is an excellent ﬁt with the Group’s existing products and market positions. For the year ended 31 December 2012, Vado’s audited results showed revenue of £25.6m, EBITDA of £2.5m and proﬁt before tax of £2.1m. The acquisition was funded by a £19m increase to the Group’s existing banking facility, taking the Group’s overall committed credit facilities from £51m to £70m on existing terms. Pension The Group’s UK deﬁned beneﬁt pension scheme was closed to future accrual on 31 March 2013 and replaced with a new auto enrolment compliant deﬁned contribution scheme. Closure to future accrual is a key step in de-risking the pension scheme, preventing the build-up of future liabilities. The UK deﬁned beneﬁt pension scheme deﬁcit calculated under IAS19 increased to £30.0m (2012: £18.7m). Although asset values continued to increase, liabilities increased further driven by a signiﬁcant reduction in the discount rate. Surplus property The Group is pleased to report that planning consent for the proposed development at Highgate Park, Tunstall has been obtained. The approved plans for the site include a food store and petrol station which as previously announced is subject to a conditional sale contract with Optimisation Developments Ltd., a subsidiary of WM Morrison Supermarkets plc, (“Morrisons”) for gross proceeds of £8.25m and net proceeds of £2.6m. It is now expected that the sale contract with Morrisons will become unconditional by the end of August 2013. A further update will be provided at the appropriate time. 6 Norcros plc Annual report and accounts 2013 Progress in our South African businesses has been encouraging, with both strong revenue growth and a return to overall proﬁtability achieved in the year. In addition to the food store and petrol station, the approved planning consent also includes a number of non-food retail and restaurant/leisure units, which the Group will now actively market to prospective tenants to generate incremental returns, although it is too early to comment on the likely proceeds and timing. Dividend The Board is recommending that the ﬁnal dividend for the year be increased by 8.9% to 0.305p per share. When added to the interim dividend of 0.155p per share which was paid on 8 January 2013 this will make the total dividend for the year 0.46p per share, a 9.5% increase on the previous year. This ﬁnal dividend, if approved at the Annual General Meeting, will be payable on 30 July 2013 to shareholders on the register on 28 June 2013. The shares will be quoted ex-dividend on 26 June 2013. Board changes As announced separately, John Brown, Senior Independent Director and Chairman of the Audit Committee, has notiﬁed the Board of his intention to retire at the AGM on 24 July 2013. David McKeith will join the Board as Senior Non-Executive Director and Chairman of the Audit Committee at the AGM. David Hamilton, Executive Director and Company Secretary, has also notiﬁed the Board of his intention to retire from the Board at the same AGM. Richard Collins has been appointed Company Secretary as of 3 June 2013 although in line with best practice he will not be appointed to the Board as an Executive Director. On behalf of the Board I wish both John and David well for the future, and I look forward to working with David and Richard in their new roles. Employees Continuing to drive strong results in the current economic climate is a testament to the commitment, dedication and talent of all of our employees. On behalf of the Board I would like to welcome all Vado employees who have joined the Group recently and to thank everyone in the Group for their continued support. Summary and outlook Whilst our South African and Australian businesses have traded in line with expectations in the ﬁrst two months of the current year, demand in our UK markets has been weaker than expected reﬂecting the unseasonally cold weather and destocking by key customers. Early action has been taken to mitigate the impact of this and of higher energy costs and weaker exchange rates, including a cost reduction programme at Johnson Tiles UK which could involve up to 75 redundancies. It is expected that this will result in an exceptional charge in the region of £1.5m in the current year, with the resultant savings being more heavily weighted to the second half of the ﬁnancial year. The integration of the Vado business is progressing well. Although there is no contribution from Vado in these results, the business has maintained its strong momentum post acquisition largely reﬂecting outperformance in its export markets which historically have accounted for 45% of total revenue. We have continued to invest in our businesses through this protracted economic downturn and succeeded in growing market share, revenue and proﬁt. We will continue to apply this successful formula alongside an enhanced growth strategy including targeted acquisitions that complement the Group’s current main businesses and markets. With our leading brands and market positions, high quality and innovative products, strong customer relationships, talented people and successful self-help initiatives, together with the acquisition of Vado which will provide further synergy opportunities, the Board is conﬁdent that the Group is well placed to make further progress. M. Towers Chairman 13 June 2013 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Norcros plc Annual report and accounts 2013 7 Business review United Kingdom New product innovation is a continuing feature of the Triton business, and the new stylish Touch electric shower, which was launched to the trade in March 2013, has been very well received. Strong revenue growth in Johnson Tiles was offset by lower revenue at the more proﬁtable Triton Showers and, with continued energy cost increases, resulted in a 4.8% reduction in underlying operating proﬁt to £11.9m (2012: £12.5m), a resilient performance given the challenging market conditions. Nick Kelsall Group Chief Executive Summary Share of Group revenue UK revenue (£m) 58% 103.7 94.6 5 . 2 . 9 4 4 . 2 7 4 6 2 . 5 . 8 4 6 . 1 5 114.0 116.8 122.8 5 . 3 . 4 5 5 1 . 5 5 1 . 4 1 . 9 5 . 6 3 5 . 4 4 . 3 7 6 1 . 1 5 09 10 11 12 13 £122.8m +5.1% Total Norcros Adhesives Johnson Tiles Triton Revenue increased in the year by 5.1% to £122.8m (2012: £116.8m). Strong revenue growth in Johnson Tiles was offset by lower revenue at the more proﬁtable Triton Showers and, with continued energy cost increases, resulted in a 4.8% reduction in underlying operating proﬁt to £11.9m (2012: £12.5m). Although this represents a reduced margin of 9.7% (2012: 10.7%), it nevertheless was a resilient performance given the challenging market conditions. Triton Showers Triton, the UK market leading domestic shower business, continued to gain market share in the UK market, but with a declining UK market and continued tough conditions in the Irish market, revenue for the year was 4.6% lower at £51.1m (2012: £53.6m). In the UK, revenue for the year was 3.5% lower than prior year but ahead of the market. This represented a much stronger second half performance with revenue only 0.7% lower despite a subdued February and March performance in the retail sector driven by the poor weather conditions impacting footfall in store. Both trade and retail sector revenues declined by similar amounts in the year, but market share gains were made in both segments. Export revenue, which represents approximately 14% of overall revenue, was 10.9% lower compared to prior year but again represents a much stronger second half performance, being only 1.0% lower. The primary export market for Triton is Ireland and, although lower than last year, this is a respectable result given the general economic conditions in this market. Performance of the Triton T80z Fast Fit range since its launch in the fourth quarter of the previous year has been pleasing having been extremely well received by installers and the trade sector. The range boasts a new “swivel ﬁt” feature for water inlet and a “swing ﬁt” feature for electrical connections which increases installation ﬂexibility and reduces installation time. New product innovation is a continuing feature of the Triton business, and the new stylish Touch electric shower, which was launched to the trade in March 2013, has been very well received. As the name indicates the product uses touch control technology, a new feature for Triton electric showers. With lower revenues in the year, underlying operating proﬁts were also lower, although further cost reduction initiatives and tight overhead control helped maintain strong proﬁtability and cash generation. 8 Norcros plc Annual report and accounts 2013 Johnson Tiles is just the ticket for new-look Blackfriars Station Colour is crucial when it comes to identifying lines on the London tube map – and so the £600m re-build of Blackfriars Station had to reﬂect the vital colour connection travellers make every day. Thanks to a successful partnership between Johnson Tiles and Craven Dunnill Jackﬁeld, passengers will now instantly identify the District and Circle Line in the station through a distinctive tile combination in the bespoke London Underground colours of cream and blue – a speciﬁcation which will form the theme for future upgrades of the line. The Johnson Tiles and Craven Dunnill Jackﬁeld partnership remains a powerful combination, taking the very best of both companies and offering bespoke project solutions . We are proud to be a major part of this important project which will beneﬁt London commuters for generations to come. Andrew Sadler Trade Sales Manager, Johnson Tiles Johnson Tiles Johnson Tiles, the UK market leading ceramic tile manufacturer and a market leader in the supply of both own manufactured and imported tiles, saw revenue increase by 13.8% to £67.3m (2012: £59.1m). In the UK revenue grew by 16.8% with strong growth in the retail sector more than offsetting a decline in the trade sector. Market share gain in the DIY multiples sector was driven largely by B&Q which has implemented a major tile range review and introduced a new in-store tile shop. Implementation of this new concept involved us increasing our stockholding by £6.6m and delivering over 12 million boxes of tiles and 34,000 POS display boards in a three-month period. Our success in this project is testament to the excellent logistics capabilities and strong customer and supplier relationships the business has built. The UK social housing market has declined further in the year with Government spending cuts constraining activity, although we continue to hold our strong market share in this sector with signiﬁcant projects completed in the period including the MOD in Tidworth, the Foreign Office, as well as Decent Homes programmes in Leeds, Edinburgh and South Wales. Increased focus on growing our private sector speciﬁcation business is continuing to progress well. Architects and interior designers recognise our strong product offer backed up by Material Lab, our London-based architects and designer centre, our highly knowledgeable sales team, and quality service. Notable successes in the year include further work with Marks and Spencer, Premier Inn, Costa Coffee, Radisson Edwardian Hotels and John Lewis. Export revenue, which represents approximately 9% of overall revenue, declined 9.3%. Growth was seen in most regions during the year, but sales to the Middle East fell as a result of large projects in the prior year in Kuwait and Qatar not being repeated in the current year. Manufacturing performance was signiﬁcantly improved in the year, with the problems following installation of the new kiln in March 2011 fully resolved. However, energy prices rose a further 14% in the year and continue to constrain ﬁnancial performance and, despite increased revenue, underlying operating proﬁts were marginally lower than prior year. Norcros Adhesives Norcros Adhesives, our manufacturer and supplier of tile and stone adhesives and ancillary products, saw revenue grow by 7.1% in the year to £4.4m (2012: £4.1m). Growth in the second half was stronger, helped in part by new business won following the exit of a competitor from the UK market. New product introductions during the year include wet room wall boarding and ﬂoor proﬁles, together with a high performance two-part levelling screed. These latest additions to the range now enable Norcros Adhesives to offer the professional ﬁxer one-stop sourcing of tile adhesives, screeds and ancillary products. Investment in new products and continued investment in sales and marketing in order to drive further growth have left underlying operating proﬁt at a similar level to last year. Norcros plc Annual report and accounts 2013 9 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Business review South Africa All three businesses within the South African group recorded double-digit constant currency revenue growth. An overall underlying operating proﬁt for the year of £1.0m (2012: £0.5m loss) marks the return to proﬁt for our South African operations. Summary Share of Group revenue South Africa revenue (£m) 37% 72.4 74.0 59.0 52.6 2 . 5 . 4 5 3 . 0 2 1 09 0 5 . . 3 0 4 7 . 3 1 10 . 6 6 8 . 8 4 . 0 7 1 11 2 . 8 . 7 7 4 1 . 8 1 12 77.6 3 . 1 1 . 9 6 4 . 4 9 1 13 £77.6m +4.8% Total Johnson Tiles South Africa Tile Africa TAL Adhesives TAL supplies adhesives to Soweto Theatre TAL is proud to be associated with the Soweto Theatre in Jabulani for which it supplied various products to install almost 7000m² of glazed stoneware tiles. The company issued a materials and methods speciﬁcation for the facade cladding, which entailed ﬁxing glazed stoneware tiles in a mosaic format. We required guarantees on the tile adhesive, which TAL was able to provide as they supplied installation instructions and conducted regular site inspections. Tatenda Mavunga Architect, Afritects 10 Norcros plc Annual report and accounts 2013 The operational improvements in Johnson Tiles South Africa noted last year have continued and further progress made this year with signiﬁcantly better quality, higher throughput and reduced downtime leading to a 16.0% increase in production volumes. Another strong year of growth in our South African business saw revenue 19.3% higher on a constant currency basis and 4.8% higher on a reported basis at £77.6m (2012: £74.0m). The average exchange rate for Sterling to Rand for the year was 14% weaker at SAR13.37 (2012: SAR11.77). All three businesses within the South African group recorded double- digit constant currency revenue growth, and Johnson Tiles South Africa has made signiﬁcant operational improvements in the year, although a 26% rise in energy costs has limited some of the ﬁnancial beneﬁts of this improvement. Nonetheless, an overall underlying operating proﬁt for the year of £1.0m (2012: loss of £0.5m) marks the return to proﬁt for our South African operations. Johnson Tiles South Africa Johnson Tiles South Africa continued to beneﬁt from a number of key successes in the retail sector with independent sector revenue increasing 56.9% on a constant currency basis and 37.7% on a reported basis to £11.3m (2012: £8.2m). Further gains in the DIY sector have been achieved as we continue our successful strategy of importing ceramic tile products to complement our own manufactured product to create a “one-stop shop” for larger retailers, particularly Builders Warehouse. The operational improvements in Johnson Tiles South Africa noted last year have continued and further progress made this year with signiﬁcantly better quality, higher throughput and reduced downtime leading to a 16.0% increase in production volumes. New sorting, packaging and palletising equipment was successfully installed in September 2012, and further improvements to planned maintenance and operating practices yielded further efficiencies. Energy costs were, however, 26% higher than prior year and held back the ﬁnancial beneﬁt of this improved manufacturing performance. Notwithstanding this, the business recorded a signiﬁcantly reduced loss in the year. TAL Adhesives TAL, our market leading adhesives business in South Africa, saw independent sector revenue grow 22.3% on a constant currency basis and 7.5% on a reported basis to £19.4m (2012: £18.1m), driven by continued market share growth both inside and outside of South Africa. This growth has helped mitigate margin pressure from competition which continues to be challenging, and in conjunction with continued cost control and formulation improvements, has helped TAL produce another proﬁtable and cash generative year. Within South Africa, the ability to offer a full tiling solution on a single truck to our major retail customers by combining tile and adhesive deliveries has helped drive improved sales and cost efficiencies. To further build on this “one-stop” strategy, Tilemate, a range of tile tools has been successfully launched in the period and further initiatives are underway to add to this portfolio of products. Exports have again shown good growth off the back of new distribution agreements signed in the year in both Southern and Eastern Africa and have grown 39% in constant currency terms in the period, now representing nearly 10% of total independent sector revenue. In November 2012, we sold the business and assets of Nortec, TAL’s small but loss making industrial adhesives business, to Permoseal Pty Ltd. Nortec revenue for the year was £1.9m (2012: £3.9m) and an exceptional charge of £0.4m reﬂects the net loss on sale. Excluding Nortec, year on year constant currency growth in TAL was 41% compared to the 22.3% noted above. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Tile Africa Tile Africa, our leading retailer of wall and ﬂoor tiles, adhesive, showers, sanitaryware and bathroom ﬁttings, saw revenue increase 11.7% on a constant currency basis but reduce 1.8% on a reported basis to £46.9m (2012: £47.7m). Continued enhancement of the product offering and availability has driven revenue higher despite market conditions being challenging. Tile Africa currently has 29 owned stores and six franchises. Continual assessment and focus on underperforming stores is a normal ongoing part of running any retail business successfully. Senior management identiﬁes underperforming stores and then works proactively to improve performance, relocate, or close stores. In the past year we successfully relocated the Paarden Eiland store and are in the process of relocating our Klerksdorp store. Our Germiston store has now been completely refurbished in the year, leaving 21 of our owned stores fully refurbished, and this programme continues to be rolled out across most of the remaining store network. We have also closed two underperforming stores at Fourways and N1 City. These two closures as well as the Klerksdorp relocation involved the sale of freehold sites which generated a proﬁt on disposal of £1.2m (2012: £0.4m). We expect to secure two new sites in the current year with the stores becoming operational in the next ﬁnancial year. In line with our Group strategy of growing our geographical footprint, Tile Africa will look to use its strongly performing contracts division to spearhead this growth, with the opening of a contracts office being planned for East Africa in the year to March 2015. Norcros plc Annual report and accounts 2013 11 Business review Rest of the World The Johnson Tiles Australia business was proﬁtable in the year and remains in a strong position to capitalise on further opportunities in its markets. Summary Share of Group revenue 5% Rest of the World revenue (£m) . 7 9 . 5 9 . 3 0 1 £10.3m 9 7 . 0 7 . +8.8% 09 10 11 12 13 Rising Angels Norcros Adhesives manufactures a comprehensive range of adhesives, grouts, surface preparation and aftercare products for ﬁxing ceramic and porcelain tiles, mosaics, natural stone and marble. The extended open time of Norcros One Part Flexible White adhesive enabled the ﬁxers at Rowles & Co to cope with the intricate design of the “Rising Angels” mosaic at Phoenix Court on Bond Street, Bristol, with minimal wastage. The high polymer content of both the adhesive and Stop Mould Flexible Grout makes both products perfect for external use and able to withstand the unpredictable British weather. We are able to provide a tiling solution to suit most situations. Technical advice and site visits are available to all our customers together with a bespoke NBS M40 speciﬁcation writing service. This ensures that the correct products are used on every installation, all covered by our lifetime guarantee. Mandy Searle Head of Technical Services, Norcros Adhesives 12 Norcros plc Annual report and accounts 2013 Australia Johnson Tiles Australia saw revenue in the year increase 8.8% to £10.3m (2012: £9.5m) or 9.3% higher on a constant currency basis. General conditions in the Australian economy have improved in the year, driven by the resources and mining sector, leading to a 12.8% increase in building approvals following reductions in the two previous years. Revenue also beneﬁted from upgrades and new stores openings by Bunnings, a major Australian retail customer. Furthermore, in October 2012 a new contract to supply Bunnings New Zealand was won, with product being supplied to 22 stores. In March 2013 the business and assets of One Stop Tiles Pty Ltd were acquired. One Stop Tiles has two retail stores in Tasmania and the acquisition of these assets should provide good growth opportunities in a market where we have been under-represented. The Johnson Tiles Australia business was proﬁtable in the year with underlying operating proﬁt maintained at £0.1m (2012: £0.1m) and remains in a strong position to capitalise on further opportunities in its markets. General conditions in the Australian economy have improved in the period, driven by the resources and mining sector, leading to a 12.8% increase in building approvals R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Norcros plc Annual report and accounts 2013 13 Business review Financial review Group underlying return on capital employed rose to 12.6% (2012: 12.3%) and continues to exceed our cost of capital. Martin Payne Group Finance Director Summary Group revenue increased by 5.2% to £210.7m (2012: £200.3m) Group underlying operating proﬁt of £13.0m (2012: 12.1m) was 7.4% ahead of the prior year Group underlying return on capital employed was 12.6% (2012: 12.3%) Working capital outﬂow increased to £7.7m (2012: £0.4m) to support new business gained with B&Q Net debt was £30.7m (2012: £17.8m) including a £10.6m outﬂow on 31 March 2013 to acquire Vado Revolving credit facility increased from £51.0m to £70.0m on the same commercial terms 14 Norcros plc Annual report and accounts 2013 The Group recorded increases in revenue in its UK businesses of 5.1% and increases on a constant currency basis in South Africa of 19.3% and in Australia of 9.3%. Key cash ﬂow components and movement in Group net debt Cash ﬂow from operations Net interest paid Taxation Free cash ﬂow available for investment Issue of share capital Capital expenditure Disposal proceeds Acquisitions Dividends Other items including foreign exchange and amortised ﬁnancing costs Movement in net debt Opening net debt Closing net debt 2013 £m 6.6 (1.3) (1.0) 4.3 0.3 (6.7) 2.5 (10.6) (2.5) (0.2) (12.9) (17.8) 2012 £m 6.0 (1.6) (0.6) 3.8 0.2 (6.7) — — (2.2) (2.3) (7.2) (10.6) (30.7) (17.8) R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Revenue Group revenue increased on a reported basis by 5.2% or by £10.4m to £210.7m (2012: £200.3m). The underlying increase on a constant currency basis was 10.2% reﬂecting the translation impact of the South African Rand and Australian Dollar against Sterling. The Group recorded increases in revenue in its UK businesses of 5.1% and increases on a constant currency basis in South Africa of 19.3% and in Australia of 9.3%. Underlying operating proﬁt Underlying operating proﬁt increased by 7.4% to £13.0m (2012: £12.1m). Our UK businesses delivered underlying operating proﬁts of £11.9m against £12.5m with the beneﬁt of revenue growth in Johnson Tiles being offset by lower revenue at the more proﬁtable Triton Showers and higher energy costs. Our South African businesses returned to proﬁtability with an underlying operating proﬁt of £1.0m compared to a underlying operating loss of £0.5m last year. The beneﬁt of operational improvements made over the last two years in Johnson Tiles South Africa has contributed to this result, although somewhat constrained by higher energy costs, but continued improvements in TAL and Tile Africa have also had an impact. In Australia trading proﬁt of £0.1m is consistent with the performance in 2012. Group underlying operating proﬁt margins improved to 6.2% (2012: 6.0%). Exceptional items and operating proﬁt Exceptional items at £4.4m (2012: £nil) include a £3.0m increase in provisions for the Group’s legacy property leases. The Group has three remaining legacy leasehold properties which are not actively used by Group operating businesses. The increased provision has been necessary in light of the Group’s view of the likely costs (net of any future rental income) which will be incurred over the remainder of the lease tenure. Norcros plc Annual report and accounts 2013 15 Business review Financial review continued Underlying proﬁt before tax was £11.7m (2012: £10.7m) reﬂecting the increased underlying operating proﬁt and reduced ﬁnance costs Triton’s new Touch shower. Exceptional items and operating proﬁt continued The remaining charge covers acquisition related expenses of £0.9m in respect of Vado, net costs of £0.3m resulting from the disposal of the small non-core Nortec business previously operated by the Group’s South African adhesives business and £0.2m of other restructuring costs. Operating proﬁt for the year was £8.6m (2012: £12.1m). Net ﬁnance costs Net ﬁnance costs decreased to £0.8m (2012: £3.1m) driven by a £1.6m favourable variance in respect of the movement on fair value of derivatives and lower amortisation of costs of raising debt ﬁnance following the reﬁnancing in September 2011. Bank interest payable of £1.3m (2012: £1.4m) was lower than prior year and reﬂects a full year of improved terms also following the September 2011 reﬁnancing. IAS19 ﬁnance income of £2.2m (2012: £1.6m) relates to the Group’s UK deﬁned beneﬁt pension scheme and reﬂects the net of expected rates of return on pension scheme assets and expected interest pension scheme liabilities. underlying operating proﬁt and reduced ﬁnance costs noted above. The Group reported proﬁt before tax of £10.0m (2012: £9.4m). Taxation The taxation charge of £0.9m (2012: £nil) represents an effective tax rate of 9% (2012: nil) and is lower than the standard rate primarily because of the recognition in the year of certain South African deferred tax assets now that our South African businesses are ﬁrmly in proﬁt. Details of the tax charged in the year are provided in note 7 to the ﬁnancial statements. Earnings per share Underlying earnings per share amounted to 1.9p (2012: 1.9p). Basic earnings per share was 1.6p (2012: 1.6p). Dividends As previously announced it is the Board’s intention to continue a progressive dividend policy subject to the Group’s earnings, cash ﬂow and balance sheet position. As such the Board is recommending a ﬁnal dividend of 0.305p per share, which, together with the interim dividend of 0.155p, makes a total dividend of 0.46p in respect of the year ended 31 March 2013. A charge of £1.2m for exceptional ﬁnance costs was made in 2012 relating to the immediate write-off of unamortised ﬁnance costs from the previous banking facility which was superseded by the September 2011 facility agreement. Pension schemes The Group contributed £3.2m (2012: £2.2m) into its UK deﬁned beneﬁt pension scheme during the year. This included an additional contribution of £2.0m (2012: £1.0m) as part of the 2012 deﬁcit recovery plan. Proﬁt before tax Underlying proﬁt before tax was £11.7m (2012: £10.7m) reﬂecting the increased The total charge in respect of deﬁned beneﬁt schemes to operating expenses in the Consolidated Income Statement was £1.3m (2012: £1.5m). 16 Norcros plc Annual report and accounts 2013 Key performance indicators Foreign currency translation Revenue Underlying operating proﬁt* Underlying proﬁt before tax Underlying diluted earnings per share – pence 2013 £m 210.7 13.0 11.7 2012 £m Change % 200.3 +5.2% South African Rand 12.1 10.7 +7.4% Australian Dollar +9.3% Euro US Dollar 1.9p 1.9p — Averare rate vs £ 2013 2012 Closing rate vs £ 2013 2012 13.37 1.54 1.23 1.58 11.77 1.53 1.16 1.60 13.93 12.26 1.46 1.18 1.52 1.54 1.20 1.60 Underlying return on capital employed** 12.6% 12.3% +0.3% Cash generated from operations Net debt 6.6 (30.7) 6.0 +10.0% (17.8) +72.5% R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E I F I N A N C A L S T A T E M E N T S Foreign currency translation Pre-tax proﬁts from our overseas operations are translated at the average exchange rate for the year and balance sheets of these operations translated at the closing rate of exchange. The table above sets out the relevant exchange rates used. The movement in average exchange rates compared to 2012 had the effect of reducing 2012 reported Group revenue by £9.0m but had no material effect on Group underlying operating proﬁt. Key performance indicators Management uses a full suite of measures to manage and monitor the performance of its individual businesses. The Board considers that its key performance indicators are the measures most relevant in monitoring its progress to creating shareholder value. The relevant statistics for 2013 and 2012 are shown above. N. P. Kelsall Group Chief Executive M. K. Payne Group Finance Director The gross deﬁned beneﬁt pension scheme valuation on the UK scheme showed a deﬁcit of £30.0m compared to a deﬁcit of £18.7m last year. The higher deﬁcit reﬂects increased liabilities due to a reduced discount rate of 4.20% (2012: 4.95%), although offset partially by higher assets driven by strong investment returns. The table on page 15 sets out the key cash ﬂow components and the movement in Group net debt. The Group’s net interest payments have decreased as a result of beneﬁtting from a full year of lower interest rates in respect of the ﬁnancing facility agreed in September 2011. The UK deﬁned beneﬁt scheme’s March 2012 triennial actuarial valuation process has now been largely completed and shows a deﬁcit of £62.4m and represents an 85% funding level on this more prudent actuarial basis. The increased deﬁcit is driven predominantly by the well documented historically low gilt yields resulting partly from the Government’s use of quantitative easing during the banking crisis and subsequent stimulus packages. In light of this, a new deﬁcit recovery payment schedule has been agreed with the Scheme Trustee, with a contribution of £2m per annum starting in March 2013, and increasing with CPI, payable over the next 15 years. This is subject to ﬁnal regulatory clearance, and we are not aware of any reasons why this clearance will not be given. The Group’s contributions to its deﬁned contribution pension schemes were £1.2m (2012: £1.1m). Cash ﬂow and ﬁnancial position Whilst cash ﬂow from operations increased to £6.6m, the previous year included an outﬂow of £7.8m related to lease surrender costs to exit the legacy lease at Springwood Drive, Braintree. Excluding this, cash ﬂow from operations was £7.2m lower than 2012 which principally relates to the increase in inventory at Johnson Tiles UK to support new business with B&Q. Net cash generated after tax and interest was £4.3m (2012: £3.8m). The Group’s working capital outﬂow was £7.7m (2012: outﬂow of £0.4m), chieﬂy to support new business gained by Johnson Tiles in the UK with B&Q. Capital expenditure of £6.7m includes two new sorting lines at Johnson Tiles South Africa, the freehold purchase of a new store at Klerksdorp and continued Tile Africa store improvements and new product development at Triton Showers, particularly in respect of the new single control and touch screen showers. The Group acquired Eurobath International Limited trading as Vado on 31 March 2013 for initial consideration of £10.6m, net of cash acquired of £0.4m. Full details of the acquisition are provided in note 27 to the ﬁnancial statements. Bank funding Following a re-ﬁnancing in September 2011 the Group agreed an amendment in March 2013 in order to ﬁnance the acquisition of Vado. This increased the revolving credit facility from £51.0m to £70.0m on the same commercial terms. As a result of this amendment the headroom on facilities was £28.6m at 31 March 2013. This facility expires in October 2015 and is currently subject to a margin of 1.75% above LIBOR. ** Underlying operating proﬁt is deﬁned as proﬁt before taxation, exceptional items, amortisation of costs of raising ﬁnance, movement on fair value of derivative ﬁnancial instruments, discounting of property lease provisions and ﬁnance costs relating to pension schemes. ** Underlying return on capital employed is deﬁned as underlying operating proﬁt divided by the average of opening and closing underlying capital employed. Underlying capital employed is deﬁned as Group net assets excluding net debt and the UK pension deﬁcit (net of deferred tax), as adjusted for translational foreign exchange differences to enable overseas net assets to be stated on a constant currency basis. Norcros plc Annual report and accounts 2013 17 Competition The Group operates within a highly competitive environment in all its markets. Potential effects The Group accepts there is a risk to its results and ﬁnancial condition caused by the actions of its competitors, including competitors’ marketing strategies and product development. Mitigating actions To help identify such risks the competitive environment, speciﬁc marketplace and the actions of particular competitors are discussed at both Group and operating divisional Board meetings. In addition each market is carefully monitored to identify any signiﬁcant shift in policy by any competitor. Change from prior year: Performance against banking covenants The Group is subject to key banking covenants including interest cover and debt cover. Whilst leverage has increased in view of the acquisition of Vado, the Group is still well within the required targets. Potential effects Failure to meet these covenants could result in the Group being in default of its banking facilities. Mitigating actions Performance against banking covenants is regularly and closely monitored and is a key element of the forecasting and budgeting process. Change from prior year: Key commercial relationships Whilst the Group has a diverse range of customers there are nevertheless certain key customers who account for high levels of revenue. Potential effects Many of the contractual arrangements with customers are short term in nature (as is common in our markets) and there exists some risk that the current performance of a business may not be maintained if such contracts were not renewed or extended, or were maintained at lower volumes due to a decline in economic activity. Mitigating actions The importance of relationships with key customers is recognised and managed by senior personnel within the Group who have direct and regular access to their counterparts at the highest levels of management. Rebate schemes and incentive programmes help maintain these key relationships in a competitive market situation. The Group stresses key selling points such as continuity of supply, ﬁnancial strength of the Group and level of customer service to help maintain relationships. As well as an excellent product offering the Group is also able to take care of customers’ sourcing, storage and logistics requirements. The existence of a ﬂexible cost base helps alleviate this potential risk in certain of the Group’s businesses. Change from prior year: Additional capital requirements to fund ongoing operations Potential effects The Group must ensure it has adequate funding to meet capital demands within its current available facilities. Mitigating actions The Group’s current and forecast performance against its banking facilities in monitored regularly by the Executive Directors. This has historically shown there are ample facilities available to meet the current and future needs of the existing Group. The Group reﬁnanced its facilities in 2011 and successfully increased the facility in the current year by a further £19m on the same commercial terms to ﬁnance the acquisition of Vado. This facility remains in place until October 2015. Change from prior year: Operational risk management There are a number of potential risks and uncertainties which could have a material impact on the Group’s performance. Norcros has a system of risk management which identiﬁes these items and seeks ways of mitigating such risks as far as possible. The key risks which the Group believes it is exposed to are noted as follows: Energy price risk Energy costs are a signiﬁcant proportion of the Group’s manufacturing costs, especially in its tile manufacturing businesses. Potential effects Sustained increases in energy costs could signiﬁcantly affect the Group’s proﬁtability. Mitigating actions Prices are monitored on a regular basis and, where believed to be appropriate, a proportion of energy costs are hedged. Energy costs tend to increase worldwide at similar rates, therefore competitors will generally face the same pressures of any sustained increase. Change from prior year: Key: Risk increased Risk reduced No change in risk Pension scheme management The UK companies in the Group participate in a deﬁned beneﬁt pension scheme. Potential effects The Group’s ﬁnancial results show an aggregate deﬁcit in this scheme, as at 31 March 2013 of £30.0m (2012: £18.7m) assessed in accordance with IAS 19. There are various risks that could adversely affect the funding of the deﬁned beneﬁts under the scheme and consequently the Group’s funding obligations. Mitigating actions The scheme was closed to new members and future accrual with effect from 1 April 2013 and replaced by an auto-enrolment compliant deﬁned contribution scheme. Risks from rising costs of providing a ﬁnal salary pension scheme have therefore been materially reduced. Executive Management regularly monitors the funding position of the scheme and is represented on both the Trustee’s board and its investment sub-committee to monitor and assess investment performance and other risks to the Group. The Group considers each actuarial valuation (annual IAS 19 valuation and each tri-annual valuation) to re-assess its position with regard to its pension commitments in conjunction with external actuarial advice. Change from prior year: 18 Norcros plc Annual report and accounts 2013 Reliance on production facilities The Group has a small number of fully automated manufacturing facilities for the manufacture of tiles and adhesives. Potential effects If any of these facilities (including technology used to operate them) were to fail, the effect on the Group could be signiﬁcant. Mitigating actions The Group has a well established ongoing preventative maintenance programme as well as a comprehensive “annual shutdown” programme throughout its manufacturing operations. Furthermore the Group has developed an experienced globally co-ordinated product sourcing function which could mitigate the risk of failure. Finished inventory holdings across the operations acts as a limited buffer in the event of operational failure. A business interruption insurance policy is maintained to mitigate losses caused by a serious event affecting manufacturing capability. Change from prior year: Staff retention and recruitment The Group employs over 1600 people worldwide. Potential effects The Group’s ability to grow and increase its market share depends signiﬁcantly on its continuing ability to recruit and retain highly skilled employees in each area of its activities. Future growth plans may be restricted or delayed by difficulties experienced in recruiting and retaining appropriate staff. Mitigating actions Group policy is to remunerate its personnel in line with market rates and practice. In addition to competitive salaries there are annual bonus schemes, share options and other beneﬁts offered. Executives and key management are now incentivised via an Approved Performance Share Plan (APSP) which was approved at the 2011 AGM. A second grant of options under the APSP took place in 2012. Succession planning is an agenda item at Group Board level. The Group is able to offer capable employees appropriate training and opportunities for advancement and has a demonstrable track record of internal promotion. Change from prior year: Many of the products the Group sells are subject to changing consumer preferences South African operations Approximately a third of the Group’s activities are conducted in South Africa. Potential effects The Group may be exposed to risks outside of its control including political, social and economic instability, unexpected changes in the regulatory environment, exposure to different legal standards or employment relations and potentially adverse tax consequences. In addition, the geographical spread of the Group’s operations means management co-ordination of effort and communications with employees are subject to certain challenges. Mitigating actions The Group Executives and Head Office ﬁnance staff are in regular contact with their South African counterparts via electronic communication. In addition Group Executives make regular visits to the Group’s SA operations and speciﬁc internal audit visits are made annually. Change from prior year: Potential effects The Group’s revenues and proﬁts can be sensitive to these changing preferences. Failure to anticipate, identify or react swiftly to changes in consumer preferences could result in lower sales, higher mark-downs to reduce excess inventories and lower proﬁts. Conversely, failure to anticipate increased consumer demand for its products may lead to inventory shortages, negatively impacting customer goodwill, brand image and proﬁtability. Mitigating actions The Group invests signiﬁcantly in sales and marketing including design, new product development and market research. All these are discussed at each operating divisional Board meeting and are regular agenda items. Each divisional Board has appropriate sales and marketing representation. This ensures the Group is aware of changes in the marketplace and can adapt resources accordingly. Change from prior year: Interest rate risk The Group paid interest and other facility fees based on current base rates and LIBOR rates. Potential effects A signiﬁcant increase in interest rates would affect the Group’s proﬁtability and cash ﬂow. Mitigating actions Given the current low interest rates negotiated as part of the reﬁnancing of bank debts in 2011, it is not considered advantageous to enter into hedging arrangements for the time being. The Group’s interest rate risk is reviewed regularly by Executive Management and at least annually as part of the Group budget process. Change from prior year: Foreign currency exchange risk A signiﬁcant amount of the Group’s business is conducted in currencies other than Sterling (primarily South African Rand, US Dollar, Australian Dollar and Euro). Sterling has become weaker relative to the major currencies on the back of poor UK economic data. Potential effects The Group’s ﬁnancial performance is subject to the effects of ﬂuctuations in foreign exchange rates. Mitigating actions The Group typically seeks to hedge its foreign exchange transactional ﬂows for up to twelve months forward. The Group may, where it is considered appropriate, denominate some of its borrowings in other currencies to hedge translational proﬁt and asset risk although this is not considered necessary at present given the level of earnings made by its overseas businesses at present compared to the Group as a whole. Change from prior year: Management of property estate The Group has several leasehold interests in properties which are no longer used by the Group. Potential effects In a number of cases the rent paid by the Group exceeds the rents received from sub-letting these properties. Mitigating actions The Groups maintains a leasehold provision speciﬁcally to cover these rental shortfalls. This was reviewed at the year end and a further £3.0m provision was recognised. The property portfolio is managed on a day to day basis by a property consultant who is engaged by the Group. The Group seeks to enter long term leases with tenants to give it as much security over future revenues as possible and minimise rent free periods and voids. Change from prior year: Vado acquisition risk The Group acquired Vado at the end of the year. Potential effects Business performance may not reach expectations impacting Group proﬁtability and cash ﬂows. Mitigating actions Key management have been incentivised to remain with the business. They will participate with Executive Directors at regular divisional Board meetings to monitor business performance. The Vado Managing Director reports directly to the Group Chief Executive and there is regular dialogue between Vado management and Head Office staff. The terms of purchase provided that a signiﬁcant proportion of the consideration is deferred and contingent upon future business performance over the next three years. Change from prior year: New in year R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 19 Corporate social responsibility The Board takes regular account of the signiﬁcance of environmental, ethical and social matters affecting the Group and recognises that management of these matters is key to ensuring the long-term sustainability if its businesses. The environment The Board recognises the Group’s activities do have an impact on the environment. Norcros is committed to minimising this impact by continually improving its efficiency in terms of energy, water and material consumption. for its stunning “Tones” range of tiles, and the top “Environmental and Social Impact” award at the 2012 MIXOLOGY North Awards. Johnson Tiles’ environmental policy and brochure can be viewed on their website at www.johnson-tiles.com. For example, approximately a quarter of the body of a tile manufactured by Johnson Tiles UK is recycled ceramic waste from both its own manufacturing process and also from other ceramic manufacturers in the local area. This not only saves the company money, but avoids waste landﬁll and reduces the need for excavation of new materials. This and their successful energy efficiency programme has seen the business awarded the EEF National Energy Efficiency Award in January 2012 as well as being named in The Sunday Times Top 60 Best Green Companies every year since 2008. The business also won Silver “Best Eco Product” prize at the awards of top consumer interiors magazine House Beautiful, Triton Showers also has a speciﬁc environmental policy which targets the use of recyclable materials and minimising the production of waste. In addition, Triton aims to develop advanced technological solutions that make their products even more environmentally friendly. This has resulted in a number of “Eco” products being included in their range. Triton’s environmental commitment can be viewed on its website at www.tritonshowers.co.uk. The newly acquired Vado business has recognised that saving water is increasingly becoming a focus for its customers and accordingly it has a range of products which CSI Childline Christmas party Childline services began in KwaZulu-Natal in 1986 in response to the very high levels of child sexual abuse which characterise South Africa. Norcros South Africa have aligned themselves with Childline from 2009 as part of our Corporate Social Investment initiative by the Corporate Citizenship Committee. We annually sponsor and, when possible, send staff volunteers to the Childline Christmas party that is quickly becoming a company tradition. This was the third year running that we not only provided funding for the party but also had staff attending the party. 20 Norcros plc Annual report and accounts 2013 The necessity for, and importance of, good relations with all employees is well recognised and accepted throughout the Group. speciﬁcally meet this objective. More details on the H2ECO product range can be found on its website www.vado-uk.com. Ethics The Group aims to act with integrity towards all stakeholders in its businesses and respects the laws, regulations and customs in all the counties within which it operates. The Group makes every effort to ensure its employees are aware of, and comply with, the relevant business’ ethical code. The Group has implemented an anti-bribery policy to comply with the Bribery Act 2010. Appropriate procedures are in place at each location to mitigate the risk of any employee committing an offence under this act. Social Companies in the Group are encouraged to become involved in and support local initiatives where possible. Employees The necessity for, and importance of, good relations with all employees is well recognised and accepted throughout the Group. However, because the Group’s activities are organised on a de-centralised basis, with each operating business having autonomy over its operations, there is no uniform set of arrangements for employee involvement imposed throughout the Group. Nevertheless, all Group companies are strongly encouraged to devise and adopt whatever means of employee consultation best suit their circumstances. Norcros also recognises the need to train their staff in order to give them the necessary skills to perform their duties to the high standards required. The Group’s businesses invest in a range of development activities, for example Tile Africa is committed to invest at least 1% of its annual payroll in training and development initiatives, ranging from management development to adult literacy programmes. In addition all our business units run training programmes and local projects to help support our employees and their local communities. The Group is fully committed to keeping its employees informed about their work unit and the wider business. The Group recognises its responsibilities towards disabled persons and therefore all applications from such persons are fully and fairly considered bearing in mind the respective aptitudes and abilities of the applicant. In the event of existing employees 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 an able-bodied person. Warwickshire Young Carers Triton Showers sponsors the Warwickshire Young Carers’ Project which supports children and young adults from the age of six upwards, in their caring role at home, and encourages wider recognition of their contribution to society. Financial support from Triton Showers will allow the project staff to organise additional group activities, workshops, days out and short breaks for the young carers. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 21 Directors and officers Martin Towers Chairman Joined the Board in July 2011 and was appointed Chairman in November 2012. He is also a Non-Executive director of RPC Group plc, KCOM Group plc and Tyman plc. He was formerly chief executive officer of Spice plc and prior to that group ﬁnance director of Kelda Group plc, Spring Ram Corporation plc and McCarthy and Stone plc. He is a Fellow of the Institute of Chartered Accountants in England and Wales. Nick Kelsall Group Chief Executive Joined Norcros as Finance Director of H&R Johnson Tiles Limited in 1993. Formerly, Nick had held a number of senior ﬁnancial management positions with Touche Ross, Manchester and, immediately prior to joining Norcros, with Waterford Wedgwood Group plc. Nick was appointed as Group Chief Executive on 1 April 2011 having previously served as Group Finance Director since October 1996. He is a member of the Institute of Chartered Accountants in England and Wales. Martin Payne Group Finance Director Appointed Group Finance Director in March 2011. He has most recently held senior ﬁnancial positions at JCB and IMI plc. Earlier in his career he spent six years as Finance Director of H & R Johnson Tiles Limited. He is a Fellow of the Chartered Institute of Management Accountants. John Brown Non-Executive Director Appointed to the Board as Chairman on admission of Norcros plc to the London Stock Exchange on 16 July 2007, John stood down from that role in November 2012 and is now Senior Non-Executive Director and Chairman of the Audit Committee. He was formerly the chief executive of Speedy Hire plc which he founded in 1977. He is chairman of Henry Boot plc and a Non-Executive director of Lookers plc, both London Stock Exchange listed companies. He also holds a number of other unlisted directorships. John will resign from the Board at the Annual General Meeting on 24 July 2013. Jo Hallas Non-Executive Director Appointed to the Board in September 2012, Jo also serves as Chairman of the Remuneration Committee. She is currently General Manager of the Invensys Heating Controls business and prior to that held a number of senior management positions with Bosch and Procter & Gamble both in the UK and overseas. Jo is a Chartered Engineer. Vijay Aggarwal Non-Executive Director Appointed to the Board in October 2009. A former merchant banker, he is currently managing director of Prism Cement Limited (formerly H & R Johnson (India) Limited). He is a graduate of the Indian Institute of Technology in Delhi and of the Indian Institute of Management in Ahmedabad, where he completed his MBA. Girija Patnaik was appointed as an alternate Non-Executive Director to Vijay on 4 March 2010. 22 Norcros plc Annual report and accounts 2013 David Hamilton Director Appointed to the Board in April 1996 having previously been appointed Company Secretary in 1989. He joined Norcros plc as Group Legal Adviser in 1973 following positions as legal adviser and legal assistant respectively with Automotive Products Associated Limited and Pﬁzer Limited. David will resign from the Board at the Annual General Meeting on 24 July 2013. Richard Collins Company Secretary Richard joined the Company in June 2013 as Company Secretary and Group Counsel. He qualiﬁed as a solicitor in 1988 and was previously company secretary and director of risk and compliance at Vertex Financial Services. Prior to that, Richard held a number of company secretarial and legal positions with Tribal Group plc, Blick plc and Aggregate Industries plc. Advisers and company information Company website www.norcros.com Listing details Market Reference – NXR Index – UK Listed – FTSE All Share FTSE SmallCap – Construction Sector and materials Registered office Ladyﬁeld House Station Road Wilmslow Cheshire SK9 1BU Tel: 01625 549010 Fax: 01625 549011 Registered number 3691883 Registered in England Principal bankers Lloyds TSB Bank plc 8th Floor 40 Spring Gardens Manchester M2 1EN Barclays Bank plc 3 Hardman Street Spinningﬁelds Manchester M3 3HF Svenska Handelsbanken AB (pupl) 1st Floor, Unit 8 Acorn Business Park Heaton Lane Stockport SK9 1AS Solicitors Addleshaw Goddard LLP 100 Barbirolli Square Lower Mosley Street Manchester M2 3AB Registrars Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Stockbrokers Numis Securities Limited The London Stock Exchange Building 10 Paternoster Square London EC4M 7LT Financial PR Hudson Sandler 29 Cloth Fair London EC1A 7NN Independent auditors PricewaterhouseCoopers LLP 101 Barbirolli Square Lower Mosley Street Manchester M2 3PW R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Financial calendar Annual General Meeting 24 July 2013 Final dividend Payable 30 July 2013 Interim results Announcement November 2013 Interim Report Available to shareholders November 2013 Norcros plc Annual report and accounts 2013 23 Directors’ report The Directors present their Annual Report and the audited consolidated ﬁnancial statements for the year ended 31 March 2013. Principal activities The Company acts as a holding company for the Norcros Group. The Company’s registered number is 3691883 and the Company is registered and domiciled in England. The Group’s principal activities are the development, manufacture and marketing of home consumer products in the UK, South Africa and the rest of the world. Results and dividends The information that fulﬁls the requirements of the Business Review, which is incorporated in the Directors’ Report by reference, including the review of the Group’s business and future prospects, is included in the Chairman’s Statement and the Business Review on pages 4 to 17. Key performance indicators are shown on pages 2 and 3. The Directors recommend a ﬁnal dividend for the year ended 31 March 2013 of 0.305p (2012: 0.28p). This follows the decision to pay an interim dividend earlier in the year of 0.155p (2012: 0.14p). Directors Biographical details of the present Directors are set out on pages 22 and 23. The Directors who served during the year and to the date of this report are set out below: Martin Towers Chairman John Brown Non-Executive Director Jo Hallas Non-Executive Director (appointed 27 September 2012) Vijay Aggarwal Non-Executive Director Girija Patnaik Alternate Non-Executive Director to Vijay Aggarwal Nick Kelsall Group Chief Executive Martin Payne Group Finance Director David Hamilton Director Les Tench Non-Executive Director (resigned 26 July 2012) The interest of the Directors in the shares of the Company at 31 March 2013 and 31 March 2012 are shown in the Remuneration Report. Directors’ and officers’ liability insurance and indemnities The Company purchases liability insurance cover for Directors and officers of the Company which gives appropriate cover for any legal action brought against them. The Company also provides an indemnity for its Directors (to the extent permitted by the law) in respect of liabilities which could occur as a result of their office. This indemnity does not provide cover should a Director be proven to have acted fraudulently or dishonestly. Purchase of own shares In 2007 the Company formed the Norcros Employee Beneﬁt Trust (the “Trust”). The purpose of the Trust is to meet part of the Company’s liabilities under the Company’s share schemes. The Trust purchased no ordinary shares during the year (2012: nil). At the Company’s 2012 Annual General Meeting, the shareholders authorised the Company to make market purchases of up to 57,983,260 ordinary shares. At the forthcoming Annual General Meeting, shareholders will be asked to renew the authority to purchase its own shares for another year. Details are contained in the Notice of Meeting. Substantial shareholding As at 21 May 2013 the Company had received notiﬁcation that the following were interested in 3% or more of the Company’s issued share capital: Lifestyle Investments PVT Limited Aviva Investors Artemis Fund Managers Crystal Amber Asset Management (Guernsey) SVM Asset Management Standard Life Investments Hargreave Hale Legal & General Investment Management Percentage of issued share capital 24.97 11.37 10.05 8.16 4.88 3.56 3.44 3.14 Employees The necessity for, and importance of, good relations with all employees is well recognised and accepted throughout the Group. However, because the Group’s activities are organised on a de-centralised basis, with each operating business having autonomy over its operations, there is no uniform set of arrangements for employee involvement imposed throughout the Group. Nevertheless, all Group companies are strongly encouraged to devise and adopt whatever means of employee consultation best suit their circumstances. 24 Norcros plc Annual report and accounts 2013 Interest rate risk The Group has the ability to secure a substantial proportion of its bank loans at ﬁxed rates via interest rate swaps. However, due to the current low level of debt and historically low UK LIBOR rates, the Group has decided not to take out any such swaps at the present time. This position is regularly reassessed. Credit risk Credit risk arises from cash and cash equivalents, derivative ﬁnancial instruments and deposits with banks and ﬁnancial institutions, as well as credit exposures to customers. The Group maintains a credit insurance policy for all its operations which covers a substantial portion of the Group’s trade debtors. For banks and ﬁnancial institutions only independently rated parties with a strong rating are accepted. Liquidity risk The Group’s banking facilities are designed to ensure there are sufficient funds available for the current operations and the Group’s further development plans. Exchange rate risk Through its centralised treasury function the Group seeks to hedge its UK-based transactional foreign exchange risk on a rolling annual basis through the use of forward exchange contracts and similar hedging instruments. The Group’s principal UK-based foreign currency exposures are largely hedged until at least March 2014 based on current forecasts. In the overseas businesses the policy is to hedge the local transactional risk to the extent this is permitted and not cost prohibitive. The Group has certain investments in foreign operations whose net assets are exposed to foreign currency translational risk. The Group seeks to mitigate this exposure through borrowings denominated in the relevant foreign currencies to the extent that this is considered to be commercially beneﬁcial. Energy price risk The Group seeks to secure a proportion of its key energy requirements using forward purchase contracts where it is believed to be necessary. Takeover directive The Company has only one class of shares, being ordinary shares, which have equal voting rights. The holdings of individual Directors are disclosed on page 32. There are no signiﬁcant agreements to which the Company is a party which take effect, alter or terminate in the event of a change of control of the Company, except for the banking facilities dated 22 September 2011 (as amended on 28 March 2013) in respect of the £70.0m term facilities which contain mandatory prepayment provisions on a change of control. There are no provisions within Directors’ employment contracts which allow for speciﬁc termination payments upon a change of control. Statement of disclosure of information to auditors In the case of each of the persons who are Directors, the following applies: (a) (b) so far as the Director is aware, there is no relevant audit information of which the Company’s auditors are unaware; and they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. Independent auditors A resolution to re-appoint PricewaterhouseCoopers LLP as auditors to the Company will be proposed at the Annual General Meeting. Annual General Meeting The Annual General Meeting of the Company will take place at 11.00am on 24 July 2013 at Ladyﬁeld House, Station Road, Wilmslow, Cheshire SK9 1BU. The Notice convening that meeting, together with the resolutions to be proposed, appears on pages 71 to 73 of this document. The Directors recommend that all shareholders vote in favour of all of the resolutions to be proposed, as the Directors intend to do so in respect of their own shares, and consider that they are in the best interests of the Company and the shareholders as a whole. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Employees continued The Group is fully committed to keeping its employees informed about their work unit and the wider business. The Group recognises its responsibilities towards disabled persons and therefore all applications from such persons are fully and fairly considered bearing in mind the respective aptitudes and abilities of the applicant. In the event of existing employees 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 an able-bodied person. Charitable donations The Group made donations for charitable purposes of £16,000 during the year (2012: £10,000). There were no political donations (2012: £nil). Creditor payment policy Group policy requires all operating units to apply appropriate controls to working capital management, whilst developing relationships with suppliers. In view of the international nature of the Group’s activities, no universal code or standard on payment policy is followed but subsidiary companies are expected to establish payment terms consistent with the above policy, local procedures, customs and practice. Group trade payables amounting to £31.5m (2012: £30.9m) reported in note 17 to the accounts represent 74 days (2012: 77 days) of average daily purchases. The Parent Company has no trade creditors (2012: £nil). Research and development The Group’s expenditure on research and development is disclosed in note 3 to the accounts and is focused on the development of new products. Corporate governance Details of the Group’s corporate governance is contained on pages 26 to 29. This Corporate Governance Report forms part of the Directors’ Report and is incorporated into it by cross reference. Financial risk management The Group’s operations expose it to a variety of ﬁnancial risks that include the effect of changes in interest rate risk, credit risk, liquidity risk, exchange rate risk and energy price risk. The Group actively seeks to limit the adverse effects of these risks on the ﬁnancial performance of the Group. R. H. Collins Company Secretary 13 June 2013 Norcros plc Annual report and accounts 2013 25 Corporate governance The Board is committed to ensuring that high standards of corporate governance are maintained by Norcros plc and is accountable to the Company’s shareholders for good corporate governance. Its policy is to manage the affairs of the Company in accordance with the principles of the UK Corporate Governance Code referred to in the Listing Rules of the UK Listing Authority. For the year under review, the Company has complied with the UK Corporate Governance Code issued in 2010 (“the Code”) in all respects save for those mentioned within this statement. The following sections of this statement describe the Board’s approach to corporate governance and how the principles of the Code are applied. Board balance and independence The Board currently comprises a Non-Executive Chairman, three Non-Executive Directors and three Executive Directors, who are equally responsible for the proper stewardship and leadership of the Company. The Directors holding office at the date of this report and their biographical details are given on pages 22 and 23. Taking into account the provisions of the Code, the Chairman and two Non-executive Directors (being John Brown and Jo Hallas) are considered by the Board to be independent of the Company’s Executive Management and free from any business or other relationship that could materially interfere with the exercise of their independent judgement. The terms and conditions of appointment of the Chairman and the Non-Executive Directors are available for inspection at the registered office of the Company. The letters of appointment set out the expected time commitment. Other signiﬁcant commitments of the Chairman and Non-Executive Directors are disclosed to the Board on a regular basis throughout the year. The Board is satisﬁed that the Chairman’s other signiﬁcant commitments do not prevent him from devoting sufficient time to the Company. John Brown is the Senior Independent Non-Executive Director. He is available to shareholders if they have reasons for concern for which contact through the normal channels of Chairman, Group Chief Executive or Group Finance Director have failed to resolve. All Directors are supplied, in a timely manner, with all relevant documentation and ﬁnancial information to assist them in the discharge of their duties by the making of well-informed decisions that are in the best interests of the Company as a whole. The Board regularly reviews the management and ﬁnancial performance of the Company, as well as long- term strategic planning and risk assessment. Regular reports are given to the Board on matters such as pensions, health and safety and litigation. Any concerns that a Director may have about how the Group is being run or about a course of action being proposed by the Board will, if they cannot be resolved once those concerns have been brought to the attention of the other Directors and the Chairman, be recorded in the Board minutes. In the event of the resignation of a Non-Executive Director, that Director is encouraged to send a written statement setting out the reasons for the resignation to the Chairman who will then circulate it to the other members of the Board and the Secretary. Chairman and Group Chief Executive The positions of Chairman and Group Chief Executive are held by separate individuals and the Board has clearly deﬁned their responsibilities. The Chairman is primarily responsible for the effective working of the Board, ensuring that each Director, particularly the Non-Executive Directors, is able to make an effective contribution. The Group Chief Executive has responsibility for running the Group’s businesses and for the implementation of the Board’s strategy, policies and decisions. Appraisals and evaluation The performance of the Board is appraised by the Chairman. The Non-Executive Directors are appraised individually by the Chairman. The Board, led by the Senior Independent Non-Executive Director, appraises the Chairman. The Non-Executive Directors appraise the performance of each of the Executive Directors. Appraisals are conducted periodically and they are organised to ﬁt in with Board priorities and succession planning activity. Accordingly, there was no formal evaluation in the year under review as the scheduled programme of board changes was underway. As this is now complete, a formal and rigorous evaluation process will take place in the current ﬁnancial year. The Chairman is responsible for the review of each Director’s development and ongoing training requirements to ensure that the performance of each Director continues to be effective. 26 Norcros plc Annual report and accounts 2013 Advice for Directors Procedures have been adopted for the Directors to obtain access through the Secretary to independent professional advice at the Company’s expense, where that Director judges it necessary in order to discharge their responsibilities as a Director of the Company. Directors’ roles The Executive Directors work solely for the Group and none has taken on any Non-Executive directorship. However, in appropriate circumstances, Executive Directors will be encouraged to take on one Non-Executive directorship in another non-competing company or organisation. All Directors have access to the advice and services of the Secretary who is responsible to the Board for ensuring that Board policies and procedures are complied with. Both the appointment and removal of the Secretary is a matter reserved for decision by the Board. Board procedures The Board has a formal schedule of matters speciﬁcally reserved to it for decision which it reviews periodically. This ensures the Board takes all major strategy, policy and investment decisions affecting the Company. In addition, it is responsible for business planning and risk management policies and the development of policies for areas such as safety, health and environmental policies, Directors’ and senior managers’ remuneration and ethical issues. The Board provides direction to the management of the Company, and it is ultimately accountable for the performance of the Group. The Board operates in such a way as to ensure that all decisions are made by the most appropriate people in a timely manner that will not unnecessarily delay progress. The Board has formally delegated speciﬁc responsibilities to Board Committees, including the Audit Committee, Remuneration Committee and Nominations Committee (see below). The Board will also appoint committees to approve speciﬁc processes as deemed necessary. The Directors and management teams of each Group Company are responsible for those business entities. They are tasked with the delivery of targets approved by the Board on budgets, strategy and policy. The terms and conditions of appointment of the Non-Executive Directors are available upon written request from the Company. All the Non-Executive Directors undertake that they have sufficient time to meet the requirements of their role. They also undertake to disclose to the Company their other commitments and to give an indication of the time involved in each such commitment. The performance evaluation process will assess whether the Non-Executive Director is spending enough time to fulﬁl his duties. If a Non-Executive Director is offered an appointment elsewhere, the Chairman is informed before any such offer is accepted and the Chairman will subsequently inform the Board. The Board has suitable procedures in place for ensuring that its powers to authorise conﬂict situations are operated effectively. Such powers are operated in accordance with the Company’s Articles of Association by means of each Director having a responsibility to notify the Board of any conﬂict situation and for the Board to deal with that situation as appropriate. The Board ensures that all new Directors (including Non-Executive Directors) will receive a full, formal and tailored induction on joining the Company. As part of that induction procedure, the Chairman will offer to major shareholders the opportunity to meet a new Non-Executive Director. The Chairman also periodically assesses the training and development needs of all Directors and ensures that any suitable training and updates are provided to Directors. Attendance by individual Directors at meetings of the Board and its committees The attendance of Directors at the Board and principal Board Committee meetings during the year is detailed in the table below: Main Board 9 meetings Audit Committee 3 meetings Remuneration Committee 3 meetings Nominations Committee 3 meetings M. Towers, Chairman L. Tench (resigned 26 July 2012) J. E. Brown V. Aggarwal G. Patnaik (as alternate to V. Aggarwal) J. Hallas (appointed 27 September 2012) N. P. Kelsall M. K. Payne D. W. Hamilton 9/9 3/3 9/9 4/9 5/9 6/6 9/9 9/9 9/9 3/3 1/1 3/3 2/3 1/3 2/2 — — — 3/3 2/2 3/3 1/3 2/3 1/1 — — — 3/3 1/1 3/3 2/3 1/3 3/3 — — — Retirement by rotation Each of the Directors is subject to election by shareholders at the ﬁrst Annual General Meeting after their appointment. Thereafter, in accordance with the Company’s Articles of Association, all of the Directors are subject to retirement by rotation such that one third of the Directors retire from the Board each year and each Director must seek re-election at intervals of no more than three years. However, the Board has decided that every Director should, where appropriate, offer themselves for re-election at each Annual General Meeting. Accordingly, each continuing Director will seek re-election at the next Annual General Meeting. Biographical details of all of the Directors are set out on pages 22 and 23. John Brown and David Hamilton have both informed the Board that they intend to retire as Directors at the conclusion of the next Annual General Meeting after 6 and 17 years of service respectively as Directors, and neither will be seeking re-election. Nominations Committee The Nominations Committee and the Board seek to maintain an appropriate balance between the Executive and Non-Executive Directors. The Nominations Committee is chaired by the Chairman and consists of all the Non-Executive Directors. The Chairman will not chair the Committee when it deals with the appointment of a successor to the Chairmanship. The terms of reference of the Committee are available for inspection upon written request to the Company and on its website at www.norcros.com. The Nominations Committee evaluates the balance of skills, knowledge, diversity and experience of the Board. In light of this evaluation and, if deemed necessary, it determines the scope of the role of a new Director, the skills and time commitment required and makes recommendations to the Board about ﬁlling Board vacancies and appointing additional Directors. The Committee utilises external search and selection consultants as appropriate. If a new Director is selected, the Nominations Committee will use the appropriate selection process. In the case of the appointment of Martin Towers as Chairman during the year under review, he was selected as successor to the retiring Chairman pursuant to the Board’s succession plans for the role. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 27 Corporate governance continued Audit Committee The Audit Committee consists of all the Non-Executive Directors including the Chairman. The Board is satisﬁed that John Brown, who chairs the Committee, has recent and relevant ﬁnancial experience. The main role and responsibilities of the Audit Committee are set out in written terms of reference. These terms of reference are available upon written request to the Company and on the Company’s website at www.norcros.com. The main work of the Audit Committee in discharging its functions is described in this section. The Committee has primary responsibility for making recommendations to the Board on the appointment, re-appointment and removal of the external auditor. The Committee keeps under review the scope and results of the audit and its cost effectiveness and the independence and objectivity of the auditor. The last review of the external auditor was undertaken in 2011 and it led to the continued appointment of PricewaterhouseCoopers LLP. The Committee keeps the nature and extent of non-audit services under review by regularly reviewing the balance of audit to non-audit fees. The Committee is aware of the need to safeguard the auditor’s objectivity and independence and the issue is discussed by the Committee and periodically with the audit engagement leader from PricewaterhouseCoopers LLP. The Committee reviews the policy by which employees of the Group may, in conﬁdence, raise matters of concern, including possible improprieties in matters of ﬁnancial reporting or other matters. The Group has a formal whistleblowing procedure which is regularly monitored. The Committee monitors the integrity of the Group’s ﬁnancial statements and any formal announcements relating to ﬁnancial performance and reviews the signiﬁcant ﬁnancial reporting judgements contained in them. The Audit Committee undertakes a review, at least annually, of the effectiveness of the Group’s system of internal controls and the Board will take into account the Audit Committee’s report, conclusions and recommendations in this regard. Remuneration Committee The Remuneration Committee is chaired by Jo Hallas. It operates under written terms of reference, which are consistent with current best practice. These terms of reference are available upon written request to the Company and on the Company’s website at www.norcros.com. The Committee comprises only Non-Executive Directors. Vijay Aggarwal sits on the Remuneration Committee. As he represents a signiﬁcant shareholder he is not regarded as being independent under the Code but the Board is of the opinion that he is able to carry out his role on Committees of the Board effectively as that signiﬁcant shareholder is not represented by any other Director on the Board and he does not participate in the consideration or decision-making regarding matters where this would be inappropriate. The Committee’s report is set out on pages 30 to 35. The Remuneration Committee used the services of Deloitte LLP as remuneration consultants during the year under review. Deloitte LLP has assisted the Company with various remuneration-related matters but otherwise has no connection with the Company. Financial reporting When releasing the annual and interim ﬁnancial statements the Directors aim to present a balanced and understandable assessment of the Group’s results and prospects. The Directors have a collective responsibility for the preparation of the Annual Report and Accounts which is more fully explained in the Statement of Directors’ Responsibilities on page 36. Relations with shareholders The Company recognises the importance of maintaining good communications with shareholders. The Company takes a number of steps to ensure that the Board, and in particular, the Non-Executive Directors, develop an understanding of the views of major shareholders about the Company. The Directors have regular meetings with the Company’s major shareholders and have regular feedback on the views of those shareholders through the Company’s brokers. Reports of these meetings, and any shareholder communications during the year, are given to the Board. In addition, the Company publishes any signiﬁcant events affecting the Group and updates on current trading. The Chairman and the Non-Executive Directors are also offered the opportunity to attend meetings with major shareholders and the Non-Executive Directors, and in particular the Senior Independent Director, would attend such meetings if requested to do so by any major shareholder. The Board regularly receives copies of analysts’ and brokers’ brieﬁngs. The Annual and Interim Reports, together with all announcements issued to the London Stock Exchange, are published on the Company’s website at www.norcros.com. The Notice of the Annual General Meeting is sent to shareholders at least 20 working days before the meeting. It is the Company’s practice to propose separate resolutions on each substantially separate issue. 28 Norcros plc Annual report and accounts 2013 The system of internal control is designed to manage rather than eliminate the risk of failing to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The control framework as outlined above gives reasonable assurance that the structure of controls in operation is appropriate to the Group’s situation and that risk is kept to acceptable levels throughout the Group. The Board conﬁrms that there is an ongoing process for identifying, evaluating and managing the signiﬁcant risks faced by the Group and that this has been in place for the period under review and up to the date of approval of the Annual Report and Accounts. Takeover directive Share capital structures are included in the Directors’ Report on page 24. Going concern The Directors consider, after making appropriate enquiries at the time of approving the ﬁnancial statements, that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future and accordingly, that it is appropriate to adopt the going concern basis in the preparation of the ﬁnancial statements. Approved by the Board of Directors on 13 June 2013 and signed on its behalf by: M. G. Towers Chairman R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Relations with shareholders continued For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The Company ensures that all valid proxy appointments received for general meetings are properly recorded and counted. For each resolution the Company ensures that the following information is given at the meeting and made available as soon as reasonably practicable on a website which is maintained by or on behalf of the Company: The Group’s insurance continues to be managed and co-ordinated centrally with the assistance of insurance brokers. This gives the Group full visibility of both claims history and the insurance industry’s perception of the Group’s overall risk via the respective insurance premiums. The Company examines the size and trend of these premiums and the extent to which it can mitigate the risk and reduce the overall risk burden in the business by considering the appropriate level of insurance deductible and the potential beneﬁt of self-insurance in some areas. Operational structure, review and compliance In addition to the Group Finance Director, the Group has Senior Financial Managers at its Head Office. The Board has considered whether the Company should have an internal audit department and has deemed that given both its risk management and internal control programme noted previously, together with the size and complexity of the Group, it is not necessary to employ such a department at the present time. The Board will, however, continue to keep this matter under review. The key elements of the controls framework within which the Group operates are: — an organisational structure with clearly deﬁned lines of responsibility, delegation of authority and reporting requirements; — an embedded culture of openness of communication between operational management and the Company’s Executive Management on matters relating to risk and control; — deﬁned expenditure authorisation levels; and — a comprehensive system of ﬁnancial reporting. An annual budget for each business unit is prepared in detail and approved by the Group Executive Management. The Board approves the overall Group’s budget and plans. Monthly actual results are reported against budget, prior year and the forecast for the year is revised where necessary. Any signiﬁcant changes and adverse variances are questioned by the Board and remedial action is taken where appropriate. There is weekly cash and treasury reporting to the Group Finance Director and periodic reporting to the Board on the Group’s tax and treasury position. — the date of the meeting; — the text of the resolution; — the number of votes validly cast; — the proportion of the Company’s issued share capital represented by those votes; — the number of votes cast in favour of the resolution; — the number of votes against the resolution; and — the number of shares in respect of which the vote was withheld. The Chairman seeks to arrange for the Chairmen of the Audit, Remuneration and Nominations Committees (or deputies if any of them are unavoidably absent) to be available at the Annual General Meeting to answer those questions relating to the work of these Committees. Accountability and audit The respective responsibilities of the Directors and auditors in connection with the ﬁnancial statements are explained in the Statement of Directors’ Responsibilities on page 36 and the Auditor’s Report on page 37. The Directors ensure the independence of the auditors by requesting annual conﬁrmation of independence which includes the disclosure of all non-audit fees. Risk management and internal control The Board is responsible for the Group’s system of internal control and for reviewing its effectiveness (covering all material controls including ﬁnancial, operational, risk management and compliance). This is undertaken via an annual programme to review the internal control environment at each business unit. Each review is carried out by senior ﬁnance staff independent of that business unit. The results of these reviews are communicated to the Audit Committee. The Board has identiﬁed and evaluated what it considers to be the signiﬁcant risks faced by the Group and has also assessed the adequacy of the actions taken to manage these risks. This has been disclosed on pages 18 and 19. Norcros plc Annual report and accounts 2013 29 Directors’ remuneration report Year ended 31 March 2013 Dear Shareholder Following my appointment as Remuneration Committee Chairman and on behalf of the Board, I am pleased to present the Remuneration Committee’s report for the year ended 31 March 2013. We will be seeking approval from shareholders for this report at our Annual General Meeting. The Remuneration Committee’s overall approach remains unchanged. We are focused on ensuring the Group’s remuneration policy is aligned with shareholders’ interests while also enabling us to attract, retain and motivate our executive leadership. In making remuneration decisions, the Committee considers the Group’s overall performance against its long-term goals. For the year to 31 March 2013, Norcros has delivered another strong set of results as described in both the Chairman’s statement and Business Review. Particular highlights include: — Revenue growth up 5.2% (10.2% on constant currency basis) to £210.7m — Underlying operating proﬁt up 7.4% to £13.0m — The return to proﬁtability of the South African business — The acquisition of Vado, supporting the strategic growth objectives of the Group — Signiﬁcant progress in addressing legacy pension and property issues During the year the Committee also undertook a benchmarking review of our executive remuneration packages and concluded that these are in line with market norms in terms of both structure and level, also meeting the preference for simplicity outlined in recent institutional guidance. As a result, for the year ahead, the remuneration policy remains largely unchanged but will be kept under review. The detail of the Directors’ remuneration is contained in the report that follows, but in summary: Base salary Following a review of Directors’ base salary, the Remuneration Committee considered it appropriate to award salary increases of 3% for the year to 31 March 2014 for the Group Chief Executive and Group Finance Director. This increase is in line with the majority of the Group’s UK employees and inﬂation. Annual bonus Performance against the underlying operating proﬁt targets for the annual bonus was carefully assessed by the Remuneration Committee and annual bonuses of 50% of base salary have been proposed for the year ended 31 March 2013, to be delivered half in cash and half in the form of nil cost options under the 2011 Deferred Share Bonus Plan. For the year to 31 March 2014, the maximum opportunity of the annual bonus will remain at 100% of base salary and the Remuneration Committee has determined that underlying operating proﬁt continues to provide the best measure of short-term performance. Long term incentive The Remuneration Committee considers that the current long-term incentive based on achieving aggregate diluted underlying earnings per share targets over a three-year performance period (Aggregate EPS) continues to provide an effective alignment between the Directors and the long-term interests of all of our shareholders. Awards equal to 100% of base salary were made in the year. We have followed the widespread debate on executive reward and welcome the proposals for improved remuneration reporting to ensure clear and transparent information for our shareholders. During this year we will continue with our preparations to implement the forthcoming regulations on Directors’ remuneration reporting for the year to 31 March 2014. On behalf of the Board, I would like to thank shareholders for their continued support. Jo Hallas Chairman of the Remuneration Committee 30 Norcros plc Annual report and accounts 2013 Directors’ remuneration policy The Company’s policy on remuneration of Directors is to provide packages sufficient to attract, retain and motivate the best people, recognising that they are key to the ongoing success of the business but to avoid paying more than is necessary. Consistent with this policy, the remuneration of our Directors is intended to be competitive and comprises a mix of ﬁxed and performance related remuneration designed to incentivise Directors and align their interests with those of shareholders whilst also reﬂecting good corporate governance practice. When setting Directors’ packages and reviewing potential increases to base salary, consideration is given to pay in the rest of the Company. Base Salary In April 2013 annual salary increases for Nick Kelsall and Martin Payne of 3% were agreed by the Remuneration Committee. The level of increase is consistent with that awarded to the majority of the Group’s UK employees and is broadly in accord with the rate of inﬂation in the UK during the period. These increases took effect from 1 April 2013. Annual Bonus Nick Kelsall and Martin Payne participated in the Company’s annual bonus scheme during the year. The scheme allows for maximum annual bonus opportunities of up to 100% of base salary, determined wholly in terms of Group underlying operating proﬁt. The targets are considered to be commercially sensitive and are not disclosed. For the year to 31 March 2013, the Committee determined that total bonuses of £133,250 and £92,250 would be awarded to Nick Kelsall and Martin Payne respectively, with 50% paid in cash as reﬂected in the Directors’ emoluments table below and 50% in the form of nil cost options under the 2011 Deferred Share Bonus Plan (DSBP). The number of options granted is calculated by dividing the amount of bonus to be deferred by the share price at the relevant time. The options become exercisable on the third anniversary of grant, but lapse in the event of resignation from the Company, unless the Committee exercises its discretion otherwise. The Committee feels that this approach provides an appropriate balance between annual performance measures and longer term alignment with shareholder interests. The proportion of bonus deferred will be kept under review each year. Details of bonuses earned are provided in the audited information below. Long Term Incentive Nick Kelsall and Martin Payne were awarded nil cost share options under the 2011 Approved Performance Share Plan (APSP) in 2011 and 2012. The options will be capable of exercise after three years subject to achieving aggregate diluted underlying earnings per share targets over a three year performance period (Aggregate EPS) . The Committee considers that Aggregate EPS is a transparent, objective and effective measure of performance which is in the long term interests of all of our shareholders and that a three year period is appropriate over which to measure long-term earnings growth. In the event that a Director resigns, the awards will lapse, unless the Committee exercises its discretion otherwise. In any year the value of the shares notionally awarded to a Director under this scheme will not exceed 150% of base salary. If the Aggregate EPS target is met, thereby allowing 100% of his options under the scheme to vest, the percentage composition of each Director’s remuneration (based on his remuneration to 31 March 2013) will be as follows: N. P. Kelsall M. K. Payne D. W. Hamilton Non-performance related Performance related 53% 53% 100% 47% 47% — Of the total performance related proportion, 23% is in respect of the APSP and the remaining 24% in respect of the annual bonus scheme. Directors’ service contracts The details of the service contracts of the present Directors are: R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S N. P. Kelsall M. K. Payne D. W. Hamilton J. E. Brown J. C. Hallas M. G. Towers V. Aggarwal Contract date Notice period 1 April 2011 18 March 2011 1 April 2011 16 July 2007 27 September 2012 28 July 2011 8 October 2009 12 months 12 months 12 months 1 month 1 month 1 month 1 month Nick Kelsall, Martin Payne and David Hamilton have signed rolling contracts. These contracts are terminable on notice by either the Company or Director. The contracts are expressed so as to expire on each Director’s applicable retirement date. John Brown, Jo Hallas, Martin Towers and Vijay Aggarwal are on contracts which specify an initial term of at least three years although these contracts may be terminated at one month’s notice by either the Company or Director. Norcros plc Annual report and accounts 2013 31 Directors’ remuneration report Year ended 31 March 2013 continued Directors’ remuneration policy continued Directors’ service contracts continued The Company’s Articles of Association contain provisions for the retirement and re-election of Directors by rotation. However, the Board has decided that every Director should, where appropriate, offer themselves for re-election at each Annual General Meeting. Accordingly, each continuing Director will seek re-election at the next Annual General Meeting. Biographical details of all of the Directors are set out on pages 22 and 23. Interest in shares The interests of the Directors in the shares of the Company and other Group members were: N. P. Kelsall M. K. Payne D. W. Hamilton J. E. Brown M. G. Towers 31 March 2013 Ordinary shares 7,865,143 300,000 12,247,960 778,387 713,635 31 March 2012 Ordinary shares 7,865,143 — 12,247,960 778,387 500,000 All Directors’ interests are beneﬁcially held. There has been no change in the interests set out above between 31 March 2013 and 13 June 2013. Performance graph The following graph demonstrates how £100 invested in Norcros plc has changed over a ﬁve year period beginning on 1 April 2008 compared with the same investment in a fund mirroring the make-up of the construction and materials index of listed companies: Norcros Plc Construction & Materials 120.00 100.00 ) £ ( t n e m t s e v n I 80.00 60.00 40.00 20.00 0.00 01/04/08 31/03/09 31/03/10 31/03/11 31/03/12 31/03/13 In the opinion of the Directors, the construction and materials index is the most appropriate index against which the performance of Norcros plc should be measured because it is an index of companies in the same industrial sector as Norcros plc. Remuneration Committee The members of the Remuneration Committee during the year were: Jo Hallas (Chairman) (appointed 27 September 2012) John Brown Martin Towers Vijay Aggarwal Les Tench (former Chairman) (resigned 26 July 2012) Compliance of the Remuneration Committee to Corporate Governance requirements and best practice is discussed on page 28. The Remuneration Committee is responsible for setting all aspects of Executive Directors’ remuneration, with its terms of reference being published on the Company’s website at www.norcros.com. The fees for the Non-Executive Directors are determined by the Chairman and Executive members of the Board. The Committee met formally three times during the year. Details of attendance at the meetings are shown in the attendance table on page 27. Girija Patnaik attended two of the meetings as Alternate Non-Executive Director to Vijay Aggarwal. David Hamilton, Executive Director and Company Secretary, attended meetings as Secretary to the Committee. In addition, Nick Kelsall, the Chief Executive, was invited to attend some of the meetings, but was not present when his own remuneration was discussed. 32 Norcros plc Annual report and accounts 2013 Remuneration Committee continued The Committee took advice from Deloitte LLP. Deloitte LLP is a member of the Remuneration Consultants Group and is committed to the Group’s voluntary code of practice for remuneration consultants in the UK. Deloitte LLP did not provide the Company with advice in relation to any other matters during the year. The key matters discussed by the Remuneration Committee during the year included: — review of overall remuneration structure and levels for both Executive Directors and key members of the senior management team; — salary increases for Executive Directors; — performance conditions for 2012 APSP awards and the annual bonus plan for the year to 31 March 2013 for Executive Directors; and — operation of the Deferred Share Bonus Plan. Directors’ emoluments and interests in shares and share option plans Audited information The remainder of the Remuneration Report is audited information. Director N. P. Kelsall M. K. Payne D. W. Hamilton J. E. Brown M. G. Towers V. Aggarwal L. Tench* J. C. Hallas** J. Matthews* J. R. Stevenson* * To date of resignation. ** From date of appointment. Salary and fees £000 Cash bonuses £000 Beneﬁts in kind £000 Expense allowances (including car allowance) £000 Pension related payments £000 267 185 103 63 57 15 13 20 — — 723 67 46 — — — — — — — — 113 1 1 6 — — — — — — — 8 29 20 20 — — — — — — — 69 70 44 — — — — — — — — 2013 Total £000 434 296 129 63 57 15 13 20 — — 2012 Total (restated) £000 365 246 126 80 27 15 40 — 127 13 114 1,027 1,039 Les Tench resigned from the Board on 26 July 2012. Jo Hallas was appointed Non-Executive Director on 27 September 2012. In addition to the above cash bonuses, which represent 50% of the total bonuses in respect of the year to 31 March 2013, awards will be made under the DSBP scheme to Nick Kelsall and Martin Payne of £66,625 (2012: £nil) and £46,125 (2012: £nil), respectively. For further details please see the section entitled Deferred Share Bonus Plan (DSBP) in this report. Beneﬁts in kind consist of medical insurance for every Executive Director. As part of their remuneration arrangements Nick Kelsall and Martin Payne are entitled to receive pension contributions from the Company. Under these arrangements, they can elect for those contributions to be paid in the form of taxable pension allowance, or direct payments into a personal pension plan or the Group’s UK deﬁned contribution scheme. If a payment is made in the form of taxable pension allowance, the amount payable is reduced to allow for employment taxes so that the total cost to the Company is the same as it would have been if the contribution had been made directly into a pension plan. During the year Nick Kelsall elected to take taxable pension allowance of £70,255 (2012: £23,000) with no amounts paid directly into a pension scheme (2012: £52,000 paid into the UK deﬁned contribution scheme). Martin Payne elected to take taxable pension allowance of £13,510 (2012: £7,000) with £30,750 paid into a personal pension plan (2012: £37,500). The total of these amounts has been included as pension related payments in the table above, and, in order to effect fair comparison, the ﬁgures for 2012 have been restated to take into account the total value of pension related payments. There were no annual increases to remuneration levels for Non-Executive Directors. Following John Brown’s resignation as Chairman on 1 November 2012, his salary reduced from £80,000 to £40,000 per annum. Martin Towers, who replaced John Brown as Chairman on the same date, received an increase from £40,000 to £80,000 per annum. Therefore in aggregate the remuneration of Non-Executive Directors was the same as in 2012. Share schemes Savings Related Share Option Scheme (SAYE) The Executive Directors are eligible to participate in the Company’s Savings Related Share Option Scheme which commenced in December 2007. The scheme is open to all UK employees. Participants save a ﬁxed amount of up to £250 per month for three years and are then able to use these savings to buy shares in the Company at a ﬁxed price. These options are not subject to any performance conditions. Date of grant Earliest exercise date Expiry date N. P. Kelsall D. W. Hamilton 23 December 2011 23 December 2011 1 March 2015 1 March 2015 31 August 2015 31 August 2015 Exercise price 10.1p 10.1p Number at 1 April 2012 89,108 89,108 Granted in year Exercised in year — — — — Number at 31 March 2013 89,108 89,108 Norcros plc Annual report and accounts 2013 33 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Directors’ remuneration report continued Directors’ emoluments and interests in shares and share option plans continued Approved Performance Share Plan (APSP) In September 2011, Nick Kelsall, Martin Payne and selected senior management were made awards of shares under the APSP. Vesting of these shares was subject to achieving aggregate diluted underlying earnings per share targets over a three year performance period (Aggregate EPS). 100% of the shares would vest if the Group achieved Aggregate EPS of over 5.75p. 25% of the shares vest if the Group achieved Aggregate EPS of 5.08p and shares would vest on a straight line basis for a performance in between these targets. No shares would vest if the Aggregate EPS performance was below 5.08p. A further grant under the APSP was made in September 2012 to Nick Kelsall, Martin Payne and selected senior management, again subject to achieving Aggregate EPS targets. 100% of the shares would vest if the Group achieved Aggregate EPS of over 6.39p. 25% of the shares vest if the Group achieved Aggregate EPS of 5.39p and shares would vest on a straight line basis for a performance in between these targets. No shares would vest if the Aggregate EPS performance was below 5.39p. Directors’ interests in the APSP N. P. Kelsall M. K. Payne Award date 1 September 2011 22 October 2012 1 September 2011 22 October 2012 Number at 1 April 2012 2,122,449 — 1,469,388 — Granted in year — 2,507,056 — 1,735,654 Number at 31 March 2013 2,122,449 2,507,056 1,469,388 1,735,654 No other Directors have been granted share options in the shares in the Company or other Group entities. Once awarded there have been no subsequent variations to the terms and conditions of the share options. All options were granted in respect of qualifying services. The options were granted at nil cost to the Directors. The performance criteria for all the above share options were consistent with the remuneration policy. The market price of the Company’s shares at the end of the ﬁnancial year was 16.50p and the range of market prices during the year was between 9.25p and 16.75p. Deferred Share Bonus Plan (DSBP) The grant of options under the DSBP in respect of the year to 31 March 2013 has not yet been made. As a result of this, the precise number of options to be granted in respect of the year to 31 March 2013 cannot yet be calculated, though the proposed monetary value of the bonus earned is known. Accordingly, Nick Kelsall and Martin Payne will receive a number of nil cost options calculated by dividing the proposed value of £66,625 and £46,125 respectively by the share price at the date of grant. Directors’ pension entitlement The following Directors had retirement beneﬁts accruing under the Group’s UK deﬁned beneﬁt scheme: Transfer value of accrued pension increase in the year £ N. P. Kelsall M. K. Payne 28,514 3,488 Accrued entitlement £ 15,970 10,696 Transfer value at 31 March 2013 £ 284,596 150,709 N. P. Kelsall M. K. Payne Transfer value at 31 March 2012 £ 236,008 142,505 Increase in accrued pension for the year less CPI inﬂation £ 1,198 — Increase in transfer value less Directors’ contributions £ 48,588 8,204 Increase in accrued pension for the year £ 1,600 248 Neither Nick Kelsall nor Martin Payne are active members of the UK deﬁned beneﬁt scheme. Martin Payne’s entitlement relates to his former employment at H&R Johnson Tiles Limited between 1993 and 2001. 34 Norcros plc Annual report and accounts 2013 Directors’ emoluments and interests in shares and share option plans continued Directors’ pension entitlement continued The accrued pension entitlement is the amount that the Director would receive if he retired at the end of the year. All transfer values have been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The transfer values of the accrued entitlement represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of the Directors’ pension beneﬁts. They do not represent sums payable to individual Directors and, therefore, cannot be added meaningfully to annual remuneration. Information related to other pension payments made is disclosed in the section on Directors’ emoluments on page 33. This report was approved by the Board and signed on its behalf by: J. C. Hallas Chairman of the Remuneration Committee 13 June 2013 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 35 Statement of directors’ responsibilities In respect of the Directors’ Remuneration Report and the ﬁnancial statements The Directors are responsible for preparing the Annual Report, the Directors’ 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 have prepared the Group ﬁnancial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the Parent Company ﬁnancial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company law the Directors must not approve the ﬁnancial statements unless they are satisﬁed that they give a true and fair view of the state of affairs of the Group and the Company and of the proﬁt or loss of the Group 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 accounting estimates that are reasonable and prudent; — state whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and Parent Company ﬁnancial statements respectively; 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 Company’s transactions and disclose with reasonable accuracy at any time the ﬁnancial position of the Company and the Group and enable them to ensure that the ﬁnancial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group ﬁnancial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of ﬁnancial statements may differ from legislation in other jurisdictions. Each of the Directors, whose names and functions are listed in Directors’ Report conﬁrm that, to the best of their knowledge: — the Group ﬁnancial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt of the Group; and — the Business Review includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. N. P. Kelsall Group Chief Executive M. K. Payne Group Finance Director 36 Norcros plc Annual report and accounts 2013 Independent auditors’ report To the members of Norcros plc We have audited the Group ﬁnancial statements of Norcros plc for the year ended 31 March 2013 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income and Expense, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Changes in Equity and the related notes. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ Responsibilities set out on page 36, the Directors are responsible for the preparation of the Group ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the ﬁnancial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufficient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the Directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non-ﬁnancial information in the Annual Report to identify material inconsistencies with the audited ﬁnancial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on ﬁnancial statements In our opinion the Group ﬁnancial statements: — give a true and fair view of the state of the Group’s affairs as at 31 March 2013 and of its proﬁt and cash ﬂows for the year then ended; — have been properly prepared in accordance with IFRSs as adopted by the European Union; and — have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation. Opinion on other matter prescribed by the Companies Act 2006 In our opinion: — the information given in the Directors’ Report for the ﬁnancial year for which the Group ﬁnancial statements are prepared is consistent with the Group ﬁnancial statements; and — the information given in the Corporate Governance Statement set out on page 29 with respect to internal control and risk management systems and about share capital structures is consistent with the Group ﬁnancial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: — 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; or — a corporate governance statement has not been prepared by the Parent Company. Under the Listing Rules we are required to review: — the Directors’ statement, set out on page 29, in relation to going concern; — the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code speciﬁed for our review; and — certain elements of the report to shareholders by the Board on Directors’ remuneration. Other matter We have reported separately on the Parent Company ﬁnancial statements of Norcros plc for the year ended 31 March 2013 and on the information in the Directors’ Remuneration Report that is described as having been audited. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Martin Heath (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Manchester 13 June 2013 Norcros plc Annual report and accounts 2013 37 Consolidated income statement Year ended 31 March 2013 Continuing operations Revenue Operating proﬁt Underlying* operating proﬁt Exceptional operating items Operating proﬁt Finance costs Exceptional ﬁnance costs Total ﬁnance costs Finance income IAS 19 ﬁnance income Proﬁt before taxation Taxation Proﬁt for the year Earnings per share attributable to equity holders of the Company From continuing operations: Basic earnings per share Diluted earnings per share Weighted average number of shares for basic earnings per share (millions) Non-GAAP measures: Underlying* proﬁt before taxation (£m) Underlying* earnings (£m) Basic underlying* earnings per share Diluted underlying* earnings per share Notes 2013 £m 2012 £m 2 3 5 6 5 6 22 7 9 9 9 8 8 9 9 210.7 200.3 8.6 13.0 (4.4) 8.6 (1.7) — (1.7) 0.9 2.2 10.0 (0.9) 9.1 1.6p 1.6p 580.0 11.7 11.0 1.9p 1.9p 12.1 12.1 — 12.1 (3.1) (1.2) (4.3) — 1.6 9.4 — 9.4 1.6p 1.6p 577.2 10.7 11.1 1.9p 1.9p * Underlying is deﬁned as before exceptional items and, where relevant, amortisation of costs of raising ﬁnance, movement on fair value of derivative ﬁnancial instruments, discounting of property lease provisions and ﬁnance costs relating to pension schemes, less attributable taxation. Consolidated statement of comprehensive income and expense Year ended 31 March 2013 Proﬁt for the year Other comprehensive expense: Items that may be subsequently be reclassiﬁed to the income statement Actuarial losses on retirement beneﬁt obligations Foreign currency translation adjustments Other comprehensive expense for the year Total comprehensive expense for the year Items in the statement are disclosed net of tax. 38 Norcros plc Annual report and accounts 2013 Notes 22 2013 £m 9.1 (12.3) (4.8) (17.1) (8.0) 2012 £m 9.4 (10.6) (5.3) (15.9) (6.5) Consolidated balance sheet At 31 March 2013 Non-current assets Goodwill Property, plant and equipment Investment properties Deferred tax assets Current assets Inventories Trade and other receivables Derivative ﬁnancial instruments Pension scheme asset Cash and cash equivalents Current liabilities Trade and other payables Derivative ﬁnancial instruments Current tax liabilities Financial liabilities – borrowings Net current assets Total assets less current liabilities Non-current liabilities Financial liabilities – borrowings Pension scheme liability Other non-current liabilities Provisions Net assets Financed by: Share capital Share premium Retained earnings and other reserves Total equity Notes 11 12 13 20 14 15 19 22 16 17 19 18 18 22 21 23 2013 £m 27.6 43.5 5.4 10.2 86.7 52.8 44.0 0.9 0.1 6.8 104.6 (51.7) — (1.8) (0.5) (54.0) 50.6 137.3 (37.0) (30.0) (2.2) (6.5) (75.7) 61.6 5.8 0.5 55.3 61.6 2012 £m 23.4 44.8 5.4 6.4 80.0 45.5 40.7 — 0.6 2.9 89.7 (50.6) (0.4) (1.1) (0.4) (52.5) 37.2 117.2 (20.3) (18.7) (1.7) (5.4) (46.1) 71.1 5.8 0.2 65.1 71.1 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S The ﬁnancial statements on pages 38 to 65 were approved on 13 June 2013 and signed on behalf of the Board by: N. P. Kelsall Group Chief Executive Group Finance Director M. K. Payne Norcros plc Annual report and accounts 2013 39 Consolidated cash ﬂow statement Year ended 31 March 2013 Cash generated from operations Income taxes paid Interest paid Net cash generated from operating activities Cash ﬂows from investing activities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Acquisition of subsidiary undertakings net of cash acquired Net cash used in investing activities Cash ﬂows from ﬁnancing activities Net proceeds from issue of ordinary share capital Repayment of borrowings Capitalised ﬁnance costs Drawdown of borrowings Dividends paid to the Company’s shareholders Net cash generated from ﬁnancing activities Net increase/(decrease) in cash at bank and in hand and bank overdrafts Cash at bank and in hand and bank overdrafts at beginning of the year Exchange movements on cash and bank overdrafts Cash at bank and in hand and bank overdrafts at end of the year Notes 24 27 25 16 2013 £m 6.6 (1.0) (1.3) 4.3 2.5 (6.7) (10.6) (14.8) 0.3 — (0.1) 16.8 (2.5) 14.5 4.0 2.5 (0.1) 6.4 2012 £m 6.0 (0.6) (1.6) 3.8 — (6.7) — (6.7) 0.2 (17.0) (0.8) 21.0 (2.2) 1.2 (1.7) 4.6 (0.4) 2.5 40 Norcros plc Annual report and accounts 2013 Consolidated statement of changes in equity Year ended 31 March 2013 At 1 April 2011 Comprehensive income: Proﬁt for the year Other comprehensive expense: Actuarial loss on retirement beneﬁt obligations Foreign currency translation adjustments Total other comprehensive expense Transactions with owners: Purchase of own shares Capital re-organisation Shares issued Dividends paid Share option schemes and warrants At 31 March 2012 Comprehensive income: Proﬁt for the year Other comprehensive expense: Actuarial loss on retirement beneﬁt obligations Foreign currency translation adjustments Total other comprehensive expense Transactions with owners: Shares issued Dividends paid Share option schemes and warrants At 31 March 2013 Ordinary share capital £m 19.2 — — — — (13.4) — — — — 5.8 — — — — — — — 5.8 Capital redemption reserve £m — — — — — 13.4 (13.4) — — — — — — — — — — — — Share premium £m 86.8 — — — — — (86.8) 0.2 — — 0.2 — — — — 0.3 — — 0.5 Translation reserve £m 11.1 — — (5.3) (5.3) — — — — — 5.8 — — (4.8) (4.8) — — — 1.0 Retained (losses)/ earnings £m (37.7) 9.4 (10.6) — (10.6) — 100.2 — (2.2) 0.2 59.3 9.1 (12.3) — (12.3) — (2.5) 0.7 54.3 Total £m 79.4 9.4 (10.6) (5.3) (15.9) — — 0.2 (2.2) 0.2 71.1 9.1 (12.3) (4.8) (17.1) 0.3 (2.5) 0.7 61.6 Following the July 2011 AGM the Company repurchased its 148,754,684 9p deferred shares for a nominal value. The value of these shares, being £13.4m, was placed in a capital redemption reserve. Immediately following this transaction the Company cancelled its share premium account and capital redemption reserve. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 41 Notes to the group accounts Year ended 31 March 2013 1. Group accounting policies General information Norcros plc (the “Company”), which is the ultimate Parent Company of the Norcros Group, is incorporated in England as a public company limited by shares. The shares of the Company are listed on the London Stock Exchange market of listed securities. The consolidated ﬁnancial statements of the Group were approved by the Board on 13 June 2013. Basis of preparation The principal accounting policies applied in the preparation of this ﬁnancial report are set out below. These policies have been consistently applied to the information presented, unless otherwise stated. The ﬁnancial statements have been prepared under the historical cost convention, except for derivative ﬁnancial instruments, the deﬁned beneﬁt pension scheme, contingent consideration and share-based payments which are stated at their fair value. The consolidated ﬁnancial statements have been prepared in accordance with IFRS as endorsed by the European Union issued by the International Accounting Standards Board (IASB), with the interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are effective as of the Balance Sheet date and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The preparation of ﬁnancial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are signiﬁcant to the consolidated ﬁnancial statements, are explained below. Standards, amendments and interpretations effective in 2013 The Group has adopted the following new IFRS amendments as of 1 April 2012: — Amendments to IFRS 7, ‘Financial instruments: Disclosures’ on transfers of assets’ – These amendments promote transparency in the reporting of transfer transactions and improve users’ understanding of the risk exposures relating to transfers of ﬁnancial assets and the effect of those risks on an entity’s ﬁnancial position, particularly those involving securitisation of ﬁnancial assets. — Amendment to IAS 1, ‘Financial statement presentation’, regarding other comprehensive income The adoption of the above amendments did not have a material impact on the ﬁnancial statements. Standards, amendments and interpretations that are not effective and have not been early adopted by the Group: — Amendment to IAS 12, ‘Income taxes’, on deferred tax — Amendment to IFRS 1, ‘First time adoption’, on ﬁxed dates and hyperinﬂation — Amendment to IAS 19, ‘Employee beneﬁts’ — IFRS 10, ‘Consolidated ﬁnancial statements’ — IFRS 11, ‘Joint arrangements’ — IFRS 12, ‘Disclosures of interests in other entities’ — Amendments to IFRS 10, 11 and 12 on transition guidance — IFRS 13, ‘Fair value measurement’ — IAS 27 (revised 2011), ‘Separate ﬁnancial statements’ — IAS 28 (revised 2011), ‘Associates and joint ventures’ — Amendment to IFRS 7, ‘Financial instruments: Disclosures’, on offsetting ﬁnancial assets and ﬁnancial liabilities — Amendment to IAS 32, ‘Financial instruments: Presentation’, on offsetting ﬁnancial assets and ﬁnancial liabilities — Amendment to IFRS 1, ‘First time adoption’, on Government loans — Amendments to IFRS 10, ‘Consolidated ﬁnancial statements’, IFRS 12 and IAS 27 for investment entities — IFRS 9 ‘Financial instruments’ on classiﬁcation and measurement of ﬁnancial assets and liabilities — Annual improvements 2011 The above amendments are not expected to have a material impact on the Group’s ﬁnancial statements with the exception of the amendment to IAS19, ‘Employee beneﬁts’. Under IAS 19, ‘Employee beneﬁts’, the interest cost on the deﬁned beneﬁt obligation, and the expected rate of return on plan assets, will be replaced with a net interest charge based on the net deﬁned beneﬁt liability using the discount rate measured at the beginning of the year. Additionally, costs in relation to the administration of the pension scheme will need to be reﬂected within the income statement rather that the statement of comprehensive income and expense. Adoption of this standard likely to result in a higher charge in the income statement, the precise quantum of which is currently being reviewed. . 42 Norcros plc Annual report and accounts 2013 1. Group accounting policies continued Summary of signiﬁcant accounting policies The principal accounting policies adopted in the preparation of the ﬁnancial statements are set out as follows. These policies have been consistently applied to all periods presented. Basis of consolidation Subsidiaries The consolidated historical ﬁnancial statements incorporate the ﬁnancial statements of Norcros plc and entities controlled by Norcros plc (its subsidiaries) made up to the reporting date each year. Control is achieved where Norcros plc has the power to govern the ﬁnancial and operating policies of an investee entity so as to obtain beneﬁts from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair value at the date of acquisition. Any excess of the cost of the acquisition over the fair values of the identiﬁable net assets acquired is recognised as goodwill. Any deﬁciency in the cost of acquisition below the fair values of the identiﬁable net assets acquired (discount on acquisition) is credited to the Income Statement in the period of acquisition. All acquisition costs are expensed as incurred. The results of subsidiaries acquired or disposed of during the year are included in the Income Statement from the effective date of acquisition or disposal, as appropriate. Where necessary, adjustments are made to the ﬁnancial statements of subsidiaries to bring the accounting policies into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. Critical estimates The Group’s accounting policies have been set by management and approved by the Audit Committee. The application of these accounting policies to speciﬁc scenarios requires estimates and assumptions to be made concerning the future. These are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The resulting accounting estimates will, by deﬁnition, seldom equal the related actual results. Under IFRS, estimates or judgements are considered critical where they involve a signiﬁcant risk or cause a material adjustment to the carrying amounts of assets and liabilities from period to period. This may be because the estimate or judgement involves matters which are highly uncertain, or because different estimation methods or assumptions could reasonably have been used. Critical judgements have been made in the following areas: — estimated impairment of goodwill, long life assets and property, plant and equipment – the Group tests annually whether these assets have suffered any impairment, in accordance with its accounting policy. The recoverable amounts of cash-generating units (CGUs) have been determined based on value-in-use calculations. These calculations require the use of estimates, both in arriving at the expected future cash ﬂows and the application of a suitable discount rate in order to calculate the present value of these ﬂows. These calculations have been carried out using the assumptions in note 11; — retirement beneﬁt obligations – the present value of pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net expense for pensions include the discount rate. Any changes in these assumptions can impact the carrying amount of retirement beneﬁt obligations (see note 22); — property provisions – where a property leased by the Group is vacated, but an ongoing lease commitment remains, provision is made for the onerous element of the lease. Key assumptions are the extent to which properties are let and rentals are achieved. Any changes in these assumptions can affect the quantum of the provisions; — deferred tax – deferred tax assets are recognised on losses and capital allowances carried forward only to the extent that it is probable they will be available for use against future proﬁts and that there will be sufficient future taxable proﬁt available against which the temporary difference can be utilised. In arriving at a judgement in relation to the recognition of deferred tax assets, management considers the regulations applicable to taxation and whether there are sufficient future taxable proﬁts. Future taxable proﬁts may be higher or lower than estimates made when determining whether it is necessary to record a tax asset and the amount to be recorded. Furthermore changes to the legislative framework or application of tax law may result in a management reassessment of the level of recognition of deferred tax assets; and — fair value measurement of contingent consideration – a proportion of the deferred consideration payable in respect of the Group’s acquisition of Vado on 31 March 2013 is contingent upon the continued employment of certain vendors within a speciﬁed timeframe. This element falls to be treated as remuneration in accordance with IFRS 3 (revised). This will be assessed at fair value and charged to the income statement in the period over which the Group receives the beneﬁt of the employment services of these vendors. The determination of this fair value will be based on an estimate of the future performance of Vado over a speciﬁed timeframe, and is therefore subject to uncertainty. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 43 Notes to the group accounts Year ended 31 March 2013 continued 1. Group accounting policies continued Revenue recognition Revenue comprises the consideration received or receivable for the sale of goods and services provided alongside the supply of goods in the ordinary course of the Group’s activities, and is shown net of value added and other sales-based taxes, customer volume rebates, discounts and promotional support. Revenue is recognised when signiﬁcant risks and rewards of ownership of the goods are transferred to the buyer, which is usually on despatch or upon sale to a customer in the case of the Group’s retail operations. Revenue received in respect of extended warranties is recognised over the period of the warranty. Segmental reporting The Group operates in three main geographical areas: the UK, South Africa and the Rest of the World. All inter-segment transactions are made on an arm’s length basis. The chief operating decision maker (being the Board) assesses performance and allocates resources based on geography as each segment has similar economic characteristics, complementary products, distribution channels and regulatory environments. Goodwill Goodwill is recognised as an asset and reviewed for impairment at least annually or whenever there is an indicator of impairment. Goodwill is carried at cost less amortisation charged prior to the Group’s transition to IFRS on 1 April 2004 less accumulated impairment losses. Any impairment is recognised in the period in which it is identiﬁed. Impairment of long life assets Property, plant and equipment and other non-current assets are reviewed on an annual basis to determine whether events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If any such indication exists, the recoverable amount of the asset is estimated as either the higher of the asset’s net selling price or value-in-use; the resultant impairment (the amount by which the carrying amount of the asset exceeds its recoverable amount) is recognised as a charge in the Consolidated Income Statement. The value-in-use is calculated as the present value of the estimated future cash ﬂows expected to result from the use of assets and their eventual disposal proceeds. In order to calculate the present value of estimated future cash ﬂows the Group uses an appropriate discount rate adjusted for any associated risk. Estimated future cash ﬂows used in the impairment calculation represent management’s best view of likely future market conditions and current decisions on the use of each asset or asset group. Property, plant and equipment Property, plant and equipment is initially measured at cost. Cost comprises the purchase price (after deducting trade discounts and rebates) and any directly attributable costs. Property, plant and equipment is stated at cost less accumulated depreciation and any provision for impairment in value. Impairment charges are recognised in the income statement when the carrying amount of an asset is greater than the estimated recoverable amount, calculated with reference to future discounted cash ﬂows that the assets are expected to generate when considered as part of an income-generating unit. Land is not depreciated. Depreciation on other assets is provided on a straight line basis to write down assets to their residual value evenly over the estimated useful lives of the assets from the date of acquisition by the Group. The estimated useful lives of Group assets are as follows: Buildings 25–50 years Plant, machinery and equipment 3–15 years Motor vehicles 4 years The assets’ residual values and useful lives are reviewed and adjusted if appropriate at each Balance Sheet date. Investment property Investment property comprises mainly land and relates to property which is either sub-let to a third party or is not being utilised in the Group’s core operations. Investment property is held at cost less depreciation on buildings (land is not depreciated). Investment property is depreciated over 50 years. Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Provisions are made for slow-moving and obsolete items. 44 Norcros plc Annual report and accounts 2013 1. Group accounting policies continued Taxation Current tax, which comprises UK and overseas corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the Balance Sheet date. Deferred tax is the tax expected to be payable or recoverable on the difference between the carrying amounts of assets and liabilities in the Balance Sheet and the corresponding tax bases used in the computation of taxable proﬁts and is accounted for using the Balance Sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable proﬁt will be available against which deductible temporary differences can be utilised. Deferred tax is calculated at the tax rates that are expected to apply in the period in which the liability is settled or the asset is realised and is charged in the Income Statement, except where it relates to items charged or credited to equity via the Statement of Comprehensive Income, when the deferred tax is also dealt with in equity and is shown in the Statement of Comprehensive Income. Operating leases Annual rentals are charged/credited directly against proﬁts on a straight line basis over the lease term. Provisions Warranty provisions – provision is made for the estimated liability on products under warranty. Liability is recognised upon the sale of a product and is estimated using historical data. Restructuring provisions – provision is made for costs of restructuring activities to carried out by the Group when the Group is demonstrably committed to incurring the cost in a future period and the cost can be reliably measured. Property provisions – where the Group has vacated a property but is committed to a leasing arrangement, an onerous lease provision is recorded. This is calculated as the cost that management expects to incur over the period of the lease, which is net of any expected future sub-lease income. Provisions are measured at the best estimate of the amount to be spent and discounted where material. Retirement beneﬁt obligations The Group operates a deﬁned beneﬁt scheme in the UK and South Africa and a number of deﬁned contribution pension schemes. A full actuarial valuation of the Group’s deﬁned beneﬁt scheme is carried out every three years with interim reviews in the intervening years; these valuations are updated to 31 March each year by qualiﬁed independent actuaries. The operating and ﬁnancing costs of the scheme are recognised separately in the Income Statement; service costs are spread systematically over the lives of employees; and ﬁnancing costs are recognised in the periods in which they arise. Actuarial gains and losses, including differences between the expected and actual return on scheme assets, are recognised, net of the related deferred tax, in the Statement of Comprehensive Income. The asset or liability in respect of deﬁned beneﬁt pension scheme is the present value of the deﬁned beneﬁt obligation at the Balance Sheet date less the market value of scheme assets. The deﬁned beneﬁt obligation is calculated annually by independent actuaries using the projected unit cost method. The present value of the deﬁned beneﬁt obligation is determined by the estimated future cash outﬂows using interest rates of Government securities, which have terms to maturity approximating the terms of the related liability. Pension scheme surpluses (to the extent that they are considered recoverable) or deﬁcits are recognised in full on the face of the Balance Sheet. Curtailment gains are recognised in the Income Statement. The costs of the Group’s deﬁned contribution pension schemes are charged to the Income Statement in the period in which they fall due. The assets of these schemes are held in independently administered funds. Exceptional items Exceptional items are transactions or events which occur outside the course of the Group’s normal operations. They include proﬁts and losses on disposal of non-current assets outside the normal course of business, restructuring costs, acquisition fees and large or signiﬁcant one-off items. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 45 Notes to the group accounts Year ended 31 March 2013 continued 1. Group accounting policies continued Financial assets and liabilities Borrowings – the Group measures all borrowings initially at fair value. This is taken to be the fair value of the consideration received. Transaction costs (any such costs that are incremental and directly attributable to the issue of the ﬁnancial instrument) are included in the calculation of the effective interest rate and are, in effect, amortised through the Income Statement over the duration of the borrowing. Borrowings are classiﬁed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the Balance Sheet date. Treasury derivatives – where deemed necessary, the Group uses interest rate swaps to manage exposure to interest rate ﬂuctuations. The Group’s exposure to foreign exchange rate ﬂuctuations is managed through the use of forward exchange contracts and cross currency swaps. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of these derivative instruments are recognised immediately in the Income Statement. Amounts payable/receivable under interest rate swaps are accounted for as adjustments to ﬁnance cost/income for the period. Cash and cash equivalents – cash and cash equivalents include cash in hand and deposits held at call with banks and bank overdrafts. Cash and cash equivalents are offset against overdrafts and borrowings when there is a legally enforceable right to do so. Trade receivables – trade receivables are recognised initially at fair value and subsequently reviewed for impairment. A provision for impairment of trade receivables is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Evidence including signiﬁcant ﬁnancial difficulties of a debtor, probability that the debtor will enter bankruptcy or ﬁnancial re-organisation and default or delinquency in payment are considered indicators that the trade receivables are impaired. The amount of provision is the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows, discounted at the effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of loss is recognised in the income statement within administration costs. When a trade receivable is uncollectable, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against administration costs in the income statement. Trade payables – trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Fair value estimation The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the Balance Sheet date. The Group determines the fair value of its remaining ﬁnancial instruments through the use of estimated discounted cash ﬂows. The fair value of interest rate and cross currency swaps is calculated as the net present value of the estimated future cash ﬂows. The carrying values less impairment provision of trade receivables and payables are assumed to approximate to their fair values due to their short-term nature. The fair value of ﬁnancial liabilities for disclosure purposes is estimated by discounting the future contractual cash ﬂows at the current market interest rate that is available to the Group for similar ﬁnancial instruments. Research and development Expenditure on research is charged against proﬁts for the year in which it is incurred. The Directors do not believe development costs can be measured accurately enough to meet the requirements for capitalisation. Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s ﬁnancial statements in the period in which the dividends are approved by the Company’s shareholders, or when paid if earlier. Foreign currency transactions Functional currency Items included in the ﬁnancial statements of each entity in the Group are measured using the currency that best reﬂects the economic substance of the underlying events and circumstances relevant to that entity (the “functional currency”). The consolidated ﬁnancial statements are presented in Sterling, which is the functional and presentational currency of the parent entity. Transactions and balances Assets and liabilities expressed in currencies other than functional currency are translated at rates applicable at the year end and trading results at average rates for the year. Exchange gains and losses of a trading nature are dealt with in arriving at operating proﬁt. Translation of overseas net assets Exchange gains and losses arising on the retranslation of overseas net assets and results are taken directly to reserves. 46 Norcros plc Annual report and accounts 2013 1. Group accounting policies continued Share capital Issued share capital is recorded in the Balance Sheet at nominal value with any premium at that date of issue being credited to the share premium account. Share-based payments The Group operates a number of equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each Balance Sheet date, the Company revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. 2. Segmental reporting The Group operates in three main geographical areas: the UK, South Africa and the Rest of the World. All inter-segment transactions are made on an arm’s length basis. The chief operating decision maker (being the Board) assesses performance and allocates resources based on geography as each segment has similar economic characteristics, complementary products, distribution channels and regulatory environments. Continuing operations — year ended 31 March 2013 Revenue Underlying operating proﬁt Exceptional operating items Operating proﬁt Finance costs Finance income IAS 19 ﬁnance income Proﬁt before taxation Taxation Proﬁt from continuing operations Net debt Segmental assets Segmental liabilities Additions to property, plant and equipment Proceeds from disposals of property, plant and equipment Proﬁt on disposal of property, plant and equipment Depreciation UK £m 122.8 11.9 (4.1) 7.8 128.1 (113.5) 2.5 — — 3.8 South Africa £m 77.6 1.0 (0.3) 0.7 54.7 (14.8) 4.0 2.5 1.2 2.3 Rest of the World £m 10.3 0.1 — 0.1 8.5 (1.4) 0.2 — — 0.1 Group £m 210.7 13.0 (4.4) 8.6 (1.7) 0.9 2.2 10.0 (0.9) 9.1 (30.7) 191.3 (129.7) 6.7 2.5 1.2 6.2 Revenues of £49.6m (2012: £32.9m) are derived from a single customer. These revenues are attributable to the UK segment. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 47 Notes to the group accounts Year ended 31 March 2013 continued 2. Segmental reporting continued Continuing operations — year ended 31 March 2012 Revenue Underlying operating proﬁt/(loss) Exceptional operating items Operating proﬁt/(loss) Finance costs Exceptional ﬁnance costs IAS 19 ﬁnance income Proﬁt before taxation Taxation Proﬁt from continuing operations Net debt Segmental assets Segmental liabilities Additions to property, plant and equipment Proﬁt on disposal of property, plant and equipment Depreciation 3. Operating proﬁt The following items have been included in arriving at operating proﬁt: Staff costs (see note 4) Depreciation of property, plant and equipment (all owned assets) Depreciation of investment properties Other operating lease rentals payable: – plant and machinery – other Research and development expenditure Proﬁt on disposal of property, plant and equipment UK £m 116.8 12.5 — 12.5 104.4 (82.2) 2.7 — 3.9 South Africa £m 74.0 (0.5) (0.5) (1.0) 57.1 (15.0) 2.7 0.4 2.3 Rest of the World £m 9.5 0.1 0.5 0.6 8.2 (1.4) — — 0.1 2013 £m 41.3 6.2 — 1.6 2.7 2.2 (1.2) Auditor’s remuneration During the year the Group (including its overseas subsidiaries) obtained the following services from the Company’s auditor and its associates: Audit of the Parent Company and consolidated ﬁnancial statements Audit of the Company’s subsidiaries Tax services Other services – due diligence services 2013 £m 0.1 0.1 0.1 0.1 0.4 Group £m 200.3 12.1 — 12.1 (3.1) (1.2) 1.6 9.4 — 9.4 (17.8) 169.7 (98.6) 5.4 0.4 6.3 2012 £m 41.2 6.2 0.1 1.6 3.1 2.2 (0.4) 2012 £m 0.1 0.1 0.1 — 0.3 48 Norcros plc Annual report and accounts 2013 4. Employees Staff costs: – wages and salaries – social security costs – pension costs: – deﬁned beneﬁt – deﬁned contributions 2013 £m 36.3 2.5 1.3 1.2 41.3 2012 £m 36.3 2.3 1.5 1.1 41.2 Included in wages and salaries for 2012 were £0.3m of redundancy costs which were classiﬁed as exceptional items in the income statement. There are no redundancy costs in 2013. Average monthly numbers employed: – UK – overseas 2013 Number 815 793 1,608 2012 Number 827 803 1,630 Owing to the fact that the acquisition of Vado took place on 31 March 2013, the above table does not include any Vado employees. At 31 March 2013 Vado employed 144 staff. Directors’ emoluments Salaries and short-term employee beneﬁts Post employment beneﬁts 2013 £m 0.9 0.1 1.0 Further information about the Directors’ remuneration may be found in the Directors’ Remuneration Report on pages 30 to 35. Highest paid Director Salaries and short-term employee beneﬁts Post employment beneﬁts Key management compensation Salaries and short-term employee beneﬁts Post employment beneﬁts 2013 £m 0.3 0.1 0.4 2013 £m 1.6 0.1 1.7 Key management is deﬁned as the Directors of Norcros plc together the Managing Directors of the Group’s signiﬁcant divisions. 5. Exceptional items Exceptional operating items Property provisions1 Equity related acquisition fees2 Restructuring costs3 Impairment of associate’s carrying value and related costs4 Exceptional ﬁnance costs Write-off of capitalised costs of raising debt ﬁnance5 2013 £m 3.0 0.9 0.5 — 4.4 — 2012 £m 0.9 0.1 1.0 2012 £m 0.3 0.1 0.4 2012 £m 1.6 0.1 1.7 2012 £m — — 0.5 (0.5) — 1.2 1 The provision to cover the Group’s onerous property leases was increased by £3.0m during the year, following a reappraisal of the future cash ﬂows arising from these leases. 2 The fees arose as a result of the Group’s acquisition of Vado (see note 27). 3 Restructuring costs related to redundancies, asset write-downs and consultancy costs following the implementation of a programme of restructuring initiatives throughout the Group’s business units. In 2013 this included a loss of £0.3m on the sale of the small non-core South African Nortec adhesives business. 4 In 2009 the carrying value of the Group’s Greek associate was fully impaired together with associated costs including the mark to market value of the related cross currency swap. This swap matured in 2012 and other associated costs were paid. The cost of settling the cross currency swap was £0.5m lower than initially estimated. 5 Following the reﬁnancing of the Group’s banking facilities in September 2011, £1.2m of costs relating to the previous banking arrangements were written off. Norcros plc Annual report and accounts 2013 49 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Notes to the group accounts Year ended 31 March 2013 continued 6. Finance income and costs Finance costs Interest payable on bank borrowings Amortisation of costs of raising debt ﬁnance Movement on fair value of derivatives Discount on property lease provisions Total ﬁnance costs Finance income Movement on fair value of derivative ﬁnancial instruments Total ﬁnance income Net ﬁnance costs 7. Taxation Taxation comprises: Current UK taxation Deferred Origination and reversal of temporary differences Taxation 2013 £m 1.3 0.2 — 0.2 1.7 (0.9) (0.9) 0.8 2013 £m 1.3 (0.4) 0.9 2012 £m 1.4 0.7 0.7 0.3 3.1 — — 3.1 2012 £m 0.8 (0.8) — The tax for the year is different from the standard rate of corporation tax in the UK (24% throughout the period). The differences are explained below: Proﬁt before tax Proﬁt on ordinary activities multiplied by rate of corporation tax in the UK of 24% (2012: 26%) Effects of: – over provision in prior years – income/expenses not chargeable/deductible for tax purposes – recognition of overseas tax losses – overseas tax losses for which no deferred tax asset was recognised – recognition of UK losses and capital allowances – origination and timing differences Total tax charge 8. Non-GAAP measures Proﬁt before taxation Adjusted for: – exceptional operating items – amortisation of costs of raising ﬁnance – net movement on fair value of derivative ﬁnancial instruments – discount on property lease provisions – IAS 19 ﬁnance income Underlying proﬁt before taxation Taxation attributable to underlying proﬁt before taxation Underlying earnings 2013 £m 10.0 (2.4) — (0.9) 2.0 — 0.3 0.1 (0.9) 2013 £m 10.0 4.4 0.2 (0.9) 0.2 (2.2) 11.7 (0.7) 11.0 2012 £m 9.4 (2.4) 0.3 1.0 — (0.9) 1.7 0.3 — 2012 £m 9.4 — 1.9 0.7 0.3 (1.6) 10.7 0.4 11.1 Underlying proﬁt before taxation is deﬁned as proﬁt before taxation, exceptional items, amortisation of costs of raising ﬁnance, movement on fair value of derivative ﬁnancial instruments, discounting of property lease provisions and ﬁnance costs relating to pension schemes. The Directors believe that underlying proﬁt before taxation and underlying earnings provide shareholders with additional useful information on the underlying performance of the Group. 50 Norcros plc Annual report and accounts 2013 9. Earnings per share Basic EPS is calculated by dividing the proﬁt attributable to shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held in the Norcros Employee Beneﬁt Trust. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potential dilutive ordinary shares. At 31 March 2013 the potential dilutive ordinary shares amounted to 8,895,196 (2012: 2,383,527) as calculated in accordance with IAS 33. The calculation of EPS is based on the followings proﬁts and numbers of shares: Basic and diluted: – earnings for the year – underlying earnings for the year (see note 8) Weighted average number of shares for basic earnings per share Share options and warrants Weighted average number of shares for diluted earnings per share 2013 £m 9.1 11.0 2012 £m 9.4 11.1 2013 Number 2012 Number 580,021,666 8,895,196 577,231,925 2,383,527 588,916,862 579,615,452 Basic earnings per share Diluted earnings per share Basic underlying earnings per share Diluted underlying earnings per share 10. Share-based payments Approved Performance Share Plan 2011 (APSP) Approved Performance Share Plan 2012 (APSP) Save As You Earn Scheme (2) (SAYE) Save As You Earn Scheme (3) (SAYE) Save As You Earn Scheme (4) (SAYE) Save As You Earn Scheme (5) (SAYE) 2013 1.6p 1.6p 1.9p 1.9p Price per share 1 April 2012 Granted Exercised Lapsed 31 March 2013 Date from which exercisable 0.0p 7,045,037 0.0p 9.3p 1,483,480 9.4p 1,525,367 10.1p 2,894,563 11.8p — 7,045,037 — 12,520,560 — — 12,520,560 — — (927,172) — (556,308) (127,146) 1,398,221 — — — (139,006) 2,755,557 — — 1,229,469 — — 1,229,469 30.06.14 30.06.15 — 01.03.12 01.03.14 01.03.15 01.03.16 2012 1.6p 1.6p 1.9p 1.9p Expiry date 01.09.21 22.10.22 31.08.12 31.08.14 31.08.15 31.08.16 Details of the terms of the APSP and SAYE scheme are disclosed in the Directors’ Remuneration report. In accordance with IFRS 2, the fair value of equity-settled share-based payments to employees is determined at the date of grant and is expensed on a straight line basis over the vesting period on the Group’s estimate of shares that will eventually vest. A charge of £0.7m was recognised in respect of share options in the period (2012: £0.2m). The Group uses a Black-Scholes pricing model to determine the annual charge for its share-based payments. The assumptions used in this model for each share-based payment are as follows: Date of grant Initial exercise price Revised exercise price after capital raising adjustment Number of shares granted initially Revised number of shares after capital raising adjustment Expected volatility Expected option life Risk free rate Expected dividend yield SAYE (2) SAYE (3) SAYE (4) SAYE (5) 22.12.08 10.0p 9.3p 4,325,760 4,642,065 69.95% 3 years 4.6% 3% 20.12.10 9.4p N/A 1,864,296 1,864,296 67.39% 3 years 2.1% 3% 20.12.11 10.1p N/A 3,001,492 3,001,492 59.53% 3 years 2.0% 3% 20.12.12 11.8p N/A 1,229,469 1,229,469 44.23% 3 years 2.1% 3% Norcros plc Annual report and accounts 2013 51 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Notes to the group accounts Year ended 31 March 2013 continued 10. Share-based payments continued Date of grant Initial exercise price Revised exercise price after capital raising adjustment Number of shares granted initially Revised number of shares after capital raising adjustment Expected volatility Expected option life Risk free rate Expected dividend yield APSP 2011 APSP 2012 01.09.11 0.0p N/A 7,045,037 7,045,037 65.67% 3 years 2.0% 3% 22.10.12 0.0p N/A 12,520,560 12,520,560 44.23% 3 years 2.1% 3% The share price at 31 March 2013 was 16.50p. The average price during the year was 12.50p. Expected volatility is based on historical volatility over either the last three years of the construction and materials sector, or the previous three years’ data for the Company. 11. Goodwill At beginning of the year Additions Exchange differences Goodwill is allocated to the Group’s CGUs. A summary of the goodwill allocation is presented below: Triton Showers Tile Africa Group Vado One Stop Tiles 2013 £m 23.4 4.8 (0.6) 27.6 2013 £m 19.1 3.7 4.7 0.1 27.6 2012 £m 23.9 — (0.5) 23.4 2012 £m 19.1 4.3 — — 23.4 Additions of £4.8m in the year relate to the acquisitions of Vado and One Stop Tiles and are disclosed in note 27. The recoverable amount of a CGU is determined by a value-in-use calculation. These calculations use cash ﬂow projections based on ﬁnancial forecasts approved by management covering a two-year period with growth rates of 2% in the UK and 3% in South Africa applied in future periods. The key assumptions for the value-in-use calculations are those regarding discount rates, growth rates, future gross margin improvements and cash ﬂows. Pre-tax discount rates of 9.0% (2012: 9.0%) in the UK and 11.05% (2012: 11.7%) in South Africa have been applied depending on the region in which the CGU operates. The discount rate is based upon the risk free rate for Government bonds adjusted for a risk premium to reﬂect the increased risk of investing in equities and investing in the Group’s speciﬁc sectors and regions. No impairment review has been carried out in respect of the goodwill relating to Vado and One Stop Tiles, on the grounds that the goodwill recognised is provisional and likely to change when the fair value exercise is completed. The following sensitivity analysis has been performed: — increase each CGU discount rate by 1%; and — reduce future growth rate by 30%. In each of these scenarios the estimated recoverable value comfortably exceeds the carrying value for the CGU and accordingly no impairment was identiﬁed. Having assessed the future anticipated cash ﬂows, management believes that any reasonably possible changes in key assumptions would not result in an impairment of goodwill. 52 Norcros plc Annual report and accounts 2013 12. Property, plant and equipment Land and buildings £m Plant and equipment £m Cost At 1 April 2011 Exchange differences Additions Disposals At 31 March 2012 Exchange differences Additions Acquisitions (see note 27) Disposals At 31 March 2013 Accumulated depreciation At 1 April 2011 Exchange differences Charge for the year Disposals At 31 March 2012 Exchange differences Charge for the year Disposals At 31 March 2013 Net book amount at 31 March 2012 Net book amount at 31 March 2013 35.8 (1.7) 0.5 (0.9) 33.7 (1.3) 1.4 1.3 (1.3) 33.8 10.2 (0.2) 1.0 (0.1) 10.9 (0.1) 1.0 (0.2) 11.6 22.8 22.2 77.5 (3.1) 4.9 (0.5) 78.8 (3.1) 5.3 0.7 (1.2) 80.5 54.0 (2.0) 5.2 (0.4) 56.8 (2.0) 5.2 (0.8) 59.2 22.0 21.3 Total £m 113.3 (4.8) 5.4 (1.4) 112.5 (4.4) 6.7 2.0 (2.5) 114.3 64.2 (2.2) 6.2 (0.5) 67.7 (2.1) 6.2 (1.0) 70.8 44.8 43.5 Plant and equipment includes motor vehicles, computer equipment and plant and machinery. The Group acquired assets under ﬁnance leases with a net book value of £0.1m as part of the acquisition of Vado (see note 27). 13. Investment properties Cost At 31 March 2011, 31 March 2012 and 31 March 2013 Accumulated depreciation At 1 April 2011 Charge for the year At 31 March 2012 Charge for the year At 31 March 2013 Net book amount at 31 March 2012 Net book amount at 31 March 2013 Investment property £m 6.3 0.8 0.1 0.9 — 0.9 5.4 5.4 Investment properties are held at cost and depreciated over 50 years with the exception of land which is not depreciated. The Directors are of the opinion that the fair value of the investment properties is not signiﬁcantly different from their carrying value. Rental income receivable in the year was £0.5m (2012: £0.5m). R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 53 Notes to the group accounts Year ended 31 March 2013 continued 14. Inventories Raw materials Work in progress Finished goods 2013 £m 9.0 0.8 43.0 52.8 Included within inventories is £4.3m in respect of Vado (see note 27). Provisions held against inventories totalled £3.4m (2012: £2.9m), of which £0.5m related to the newly acquired Vado business. The cost of inventories recognised as an expense within cost of sales in the income statement amounted to £104.9m (2012: £110.9m). During the year the Group charged £0.5m (2012: £0.3m) of inventory write-downs to the income statement within cost of sales. 15. Trade and other receivables Trade receivables Less: provision for impairment of trade receivables Trade receivables – net Other receivables Prepayments and accrued income 2013 £m 36.7 (0.4) 36.3 4.9 2.8 44.0 2012 £m 9.9 0.7 34.9 45.5 2012 £m 33.8 (0.3) 33.5 4.3 2.9 40.7 Included within trade and other receivables is £5.2m in respect of Vado (see note 27). The fair value of trade receivables does not differ materially from the book value. Taking into account the Group’s credit insurance, management believes that no further material provision is required in excess of the normal provision for impairment of receivables. Trade receivable credit exposure is controlled by credit limits that are set and reviewed by operational management on a regular basis. The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies: Sterling South African Rand Australian Dollar Movements on the provision for impairment of trade receivables are as follows: At beginning of year Provision for receivables impairment Receivables written off during the year as uncollectible Provisions arising from the acquisition of Vado (see note 27) At end of year 2013 £m 33.0 9.6 1.4 44.0 2013 £m 0.3 0.1 (0.1) 0.1 0.4 2012 £m 30.1 9.3 1.3 40.7 2012 £m 0.4 0.2 (0.3) — 0.3 As at 31 March 2013, trade receivables of £31.9m (2012: £29.6m) were fully performing. The creation and release of the provision for impaired receivables has been included in administration costs in the Consolidated Income Statement. Amounts charged to this provision are generally written off when there is no expectation of recovering additional cash. 54 Norcros plc Annual report and accounts 2013 15. Trade and other receivables continued As of 31 March 2013, trade receivables of £0.4m (2012: £0.3m) were impaired and provided for. The individually impaired receivables were impaired at 100% of their gross value (2012: 100%). The ageing of these receivables is as follows: Less than three months Greater than three months 2013 £m — 0.4 0.4 2012 £m 0.1 0.2 0.3 At 31 March 2013 trade receivables of £4.4m (2012: £3.9m) were past due but not impaired, which includes £0.3m in respect of the newly acquired business, Vado. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of these receivables is as follows: Up to one month One to two months Two to three months Greater than three months 2013 £m 3.0 0.6 0.4 0.4 4.4 2012 £m 2.7 0.5 0.1 0.6 3.9 The Group maintains a credit insurance policy which signiﬁcantly limits its exposure to credit risk. The Group does not hold any collateral as security. The other categories within trade and other receivables do not contain impaired assets. 16. Cash and cash equivalents Cash at bank and in hand Cash at bank and in hand includes the following for the purposes of the Consolidated Cash Flow Statement: Cash and cash equivalents as above Less: bank overdrafts (see note 18) 2013 £m 6.8 2013 £m 6.8 (0.4) 6.4 2012 £m 2.9 2012 £m 2.9 (0.4) 2.5 Credit risk on cash and cash equivalents is limited as the counterparties are banks with strong credit ratings assigned by international credit rating agencies. 17. Trade and other payables Trade payables Other tax and social security payables Other payables Accruals and deferred income Included in trade and other payables is £4.7m in respect of Vado (see note 27). The fair value of trade payables does not differ materially from the book value. 2013 £m 31.5 2.5 1.3 16.4 51.7 2012 £m 30.9 2.1 3.5 14.1 50.6 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 55 Notes to the group accounts Year ended 31 March 2013 continued 18. Borrowings Non-current Bank borrowings (secured): – bank loans – less: costs of raising ﬁnance Finance leases and hire purchase contracts Total non-current Current Bank borrowings (secured): – bank overdrafts (see note 16) Finance leases and hire purchase contracts Total current Total borrowings The fair value of bank loans equals their carrying amount, as they bear interest at ﬂoating rates. The repayment terms of borrowings are as follows: Not later than one year After more than one year: – between one and two years – between two and ﬁve years – costs of raising ﬁnance Total borrowings 2013 £m 37.7 (0.8) 36.9 0.1 37.0 0.4 0.1 0.5 37.5 2013 £m 0.5 0.1 37.7 (0.8) 37.0 37.5 2012 £m 21.0 (0.7) 20.3 — 20.3 0.4 — 0.4 20.7 2012 £m 0.4 — 21.0 (0.7) 20.3 20.7 Capital risk management The Group has available a £70.0m committed banking facility which expires in October 2015. This was increased from £51.0m on the same terms during the year, principally in order to ﬁnance the acquisition of Vado. The facility provides the Group with a sound ﬁnancial structure for the medium term with £28.6m of headroom being available at 31 March 2013, after taking into account net debt and ancillary facilities in use of £9.9m. Under this facility bank borrowings are secured by the Group’s UK assets. The Group has been in compliance with all banking covenants during the year. Interest rate proﬁle The effective interest rates at the Balance Sheet dates were as follows: Bank loans Overdraft 2013 % 2.2 2.2 2012 % 2.2 2.0 At 31 March 2013 the bank loans carried interest based on LIBOR plus a margin of 1.75% (2012: 1.50%). Overdrafts carry interest at base rate plus a margin of 1.75% (2012: 1.50%). Currency proﬁle of net debt The carrying value of the Group’s net debt is denominated in the following currencies: Sterling Euro South African Rand Australian Dollar 2013 £m 33.8 — (2.1) (1.0) 30.7 2012 £m 19.9 0.3 (1.3) (1.1) 17.8 56 Norcros plc Annual report and accounts 2013 19. Derivative ﬁnancial instruments During the year the Group held ﬁnancial instruments for two purposes: — ﬁnancial instruments relating to the operations, ﬁnancing and risks of the Group’s operations; and — ﬁnancial instruments relating to the ﬁnancing and risks of the Group’s bank debt. The Group’s ﬁnancial instruments comprise borrowings, cash, trade receivables and payables, cross currency swaps and forward exchange contracts. Derivative ﬁnancial instruments carried at fair value through the income statement 2013 £m Assets Forward foreign exchange contracts 0.9 2013 £m Liabilities — 2012 £m Assets — 2012 £m Liabilities (0.4) Forward foreign exchange contracts The notional principal amounts of outstanding forward foreign exchange contracts at 31 March 2013 were €7.1m and US$45.6m (2012: €16.6m and US$24.7m). The hedged forecast transactions denominated in foreign currency are expected to occur at various dates during the next 15 months. Gains and losses recognised on forward exchange contracts to date have been taken to the Consolidated Income Statement. Sensitivity analysis IFRS 7 requires the disclosure of a sensitivity analysis that details the effects on the Group’s proﬁt and loss and equity of reasonably possible ﬂuctuations in market rates. To demonstrate these, hypothetical variations of 1% increase or decrease in market interest rates and 5% strengthening or weakening in major currencies have been chosen. (A) 1% increase or decrease on market interest rates for most of the coming year As the Group has net debt of £31.5m (excluding amortised ﬁnance costs) the effect of a 1% change in market interest rates would be a change in the net ﬁnance costs of approximately £0.3m per annum. (B) 5% strengthening or weakening in major currencies A number of the Group’s assets are held overseas and as such variations in foreign currencies will affect the carrying value of these assets. A 5% strengthening of Sterling across all currencies would lead to a £2.2m devaluation in net assets. Likewise a 5% weakening in Sterling would lead to a £2.4m increase in net assets. The Group’s proﬁts and losses are exposed to both translational and transactional risk of ﬂuctuations in foreign currency risk. The Group seeks to hedge the majority of its transactional risk using forward foreign exchange contracts. After taking these hedges into account the effect of a 5% strengthening in both Sterling and South African Rand against all other currencies would be an increase in proﬁts of £1.4m. Likewise a 5% weakening in both these currencies would lead to a £1.5m reduction in proﬁts. 20. Deferred tax Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same ﬁscal authority. The main rate of UK corporation tax was reduced from 26% to 24% with effect from 1 April 2012. A further announcement was made that the rate would reduce to 23% with effect from 1 April 2013. This rate reduction was substantively enacted on 7 July 2012 and the deferred tax asset at 31 March 2013 has been re-measured accordingly. In the 2013 Annual Budget Statement on 20 March 2013 it was announced that the main rate of corporation tax would fall further to 20% with effect from 1 April 2015. However, as this change had not been substantively enacted at the balance sheet date it has not been recognised in these ﬁnancial statements. The overall effect of the further reductions from 23% to 20%, if these applied to the deferred tax balances at 31 March 2013, would be to reduce the deferred tax asset by £1.1m. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 57 Notes to the group accounts Year ended 31 March 2013 continued 20. Deferred tax continued Deferred tax is calculated in full on temporary differences under the liability method. The movement on the deferred tax account is as shown below: Deferred tax asset at the beginning of the year Credited to the income statement Credited to the Statement of Comprehensive Income Deferred tax asset at the end of the year Accelerated capital allowances Tax losses Other timing differences Deferred tax asset relating to pension deﬁcit The full potential asset for deferred tax is as follows: Accelerated capital allowances Other timing differences Net deferred tax asset relating to net pension deﬁcit Tax losses Advanced corporation tax asset 2013 £m 6.4 0.4 3.4 10.2 2013 £m 0.5 2.6 0.2 6.9 10.2 2013 £m 1.2 1.5 6.9 16.1 — 25.7 The balance in respect of advanced corporation tax which stood at £5.0m in 2012 is no longer considered to be readily accessible and therefore is no longer included in the analysis of potential deferred tax assets. 21. Provisions At 1 April 2011 Charged to the income statement Amortisation of discount Utilisation At 31 March 2012 Acquisitions (see note 27) Charged to the income statement Amortisation of discount Utilisation At 31 March 2013 Warranty provision £m Restructuring provision £m UK property provision £m South Africa property provision £m 1.1 1.3 — (1.1) 1.3 0.2 1.2 — (1.3) 1.4 0.7 0.8 — (1.2) 0.3 — — — — 0.3 13.1 — 0.3 (9.7) 3.7 — 3.0 0.2 (2.1) 4.8 0.4 — — (0.3) 0.1 — 0.4 — (0.5) — 2012 £m 2.2 0.8 3.4 6.4 2012 £m 0.6 1.1 0.2 4.5 6.4 2012 £m 1.6 1.4 4.3 18.1 5.0 30.4 Total £m 15.3 2.1 0.3 (12.3) 5.4 0.2 4.6 0.2 (3.9) 6.5 The warranty provision has been recognised for expected claims on products which remain under warranty. It is expected that this expenditure will be incurred within ﬁve years of the Balance Sheet date. The restructuring provision has been recognised for expected liabilities arising from re-organisations and company disposals. This is expected to be utilised within twelve months of the Balance Sheet date. The UK and South African property provisions have been recognised for expected liabilities arising from lease shortfalls on surplus Group properties and so future expenditure is expected to be spread over several years. 58 Norcros plc Annual report and accounts 2013 22. Retirement beneﬁt obligations (a) Pension costs Norcros Security Plan The Norcros Security Plan, the principal UK pension scheme of Norcros plc subsidiaries, is funded by a separate trust fund. It is predominantly a deﬁned beneﬁt scheme, with a modest element of deﬁned contribution beneﬁts. Norcros plc itself has no employees and so has no liabilities in respect of these pension schemes. The scheme closed to new members and future accrual with effect from 1 April 2013. As a result of the closure a new deﬁned contribution pension scheme has been implemented to replace the Norcros Security Plan from the same date. South Africa deﬁned beneﬁt schemes The Group previously operated two separate deﬁned beneﬁt schemes for the beneﬁt of the Group’s South African employees. These were the TAL Pension Fund and the Johnson Tiles Pension Fund. Both schemes were closed during the ﬁnancial year 2007/08 and replaced by deﬁned contribution schemes. Deﬁned contribution pension schemes Contributions made to these schemes amounted to £1.2m (2012: £1.1m). (b) IAS 19, ‘Retirement beneﬁt obligations’ Norcros Security Plan The valuation used for IAS 19 disclosures has been based on the most recent actuarial valuation at 31 March 2012 and updated by Mercer, a ﬁrm of qualiﬁed actuaries, to take account of the requirements of IAS 19 in order to assess the liabilities of the scheme at 31 March 2013. Scheme assets are stated at their market value at 31 March 2013. South Africa deﬁned beneﬁt schemes The actuarial valuations of the Group’s South African deﬁned beneﬁt pension schemes, carried out in March 2005, have been updated by Alexander Forbes Financial Services to take account of the requirements of IAS 19. The schemes were closed during the ﬁnancial year 2007/08 and replaced with deﬁned contribution schemes. Following the agreement of the allocation of surplus assets, the surplus was partially recovered in 2012 with the remaining £0.1m surplus due to be recovered in the forthcoming years. (i) The principal assumptions used to calculate the scheme liabilities of the Norcros Security Plan under IAS 19 are: Discount rate Inﬂation rate (RPI) Inﬂation rate (CPI) Increase to deferred beneﬁts during deferment (non-GMP liabilities) Increases to pensions in payment (other than pre-1988 GMP liabilities) Salary increases 2013 Projected unit 4.20% 3.20% 2.20% 3.05% 3.05% 3.45% 2012 Projected unit 4.95% 3.20% 2.20% 3.20% 3.20% 3.45% The mortality assumptions are based on standard mortality tables which allow for future mortality improvements. The assumptions are that a member who retires in 2013 at age 65 will on average live for a further 21.3 years (2012: 20.4 years) after retirement if they are male and 23.7 years (2012: 23.2 years) if they are female. (ii) The amounts recognised in the Income Statement are as follows: Included in operating proﬁt: Current service cost Included in IAS 19 ﬁnance income: Interest cost Expected return on plan assets Total amounts recognised in the income statement 2013 £m 1.3 18.6 (20.8) (2.2) (0.9) 2011 £m 1.5 19.8 (21.4) (1.6) (0.1) R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 59 Notes to the group accounts Year ended 31 March 2013 continued 22. Retirement beneﬁt obligations continued (b) IAS 19, ‘Retirement beneﬁt obligations’ continued (iii) The amounts recognised in the Balance Sheet are determined as follows: Equities – Norcros Security Plan Absolute return funds – Norcros Security Plan – Norcros Security Plan Bonds – Norcros Security Plan Cash and gilts – other Total market value of scheme assets Present value of scheme liabilities Pension deﬁcit Comprising: – Norcros Security Plan – other Deﬁcit in schemes (iv) The movement on scheme deﬁcit in the year is as follows: Deﬁcit at the beginning of the year Employer contributions – normal contributions – deﬁcit recovery plan Pension holiday taken on South African deﬁned contribution scheme Currency translation adjustments Current service cost Interest cost Expected return on scheme assets Actuarial loss Deﬁcit at the end of the year Long-term rate of return expected at 31 March 2013 % 7.25% 7.25% 4.20% 2.55% — Value at 31 March 2013 £m 81.0 153.2 151.7 3.6 0.1 389.6 (419.5) (29.9) (30.0) 0.1 (29.9) Long-term rate of return expected at 31 March 2012 % 7.25% 7.25% 4.95% 3.10% — 2013 £m (18.1) 1.2 2.0 (0.2) — (1.3) (18.6) 20.8 (15.7) (29.9) Value at 31 March 2012 £m 77.1 142.0 99.0 49.5 0.6 368.2 (386.3) (18.1) (18.7) 0.6 (18.1) 2012 £m (5.6) 1.2 1.0 (0.6) (0.2) (1.5) (19.8) 21.4 (14.0) (18.1) The expected return on plan assets is determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on ﬁxed interest investments are based on gross redemption yields as at the end of the reporting period. Expected returns on equity and property investments reﬂect long-term real rates of return experienced in the respective markets. (v) The reconciliation of scheme assets is as follows: Opening fair value of scheme assets Employer contributions – normal contributions – deﬁcit recovery plan Employee contributions Pension holiday taken on South African deﬁned contribution scheme Expected return on scheme assets Beneﬁts paid Actuarial gain on scheme assets Currency translation Closing fair value of scheme assets 2013 £m 368.2 1.2 2.0 0.8 (0.2) 20.8 (22.7) 19.5 — 389.6 2012 £m 363.3 1.2 1.0 0.8 (0.6) 21.4 (21.8) 3.1 (0.2) 368.2 60 Norcros plc Annual report and accounts 2013 22. Retirement beneﬁt obligations continued (b) IAS 19, ‘Retirement beneﬁt obligations’ continued (vi) The reconciliation of scheme liabilities is as follows: Opening scheme liabilities Current service cost Employee contributions Interest cost Actuarial loss Beneﬁts paid Closing fair value of scheme liabilities (vii) Amounts for the current period and previous four periods are as follows: Fair value of scheme assets Present value of deﬁned beneﬁt obligations (Deﬁcit)/surplus in the scheme Experience adjustment on scheme assets Experience gain/(loss) on scheme liabilities 2013 £m 389.6 (419.5) (29.9) 19.5 10.5 2012 £m 368.2 (386.3) (18.1) 3.1 — 2011 £m 363.3 (368.9) (5.6) 5.0 — (viii) Amounts recognised in the Statement of Comprehensive Income and expense are as follows: Actuarial loss Deferred tax 23. Called up share capital 2013 £m (386.3) (1.3) (0.8) (18.6) (35.2) 22.7 (419.5) 2010 £m 354.8 (362.9) (8.1) 57.1 (5.9) 2013 £m (15.7) 3.4 (12.3) 2013 £000 2012 £m (368.9) (1.5) (0.8) (19.8) (17.1) 21.8 (386.3) 2009 £m 300.2 (298.4) 1.8 (79.6) — 2012 £m (14.0) 3.4 (10.6) 2012 £000 Issued and fully paid 583,488,584 (2012: 579,832,604) ordinary shares of 1p each 5,835 5,798 The Company issued 556,308 1p ordinary shares to members of an SAYE scheme whose options became exercisable during the year (see note 10). Warrant instruments In 2009 the Company executed a warrant instrument in favour of its principal banks of the day over 5% of its fully diluted ordinary share capital excluding any shares issued as part of a capital raising. One of the warrant holders exercised their warrant instrument in full during the year and acquired 3,099,672 shares at the exercise price of 8.97p per share. Taking into account the capital raising in 2010 the remaining warrants now represent 6,199,344 ordinary shares (1.07% of the issued ordinary share capital) at 31 March 2013. The warrants are exercisable at 8.97p per share at any time up to July 2017. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 61 Notes to the group accounts Year ended 31 March 2013 continued 24. Consolidated cash ﬂow statements (a) Cash generated from operations Proﬁt before taxation Adjustments for: – exceptional items included in the income statement – cash ﬂows from exceptional costs – depreciation – difference between pension charge and cash contributions – proﬁt on disposal of property, plant and equipment – ﬁnance costs – ﬁnance income – other ﬁnance income – share-based payments Operating cash ﬂows before movement in working capital Changes in working capital: – increase in inventories – decrease in trade and other receivables – (decrease)/increase in trade and other payables Cash generated from operations 2013 £m 10.0 4.4 (2.2) 6.2 (2.2) (1.2) 1.7 (0.9) (2.2) 0.7 14.3 (5.6) 1.9 (4.0) 6.6 (b) Outﬂow related to exceptional items This includes expenditure charged to exceptional provisions relating to onerous lease costs, acquisition fees and other business rationalisation and restructuring costs. (c) Analysis of net debt At 1 April 2011 Cash ﬂow Other non-cash movements Exchange movement At 31 March 2012 Cash ﬂow Acquisitions Other non-cash movements Exchange movement At 31 March 2013 Net cash £m 4.6 (1.7) — (0.4) 2.5 4.0 — — (0.1) 6.4 Net debt £m (15.2) (4.0) (1.1) — (20.3) (16.8) (0.2) 0.2 — (37.1) 2012 £m 9.4 — (11.1) 6.3 (0.7) (0.4) 4.3 — (1.6) 0.2 6.4 (5.9) 2.1 3.4 6.0 Total £m (10.6) (5.7) (1.1) (0.4) (17.8) (12.8) (0.2) 0.2 (0.1) (30.7) Other non-cash movements relates to additional ﬁnancing costs incurred following the increase in the ﬁnancing facilities in March 2013, less amortisation charged for the year. 25. Dividends A ﬁnal dividend in respect of the year ended 31 March 2012 of £1.6m (0.28p per share) was paid in July 2012 and an interim dividend of £0.9m (0.155p per share) was paid in January 2013. A ﬁnal dividend in respect of the year ended 31 March 2013 of £1.8m (0.305p per share) is to be proposed at the Annual General Meeting on 24 July 2013. These ﬁnancial statements do not reﬂect this ﬁnal dividend. 62 Norcros plc Annual report and accounts 2013 26. Capital and other ﬁnancial commitments (a) Capital commitments Contracts placed for future capital expenditure not provided in the ﬁnancial statements (b) Operating lease commitments Total commitments under operating leases: – not later than one year – later than one year and not later than ﬁve years – later than ﬁve years Total future sub-lease payments receivable relating to the above operating leases amounted to £0.7m (2012: £1.6m). The above operating lease commitments are analysed as: Equipment: – not later than one year – later than one year and not later than ﬁve years – later than ﬁve years Land and buildings: – not later than one year – later than one year and not later than ﬁve years – later than ﬁve years 2013 £m 0.3 2013 £m 6.3 16.1 18.2 40.6 2013 £m 1.5 2.9 0.1 4.8 13.2 18.1 40.6 2012 £m 1.4 2012 £m 6.5 17.6 20.9 45.0 2012 £m 1.3 2.5 0.2 5.2 15.1 20.7 45.0 (c) Operating leases receivable The Group leases certain of its investment properties to third parties. The total future minimum lease payments receivable are analysed below: Total commitments under operating leases: – not later than one year – later than one year and not later than ﬁve years – later than ﬁve years 2013 £m 0.6 2.2 0.1 2.9 2012 £m 0.7 3.0 1.4 5.1 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 63 Notes to the group accounts Year ended 31 March 2013 continued 27. Business combinations On 31 March 2013, the Group acquired 100% of the ordinary share capital of Eurobath International Limited, known principally under its trading name Vado, a leading manufacturer and global distributor of bathroom controls including taps, mixer showers, bathroom accessories and valves. Vado is an excellent strategic ﬁt for the group as it builds on the Group’s existing product portfolio and secures strong positions in complementary segments. Additionally, the Group intends to leverage the combined platform of Vado and the Group’s market leading Triton shower business to drive increased demand for its products utilising the enlarged customer base, broader product offering, dual branding, and extended geographical scope. Vado is incorporated in England and is based in Cheddar, Somerset. The following table summarises the consideration paid for Vado and the provisional fair value of the assets acquired and the liabilities assumed: £m Consideration Cash Contingent consideration Recognised amounts of identiﬁable assets and liabilities Property, plant and equipment Deferred tax asset Inventories Trade and other receivables Derivative ﬁnancial instruments Cash Trade and other payables Current tax liabilities Borrowings – loans Borrowings – hire purchase contracts Provisions Total identiﬁable net assets Goodwill Total 11.0 0.4 11.4 £m 2.0 0.1 4.3 5.2 0.4 3.1 (4.7) (0.6) (2.7) (0.2) (0.2) 6.7 4.7 11.4 Due to the fact that the acquisition took place on the last day of the accounting period it has not been possible for the Group to ﬁnalise the fair values of Vado’s assets and liabilities. Accordingly, the amounts stated in the table above reﬂect the reported balances of Vado, as adjusted where possible to comply with the accounting policies of the Group. The provisional fair value adjustments reﬂect the recognition of derivative ﬁnancial instruments of £0.4m, provisions for inventory, trade receivables and warranty obligations totalling £0.7m, trade and other payables of £0.2m and a deferred tax asset of £0.1m. A full review of the fair values of the identiﬁable assets and liabilities will take place over the coming months with the expectation that a revised position will be presented in the Group’s interim statement for the six months ended 30 September 2013. It is not expected at this stage that any residual goodwill which remains after this review will be deductible for tax purposes. Acquisition related costs of £0.9m have been charged to exceptional operating items for the year ended 31 March 2013 (see note 5). The contingent consideration of £0.4m reﬂects the maximum amount and current best estimate of amounts to be paid to a number of former minority shareholders of Vado over the next three years, subject to Vado achieving certain ﬁnancial performance targets over the same period. The former majority shareholders of Vado also participate in this arrangement, but in view of the fact that payment of this amount is contingent upon the continued employment of one of these individuals, no contingent consideration has been recognised in accordance with IFRS 3 (revised). The amounts payable will instead fall to be treated as remuneration and accordingly they will be expensed to the proﬁt and loss account over the next three years should the performance targets be achieved. The maximum amount and current expectation is that future payments over this period to the former majority shareholders will total £3.7m. As the transaction took place on the last day of the ﬁnancial year, the acquisition of Vado had no impact on the Consolidated Income Statement or the Consolidated Statement of Comprehensive Income and Expense, other than the acquisition related costs of £0.9m disclosed in note 5. Had Vado been consolidated from 1 April 2012, the Consolidated Income Statement would contain pro-forma revenue of £25.8m and a pro-forma proﬁt after tax of £1.6m. The net cash outﬂow from the transaction was as follows: Cash consideration Loan borrowings repaid at acquisition Cash acquired Net cash outﬂow reported in the Consolidated Cash Flow Statement £m 11.0 2.7 (3.1) 10.6 On 20 February 2013 the Group acquired the trade and assets of One Stop Tiles (Pty) Limited, a supplier of tiles and adhesives in Tasmania, Australia, for consideration of £0.1m. Goodwill of £0.1m was recognised in respect of this transaction. There was no cash effect of this transaction in the year. 64 Norcros plc Annual report and accounts 2013 28. Related party transactions The following transactions were carried out with related parties: (a) Purchases of goods and services Purchases of goods: – Prism Cement Limited Goods are purchased on normal commercial terms and conditions. 2013 £m 1.2 2012 £m 1.5 Dividends of £0.8m (2012: £0.7m) were paid to Lifestyle Investments PVT Limited which owns 24.97% of the Company’s issued share capital (as of 21 May 2013). This company is owned by Prism Cement Limited, a company of which Vijay Aggarwal is a director. Key management and Directors’ compensation is disclosed in note 4. (b) Year end balances arising from sales/purchases of goods and services Payables to related parties (note 17): – Prism Cement Limited 2013 £m (0.3) 2012 £m (0.3) 29. Contingent liabilities The Company’s material UK subsidiaries (with the exception of Vado) have entered into a guarantee and debenture which effectively means that all of their assets, property or otherwise, and undertakings are charged in favour of the security agent acting on behalf of the lending banks to the Company. Vado acceded to the guarantee and debenture on 13 May 2013. 30. Principal subsidiaries The principal Group subsidiaries are disclosed below. Transactions between subsidiaries and between the Parent Company and its subsidiaries are eliminated on consolidation. UK — Norcros Group (Holdings) Limited — Eurobath International Limited* trading as Vado Overseas — Johnson Tiles (Pty) Limited* (incorporated in Australia) — Norcros SA (Pty) Limited* trading as Johnson Tiles (Pty) Limited, TAL and TAF (incorporated in South Africa) * The Group interest is owned by Group companies other than Norcros plc. Notes Unless otherwise stated, all companies are 100% owned and all UK companies are incorporated and operate in Great Britain and are registered in England. Overseas companies operate in the countries in which they are incorporated. Only those subsidiary undertakings whose results principally affect the ﬁnancial statements of the Group are included above. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 65 Independent auditors’ report To the members of Norcros plc We have audited the Parent Company ﬁnancial statements of Norcros plc for the year ended 31 March 2013 which comprise the Parent Company Balance Sheet and the related notes. The ﬁnancial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Respective responsibilities of Directors and auditors As explained more fully in the Statement of Directors’ Responsibilities set out on page 36, the Directors are responsible for the preparation of the Parent Company ﬁnancial statements and for being satisﬁed that they give a true and fair view. Our responsibility is to audit and express an opinion on the Parent Company ﬁnancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Parent Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of the audit of the ﬁnancial statements An audit involves obtaining evidence about the amounts and disclosures in the ﬁnancial statements sufficient to give reasonable assurance that the ﬁnancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of signiﬁcant accounting estimates made by the Directors; and the overall presentation of the ﬁnancial statements. In addition, we read all the ﬁnancial and non-ﬁnancial information in the Annual Report to identify material inconsistencies with the audited ﬁnancial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on ﬁnancial statements In our opinion the Parent Company ﬁnancial statements: — give a true and fair view of the state of the Parent Company’s affairs as at 31 March 2013; — have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and — have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: — the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and — the information given in the Directors’ Report for the ﬁnancial year for which the Parent Company ﬁnancial statements are prepared is consistent with the Parent Company ﬁnancial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where 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. Other matter We have reported separately on the Group ﬁnancial statements of Norcros plc for the year ended 31 March 2013. Martin Heath (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Manchester 13 June 2013 66 Norcros plc Annual report and accounts 2013 Parent company balance sheet At 31 March 2013 Fixed assets Investments Deferred tax asset Debtors Amounts owed by Group undertakings Creditors: amounts falling due within one year Other Net current assets/(liabilities) Total assets less current liabilities Creditors: amounts falling due after more than one year Borrowings – bank and other loans Net assets Financed by: Share capital Share premium account Proﬁt and loss account Total shareholders’ funds Notes 3 7 4 6 5 8 9 9 9 2013 £m 177.3 0.2 177.5 7.8 (1.1) 6.7 184.2 (36.9) 147.3 5.8 0.5 141.0 147.3 The ﬁnancial statements on pages 67 to 70 were approved on 13 June 2013 and signed on behalf of the Board by: N. P. Kelsall Group Chief Executive M. K. Payne Group Finance Director 2012 £m 177.3 — 177.3 — (6.5) (6.5) 170.8 (20.3) 150.5 5.8 0.2 144.5 150.5 R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 67 Notes to the parent company accounts Year ended 31 March 2013 1. Statement of accounting polices Norcros plc prepares its ﬁnancial statements on the going concern basis under the historical cost basis of accounting with the exception of share-based payments which are measured at fair value at the date of grant and in accordance with both applicable Accounting Standards in the UK and the Companies Act 2006. A summary of the more important accounting polices which have been applied consistently is set out below. Accounting reference date The Company’s year end is stated as 31 March. Investments in subsidiaries Investments held as ﬁxed assets are stated at cost, less any provision for impairment. The Directors believe the carrying value of investments is supported by their underlying assets. Dividends received from investments are included within turnover and recognised on receipt of the dividend. Foreign currency transactions Monetary assets and liabilities expressed in foreign currencies are translated into Sterling at rates applicable at the year end. Exchange gains and losses are dealt with in arriving at the operating proﬁt. Taxation Deferred taxation has been recognised as a liability or asset if transactions have occurred at the Balance Sheet date that give rise to an obligation to pay more taxation in the future or a right to pay less taxation in the future. An asset is recognised only when the transfer of economic beneﬁts is more likely than not to occur. Proﬁt and loss account A separate proﬁt and loss account dealing with the results of the Company has not been presented as permitted by Section 408 of the Companies Act 2006. Cash ﬂow statement As the Group prepares consolidated ﬁnancial statements, the Company is exempt from publishing a Cash Flow Statement under FRS 1 (revised 1996). Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the ﬁnancial statements in the period in which the dividends are approved by the Company’s shareholders or when paid if earlier. Financial assets and liabilities Borrowings – the Company measures all borrowings initially at fair value. This is taken to be the fair value of the consideration received. Transaction costs (any such costs that are incremental and directly attributable to the issue of the ﬁnancial instrument) are included in the calculation of the effective interest rate and are, in effect, amortised through the Proﬁt and Loss Account over the duration of the borrowing. Borrowings are classiﬁed as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the Balance Sheet date. Share-based payments The Company operates a number of equity-settled, share-based compensation plans. The fair value of the employee services received in exchange for the grant of options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each Balance Sheet date, the Company revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the Income Statement, with a corresponding adjustment to equity. Related parties Related party disclosures are made in the Group accounts under note 28. 2. Other information Other than the Directors, who receive no emoluments from the Parent Company, the Company has no employees. Details of the Directors’ emoluments can be found in note 4 of the Group accounts. Auditor’s remuneration of £3,000 (2012: £3,000) is borne by the Company’s subsidiary, without recharge. 3. Investments At 1 April 2012 and 31 March 2013 Shares in subsidiaries £m 177.3 The Company owns 100% of the share capital of Norcros Group (Holdings) Limited, a company incorporated in England and Wales. The principal activities of the subsidiary are to act as an intermediate holding company and a manufacturer and distributor of showers, tiles and adhesives. Details of the principal operating subsidiaries indirectly owned by the Company are shown in note 30 of the Group accounts. 68 Norcros plc Annual report and accounts 2013 4. Debtors Amounts owed by Group undertakings Amounts owed by Group undertakings were unsecured, interest free and repayable on demand. 5. Borrowings Loans and bank overdrafts – secured Costs of raising ﬁnance Repayable after more than one year: – between two and ﬁve years – costs of raising ﬁnance 2013 £m 7.8 2013 £m 37.7 (0.8) 36.9 37.7 (0.8) 36.9 2012 £m — 2012 £m 21.0 (0.7) 20.3 21.0 (0.7) 20.3 Loans and bank overdrafts are secured on the Group’s UK assets and principally carry interest based on LIBOR. Bank loans are repayable on expiry of the current banking arrangements in October 2015. 6. Creditors – amounts falling due within one year Amounts owed to Group undertakings Other creditors and accruals 2013 £m — 1.1 1.1 Amounts owed to Group undertakings were unsecured, interest free and repayable on demand. 7. Deferred tax Deferred tax is calculated in full on temporary differences under the liability method. The movement on the deferred tax account is as shown below: Deferred tax asset at the beginning of the year Credited to the income statement Deferred tax asset at the end of the year Other timing differences The full potential asset for deferred tax is as follows: Other timing differences Tax losses 2013 £m — 0.2 0.2 2013 £m 0.2 2013 £m 0.3 6.0 6.3 2012 £m 5.9 0.6 6.5 2012 £m — — — 2012 £m — 2012 £m — 6.3 6.3 No deferred tax has been recognised in the ﬁnancial statements in respect of the tax losses as the Company does not believe that utilisation of these losses is probable. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 69 Notes to the parent company accounts Year ended 31 March 2013 continued 8. Called up share capital Issued and fully paid 583,488,584 (2012: 579,832,604) ordinary shares of 1p each 2013 £m 2012 £m 5,835 5,798 The Company issued 556,308 1p ordinary shares to members of a SAYE scheme whose options became exercisable during the year (see note 10 of the Group accounts). Warrant instruments In 2009 the Company executed a warrant instrument in favour of its principal banks of the day over 5% of its fully diluted ordinary share capital excluding any shares issued as part of a capital raising. One of the warrant holders exercised their warrant instrument in full during the year and acquired 3,099,672 shares at the exercise price of 8.97p per share. Taking into account the capital raising in 2010 the remaining warrants now represent 6,199,344 ordinary shares (1.07% of the issued ordinary share capital) at 31 March 2013. The warrants are exercisable at 8.97p per share at any time up to July 2017. 9. Reconciliation of movements in shareholders’ funds At beginning of year Shares issued in the year Loss for the year Share option schemes Dividends paid At end of year Share capital £m 5.8 — — — — 5.8 Share premium account £m 0.2 0.3 — — — 0.5 Proﬁt and loss account £m 144.5 — (1.7) 0.7 (2.5) 141.0 Total £m 150.5 0.3 (1.7) 0.7 (2.5) 147.3 10. Dividends A ﬁnal dividend in respect of the year ended 31 March 2012 of £1.6m (0.28p per share) was paid in July 2012 and an interim dividend of £0.9m (0.155p per share) was paid in January 2013. A ﬁnal dividend in respect of the year ended 31 March 2013 of £1.8m (0.305p per share) is to be proposed at the Annual General Meeting on 24 July 2013. These ﬁnancial statements do not reﬂect this ﬁnal dividend. 11. Contingent liabilities The Company has entered into a guarantee and debenture which effectively means that all of its assets, property or otherwise, and undertakings are charged in favour of the security agent acting on behalf of the lending banks to the Company. 12. Financial risk management objectives and policies A description of the Group’s ﬁnancial risk management policies are provided in the Directors’ Report on page 25. These objectives and policies also apply to the Company. 13. Share-based payments The grants and related accounting treatment adopted by Norcros plc under FRS 20, ‘Share-based payments’ are identical to those adopted by the Group under IFRS 2, ‘Share-based payments’. For details refer to note 10 in the Group accounts. 70 Norcros plc Annual report and accounts 2013 Notice of annual general meeting Notice is given that the 2013 Annual General Meeting of Norcros plc (“the Company”) will be held at 11.00 am on 24 July 2013 at Ladyﬁeld House, Station Road, Wilmslow, Cheshire SK9 1BU for the purpose of considering and, if thought ﬁt, passing the resolutions set out below. Resolutions 1 to 11 (inclusive) below will be proposed as ordinary resolutions and resolutions 12 to 14 (inclusive) below will be proposed as special resolutions. 1. To receive and adopt the audited accounts and the auditors’ and Directors’ reports for the year ended 31 March 2013. 2. To approve the Board’s remuneration report for the year ended 31 March 2013. 3. To declare a ﬁnal dividend of 0.305p per ordinary share. 4. To elect Jo Hallas as a Director. 5. To re-elect Martin Towers as a Director. 6. To re-elect Vijay Aggarwal as a Director. 7. To re-elect Nick Kelsall as a Director. 8. To re-elect Martin Payne as a Director. 9. To re-appoint PricewaterhouseCoopers LLP as auditors. 10. To authorise the Directors to determine the auditors’ remuneration. 11. That the Directors be and are hereby generally and unconditionally authorised pursuant to Section 551 of the Companies Act 2006 to exercise all the powers of the Company to allot shares in the Company and to grant rights to subscribe for or to convert any security into such shares (“Allotment Rights”), but so that: (a) the maximum amount of shares that may be allotted or made the subject of Allotment Rights under this authority are shares with an aggregate nominal value of £3,889,923 of which: (i) one half may be allotted or made the subject of Allotment Rights in any circumstances; and (ii) the other half may be allotted or made the subject of Allotment Rights pursuant to any rights issue (as referred to in the Financial Conduct Authority’s listing rules) or pursuant to any arrangements made for the placing or underwriting or other allocation of any shares or other securities included in, but not taken up under, such rights issue; this authority shall expire 18 months after the passing of this resolution or, if earlier, on the conclusion of the Company’s next Annual General Meeting; the Company may make any offer or agreement before such expiry which would or might require shares to be allotted or Allotment Rights to be granted after such expiry; and all authorities vested in the Directors on the date of the Notice of this Annual General Meeting to allot shares or to grant Allotment Rights that remain unexercised at the commencement of this Meeting are revoked. (b) (c) (d) 12. That the Directors be and are hereby empowered pursuant to Section 570 of the Companies Act 2006 to allot equity securities, as deﬁned in Section 560 of that Act, pursuant to the authority conferred on them by resolution 11 in the Notice of this Annual General Meeting or by way of a sale of treasury shares as if Section 561 of that Act did not apply to any such allotment, provided that this power is limited to: (a) the allotment of equity securities in connection with any rights issue or open offer (each as referred to in the Financial Conduct Authority’s listing rules) or any other pre-emptive offer that is open for acceptance for a period determined by the Directors to the holders of ordinary shares on the register on any ﬁxed record date in proportion to their holdings of ordinary shares (and, if applicable, to the holders of any other class of equity security in accordance with the rights attached to such class), subject in each case to such exclusions or other arrangements as the Directors may deem necessary or appropriate in relation to fractions of such securities, the use of more than one currency for making payments in respect of such offer, any such shares or other securities being represented by depositary receipts, treasury shares, any legal or practical problems in relation to any territory or the requirements of any regulatory body or any stock exchange; and (b) the allotment of equity securities (other than pursuant to paragraph (a) above) with an aggregate nominal value of £291,744, and shall expire when the authority conferred on the Directors by resolution 11 in the Notice of this Annual General Meeting expires, save that, before the expiry of this power, the Company may make any offer or agreement which would or might require equity securities to be allotted after such expiry. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 71 Notice of annual general meeting continued 13. That the Company is generally and unconditionally authorised pursuant to Section 701 of the Companies Act 2006 to make market purchases (as deﬁned in Section 693 of that Act) of ordinary shares of 1p each in its capital, provided that: (a) the maximum aggregate number of such shares that may be acquired under this authority is 58,348,858; (b) the minimum price (exclusive of expenses) that may be paid for such a share is its nominal value; (c) (d) (e) the maximum price (exclusive of expenses) that may be paid for such a share is the maximum price permitted under the Financial Conduct Authority’s listing rules or, in the case of a tender offer (as referred to in those rules), ﬁve per cent above the average of the middle market quotations for an ordinary share (as derived from the Daily Official List of London Stock Exchange plc) for the ﬁve business days immediately preceding the date on which the terms of the tender offer are announced; this authority shall expire 18 months after the passing of this resolution or, if earlier, on the conclusion of the Company’s next Annual General Meeting; and before such expiry, the Company may enter into a contract to purchase shares that would or might require a purchase to be completed after such expiry. 14. That any general meeting of the Company that is not an Annual General Meeting may be convened by not less than 14 clear days’ notice. By order of the Board R. H. Collins Company Secretary 13 June 2013 Registered office: Ladyﬁeld House Station Road Wilmslow Cheshire SK9 1BU Notes 1. A member who is entitled to attend and vote at the meeting is entitled to appoint another person, or two or more persons in respect of different shares held by him, as his proxy to exercise all or any of his rights to attend and to speak and vote at the meeting. 2. 3. The right of a member of the Company to vote at the meeting will be determined by reference to the register of members. A member must be registered on that register as the holder of ordinary shares of 1p each (“ordinary shares”) by 6pm on 22 July 2013 in order to be entitled to attend and vote at the meeting as a member in respect of those shares. A member wishing to attend and vote at the meeting in person should arrive prior to the time ﬁxed for its commencement. A member that is a corporation can only attend and vote at the meeting in person through one or more representatives appointed in accordance with Section 323 of the Companies Act 2006, as amended. Any such representative should bring to the meeting written evidence of his appointment, such as a certiﬁed copy of a board resolution of, or a letter from, the corporation concerned conﬁrming the appointment. Any member wishing to vote at the meeting without attending in person or (in the case of a corporation) through its duly appointed representative must appoint a proxy to do so. Forms for the appointment of a proxy that can be used for this purpose have been provided to members with this Notice of Annual General Meeting. To be valid, a proxy appointment form must be completed in accordance with the instructions that accompany it and then be delivered (together with any power of attorney or other authority under which it is signed, or a certiﬁed copy of such item) to Capita Registrars, PXS at The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU so as to be received by 11am on 22 July 2013. Alternatively, a member may appoint a proxy online by following the instructions for the electronic appointment of a proxy at www.capitashareportal.com. If you have not previously registered to use this facility you will require your investor code which can be located on the enclosed proxy form. In order to be a valid proxy appointment, the member’s electronic message conﬁrming the details of the appointment completed in accordance with those instructions must be transmitted so as to be received by the same time. Members who hold their shares in uncertiﬁcated form may also use the CREST voting service to appoint a proxy electronically, as explained below. Appointing a proxy will not prevent a member from attending and voting in person at the meeting should he so wish. 72 Norcros plc Annual report and accounts 2013 Notes continued 4. Any person to whom this notice is sent who is currently nominated by a member of the Company to enjoy information rights under Section 146 of the Companies Act 2006, as amended, (a “nominated person”) may have a right under an agreement between him and that member to be appointed, or to have someone else appointed, as a proxy for the meeting. If a nominated person has no such right or does not wish to exercise it, he may have a right under such an agreement to give instructions to the member concerned as to the exercise of voting rights. The statement in note 1 above of the rights of a member in relation to the appointment of proxies does not apply to a nominated person. Such rights can only be exercised by the member concerned. 5. 6. 7. 8. 9. Voting on all resolutions will be conducted by way of a poll, rather than a show of hands. This is a more transparent method of voting as members’ votes are counted according to the number of ordinary shares held. As soon as practicable following the meeting, the results of the voting at the meeting and the numbers of proxy votes cast for and against, together with the number of votes actively withheld in respect of, each of the resolutions will be announced via a Regulatory Information Service and will also be placed on the Company’s website: www.norcros.com. As at 11 June 2013 (being the latest practicable date prior to the printing of this document), (i) the Company’s issued share capital consisted of 583,488,584 ordinary shares carrying one vote each and (ii) the total voting rights in the Company were 583,488,584. Each member attending the meeting has the right to ask questions relating to the business being dealt with at the meeting which, in accordance with Section 319A of the Companies Act 2006, as amended, and subject to some exceptions, the Company must cause to be answered. Information relating to the meeting which the Company is required by the Companies Act 2006, as amended, to publish on a website in advance of the meeting may be viewed at www.norcros.com. A member may not use any electronic address provided by the Company in this document or with any proxy appointment form or in any website for communicating with the Company for any purpose in relation to the meeting other than as expressly stated in it. It is possible that, pursuant to members’ requests made in accordance with Section 527 of the Companies Act 2006, as amended, the Company will be required to publish on a website a statement in accordance with Section 528 of that Act setting out any matter that the members concerned propose to raise at the meeting relating to the audit of the Company’s latest audited accounts. The Company cannot require the members concerned to pay its expenses in complying with those sections. The Company must forward any such statement to its auditors by the time it makes the statement available on the website. The business that may be dealt with at the meeting includes any such statement. CREST members who wish to appoint one or more proxies through the CREST system may do so by using the procedures described in the CREST voting service section of the CREST manual. CREST personal members or other CREST sponsored members, and those CREST members who have appointed one or more voting service providers, should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. In order for a proxy appointment or a proxy instruction made using the CREST voting service to be valid, the appropriate CREST message (a “CREST proxy appointment instruction”) must be properly authenticated in accordance with the speciﬁcations of CREST’s operator, Euroclear UK & Ireland Limited (“Euroclear”) and must contain all the relevant information required by the CREST manual. To be valid, the message (regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy) must be transmitted so as to be received by Capita Registrars (ID RA10), as the Company’s “issuer’s agent”, by 11am on 22 July 2013. After this time, any change of instruction to a proxy appointed through the CREST system should be communicated to the appointee through other means. The time of the message’s receipt will be taken to be when (as determined by the timestamp applied by the CREST Applications Host) Capita Registrars is ﬁrst able to retrieve it by enquiry through the CREST system in the prescribed manner. Euroclear does not make available special procedures in the CREST system for transmitting any particular message. Normal system timings and limitations apply in relation to the input of CREST proxy appointment instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or a CREST sponsored member or has appointed any voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as is necessary to ensure that a message is transmitted by means of the CREST system by any particular time. CREST members and, where applicable, their CREST sponsors or voting service provider(s) should take into account the provisions of the CREST manual concerning timings as well as its section on “Practical limitations of the system”. In certain circumstances, the Company may, in accordance with the Uncertiﬁcated Securities Regulations 2001 or the CREST manual, treat a CREST proxy appointment instruction as invalid. 10. The Company takes all reasonable precautions to ensure that no viruses are present in any electronic communication which it sends but does not accept responsibility for any loss or damage arising from the opening or use of any email or attachment sent by the Company. The Company recommends that members subject all emails and attachments to virus checking procedures prior to opening or use. Any electronic communication received by the Company or Capita Registrars (including the lodgement of an electronic proxy form) which is found to contain any virus will not be accepted. 11. Copies of Directors’ service contracts and letters of appointment will be available for inspection at the registered office of the Company during normal business hours each business day and at the place of the Annual General Meeting for at least 15 minutes prior to and during the meeting. 12. Information regarding this meeting, including information required by Section 311A of the Companies Act 2006, is available at www.norcros.com. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 73 Explanatory notes The Annual General Meeting of the Company will take place at 11am on 24 July 2013 at Ladyﬁeld House, Station Road, Wilmslow, Cheshire SK9 1BU. The Notice convening that meeting, together with the resolutions to be proposed, appears on pages 71 to 73 of this document. The Directors recommend all shareholders to vote in favour of all of the resolutions to be proposed, as the Directors intend to do so in respect of their own shares, and consider that they are in the best interests of the Company and the shareholders as a whole. Explanatory notes in relation to the resolutions appear below: Resolution 1 Report and accounts For each ﬁnancial year, the Directors are required to present the audited accounts, the auditors’ report and the Directors’ report to shareholders at a general meeting. Resolution 2 Approval of the Remuneration Report The Company is required by law to seek the approval of shareholders of its annual report on remuneration policy and practice. This does not affect the Directors’ entitlement to remuneration and the result of this resolution is advisory only. The Directors’ Remuneration Report for the year ended 31 March 2013 is set out in full on pages 30 to 35 of this document. Any shareholder who would like a copy of the Annual Report and Accounts 2013 can obtain one by contacting our registrar on 0871 664 0300. Alternatively, the Annual Report and Accounts 2013 can be viewed on our website at www.norcros.com. Your Directors are satisﬁed that the Company’s policy and practice in relation to Directors’ remuneration are reasonable and that they deserve shareholder support. Resolution 3 Dividend The payment of the ﬁnal dividend requires the approval of shareholders at a general meeting. If the meeting approves resolution 3, the ﬁnal dividend of 0.305p per ordinary share will be paid on 30 July 2013 to ordinary shareholders who are on the register of members on 28 June 2013 in respect of the year ended 31 March 2013. Resolution 4 Election of Jo Hallas It is proposed that Jo Hallas be elected as a Director. Biographical details of Jo can be found on page 22. Jo was appointed to the Board in September 2012 and is therefore seeking election at the ﬁrst Annual General Meeting following this. The other Directors believe that she is performing her role effectively and possesses the necessary experience and knowledge and they unanimously recommend that Jo be elected as a Director. The Chairman conﬁrms that her performance has been evaluated as effective and demonstrating commitment to the role. Resolution 5 Re-election of Martin Towers It is proposed that Martin Towers be re-elected as a Director. Biographical details of Martin can be found on page 22. The other Directors believe that he is performing his role effectively, possesses the necessary experience and knowledge and he has demonstrated commitment to the role. They therefore unanimously recommend that Martin be re-elected as a Director. Resolution 6 Re-election of Vijay Aggarwal It is proposed that Vijay Aggarwal be re-elected as a Director. Biographical details of Vijay can be found on page 22. The other Directors believe that he is performing his role effectively and possesses the necessary experience and knowledge and they therefore unanimously recommend that Vijay be re-elected as a Director. The Chairman conﬁrms that his performance has been evaluated as effective and demonstrating commitment to the role. Resolution 7 Re-election of Nick Kelsall It is proposed that Nick Kelsall be re-elected as a Director. Biographical details of Nick can be found on page 22. The other Directors believe that he is performing his role effectively and possesses the necessary experience and knowledge. They therefore unanimously recommend that Nick be re-elected as a Director. 74 Norcros plc Annual report and accounts 2013 Resolution 8 Re-election of Martin Payne It is proposed that Martin Payne be re-elected as a Director. Biographical details of Martin can be found on page 22. The other Directors believe that he is performing his role effectively and possesses the necessary experience and knowledge. They therefore unanimously recommend that Martin be re-elected as a Director. Resolution 9 Re-appointment of auditors The Company is required to appoint an auditor at each general meeting before which accounts are laid, to hold office until the end of the next such meeting. PricewaterhouseCoopers LLP has indicated that it is willing to continue as the Company’s auditor for another year. You are therefore asked to re-appoint PricewaterhouseCoopers LLP. The Directors recommend the re-appointment of PricewaterhouseCoopers LLP. Resolution 10 Remuneration of auditors The resolution follows best practice in giving authority to the Directors to determine the remuneration of the Company’s auditor. Resolution 11 Power to allot shares Most listed companies renew their directors’ authority to issue shares at each Annual General Meeting. Such an authority was granted at last year’s Annual General Meeting and is due to expire on 25 January 2014 or, if earlier, at the conclusion of the next Annual General Meeting of the Company. In accordance with best practice, this resolution seeks to renew the Directors’ authority to allot shares. Resolution 11, if passed, will renew the Directors’ authority to allot shares in the capital of the Company up to a maximum aggregate nominal value of £3,889,923 (representing 388,992,389 ordinary shares). This represents the Association of British Insurers’ (ABI) guideline limit of approximately two thirds of the Company’s issued ordinary share capital as at 11 June 2013 (being the latest practicable date prior to the publication of this document). Of this amount, ordinary shares to an aggregate nominal value of £1,944,961 (representing 194,496,194 ordinary shares which is approximately one third of the Company’s issued ordinary share capital as at 11 June 2013 (being the latest practicable date prior to the publication of this document)) can only be allotted pursuant to a rights issue. As at 11 June 2013 (being the latest practicable date prior to the publication of this document), the Company did not hold any shares in the Company in treasury. The renewed authority will remain in force until 18 months after the passing of this resolution or, if earlier, at the conclusion of the next Annual General Meeting in 2014. The Directors have no present intention of exercising this authority (save in connection with any obligation to issue shares under the Company’s share option schemes). The purpose of giving the Directors this authority is to maintain the Company’s ﬂexibility to take advantage of any appropriate opportunities that may arise. Resolution 12 Disapplication of pre-emption rights The Directors are currently authorised, subject to certain limitations, to issue securities of the Company for cash without ﬁrst offering them to existing shareholders in proportion to their existing shareholdings. That authority will expire on 25 January 2014 or, if earlier, at the conclusion of the next Annual General Meeting of the Company and, in accordance with best practice, this resolution (which will be proposed as a special resolution) seeks to renew the Directors’ authority to disapply pre-emption rights. Other than in connection with a rights or other similar issue or where, for example, difficulties arise in offering shares to certain overseas shareholders and in relation to fractional entitlements, the authority contained in this resolution will be limited to an aggregate nominal value of £291,744, which represents 29,174,429 ordinary shares and is approximately ﬁve per cent of the Company’s issued ordinary share capital as at 11 June 2013 (being the latest practicable date prior to the publication of this document). The renewed authority will remain in force until 18 months after the passing of this resolution or, if earlier, at the conclusion of the next Annual General Meeting in 2014. In accordance with the Statement of Principles on disapplying pre-emption rights issued by the Pre-Emption Group (which is supported by the ABI, the National Association of Pension Funds Limited and the Investment Managers Association), the Board conﬁrms its intention that no more than 7.5% of the issued share capital will be issued for cash on a non pre-emptive basis during any rolling three-year period. R E V I E W O F T H E Y E A R C O R P O R A T E G O V E R N A N C E F I N A N C A L I S T A T E M E N T S Norcros plc Annual report and accounts 2013 75 Explanatory notes continued Resolution 13 Authority to purchase own shares This resolution, which will be proposed as a special resolution, is a resolution which the Company proposes to seek on an annual basis, in line with other listed companies in the UK, to give the Company authority to buy back its own ordinary shares in the market as permitted by the Companies Act 2006. The authority limits the number of shares that could be purchased to an aggregate maximum of 58,348,858 ordinary shares which have an aggregate nominal value of £583,488 (representing approximately 10% of the aggregate nominal value of the issued ordinary share capital of the Company as at 11 June 2013 (being the latest practicable date prior to the publication of this document)) and sets minimum and maximum prices. The renewed authority will remain in force until 18 months after the passing of this resolution or, if earlier, at the conclusion of the next Annual General Meeting in 2014. The Directors have no present intention of exercising the authority to purchase the Company’s ordinary shares, but will keep the matter under review, taking into account other investment opportunities. The authority will be exercised only if the Directors believe that to do so would result in an increase in earnings per share and would promote the success of the Company and be in the best interests of its shareholders generally. To the extent that any shares so purchased are held in treasury (see below), earnings per share will be enhanced until such time, if any, as such shares are resold or transferred out of treasury. Any purchases of ordinary shares would be by means of market purchases through the London Stock Exchange. If any shares are purchased, they will be either cancelled or held in treasury. Any such decision will be made by the Directors at the time of purchase on the basis of the shareholders’ best interests. Shares held in treasury can be cancelled, sold for cash or, in appropriate circumstances, used to meet obligations under employee share schemes. Any shares held in treasury would not be eligible to vote nor would any dividend be paid on any such shares. If any ordinary shares purchased pursuant to this authority are not held by the Company as treasury shares, then such shares would be immediately cancelled, in which event the number of ordinary shares in issue would be reduced. The Directors believe that it is desirable for the Company to have this choice. Holding the repurchased shares as treasury shares gives the Company the ability to re-issue them quickly and cost effectively and provides the Company with additional ﬂexibility in the management of its capital base. As at 11 June 2013 (being the latest practicable date prior to the publication of this document), there were warrants and options over 31,152,663 ordinary shares in the capital of the Company, which represent, in aggregate, approximately 5.3% of the Company’s issued ordinary share capital. If the authority to purchase the Company’s ordinary shares was exercised in full, these options and warrants would represent approximately 5.9% of the Company’s issued ordinary share capital. As at 11 June 2013 (being the latest practicable date prior to the publication of this document), the Company did not hold any shares in treasury. Resolution 14 Notice of general meeting This special resolution is required in order to preserve the ability of the Company to convene general meetings (other than Annual General Meetings) of the Company on not less than 14 clear days’ notice, rather than on not less than the 21 days’ notice which would otherwise be required. In order to preserve this ability, the Company’s shareholders must have approved the calling of such meetings on not less than 14 clear days’ notice. Resolution 14 seeks such approval. The shorter notice period would not be used as a matter of routine for general meetings, but only where the ﬂexibility is merited by the business of the meeting and is thought to be to the advantage of the shareholders as a whole. The approval will be effective until the Company’s next Annual General Meeting, when it is intended that a similar resolution will be proposed. The Company will also need to meet the requirements for electronic proxy submission under the Companies (Shareholders’ Rights) Regulations 2009 before it can call a general meeting on such notice. 76 Norcros plc Annual report and accounts 2013 Norcros plc Ladyﬁeld House Station Road Wilmslow Cheshire SK9 1BU www.norcros.com

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