Severfield Annual Report 2014

Plain-text annual report

Building a solid platform for growth Annual report and accounts for the year ended 31 March 2014 Stock code: SFR www.severfield.com 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plc Annual report and accounts for the year ended 31 March 2014 Welcome to our 2014 annual report Severfield plc is the largest specialist structural steelwork group in the UK, with a growing presence in India and a reputation for performance and value. Our vision is to be recognised as world-class leaders in structural steel, known for our ability to deliver any project, to the highest possible standards. Five reasons to invest Market leading UK position — well positioned to benefit from a future recovery in the wider UK construction market. Strong balance sheet — rights issue provides greater operational and financial flexibility. Unrivalled experience and capability in design, fabrication and construction of steel structures. Operational improvement and cost savings programme under way — operating margin target remains 5 per cent to 6 per cent in current market conditions. Established foothold in the developing Indian market — good production capability with further investment made to support expansion. Investor website We maintain a corporate website at www.severfield.com containing a wide range of information of interest to institutional and private investors including: • Latest news and press releases • Annual reports and investor presentations Getting around the report View more content within this report Find out more information on our website: www.severfield.com Our core values /Safety /Customer focus /Integrity /Commitment 23372.04 16 July 2014 10:30 AM PROOF 8 What’s inside 06 Strategic report Overview 2013/14 highlights and milestones Chairman’s introduction Our business and strategy 25 03 Case study: Aldgate Tower 22 Our performance Chairman’s introduction Our financials Our business and strategy Group at a glance Our business model Marketplace Market sectors Our strategy JSW Severfield Structures Our performance Operating review Financial review Corporate social responsibility Key performance indicators How the business manages risk Our governance Board of directors Executive committee Chairman’s review Corporate governance report Audit committee report Directors’ report Directors’ remuneration report — Letter from the committee chairman — Policy — Implementation Directors’ responsibilities statement Our financials Independent auditor’s report Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the consolidated financial statements Five year summary Financial calendar Company balance sheet Notes to the Company financial statements Shareholder information Addresses and advisers 01 02 03 08 10 14 16 18 20 24 28 32 38 40 46 48 50 52 58 61 64 66 73 81 84 87 88 89 90 91 92 121 121 124 125 130 82 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStrategic reportOverviewStock code: SFR02 2013/14 highlights and milestones Revenue £231.3m2013: £318.3m Underlying* operating profit (before results of JVs and associates) Underlying* operating margin (before results of JVs and associates) £7.6m 2013: (£19.2m) Operating loss (before JVs and associates) £0.1m 2013: £26.5m Loss after tax £2.6m 2013: £23.1m 3.3% 2013: (6.0%) Underlying* profit before tax £4.0m 2013: (£21.5m) Underlying* basic earnings per share 0.88p 2013: (10.78p) • UK underlying operating margin (before JVs and • amortisation of acquired intangible assets – £2.7m * Underlying profit measures are stated before: associates) recovery to 3.3 per cent (2013: -6.0 per cent) • Share of losses from Indian joint venture of £3.0m (2013: £0.3m loss) • Period end net funds position of £0.3m (31 March 2013: £41.2m net debt) • Further restructuring of largest business, Severfield (UK) Limited, concluded successfully • Operational improvement programme progressing well and continuing • UK order book solid at £168m at 1 May 2014 • (1 November 2013: £172m) India order book of £41m at 1 May 2014 (1 November 2013: £34m) • Development of clear Group strategy in addition to anticipated recovery in UK market means the Group is well placed for future growth (2013: £3.4m) • • • • restructuring and redundancy costs – £2.6m (2013: £0.8m) retirement of acquired intangible assets – £2.4m (2013: nil) impairment of investment in associates – £0.4m (2013: nil) refinancing related transaction costs – nil (2013: £2.1m) • contract legal costs and provision movements – nil (2013: £1.1m) • movements in valuation of derivative financial instruments — nil (2013: £0.1m favourable) • the associated tax impact of the above, together with the impact of a reduction in future corporation tax rates on deferred tax liabilities. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014 John Dodds Chairman We expect 2014/15 to be another year of progress.” 03 Chairman’s introduction 2013/14 was a year of transition for the Group. We have made a number of changes to the board, including the appointment of a new chief executive officer and three new non- executive directors, and the Group executive team has been strengthened. We now have a strategy in place for future growth, a clear vision for the future and a new Group branding. The Group reported underlying operating profits for the year of £7.6m which represents a recovery in the UK operating margin to 3.3 per cent which is a good step towards our previously stated target of 5–6 per cent by 2015/16 in current market conditions. Underlying profit before tax of £4.0m represented a significant turnaround from the underlying loss of £21.5m in the 15 months to 31 March 2013. The UK order book of £168m remains solid. This year has seen stabilisation and recovery in the UK business, but disappointment in India. The recovery in UK operating margins reflects the positive effects of the reorganisation undertaken in the first half of the year in the Group’s largest trading entity, Severfield (UK) Limited, together with the Group’s ongoing operational improvement programme. Performance from the Indian joint venture was disappointing. The Group’s share of losses for the year was £3.0m reflecting contract delays and timing variations which led to underutilisation of the factory. This situation was exacerbated by the effects on the Indian market of uncertainties around the election process. In response, significant changes have been made to the senior management team in India and a new business development and operational improvement programme has been implemented. We believe the market in India continues to present significant future growth opportunities, particularly in light of the recent election results. Find out more in the operating review on pages 24 to 27 The rights issue which launched in February 2013 with the overwhelming support of our principal shareholders, was completed in April 2013, significantly strengthening the Group’s balance sheet. The Group ended the year with net funds of £0.3m. Find out more in the financial review on pages 28 to 31 Board The composition of our board has changed substantially over the last 12 months and has, I believe, a stronger balance of skills and mix of experience. Ian Lawson was appointed as chief executive officer in November 2013, allowing me to revert to my previous role of non-executive chairman. Ian has made an excellent start to his tenure and has been instrumental in formulating a fresh strategy and branding for the business which I am confident will make a significant contribution to our future performance. In addition, the executive team has been further strengthened with the appointment of Ian Cochrane as chief operating officer, Mark Sanderson as Group legal director and Company secretary, and Lee Mills as Group safety, health and environment (SHE) director. Alun Griffiths joined the board as a non-executive director with effect from 1 May 2014 and Kevin Whiteman and Tony Osbaldiston will join the board with effect from 19 July 2014. In combination, they bring to the board a wealth of experience that will be of significant benefit to the Group as we continue our strategic and operational progression. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStrategic reportOverviewStock code: SFR04 Chairman’s introduction continued Furthermore, a new vision was expressed for the Group, and its core values. The vision is ‘to be recognised as world-class leaders in structural steel, known for our ability to deliver any project, to the highest possible standards’. The core values are safety, integrity, customer focus and commitment. Find out more about strategy on pages 18 and 19 Outlook Overall we expect 2014/15 to be another year of progress. We believe we are well placed, with the right leadership team, to deliver stronger growth in the future. We have excellent relationships with a number of key clients, unrivalled capacity and performance, a solid UK order book and have implemented a series of wide-ranging operational improvements both in the UK and India. We now look ahead to a more optimistic industry outlook whilst not underestimating the challenges that lie ahead. John Dodds Non-executive chairman 11 July 2014 Two non-executive directors will retire from the board following the year-end: Keith Elliott having served fifteen years, including as senior independent non- executive director, and Toby Hayward having served six years, including as non-executive chairman and chairman of the audit committee. I would like to wish both all the best for the future and thank them for all their efforts within the business. Find out more about corporate governance on pages 52 to 57 Employees and safety We remain committed to the health and safety of all our people and with the appointment of a new SHE director are looking forward to continued improvements in our performance in this area as we strive constantly to adopt the best safety, health and environmental practices. Our key strength remains the dedication and commitment of our people and on behalf of the board I would like to thank them for their hard work, loyalty and support especially in the difficult times experienced recently by the Group. Find out more about employees and safety on pages 32 to 37 Strategy and branding Following Ian’s appointment as chief executive officer, the Group undertook a review of its brand and strategy. This resulted in the change of the Group’s name to Severfield plc, a simpler naming structure for the main operating businesses, and a new branding strategy to enable improved and clearer communication with all stakeholders in the future. A significant amount of work was also undertaken in developing a new long-term strategy, the core of which revolves around the continuation of the UK operational improvement plan to ensure that we have a sustainable, profitable base for the business. The strategy will provide a platform for continued growth and we will be looking more actively for opportunities to expand the business both in the UK and in overseas markets. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201405 Project: BNP Paribas Location: London Tonnage: 3,000 Client: BNP Paribas Real Estate Main contractor: Vinci Completion: 2014 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStrategic reportOverviewStock code: SFR06 Severfield plc Annual report and accounts for the year ended 31 March 2014 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.com Stock code: SFR Strategic report Our business and strategy 07 Strategic report Our business and strategy Group at a glance Our business model Marketplace Market sectors Our strategy JSW Severfield Structures 08 10 14 16 18 20 Project: Francis Crick Institute Location: London Tonnage: 2,300 Client: UKCMRI Main contractor: Laing O’Rourke Completion: 2014 23372.04 16 July 2014 10:30 AM PROOF 8 08 Group at a glance The combined resources of our Group of companies have the design skills, engineering skills and experience to handle complex projects over a diverse range of market sectors. We can facilitate the production of a wide range of steelwork packages, from projects requiring added value engineering content to basic structural work. Severfield (UK) Limited Severfield (UK) Limited combines high volume structural steel production with specialist design and engineering expertise to deliver a complete service to clients from project concept to completion. It has a combined capacity of around 100,000 tonnes of fabricated steelwork per year, the most extensive product range and capability in the industry and its own highly skilled site construction teams. Its Dalton site in North Yorkshire boasts ten state-of-the-art production lines where modern manufacturing and painting processes are undertaken in a controlled environment. The streamlined, high volume and efficient nature of this facility is geared for strong repeat business in the structures market. Its Lostock site in Lancashire can also take on more difficult or complex work with the capability of operating in ‘challenging’ environments such as live railways, airports, public places and city centres. Severfield (Design & Build) Limited Severfield (Design & Build) Limited, located in Sherburn, near Scarborough, is the principal design and build steelwork contractor for distribution warehouses and low rise structures in the UK. The company designs, fabricates and constructs structural steelwork and portal frames principally for the warehouse, distribution and industrial sectors. The company also has a specialist steel stair and metalwork division and expertise in the commercial, residential, health and education sectors. With an annual capacity of 25,000 tonnes, the company has a business, skill base and client profile which is complementary to the rest of the Group. Severfield (NI) Limited Severfield’s base in Northern Ireland, Severfield (NI) Limited has a strong reputation for delivering quality constructional steel products in the UK and Irish structural steel market. It has contributed to such notable projects as Leadenhall Tower, Dundrum Shopping Centre in Dublin and Belfast’s Odyssey Arena and Titanic Signature Building. The company has an annual capacity in excess of 25,000 tonnes with full-service capabilities and is equipped with the latest state-of-the-art manufacturing processes. The site’s highly skilled workforce includes a directly employed site construction team. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201409 Severfield (UK) (Previously Severfield- Watson Structures) Dalton, North Yorks and Lostock, Lancashire Severfield (Design & Build) (Previously Atlas Ward Structures) Sherburn, North Yorkshire JSW Severfield Structures (Indian-based joint venture business) Mumbai, India Severfield (NI) (Previously Fisher Engineering) Enniskillen, Co. Fermanagh JSW Severfield Structures Limited Located adjacent to JSW Steel’s plant at Vidyanagar, in the District of Bellary, Karnataka, India, the site has an annual capacity of 60,000 tonnes and consists of two fabrication lines and a plate line. Plant investment has been significant, with many of the Group’s innovative features being incorporated into the joint venture. The company is involved in the design, fabrication and construction of structural steelwork to principally service the Indian markets. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur business and strategyStrategic report10 Our business model What we do Severfield is the UK’s premier structural steel group, operating across four sites providing unrivalled capacity and capability. We also have an expanding operation in India, which forms part of our international growth plans. The Group’s businesses perform every part of the fabrication and construction process from initial scheme design, through detailing, specification and manufacture to the eventual handover to our clients of a quality product on-site. The Group’s proven strengths are its unrivalled capacity and performance, iconic and high quality products, engineering excellence and customer service. Our customers Clients serviced by the Group cover a broad range of disciplines from construction contractors and developers, to engineers and architects. Contractors include Brookfield, BAM, Laing O’Rourke, Sir Robert McAlpine, MACE, Morgan Sindall, Skanska and Balfour Beatty, and developers include Stanhope, Hammerson, British Land, Land Securities, Network Rail, Westfield and Grosvenor. We have also developed structures for clients such as Arla Foods, ASDA, Sainsbury’s, Jaguar Land Rover and developers such as ProLogis and Gazeley. Resources The Group has the largest capacity and capability of any steel fabrication company in the UK and can offer great choice, value and flexibility thanks to our national network of factories and the technical expertise of our people. The Group is equipped with the latest state-of-the-art manufacturing and painting processes and has a highly skilled workforce of over 1,200 staff including an in-house construction team. We have the design, experience and engineering skills to serve a diverse range of market sectors, from education and hospitals to bridges and commercial offices. Partners A key ingredient for the long-term success of any business is the ability to forge strong and lasting relationships with supply chain partners, which provides clients with high value and consistent reliability. The Group spends a high percentage of its cost of sales on goods and subcontractor services. Careful management of the supply chain is essential to drive efficiency and suppliers are monitored to ensure that maximum benefits are delivered to clients and the Group. As the UK’s largest steelwork contractor, we engage with clients and the supply chain wherever we operate and long-term relationships are built with those who can meet the Group’s standards in quality and sustainability. This helps to improve the interfaces between disciplines as we strive to optimise construction value and performance both now and in the future. FABRICATE FABRICATE DESIGN DESIGN VALUE GENERATION VALUE GENERATION CONSTRUCT CONSTRUCT 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201411 Value generation All of the Group’s revenue and profits are generated from the design, fabrication and construction of structural steelwork and its related activities. Our state-of-the-art manufacturing facilities have been established to generate profit and surplus cash flow. Close management of our contracts and cost base is critical to our success particularly in winning new contracts, reinvesting in our business and seeking further opportunities for growth. The Group’s operational improvement programme, the objective of which is improved risk assessment and operational and contract management processes, is central to the generation of value. Good cash generation and balance sheet management provide a solid foundation for the Group. Our competitive advantage The Group’s competitive advantages derive from its scale, client focus, flexibility, experience, cost base, productivity, supply chain strengths and integrated approach from design to construction. We have unrivalled capabilities and our facilities are the best in the UK and possibly in Europe. We approach every project, from the highly technical to basic structural work, with the same level of safety, professionalism, commitment, care and customer service. The dedication, expertise and experience of our workforce ensures that we offer more skills and variety than any other UK steel contractor. We are committed to matters of health and safety, sustainability, ethics and client and staff engagement. Where we fit in the value chain DESIGN The Group’s design department consists of highly skilled and motivated professional structural and civil engineers with specialist knowledge of structural steelwork design. The design process offers our clients innovative concepts and solutions. We are able to offer ‘value engineering’ through the close guidance of our consulting engineers at the concept of the project and with the assistance of the latest state-of-the-art computer software for 2-D and 3-D building information modelling (BIM), analysis and design. Our advice on material choices, fabrication, fire protection, surface treatment and construction techniques can often lead to significant project savings and efficiencies. Our engineers are also involved in temporary works to suit site construction and buildability issues. Working closely with the Group’s in-house construction team, we ensure the most efficient and safest solutions for our clients’ needs. This expertise is essential for high-rise towers and other complex structures undertaken by the Group. FABRICATE The Group’s fabrication facilities include expansive stockyard areas and in-line cutting, fabrication, welding and painting and some of the largest finished goods storage areas in the industry. Operational investment has been significant and continuous over the years, with many innovative features being developed and incorporated. Modern, state-of-the-art processing equipment has been employed with full consideration for design, supporting layout, logistics, integration and construction. Haulage for our steel products is managed by WS Transportation, which boasts a range of state-of-the-art equipment such as new trailers, trailer safe systems, cycle aware cameras and audible warning features for city centre deliveries. CONSTRUCT The Group has its own highly trained construction workforce which provides services for all of its construction requirements. Working closely with the project management team, they are leaders in steel construction and utilise the latest equipment on-site. The Group is an industry leader in construction methodology. The Group also has a large and highly experienced contract management team. Each contract manager is the single point of contact with each client and is supported by all resources within the Group. Our contract managers engage with our clients and the supply chain to ensure optimum communication and performance in all aspects of the project, including site construction and administration. 23372.04 16 July 2014 10:30 AM PROOF 8 DESIGN DESIGN FABRICATE FABRICATE VALUE GENERATION VALUE GENERATION CONSTRUCT CONSTRUCT www.severfield.comStock code: SFROur business and strategyStrategic report12 Our business model continued Health and safety The well-being and safety of our employees, clients, suppliers and subcontractors are paramount and directly impact on the commercial viability of our business. The directors, through the implementation of our safety, health and environmental philosophy, encourage each employee and subcontractor to strive constantly to adopt the best safety, health and environmental practices. Our dedicated SHE director has overall responsibility for health and safety operations, with the aim of minimising the risk of incidents and generally promoting a proactive health and safety culture. A principal aim of the board is to ensure, through example and encouragement, that we behave ethically and responsibly, particularly in the fields of health and safety and environmental management. Training standards are high within the Group to ensure performance excellence and health and safety standards and we work closely with equipment manufacturers to ensure that efficiency and safety are always at the forefront of operations. The Group’s health and safety team monitors all sites on a regular basis to make sure these essential standards are maintained. We have developed our own unique safety handrail solution (Sever Safe) and a tool-tethering system. The items below support our health and safety policy and establish the areas that are essential to achieving our main goal, namely to ensure each and every employee can enjoy a safe working environment, with no exceptions. Leadership — people at all levels have responsibility for their own health and safety and should set an example for others. Our management is accountable for health and safety and will demonstrate leadership through personal example. Hazard, risks and control measures — we will identify the hazards and risks associated with our business activities and introduce appropriate control measures to challenge them in the changing environment and aim for continuous improvement. Health and well-being — we will promote and improve the health and well-being of all Group employees. Competence and behaviour — we will ensure our employees are trained so they are skilled and qualified for their occupation and therefore can contribute to an improved health and safety performance. Incident analyses and prevention — we will ensure work-related accidents and near-misses are reported, investigated and analysed to prevent reoccurrence. The investigations will focus on root cause and recommendations shared across the business. Safety in design — our designers and construction management teams will focus on the design aspect of the structure with the objective to erect the structure more safely and efficiently. Monitoring, audit and review — we will conduct regular internal audits on our management systems in order to achieve our objectives and targets to drive the health and safety culture of our business forward. DESIGN FABRICATE VALUE GENERATION CONSTRUCT 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201413 Sustainability Quality and accreditations Innovation Fabsec is the unrivalled market leader in the design, fabrication and supply of long span cellular and bespoke plated beams. It is a joint venture of four major UK companies at the forefront of the UK construction industry including the Group. FABSEC® beams and FBEAM® software are used on a variety of prestigious construction projects across the UK. The FABSEC® production line at Dalton, which has a capacity in excess of 30,000 tonnes per annum, is a fully self-contained production facility. The process provides the structural steelwork sector with a full range of highly efficient plated sections, optimal section profiles and shop-applied intumescent coatings. We are committed to minimising the environmental impact of our business through sustainable practices and continuous improvement of our environmental performance. The following items support our environment policy and establish the areas that are essential to achieving the policy. Management systems — to implement effective management systems and to encourage all our employees to act in an environmentally responsible manner. Continuous improvement — to improve the environmental performance of our business through research and development of new technologies, preventing and reducing our emissions and minimising waste. Sustainable development — to contribute to sustainable resources by using energy and raw materials more efficiently, thus optimising our natural resources. Monitoring and reporting — to monitor and audit our environmental performance, report progress on policy objectives and strive for continuous improvement in our targets to achieve a more environmentally friendly business. Find out more about health and safety and sustainability on pages 32 to 37 Find out more about strategy on pages 18 and 19 Find out more about risk management on pages 40 to 43 Quality assurance is a fundamental feature across all of our operations. From initial enquiry through design, materials ordering, fabrication and construction, we employ processes designed to ensure full customer satisfaction. Quality systems assumed through the British Standards Institution (BSI), together with welding control through The Welding Institute (TWI), operate to ensure customer requirements are recognised and delivered. Registration under the Qualified Steelwork Contractors Scheme provides extra confidence to customers. The CE mark is a claim that a particular construction product can be used within the European Union and is based on the principal that the product is ‘fit for purpose’. All of the Group’s manufacturing facilities are CE marking compliant and have been independently assessed to meet the requirements of Execution Class 4. Accordingly, our clients can be assured that their steelwork is in compliance with the latest Europe-wide legislation and is manufactured to a level of quality that is second to none. The Group has a strong policy of continuous improvement and seeks to enhance corporate management through proactive development. New facilities and procedures are integrated into the relevant quality assurance system as they are adopted. The Group is committed to providing our clients with the best possible service and protecting our workforce wherever we operate. By gaining the necessary certification through recognised bodies, we provide the reassurance that we are properly trained and qualified to carry out our contractual and partnership obligations. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur business and strategyStrategic report14 Marketplace The Group’s strategic focus is to increase its UK market share from construction activities, to enter new market sectors and to build market share from its existing European opportunities. Marketplace Outlook UK order book The total value of structural steel output in the UK, estimated by the British Constructional Steel Association (BCSA), was approximately £1.6bn in 2013. This represents UK structural steel production for calendar year 2013 of 848,000 tonnes. The value of this market, which is considered addressable by the Group, is approximately £1.1bn, which represents production levels of 500,000 tonnes. The Group’s potential production capability is approximately 150,000 tonnes, which represents 15 per cent of the current estimated capacity of the UK market of 1,000,000 tonnes. Its current share of the UK market is approximately 90,000 tonnes, resulting in an addressable market share for 2013 of c.18 per cent and a total UK market share for 2013 of c.11 per cent. The Group’s key market sectors and estimated market share are shown below. Market conditions have remained challenging over the past year, as a continued squeeze on margins has put pressure on contractors and, most notably, the supply chain. Nevertheless there are signs that the market will pick up towards the end of 2014. The Group is well placed for future growth given the anticipated recovery in the core UK market driven primarily by infrastructure and private sector construction growth. Forecasts prepared by the BCSA over the next three years show an expected increase in UK structural steel production, including in the Group’s key markets of power and energy, stadiums and leisure, commercial offices, industrial and health. The Group has a well-diversified order book of £168m (May 2014) which represents approximately eight months of forward production capacity. It has reduced in overall terms over the year from previous levels but this reflects both the capacity reduction arising from the reorganisation of Severfield (UK) Limited, as well as a longer negotiating period on major contracts arising from our improving risk management processes. The market has been stable during the year but prices have remained competitive and we continue to focus on ensuring that there is a fair balance of risk and reward within the contracts. The current order book does not yet reflect the positive impact of the improvement in market conditions anticipated towards the end of 2014. Our sectors Sector Industrial and distribution Commercial offices Education Power and energy Agriculture Health Leisure Bridges Retail Other Export Total Market tonnage in 2013 (000s) 350 88 88 37 35 31 31 25 20 53 90 848 (%) 42% 10% 10% 4% 4% 4% 4% 3% 2% 6% 11% 100% Group market share (estimated) 5-10% 30-40% <5% 20-30% 0% 5-10% 20-30% <5% 40-50% 5-10% <5% Find out more about strategy on pages 18 and 19 Find out more about KPIs on pages 38 and 39 Find out more about risk management on pages 40 to 43 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201415 UK order book Sector Commercial offices Transport Stadiums and leisure Industrial and distribution Power and energy Data centres and other Retail Bridges Health and education November 2013 £172m May 2014 £168m Future trend 27% 22% 5% 16% 12% 5% 6% 3% 4% 31% 18% 18% 11% 7% 6% 4% 3% 2% Pipeline/prospects Market sectors The Group continues to monitor the future pipeline of work which is likely to convert to orders in the near term. This provides forward visibility of future orders and helps to facilitate production planning. The Group’s pipeline of future orders is encouraging and includes prestigious developments in the commercial offices, stadiums and leisure, data centres, industrial (warehousing) and transport sectors. With our extensive experience in multiple sectors, the Group’s state-of-the-art facilities provide our clients with unrivalled services and value in the execution of their projects. Our structures serve people every day, whether for work, play or travel, or to provide essential services, from health to education. The Group’s key market sectors are discussed in detail on pages 16 and 17. Current estimated UK capacity 1,000,000 tonnes Total UK production of constructional steelwork 848,000 tonnes Group share of UK market 90,000 tonnes Group potential capacity 150,000 tonnes 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur business and strategyStrategic report16 Market sectors Stadiums and leisure Retail Stadiums and leisure complexes are important sectors for the steelwork industry. The Group has an unrivalled record in the design, engineering and building of many of the UK’s best known sports hubs, from the world-renowned Olympic Stadium to Arsenal Football Club’s Emirates Stadium. We have also provided timely and cost-effective solutions for key leisure destinations, ranging from exhibition and conference centres to state-of-the-art concert arenas. Other Group successes include Wimbledon Centre Court, Leeds Arena, Resorts World, Birmingham and Tate Modern Gallery. Retail developments are becoming increasingly complex and ambitious as towns and cities position themselves as attractive shopping destinations in today’s competitive economy. Major redevelopment in cities and out-of-town shopping facilities are challenging projects in their own right, requiring different skills and services. Project management and supply chain linkage are vital to successful project execution. Group successes include Westfield Shopping Centre, Hereford Old Livestock Market, John Lewis, Birmingham and projects for ASDA, Sainsbury’s, Tesco and Aldi. Power and energy Commercial offices Power stations, sustainable energy facilities and waste processing plants form an important part of our business. Our professionalism, extensive sector experience and ability to meet specific engineering requirements enable us to continue serving these vital sectors in the UK and other parts of the world. Group successes include Essex Waste Treatment Plant, Cardiff, Suffolk and Cleveland Waste-to-Energy plants, Sellafield and Staythorpe Power Station. Through our work in the commercial office sector, we have made a significant impact on the cityscapes of London and other major commercial hubs around the country. We ensure our structural steel methods, products and processes keep up with the needs and challenges of this rapidly evolving sector. Our success is underpinned by specialist products such as FABSEC® and Firebeam®, together with other initiatives. Group successes include 5 Broadgate, Aldgate Tower, Moorgate Exchange, Fitzroy Place, BNP Paribas and Mark Lane. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201417 Industrial and distribution Transport The Group is a trusted partner to the industrial, warehousing and distribution sectors, thanks to our strong reputation for engineering excellence and versatility. Unrivalled capacity, the ability to meet diverse and rigorous requirements and other strengths such as design capability, supply chain co-ordination and delivery speeds set us apart from our competitors. Our clients cover a wide range of sectors from automotive to retail, with major contracts including projects for ASDA, Sainsbury’s, Tesco, Airbus and Jaguar Land Rover. Transportation is a key market sector for the Group, which has delivered many prestigious projects, from multiple contracts with Heathrow Airport, to the pioneering Emirates Cable Car, which carries approximately two million passengers each year. Our extensive transportation expertise includes international airports, rail facilities and multi-storey car parks. Services range from design, planning and high-volume steel supply, to fabrication and construction. Other Group successes include Dublin International Airport, Birmingham New Street Station and Manchester Victoria Station. Health and education Bridges We have a long history in providing world class steel solutions for hospitals, which are increasingly being specified with structural steel frames. Key factors giving us an advantage in this sector include span length, enhanced flexibility, adaptability and speed of construction. We have also worked with many education clients and contractors over the years, each project bringing its own specific requirements and challenges. Group successes include Francis Crick Institute, Southmead Hospital and the University of Strathclyde. As a key element of a country’s infrastructure, bridge building requires skill, precision and quality on a large scale. Many of the steel bridges we create become famed landmarks in their own right. The Group has a strong reputation and extensive experience in the successful delivery of all types of bridgework, from major transport routes to footbridges. Group successes include East Croydon station Footbridge, Gateshead Millennium Bridge, Thameslink Borough Viaduct Footbridge, Pulpit Rock Viaduct and Glasgow Smartbridge. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur business and strategyStrategic report18 Our strategy In 2013/14 a new long-term strategy was developed for the Group. The core of this strategy revolves around building a solid platform for continued growth. To support this strategy, we have articulated a vision for the Group, and its core values. Identify growth opportunities Sustainability of India £ Investment in technology DESIGN FABRICATE Our strategy: VALUE GENERATION Building a solid platform for growth Develop our people CONSTRUCT Drive operational improvements and efficiencies Quality of service VISION AND MISSION VISION VALUES Safety Our vision is to be recognised as world-class leaders in structural steel, known for our ability to deliver any project, to the highest possible standards. There’s a reason it is known as ‘safety first’. We make no apologies for the fact that profit and loss, deadlines and headlines, all come second to making sure everyone goes home safely. Every day. MISSION Customer focus As ambitious, innovative leaders in a demanding and ever developing industry, we will use our collective strengths and resources to build the capacity required to deliver the structures of the future. Our clients are paramount in all that we do. We are here to understand their requirements and meet their aspirations. Together we will deliver projects of which we can all be proud. Integrity We operate in a complex and challenging industry, one that often requires innovative thinking and a flexible approach to deliver successful outcomes. The one thing we’ll never compromise on though is our integrity, which ensures we’re able to maintain the exceptionally high standards we set for ourselves. Commitment We may move with the times, but our long and rich history means that we have a few old-fashioned beliefs. One of those beliefs is that you stand by your word. When the Group say we’ll deliver, whatever challenges lie ahead, you can depend on us to deliver, and to the highest possible standard. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201419 Identify growth opportunities Quality of service In the short to medium-term, our aim is to capitalise on growth opportunities both in the UK and in overseas markets as follows: • Increase UK market share — growing market share in areas where the business already operates. • Enter new UK market sectors — looking for new market areas where the business has not operated in the past, taking advantage of our existing capacity and capabilities. • Building from existing European opportunities, including through working with known construction companies. Drive operational improvements and efficiencies During the year, recognising the difficult economic conditions, we launched a comprehensive Group operational improvement programme. The objective of this has been to improve risk assessment, operational and contract management processes within the business, which should ultimately lead to an improvement in operating margins. Our aim is to restore underlying operating margins to 5–6 per cent in 2015/16 in current market conditions which, in accordance with the Group’s business model, should generate surplus cash flow. Find out more in the operating review on pages 24 to 27 Sustainability of India We believe that the Indian market presents great opportunities for steel fabrication. However, the poor recent performance of the joint venture has highlighted that the conversion of the market from concrete to steel is taking longer than expected. In response, we have taken actions to improve the order book, strengthen management, reduce overheads and improve business development, which should lead to better future performance. Our aim is to ensure that the business develops a sustainable position whilst the market continues its conversion to steel. Find out more about India on pages 20 and 21 Our industry experience allows us to better understand our customers’ own strategic objectives and enables us to design, fabricate and construct structural steelwork solutions to support these objectives. By understanding, anticipating and responding to customer needs we aim to build secure, sustainable and mutually valuable relationships and create lasting customer satisfaction. Find out more about our business model on pages 10 to 13 Develop our people Our people are at the heart of our business and are vital to the success of our vision and the achievement of our strategic goals. Our aim is to attract and recruit the right person at every level and to keep them engaged so that we can deliver our goals and customer commitments whilst maintaining a safe working environment. Find out more about developing talent on pages 35 and 36 £ Investment in technology We will invest in market-leading technology in the short and medium-term in order to support the ongoing requirements of the business and for growth. Capital investment will be determined by a structured and responsive approach to meeting customer expectations and as part of a more general capital replacement programme. We expect the level of investment to increase to a replenishment rate of £4–5m per annum in the future. Find out more about how these strategic objectives will be measured through our KPIs on pages 38 and 39 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur business and strategyStrategic report20 Mumbai Airport – air traffic control tower Find out more about strategy on pages 18 and 19 JSW Severfield Structures The Group’s joint venture and operations in India are of significant importance in achieving its strategic growth ambitions. Overview Performance from the Indian joint venture was disappointing during the year. In response to this, the Indian management team was strengthened including the appointment of Derek Randall as managing director. In addition, an overhead reduction programme was initiated, and completed, and a new business development and operational improvement programme was put in place which is expected to generate a substantial improvement in the future performance of the business. Notwithstanding the challenges we faced in the year, there were some encouraging signs of operational progress across a wide range of areas including: • Continually high quality products and short and consistent delivery times which are best in class and appreciated by clients. • Full design, fabrication and site construction services providing design and build projects to a wide variety of commercial and industrial sectors. • Technical predesign services to assist clients in choosing the best methods of construction to achieve budget, timescale, performance and aesthetic requirements. • An excellent safety performance across the business which is recognised, appreciated and expected by valued clients. • The successful completion of our phase two expansion, improving scope of supply and increasing capacity to approximately 60,000 tonnes per annum. • An increasing order book in excess of £40m. Current and future projects The demonstration of value through design, quality, speed, consistency and overall professional capability has led to the successful award of many prestigious projects from local and inward investors including: • A prestigious office project in Bangalore for NetApp, an American data storage company. This is designed to use structural steel for both the core and frame. • Our first school building in Mumbai for Ajmera. • Industrial projects including assignments for L&T, JSW Steel Limited, Reliance, OPG, Doosan and ITC. • Commercial projects for Raheja and Shakespeare. The future India remains primarily a concrete construction market which presents great opportunity for steel. The Indian market is now more buoyant after the recent change in government with market prospects forecast to improve. The addressable opportunity for steel fabrication in construction remains large and the prospects for conversion from concrete to steel are expected to improve. The market potential continues to be reaffirmed in all the market research that we carry out, both formal and informal. Severfield and our joint venture partner JSW Steel are optimistic that the joint venture will improve performance and will grow through market demand overall improving and through market penetration as the benefits of total delivered value are appreciated by clients. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201421 Annual capacity 60,000 tonnes Site area 65 acres Order book £40m+ Current operations The plant is based in Bellary, Karnataka. Depending on mix, the capacity is now approximately 60,000 tonnes per annum following the successful implementation of our phase two expansion. The plant consists of: • A bit shop, two fabrication lines and a new bay to provide bespoke off-line heavy fabrication, tubular products, specialised multi-coat painting and further bogey line fabrication if required. • An Indisec line to produce sections from plate and to make cellular beams for steel design optimisation and improved floor to ceiling space. • Off-line facilities to make hand-railing, stairs and other ancillary products. • A second joint venture JSW Structural Metal Decking Limited (between JSW Severfield Structures and SMD Asia) which has a metal decking floor line, also in Bellary. Locations within India State-of-the-art plant • The plant has been designed to optimise product range, quality and productivity, as befitting the demands of the construction industry in India. • Incorporating state-of-the-art technology and processing equipment, the plant is managed and operated by highly qualified, experienced and dedicated people. • Bespoke plated products and Indisec are manufactured on-site at Bellary, Karnataka offering clients a range of benefits. • The plant currently utilises around 35,000 square metres of covered area, and 52,000 square metres of logistics and storage area. The site is on 65 acres, allowing future expansion. MUMBAI — Head office BELLARY — Production plant BANGALORE — Sales representation and drawing/design office DELHI — Sales representation 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur business and strategyStrategic report22 Severfield plc Annual report and accounts for the year ended 31 March 2014 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.com Stock code: SFR Strategic report Our performance 23 Strategic report Our performance Operating review Financial review Corporate social responsibility Key performance indicators How the business manages risk 24 28 32 38 40 Project: Glasgow Smartbridge Location: Glasgow Tonnage: 286 Client: Glasgow City Council Main contractor: Farrans Construction Completion: 2014 23372.04 16 July 2014 10:30 AM PROOF 8 24 Operating review Substantial operational improvements have been achieved during the year.” Ian Lawson Chief executive officer The development of a clear Group strategy in addition to the anticipated recovery in the core UK markets means that the Group is well placed for future growth. Group overview UK review This year has seen stabilisation and recovery in the UK business, but disappointment in India. Underlying profit before tax of £4.0m represented a significant turnaround from the underlying loss of £21.5m in the 15 months to 31 March 2013. This reflected both a good recovery in UK operating margins but also a share of losses from our Indian joint venture of £3.0m. The rights issue launched in February 2013 was completed in April 2013, significantly strengthening the Group’s balance sheet. Good working capital management during the year has resulted in a positive net funds position of £0.3m at the year-end. I was appointed in November 2013 which enabled John Dodds to step back into his role as non-executive chairman. I have continued to drive the UK operational improvement programme which started under John’s leadership. In addition, I have conducted an initial review of the Group’s branding, communications and market positioning, and have now put in place the initial foundations of a more comprehensive Group strategy. UK turnover of £231.3m compared with £318.3m in the prior 15 month period and reflected a modest reduction in capacity at our largest business. More importantly, the underlying operating profit of £7.6m represents a recovery in the UK operating margin to 3.3 per cent which is a good step towards our previously stated target of 5–6 per cent by 2015/16 in current market conditions. The largest business in the Group, Severfield (UK) Limited (‘SUKL’) was reorganised in the first half of the year. Ian Cochrane, previously managing director of our Severfield (NI) Limited (‘SNIL’) business in Enniskillen and now chief operating officer, was appointed acting managing director of SUKL in April 2013 and implemented this reorganisation. There were three key elements to the reorganisation: firstly, a reduction in capacity of ten per cent to improve the overall supply and demand dynamic in the market, secondly, a further reduction in overheads following an initial reduction in the previous period, taking the total savings made to £4m per annum, and 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201425 been in line with the board’s expectations coming into the year, and the board believes that balance sheet risk relating to these contracts has now been removed. thirdly, a reorganisation and strengthening of the management team. This business reorganisation has been completed with all the anticipated savings realised, with a one-time restructuring charge of £2.6m recorded in the first half of the year. In parallel with this reorganisation, a comprehensive operational improvement programme was launched across the Group. The objective of this has been to improve risk assessment and operational and contract management processes within the business. This programme has made good progress in the year, which is reflected in the improved underlying operating margin, and will continue into the 2014/15 financial year. Management believes the programme will lead to underlying operating margins reaching 5–6 per cent in 2015/16 in current market conditions. During the year, good progress was made in resolving the main legacy contract issues which were at the core of the operating losses in the previous period. As expected, there were challenges in resolving some of these issues but overall the outcome of those legacy contracts has Find out more information on our website: www.severfield.com/our-projects Case study: Aldgate Tower Client: Aldgate Tower Developments Location: London Main contractor: Brookfield Multiplex Tonnage: 5,500 Project overview: The project is a new state-of-the-art office development, the first phase of a wider regeneration of the Aldgate area by Aldgate Tower Developments. A steel solution has allowed the construction of an 18 storey commercial development on top of an existing raft foundation originally designed to support a smaller building. The building provides 16 floors of grade A office space, plus two upper levels for plant equipment. Below ground, the structure is founded on an existing three level reinforced concrete basement raft, a feature that has had an overwhelming impact on the design and construction of the tower. As the raft was in use it had to be retained and incorporated into the design, so a framing material for the new building that could be safely and quickly erected above functioning office space was needed. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report26 Operating review continued Order book and market conditions India Business investment UK investment was kept at relatively low levels during the year while the business was reorganised and stabilised. Total investment was £2.2m and represented low level replacement of some older plant and equipment. While the general stock of capital equipment across the business remains in good order, it is likely that the level of investment will need to increase to a more normal replenishment rate of £4-5m per annum in the future. New equity of £3.5m was invested in the Indian joint venture during the year. This was required both to fund the ongoing losses of the business and the balance of the investment initiated in 2012 to increase the capability and capacity of the factory. Safety The Group’s accident frequency rate (AFR) for the year was 0.57. Whilst this was only marginally worse than the level of 0.55 for the previous period, it fell short of the targets that the board had set for improvement. This performance reflected a disappointing first half of the year, followed by a marked improvement in the second half. The Group’s approach towards health and safety was reviewed during the year and a number of new initiatives were implemented. It is hoped that the improving trend we have seen in the second half of the year is a result of some of these initiatives but more time is needed to confirm that this is the case and that we have a sustainable trend heading in a positive direction. The safety and welfare of all our employees is of paramount importance to the Group and in order to further strengthen and improve on our safety culture and systems a new SHE director was appointed in April 2014. The UK order book, at £168m, remains solid and within a range which management is comfortable with, representing approximately eight months of forward production capacity. It has reduced in overall terms over the year from previous levels but this reflects both the capacity reduction arising from the business reorganisation, as well as a longer negotiating period on major contracts arising from our improving risk management processes. The market has been stable during the year but prices have remained competitive and we continue to focus on ensuring that there is a fair balance of risk and reward within the contracts. There are signs that the market will pick up towards the end of 2014 but the current order book does not yet reflect this. Projects Throughout the significant reorganisation over the past 18 months, we have continued to deliver projects to our clients’ expectations. Projects undertaken in the current year included: • Finsbury Square • Moorgate Exchange • 5 Broadgate • Fitzroy Place • BNP Paribas • Aldgate Tower • Nova, Victoria • Glasgow Smartbridge • Microsoft Data Centre, Amsterdam • Birmingham New Street Station • Paris Philharmonic • Manchester Victoria Station • Jaguar Land Rover, Midlands • Intel Developments, Ireland Performance from the Indian joint venture, JSW Severfield Structures Limited (‘JSSL’), was disappointing in the year, with the Group’s share of losses totalling £3.0m, particularly as in the previous period the business had achieved close to a breakeven position. While order book levels at the start of the year were satisfactory, unexpected delays and timing variations to some of the contracts within that order book quickly led to the factory being underutilised. Pressure to fill this spare capacity led to deterioration in the project mix within the business with low and even negative margin industrial projects being secured to utilise some of the spare capacity and make a contribution towards the overheads of the business. This situation did not improve as the year progressed. Behind this poor performance it became increasingly clear that the market for steel fabrication and commercial development of the business was not progressing as well as expected. India remains primarily a concrete construction market which presents great opportunity for steel. This potential continues to be reaffirmed in all the market research that we carry out, both formal and informal. However, converting concrete projects to steel projects continues to take longer than anticipated and efforts in this area are being stepped up. In response to these challenges, Derek Randall, executive director, moved to India full-time in August 2013. It was then agreed with our joint venture partner, JSW Steel, to reorganise the management of the business in December, at which point Derek became managing director. An overhead reduction programme was initiated, and now completed, and a new business development and operational improvement programme is in place which is expected to generate a substantial improvement in the performance of the business in the current financial year. Ultimately the business is developing a sustainable position whilst the market continues the expected conversion from concrete to steel. Greater economic optimism following the recent election may help this development. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201427 Our core values are safety, integrity, customer focus and commitment.” Strategy, branding and communication Vision, values and people Following my appointment, we undertook a comprehensive review of the Group’s branding and market positioning and feedback was gathered from major customers, management and staff. This resulted in the change of the Group’s name to Severfield plc in May 2014, a simpler and less confusing naming structure for the Group’s main operating businesses, and a new branding strategy to support this, elements of which are reflected in this report. It is believed that this new approach will better reflect the Group’s strong market position and enable improved and clearer communication with all stakeholders in the future. This review identified a number of areas for improvement in the Group’s internal and external communications strategy and this will be a key area of activity in the coming year. A significant amount of work was also undertaken in developing a new long-term strategy for the Group. The core of this strategy revolves around the continuation of the UK operational improvement plan to ensure that we have a sustainable, profitable base for the business going forward. Beyond this, it will involve a continual drive to improve operational efficiency, investment to ensure that the Group continues to have market leading technology, greater focus on developing our people and, most importantly, providing an unrivalled quality of service to customers. The strategy will provide a platform for continued growth and we will be looking more actively for opportunities to expand the business both in the UK and in overseas markets. The UK in particular may involve looking for new market areas where the business has not operated in the past as well as growing market share in areas where the business already operates. As part of the branding and strategy development work, the executive and senior management team articulated a vision for the Group, and its core values. The vision is ‘to be recognised as world-class leaders in structural steel, known for our ability to deliver any project, to the highest possible standards’. The core values are safety, integrity, customer focus and commitment. The values represent much of what the organisation lives by, even in recent challenging times. To that end, I would like to recognise the difficult times that our staff and employees have experienced recently and to thank them not only for their continued efforts on behalf of the Group, but also for the warm welcome which I have received since I was appointed. Summary and outlook The Group is recovering well and has made significant progress during the year in strengthening operations and management. With a developing strategy, focused branding and better market positioning, the Group is increasingly well placed to deliver stronger growth in the future, particularly if the core UK market starts to recover as expected. While the Indian joint venture remains challenging, there is significant market potential. The strengthened management team, reduced cost base and greater business development focus are expected to lead to improved performance in the current year. Ian Lawson Chief executive officer 11 July 2014 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report28 Financial review Alan Dunsmore Group finance director The results for the year reflect the stability restored to the UK business and the resolution of legacy contract issues. Trading performance Share of losses of JVs and associates The Group’s share of losses from its Indian joint venture was £3.0m for the year (2013: loss of £0.3m). This reflected the impact of unused capacity and therefore under- recovered overheads in the factory, a poorer mix of work going through the factory, and losses booked on negative margin contracts secured to provide some factory throughput. The underlying issue was a high level of delays and timing variability on existing orders, coupled with a lack of good quality, higher margin work in the pipeline to fill the available capacity. Actions to improve the order book, strengthen management and reduce overheads have been taken which should lead to an improved result in the coming year. Revenue for the year of £231.3m compared with £318.3m for the 15 month period to 31 March 2013. This represented a more stable underlying performance along with a modest reduction in capacity in our largest operating business during the year. The underlying operating profit before results of JVs and associates was £7.6m which reflects a significant turnaround from the loss of £19.2m in the prior 15 month period. The underlying operating margin of 3.3 per cent (2013: -6.0 per cent) reflects the stability restored to the UK business and the resolution of legacy contracts which marks a significant progression towards the target of 5–6 per cent for the 2015/16 financial year. The share of results of JVs and associates was a loss of £3.0m (2013: loss of £0.3m) and net finance costs were £0.6m (2013: £2.0m). Underlying profit before tax was £4.0m (2013: loss of £21.5m). The statutory loss before tax, reflecting both underlying and non-underlying items, was £4.1m (2013: loss of £28.9m). Revenue 349.4 318.3 266.7 267.8 231.3 2009 2010 2011 2013 2014 Underlying operating margin 14.8% 6.1% 5.3% 3.3% (6.0%) 2009 2010 2011 2013 2014 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201429 2014 231.3 7.6 4.0 0.88p 0.3 (0.1) (2.6) 2013 318.3 (19.2) (21.5) (10.78p) (41.2) (26.5) (23.1) Significant progress has been made towards the target underlying margin of 5–6 per cent for 2015/16.” £m Revenue Underlying operating profit/(loss) (before results of JVs and associates) Underlying profit/(loss) before tax Underlying earnings per share Net funds/(debt) Operating loss (before results of JVs and associates) Loss after tax Non-underlying items Non-underlying items for the year were £8.1m (2013: £7.3m) and include the following: Amortisation of acquired intangible assets — £2.7m (2013: £3.4m). Retirement of acquired intangible asset relating to brand value of Fisher Engineering — £2.4m (2013: nil). Restructuring and redundancy costs — £2.6m (2013: £0.8m). Impairment of investment in associates — £0.4m (2013: nil). During the past six months, a review has been undertaken of the Group’s market position and branding. As a result of this, the Group’s name has been changed to Severfield plc and the names of the Group’s main operating businesses have also been changed to incorporate the Severfield name. Accordingly, the directors have concluded that there is no ongoing value in the legacy Fisher Engineering brand and the residual net book value has been written off. A further restructuring of the Group’s main business, Severfield (UK) Limited was undertaken during the year. This resulted in a one-time restructuring charge of £2.6m which included redundancy costs of £1.8m and a provision of £0.8m for an onerous lease on a property no longer used. In the first half of the year, Kennedy Watts Partnership Limited, an associate company in which the Group had a 25.1 per cent shareholding, went into administration. The Group’s net investment in this business of £0.4m was correspondingly impaired to nil. Finance costs Net finance costs in the year were £0.6m (2013: £2.0m). The reduction over the prior period reflects substantially reduced net debt levels throughout the year following the completion of the rights issue on 5 April 2013. Taxation The underlying tax charge of £1.4m represents an effective tax rate of 20.2 per cent on the applicable profit (which excludes results from JVs and associates). This compares with an underlying credit of 14.4 per cent in the prior period relating to the losses incurred in that period. The total tax credit for the year of £1.4m reflects the underlying tax charge, offset by deferred tax benefits arising from the amortisation and retirement of intangibles in the year, and also the benefit of the reduction in UK corporation tax to 20 per cent in the deferred tax calculation. This item is categorised as non-underlying and is included in other items. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report30 Financial review continued Earnings per share Underlying basic earnings per share was 0.88p (2013: -10.78p). This calculation is based on the underlying profit after tax of £2.6m and 295,791,922 shares, being the weighted average number of shares in issue during the year. Basic earnings per share, based on the statutory loss after tax, is -0.89p (2013: -13.49p). There was no difference between basic and diluted earnings per share in the year (2013: no difference). Dividend No final dividend is being recommended. The board is committed to reinstating the payment of dividends. Depending, among other things, on improved financial performance, it intends to introduce a progressive dividend policy, having regard to the Group’s underlying earnings, cash flows and capital investment plans, the requirement to maintain an appropriate level of dividend cover and the prevailing market outlook. Balance sheet Shareholders’ funds increased from £102.4m to £143.4m in the year, following the completion of the rights issue on 5 April 2013, which raised £44.8m of new funds. Goodwill on the balance sheet is valued at £54.7m (2013: £54.7m) and is subject to an annual impairment review under IFRS 3. No impairment existed either at 31 March 2014 or 31 March 2013. Other intangible assets on the balance sheet are valued at £9.8m (2013: £15.1m). This represents the net book value of the intangible assets identified on the acquisition of Fisher Engineering in 2007, along with some new software assets installed during 2011 and 2012. Amortisation of £2.9m was charged in the year and the asset of £2.4m relating to the Fisher Engineering brand was retired, as a result of the rebranding of the Group and renaming of its main operating businesses. The Group has property, plant and equipment and investment property totalling £78.0m (2013: £80.1m). Depreciation charged in the year amounted to £3.6m (2013: £5.0m). Capital expenditure in the year was £2.2m (2013: £2.7m). This included new equipment for use on our construction sites and general replacement of capital equipment as required. During the year the Group invested £3.5m (2013: £3.0m) as equity into its Indian joint venture company to finance its trading losses in the year and also the balance of its investment to expand capability and capacity. The Group’s capital expenditure in the year to 31 March 2015 is expected to return towards long-term replenishment levels of £4–5m per annum. The Group has a defined benefit pension scheme which, although closed to new members, had an IAS 19 deficit of £12.5m at 31 March 2014 (2013: £11.8m). The increase in the deficit is as a result of an increase in the assumption made on mortality rates and a lower investment return on scheme assets, offset by contributions made by the Group during the year to reduce the deficit. Cash flow The Group finished the year with net funds on the balance sheet of £0.3m (2013: £41.2m net debt). The debt was repaid with the £44.8m net proceeds from the rights issue which completed on 5 April 2013. Operating cash flows for the year before working capital movements were £8.4m. Net working capital increased by £6.3m reflecting good progress in reducing outstanding balances on legacy contracts at 31 March 2013, offset by a normalisation of the trade creditor position which was somewhat stretched immediately preceding the rights issue, and the unwind of advance payments of £5.3m. The working capital position at 31 March 2014 is believed to represent a more normal position in relation to the underlying contracts which the business is now working on. Net investment during the year was £5.0m, with £3.5m going into the Indian joint venture as additional equity and £1.5m being the net capital expenditure outflow for the year. The Group has a £35m banking facility with Yorkshire Bank, part of National Australia Bank, and RBS in place until November 2016. Following a recovery period after completion of the rights issue, normal debt and interest cover covenants are now operating on this facility. Treasury Group treasury activities are managed and controlled centrally. Risks to assets and potential liabilities to customers, employees and the public continue to be insured. The Group maintains its low risk financial management policy by insuring all significant trade debtors. The treasury function seeks to reduce the Group’s exposure to any interest rate, foreign exchange and other financial risks, to ensure that adequate, secure and cost-effective funding arrangements are maintained to finance current and planned future activities and to invest cash assets safely and profitably. The Group continues to have some exposure to exchange rate fluctuations, currently between sterling and the euro. In order to maintain the projected level of profit budgeted on contracts, foreign exchange contracts are taken out to convert into sterling at the expected date of receipt. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201431 Going concern In determining whether the Group’s annual consolidated financial statements can be prepared on the going concern basis, the directors considered all factors likely to affect its future development, performance and its financial position, including cash flows, liquidity position and borrowing facilities and the risks and uncertainties relating to its business activities. The following factors were considered as relevant: • The UK order book, which remains strong, and the pipeline of potential future orders. • The Group’s operational improvement plan which is driving stronger financial performance and is expected to continue doing so in the current competitive commercial environment. • The committed finance facilities to the Group, including both the level of the facilities and the banking covenants attached to them. Based on the above, and having made appropriate enquiries and reviewed medium-term cash forecasts, the directors consider it reasonable to assume that the Group has adequate resources to continue for the foreseeable future and therefore that it is appropriate to continue to adopt the going concern basis in preparing the financial statements. Alan Dunsmore Group finance director 11 July 2014 Case study: Suffolk Waste-to-Energy Plant Client: SITA Waste Management (for Suffolk Council) Location: Ipswich Main contractor: Lagan Construction Tonnage: 1,550 Find out more information on our website: www.severfield.com/our-projects Project overview: This Suffolk energy from waste facility will use modern technology to provide enough electricity to power 30,000 homes, saving the equivalent of 75,000 tonnes of carbon dioxide each year. The new plant will treat 260,000 tonnes of waste per annum. The facility features a state-of-the-art glazed visitor centre, landscaped wetland area and an on-site ash processing facility. The project involves the supply and construction of structural and secondary steelwork for a high free-standing structure including 30 metre roof trusses, span trusses and crane beams, elements of which were erected adjacent to a live railway line, the supply and installation of pre cast walls, stairs and lift cores and 2,500 square metres of metal decking with construction handrail. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report32 Corporate social responsibility As the UK’s premier structural steel group, we know that the decisions we make can have a significant effect on the environment and people’s lives and communities. Our commitment to corporate responsibility forms part of the strategy of the Group and is essential to ensure that we deliver value to our stakeholders. We take this responsibility very seriously and are committed to good practice in all our CSR activities. We work beyond compliance to consider how we can have a positive impact on communities, minimise risk in our operations and ensure the best health and safety performance standards. Statement of ethics Severfield is the UK’s leading structural steel company. We also operate elsewhere in the world and we pride ourselves on our reputation for acting fairly and ethically wherever we do business. Our reputation is built on our Company values, the values of our employees and our collective commitment to acting with integrity throughout our organisation. This commitment can be seen in our core values and mission statement which has been communicated via roadshows to all of our personnel. SAFETY, HEALTH AND ENVIRONMENT During the year we have continued to progress our strategy of continuous improvement to meet our vision of being recognised as world-class leaders in structural steel, known for our ability to deliver any project to the highest possible standards. Those standards include corporate social responsibility. We have a set of defined objectives and targets for the factories which include leading indicators such as director reviews, number of leadership team and safety meetings held, number of toolbox talks delivered, safety, health and environment (SHE) training delivered and safety suggestions. Reactive indicators include accident frequency rates, near misses, health and safety audits plus safety violations. This year we have introduced a health and safety improvement scheme whereby we have incentivised a reduction in our accident rate and an improvement in near miss reporting on-site and in our factories. Everything else comes second to ensuring everyone goes home safely every day.” STEEL FUTURES The Group’s continuous improvement programme SAFE FUTURE • Safety leadership • Behavioural safety • Safety ‘Golden Rules’ • Health and well-being SUSTAINABLE FUTURE • Community and stakeholder ZERO CARBON FUTURE • Carbon management and reduction engagement • Leadership and people development • Market leading innovation • Supply chain partnering • Transport policy and strategy • Renewable energy • Responsible sourcing of materials 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201433 During the coming year we will be defining a full set of objectives and targets to meet our vision and conform to our core values. Our five key focus areas are: We have been trialling better personal protective equipment (PPE) with our site-based personnel and will very shortly issue a new standard to enhance the equipment we provide to our workforce. We had an AFR for the year of 0.57 We carried out 1,159 man days of SHE training in 2013/14 • Work environment • Commitment • Leadership • Engagement • Behaviour Progress during the year in each of these areas is discussed below. Work environment This year we have focused on improving the lighting levels in the factories to make them a better, safer place to work; this work will be ongoing in 2014/15. Not only does this improve the work environment for our personnel and increase lux levels but it also has a positive impact on our energy costs and greenhouse gas emissions. We have improved the conditions of the yards in all of our factories and have undertaken a comprehensive review of welfare facilities in Lostock and Dalton with these recommendations being implemented in the next year. We are also improving our pedestrian management at Dalton over the coming year. Commitment The Group continues to maintain a healthy SHE budget together with a professional, well qualified SHE team, headed by the Group SHE director. Our commitment to ‘getting it right’ is demonstrated by our Group, factory and site safety leadership team (SLT) meetings which are now held monthly and minuted, and we have representatives from the workforce at these meetings. We are committed to achieving SHE excellence and moving into the next year, we have set goals on better communication, working towards zero harm and on a coaching ethos to enable the Group to achieve its ambitions in this arena. Leadership Everyone in our business is a leader as the success of any organisation is based on how well it is able to capture the talents of every individual. Our directors and senior managers also demonstrate their leadership by being seen doing the right thing. This can be through factory Severfield UK employee (Bhogi Patel) receiving his monetary voucher after his name was pulled from a draw of hazard cards submitted in the month. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report34 Corporate social responsibility continued and site tours wearing the correct PPE and demonstrating adherence to our safe systems of work; it can be chairing safety and energy reduction meetings; and it can be one-minute corridor conversations with employees and others affected by our business to demonstrate awareness and action. Engagement We engage with our stakeholders on a daily basis. Key engagement behaviours are communication, involvement, visibility and support. We are always striving to communicate better. This year we have been actively involving the directors in SHE committees and we use the audit process as a communication tool. We have commenced safety, health and environmental auditing of our supply chain which provides assurance that our supply chain meet legal requirements and our own standards plus, where applicable, any standards stipulated by our clients. We find these audits are a good method of initiating community involvement since a number of our supply chains are geographically close to our factory locations. We have placed all of our SHE documentation on the Group’s intranet in 2013/14 and are training our workforce to make this the port of call for all SHE systems across the Group. This makes us more efficient, enables assurance that our workforce are using the correct documentation at all times and reduces the amount of paper in our business. Behaviour We define behaviour as everything we say and do. This means that any culture change model needs to include an element of understanding of what drives these behaviours and how we elicit positive, safe behaviours in the workplace. We are keen to understand this and during the next year we will embark on the next phase of our behavioural safety programme, starting with training the SHE team in cognitive behaviours. Health and safety performance In 2013/14 we had 22 RIDDORs compared to 24 in 2012/13. The Group’s accident frequency rate (AFR) for the year was 0.57. Whilst this was only marginally worse than the level of 0.55 for the previous period, it fell short of the targets that the board had set for improvement. We believe that our strategy of the five key focus areas above will deliver the performance we desire. In addition to our systems and engineering controls, we believe our behavioural safety programme will deliver a quantum change in our performance over the next year. Our health and safety management system is fully compliant with OHSAS 18001 and has been externally audited to demonstrate compliance. We attended a number of client meetings during the year and our SHE director liaises directly with the SHE teams within our client organisations to ensure that we are meeting their expectations as well as our own, together with legal requirements. With respect to our employees and supply chain; they are represented at our SLTs and committees and our visible leadership means that we frequently have workplace- based conversations with our employees and supply chain alike. It is our intention to involve our supply chain in our behavioural safety strategy since they frequently represent the Group on the sites upon which we work and hence they are as much at risk of an incident as a member of our own workforce. We reflected upon our Golden Rules in our last annual report: suffice to say these are now embedded in our corporate psychology and these are having an impact on the behaviour of anyone we ‘touch’ in our working environment (see below). We are in the process of undertaking a third-party driver audit and following on from this we are introducing mandatory documentation checks and our higher risk drivers will be undertaking additional driver training. GOLDEN RULES SAFETY FIRST TURN UP FIT FOR WORK ENSURE YOU ARE TRAINED/TASK BRIEFED EVERY UNSAFE EVENT MUST BE REPORTED LOOK AROUND — STOP IF ANYTHING CHANGES THINKSAFE ACTSAFE HOMESAFE 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014We have undertaken 1,159 man-days of training in the year. This includes more than 40 different courses; examples are: site manager safety training scheme, overhead crane use, portable magnet use, lifejacket use and reversing vehicles. In terms of health, we have undertaken occupational health assessments of 845 personnel in the year. These personnel undertook tests and checks on their audiometric performance, visual and acuity field, lung function, blood pressure, hand arm vibration syndrome, urinalysis and musculoskeletal disorders. These checks enable us to quickly spot any work-related issues which may have a deleterious effect on our employees and address this to ensure we are not harming our employees in the course of their work. By way of example on communication of health issues, skin cancer kills seven construction workers a year and we have distributed awareness documentation on this issue across our factories and construction sites: 35 During 2013/14, we have invested in building our leadership teams and individual leadership capability, ensuring that our leaders understand our strategy, the associated business challenges and their roles in leading and engaging their teams. We undertook the first two stages of a leadership development programme with our directors and associates and will continue this programme in 2014/15. Talent and succession In order to protect the long-term success of our business we want to ensure that we understand our talent pipeline and support their development so that our people can be the best that they can be. Our aim is to be an employer of choice for current and future talent within the structural steel industry and the wider business community. In 2014/15 we will conduct a Group- wide review of emerging talent to ensure consistency and visibility of talent, succession planning and career opportunity. Our agility in deploying talent and experience to maximise opportunities through sharing knowledge across the Group is a key differentiator and one which we will continue to develop. We are passionate about helping young people take their first step onto the construction career ladder, from school leavers experiencing the world of work for the first time, to graduates qualified in disciplines relevant to the construction sector. We believe that the recruitment and training of apprentices is fundamental to business development; another means of ensuring that we have all the desired skill bases available in the future. In addition, we also deliver toolbox talks on men’s health and an example is shown below: PEOPLE We’re very proud of our 1,200-strong workforce and recognise that to be the best, we need the best people and we work with every single employee to develop, grow and nurture their individual talents. Change In 2013/14, our people were called upon to embrace change and in particular Severfield (UK) completed its reorganisation, resulting in a strong, talented and aligned team. By continuing to invest in the capabilities and leadership of our people, we continue to enhance the quality of services we deliver to our clients and communities and attract and retain the best people within our sector. Leadership, management and development Our success is driven by our people so we want to ensure that we have capable leaders and managers to deliver our strategy and build teams with the right skills and capability to deliver now and in the future. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report36 Corporate social responsibility continued We have 48 apprentices within the Group, having taken on at least ten apprentices each year since our dedicated apprenticeship programme launched in 2010. Among the opportunities available, we have provided placements for welders, platers, maintenance engineers and steel erectors. We are also committed to providing opportunities for graduates across a number of functions, including business support, quantity surveying, design engineering and site and project management. Diversity We believe that equal opportunity means hiring and retaining the best people, developing them to their full potential and using their talents and resources to the full. Diversity of people, skills and abilities is a strength which will help us to achieve our best. This is not only about treating our people with dignity and respect; it also makes sound business sense. At 31 March 2014, the Group workforce consisted of 1,203 employees of whom 80 (seven per cent) were female. The Group’s executive committee (see page 48) consisted of ten directors, of whom one was female (ten per cent). The Group board of directors (see page 46) did not have any female representation. Communications Maintaining a strong dialogue with our people can be challenging in such a geographically diverse Group, with a mix of factory, office and site-based employees. Our internal communications draw on a wide variety of media, including our workspace document sharing system, Company newsletters, consultative groups, factory committees, suggestion schemes and employee roadshows. In 2014/15, the Group has appointed a communications manager to develop more effective internal and external communication strategies. High performance culture We set ourselves stretching goals and we want our people to understand the key part that they play in our strategy and our success. We want them to feel accountable for their delivery and rewarded for their success. In light of this, during 2014/15 we will redefine our performance management tools and processes. In 2014, we also plan to focus on employee engagement as there are proven links between an engaged workforce and excellence in customer service and business delivery. We are in the process of defining our approach to an employee survey that will enable us to prioritise actions that mean the most to our people. Subsequently, we plan to implement a number of initiatives across our business to help strengthen employee connection to our goals and ambitions. Reward We recognise that our approach to reward is critical to our ability to both attract and retain the best people and drive a performance culture. Each of our divisions offers a competitive reward package appropriate to the labour market in which they operate and reviews salaries annually in line with market rates. Our focus is on cash and variable pay rather than fixed benefits and each division’s reward package includes an annual Group profit performance related bonus which encourages the achievement of our strategic objectives. Over 65 per cent of our employees are shareholders in the Company via our share incentive plan and in 2014/15, we intend to set up a save as you earn share scheme to provide our employees with an improved choice in the way that they participate. Our people are also eligible to participate in a Group defined contribution pension scheme towards which we contribute as well as having the option to make their own contributions through salary sacrifice. We have also been able to facilitate a number of flexible benefits that enable our people to access programmes and savings that would not be available to them on an individual basis without additional cost to the Group. These include cycle to work and childcare voucher schemes. During 2014/15, we will look to widen the range of flexible benefits that we offer to our people. COMMUNITIES We recognise the importance of our local communities in building strong links and relationships that will enable us to attract and employ local people and improve the world in which we all live and work. In terms of engagement with the wider community in which we work, we typically work for a main contractor who consults the local community affected by each project we work on. Main contractor initiatives include maximising opportunities to employ local people from disadvantaged groups, for example the long-term unemployed. The Group seeks to share in these opportunities and further develop the support it can offer to disadvantaged groups. Our companies take a leadership role within the industry by providing employees, customers, suppliers and potential employees with opportunities for seminars, field trips and site visits. Staff throughout the Group maintain close contact with local schools, colleges and universities to share best practice and provide examples of leading-edge structural engineering. For example, our Severfield (Design & Build) business sponsored and presented at the Scarborough Engineering week where over 2,000 students attended to get an understanding of career opportunities within the engineering sector. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201437 In 2013/14, the Group’s factory committees have considered how best each facility can support local communities and charitable organisations. During the year, our people have donated their time to raise funds for a wide variety of charities which the Group has supported, including the Yorkshire Air Ambulance and local hospices. In 2014/15, the Group will set up the Severfield foundation to champion charitable work and organise donations. Despite the difficult economic conditions that have existed for everyone over recent years, we are enormously proud of the way our employees have continued to engage with their local communities and with our charitable activities. ENIRONMENTAL PERFORMANCE The Group maintains its environmental management system which is certified to ISO 14001 and has been since 2007. Information on our environmental impact is collated monthly and is reported to the board. This includes impacts such as waste, factory energy, VOC emissions and fuels. With respect to waste, 98 per cent is recovered or recycled. All our works and project sites operate in accordance with our sustainability policies. We track our sustainability performance on a project by project basis and, where required, report information to our clients. All direct (scope 1) and indirect (scope 2) emissions are reported in absolute tonnes equivalent CO2 (CO2e). Greenhouse gases (‘GHG’) included are carbon dioxide, methane and nitrous oxide emissions from the combustion of fuels disclosed below, and carbon dioxide emissions from the consumption of purchased electricity. • Scope 1 GHG emissions are from: natural gas, gas oil, propane, kerosene, welding gases, diesel and petrol. • Scope 2 GHG emissions are from: Greenhouse gas emissions reporting electricity purchased and consumed. In accordance with the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013, we report our emissions as described below. Reporting boundaries To the best of our knowledge, we have included all material emission sources which fall within the boundaries of our consolidated accounts. Methodology The Group’s GHG emissions have been calculated using an operational control approach in accordance with WRI/WBCSD GHG reporting protocols (revised edition) and emission factors from UK Government GHG conversion factors for company reporting 2013. This is the first year that our GHG emissions have been reported. Results For the year ended 31 March 2014, the Group’s global GHG emissions were as follows: Emissions from: Scope 1 – combustion of fuel and operation of facilities Scope 2 – electricity, heat, steam and cooling purchased for own use Total Intensity measurement: Absolute tonnes equivalent CO2 per £m of revenue Tonnes of C02e 6,340 6,179 12,519 Tonnes of C02e 54 We also met our monthly average VOC concentration limit targets for every factory during the year ended 31 March 2014. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report38 Key performance indicators The Group measures success through key performance indicators (KPIs) which should be reviewed in the context of market conditions and the industry sector in which the Group operates. The Group uses a range of financial and non-financial indictors across our businesses to monitor the Group’s aggregated performance against key Group executive committee and board objectives as follows: KPI Underlying operating profit/margin Underlying basic earnings per share Description / method of calculation Underlying operating profit is a key measure of the operating profitability of the Group’s revenue-generating businesses. This is the principal measure used by the Group to assess the success of its UK strategy. Performance in 2014 The underlying operating profit before results of JVs and associates was £7.6m which reflects a significant turnaround from the loss of £19.2m in the prior 15 month period. Underlying operating profit is defined as operating profit before other (non- underlying) items and before the results of JVs and associates (which principally includes the results of the Indian joint venture). The underlying operating margin of 3.3 per cent (2013: -6.0 per cent) reflects the stability restored to the UK business and the resolution of legacy contracts which marks a significant progression towards the target of 5-6 per cent for the 2015/16 financial year. Underlying operating margin is calculated as underlying operating profit expressed as a percentage of revenue. Underlying basic earnings per share represents an overall indicator of performance and is an important internal measure which is also used for setting performance share plan targets. This calculation is based on the underlying profit after tax and the weighted average number of shares in issue during the period. Underlying basic earnings per share was 0.88p (2013: -10.78p) and reflects a good recovery in UK operating margins offset by a share of losses from our Indian joint venture. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201439 KPI Operating cash flow Order book Accident frequency ratio (AFR) Description / method of calculation Cash is critical for providing the financial resources to develop the Group’s business and to provide adequate working capital to operate smoothly. The Group is also required to comply with operating cash flow covenants. The Group has a robust and detailed cash forecasting procedure that considers the Group’s position on a contract by contract basis. Operating cash flow is defined as cash flow before interest, tax and capital investment. Performance in 2014 The operating cash inflow for the year was £2.1m. This represents operating cash inflows before working capital movements of £8.4m offset by an outflow from working capital of £6.3m. The outflow from working capital reflects good progress in reducing outstanding balances on legacy contracts at 31 March 2013, offset by a normalisation of the trade creditor position which was somewhat stretched immediately preceding the rights issue, and the unwind of advance payments of £5.3m. The order book represents the amount of outstanding work on secured contracts. It is a key measure of our success in winning new work and also provides visibility of future earnings. It only includes future revenue from legally committed contracts comprising both ongoing and newly secured work. The UK order book of £168m represents approximately eight months of forward production capacity. It has reduced in overall terms over the year from previous levels but this reflects the capacity reduction arising from the business reorganisation, as well as a longer negotiating period on major contracts arising from our improving risk management processes. Whilst only the revenue within the order book is reported externally, a key forward indicator of future profitability that is tracked internally is the margin inherent within the forward order book. The AFR is a key measure of the safe operation of our business and is one of a number of health and safety measures the Group uses to monitor its activities. AFR is an industry-standard measurement equivalent to one reportable lost-time incident resulting in more than three working days’ absence per 100,000 hours worked, which equates to approximately one working lifetime. The Group’s AFR for the year was 0.57 (2013: 0.55). This performance reflected a disappointing first half of the year, followed by a marked improvement in the second half. The Group’s approach towards health and safety was reviewed during the year and a number of new initiatives were implemented. The Group recognises that all injuries are unacceptable and is committed to reducing injuries in our workforce. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report40 How the business manages risk The board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The Group’s ongoing operations and growth plans are subject to a number of different risks and uncertainties. Although we cannot eliminate such risks and uncertainties completely, we have established risk and internal control systems and procedures to mitigate their impact and the likelihood of them occurring. We have continued to develop and improve our approach to business risk management during the course of the year in response to changes in the business and operating environment. We maintain close working relationships between Group management and the businesses to understand and address risks. We strive to ensure that risk management is embedded into day-to-day business processes and operations such that it is effective at all levels of the organisation; this ensures that potential risks are identified at an early stage and mitigations are put in place to manage such risks. Through the risk management process and communication, there is a robust, periodic risk review involving Group management and all businesses. The board formally reviews risks and mitigations for the Group and each of the businesses on a biannual basis. The review focuses on identifying potential risks that could significantly impact the business and considers in detail the various impacts of the risks and the mitigations in place. The board has identified the following principal risks and uncertainties which have the potential to impact the Group’s profitability and ability to achieve its strategic objectives. Find out more about strategy on pages 18 and 19 Find out more about risks on pages 56 and 57 RISK MANAGEMENT POLICY Further detail of the Group’s risk management policies and processes are set out on page 56 of the corporate governance report I K S R S S E N S U B I SEVERFIELD SEVERFIELD LIMITED SEVERFIELD JSW SEVERFIELD STRUCTURES LIMITED S E S S E N S U B I E E T T I M M O C K S R E V I I T U C E X E E E T T I M M O C E V I T U C E X E D R A O B E E T T I M M O C T I D U A 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014 41 RISK / EXPLANATION Commercial and market environment The UK construction market, although showing some signs of recovery, remains impacted by the continued and residual effects of the global economic downturn, placing significant pressure on all parts of the supply chain, from end customers through to material suppliers and subcontractors. Through our different businesses we seek to win profitable work through successful tender processes. This success depends on our ability to identify, price and execute appropriate contracts to maintain a profitable order book. TREND DESCRIPTION / IMPACT Challenging trading conditions and lack of growth Decreased risk Uncertain demand resulting in increased competition, tighter margins and the transfer of commercial, technical and financial risk down the supply chain, through more demanding contract terms and longer payment cycles. A significant fall in construction activity could impact revenues, profits and the ability to recover overheads resulting in the need for further restructuring. Cash generation could also be impacted resulting in breaches of banking facilities. Inadequate contract pricing and cost management Decreased risk Failure to accurately estimate and evaluate the contract risks, costs to complete, contract duration and the impact of price increases could result in a contract being mispriced. Failure to achieve targeted profitability of contracts resulting in a reduction in Group margins. Decreased risk Failure to mitigate onerous contract terms Failure to appropriately assess the contractual terms or the acceptance of a contract with unfavourable terms could result in poor contract delivery, poor understanding of contract risks and legal disputes. Loss of profitability on contracts as costs incurred may not be recovered and potential reputational damage. Reliance on key suppliers Risk unchanged Failure of a key supplier would result in disruption to the Group’s operations and the increased cost of finding a suitable replacement. Loss of profitability through increased costs and potential reputational damage as a result of project delays. MITIGATION Reorganisation of business and strengthening of senior management to improve process and discipline around contract risk assessment, engagement and execution. Close engagement with both customers and suppliers and monitoring of payment cycles. Ongoing assessment of financial solvency and strength of counterparties throughout the life of contracts. Continuing use of credit insurance to minimise impact of customer failure. Business planning identifies the markets and clients that the Group will target. Estimating processes are in place with approvals by appropriate levels of management. Tender settlement processes are in place to give senior management regular visibility of major tenders. Established system of monthly reviews to measure and report contract progress and estimated out-turns, including contract variations. Use of delegated authorities to ensure appropriate contract tendering and acceptance. Contract acceptance procedures are in place including legal and commercial review of terms by the new Group legal director. Work performed under standard terms and conditions as appropriate. Plans for specific types of work are agreed in advance by individual businesses allowing management to decline work where the contract terms or pricing are not considered economic. Use of delegated authorities to ensure appropriate contract tendering and acceptance. Strong relationships maintained with key suppliers including a programme of regular meetings and reviews. The Group has no single sourcing agreements in place. Contingency plans developed to address supplier and subcontractor failure. Contracts only entered into with suppliers and subcontractors after review at the appropriate level of delegated authority. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report 42 How the business manages risk continued RISK / EXPLANATION People The Group has established a market leading position over many years due in large part to the experience and skills of its key people. TREND DESCRIPTION / IMPACT Recruitment and retention of talented people MITIGATION An improved talent review process is planned for 2014/15. Increased risk As the market starts to recover, it can become increasingly difficult to recruit capable people and retain key employees, especially those targeted by competitors. Progression and succession planning schemes will be rolled out at each business to ensure immediate and future replacements are identified and developed. Interruption to fabrication facilities The Group’s production facilities are at the core of its business and the Group relies on their smooth continued operation. Risk unchanged Loss of key people could adversely impact the Group’s existing market position and reputation. Insufficient growth and development of its people and skillsets could restrict its growth ambitions both in the UK and overseas. Inadequate business continuity planning Every business faces the potential risk of its operations being impacted by disruption due to loss of supply, industrial disputes, failure with technology, unplanned outages and physical damage as a result of fire or other such event. Interruption could impact both the Group’s performance on existing contracts and its ability to bid for future contracts, thereby impacting its financial performance. Remuneration policy is regularly reviewed to ensure that it is competitive and strikes the appropriate balance between short and long- term rewards and incentives. Skills gaps are continually identified and actions put in place to bridge these by training, development or external recruitment. The Group has four main production facilities so interruption at one facility could to some extent be absorbed by increasing capacity at a sister facility. Detailed maintenance programmes are in place at each of the Group’s facilities. A wide network of subcontract fabricators is used on a recurring basis, both for short-term peak capacity requirements and for more specialised fabrication. This network could also be used to mitigate disruption to the Group’s own fabrication facilities. Appropriate levels of business interruption insurance cover are maintained and reviewed regularly with the assistance of independent advisers and brokers. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201443 RISK / EXPLANATION Indian joint venture TREND DESCRIPTION / IMPACT Performance of the joint venture MITIGATION Robust joint venture agreement. The Group has invested in a joint venture in India, where the growth prospects are believed to be substantial. Increased risk The growth, management and performance of the business is a key element of the Group’s overall performance. Effective management of the joint venture is therefore important to the Group’s continuing success. Failure to identify, understand and evaluate the risks of operating in India could lead to financial loss, reputational damage and a drain on cash resources to fund the operations. Health and safety The construction industry sets very high standards of health and safety which the Group aims to exceed to maintain the health and well-being of its employees. Risk unchanged Serious health and safety incident Construction activities can result in injury or death to employees, leading to the potential for legal proceedings, regulatory intervention, project delays and, where at fault, potential loss of reputation. Loss of profitability and ultimately exclusion from future business. Information technology (IT) The Group’s complex and interdependent IT systems support the effective and efficient running of the business. Ensuring our systems are reliable strengthen the day-to-day operations of the Group. IT failure or disruption Risk unchanged With insufficient IT disaster recovery planning, cyber-attack or property damage could lead to IT disruption with resultant loss of data, loss of system functionality and business interruption. Prolonged or major failure of IT systems could pose significant risk to the ability of the Group to operate and trade, thereby impacting its financial performance. Two members of the Group’s board of directors are members of the joint venture board. Strong governance in place at the joint venture. Regular formal and informal meetings held with both joint venture management and joint venture partners. Joint venture was refinanced in late 2013 and the management structure was strengthened during the year. Contract risk assessment, engagement and execution process now embedded. Established safety systems, site visits, monitoring and reporting, and detailed health and safety policies and procedures, are in place across the Group. Thorough and regular employee training programmes under the leadership of the new Group SHE director. Director-led safety leadership teams established to bring innovative solutions and to engage with all stakeholders to deliver continuous improvement in standards across the business and wider industry. Priority board review of ongoing performance. Regular reporting of, and investigation and root cause analysis of, accidents and near misses. Achievement of challenging health and safety performance targets is a key element of management remuneration. IT is the responsibility of a central function which manages the majority of the systems across the Group. Other IT systems are managed locally by experienced IT personnel. Significant investments in IT systems are subject to board approval. Data protection and information security policies are in place across the Group, including anti-virus software, off-site and on-site backups, storage area networks, software maintenance agreements and virtualisation of the IT environment. Cyber-crimes and associated IT risks are assessed on a continual basis. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur performanceStrategic report44 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201445 Our governance Board of directors Executive committee Chairman’s review Corporate governance report Audit committee report Directors’ report Directors’ remuneration report — Letter from the committee chairman — Policy — Implementation Directors’ responsibilities statement 46 48 50 52 58 61 64 66 73 81 Project: 5 Broadgate Location: London Tonnage: 13,000 Client: British Land Construction manager: Mace Completion: 2014 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance46 Board of directors John Dodds Non-executive chairman Ian Lawson Chief executive officer John Dodds joined the Company as a non-executive director in October 2010, becoming chairman in September 2011. He retired in March 2010 from Kier Group plc, the construction and property services group, after serving for seven years as group chief executive officer. He worked for Kier, both in the UK and overseas, for nearly 40 years and held a main board position through the employee buy-out process in 1992 and the subsequent flotation of the group on the London Stock Exchange in 1996. John is a non-executive director of Newbury Racecourse plc and Lagan Construction Holdings Limited. Ian Lawson joined the Company on 1 November 2013 as chief executive officer and was previously a main board director of Kier Group plc, where he enjoyed a 13-year career. He was appointed to the board of Kier Group plc as executive director in 2005 with responsibility initially for its services division and later he also assumed responsibility for the property division. Prior to this, he was a director of Kier Regional, the group’s regional construction business. Before joining Kier Regional, Ian was managing director of Kier Investments which he joined in 2000 following a successful career at Bickerton Group plc where he was managing director. Ian, who is a fellow of both The Royal Institution of Chartered Surveyors (FRICS) and the Chartered Institute of Building (FCIOB), has a wide range of skills and experience from working within the construction industry for more than 35 years. Derek Randall Executive director and managing director at JSW Severfield Structures Limited Derek Randall was appointed as executive director in May 2008 and as managing director in December 2013 of JSW Severfield Structures Limited (JSSL), our joint venture in India. He is a master of business administration (Warwick Business School), a doctor of business administration (Nottingham Business School) and is the visiting professor of international management and development at Birmingham City University’s business school. Before joining the Group, most of Derek’s career was with Corus Group (now Tata Steel) where his last position was as commercial director of the long products division. Derek has held a number of international board positions with Corus and served on the executive council of the Steel Construction Institute. Alan Dunsmore Group finance director Alun Griffiths Non-executive director Ian Cochrane Chief operating officer Alan Dunsmore joined the Company in March 2010 from Smiths Group plc. He joined Smiths Group medical division in 1995, holding various positions throughout the business and from 2004 was director of finance for Smiths Detection. Prior to joining Smiths, he was with Coopers and Lybrand in Glasgow, where he qualified as a chartered accountant in 1992. Alun Griffiths was appointed to the board as a non- executive director on 1 May 2014. Having held a number of business management and corporate positions, Alun is currently group human resources director and board member at WS Atkins plc, Europe’s largest engineering and design consultancy and is a fellow of the Chartered Institute of Personnel and Development. Alun brings a wealth of experience that will be of significant benefit to the Group as we continue our strategic and operational progression. Ian Cochrane joined the Group in 2007, following the acquisition of Fisher Engineering. Ian worked at Fisher Engineering for 26 years, starting in the drawing office and progressing to managing director in October 2007. In March 2013, Ian was appointed as Group operations director and subsequently, in June 2013, as chief operating officer. Ian has a comprehensive understanding of all aspects of the business and has been involved in many major projects in the UK and Ireland, representing a range of market sectors. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201447 Chris Holt Non-executive director Tony Osbaldiston Non-executive director Kevin Whiteman Non-executive director Chris Holt was appointed as a non-executive director in November 2011. He retired in September 2010 from MJ Gleeson Group plc after serving two years as chief executive officer, and prior to that three years as group finance director. Chris’s experience also includes 17 years with Foster Wheeler Limited as finance director and deputy chairman of the UK subsidiary company and 12 years with Bechtel Corporation. Chris is a graduate of Leeds University, a qualified accountant and has an MBA from Golden Gate University, San Francisco. Following the year-end, Tony Osbaldiston was appointed as a non-executive director with effect from 19 July 2014. Following the year-end, Kevin Whiteman was appointed as a non-executive director with effect from 19 July 2014. He is a chartered accountant having qualified with PwC. He was previously finance director of Max Factor UK, Volvo Cars UK, Raymarine plc and FirstGroup plc, where he was also deputy group chief executive officer and chief executive officer of FirstGroup America. He has been a non-executive director and chairman of the audit committee of BSS Group plc, and chairman of the remuneration committee of Synstar International plc. He is currently chairman of Encon, the insulation and building products distributor, and also non-executive director and chairman of the audit and risk committee of the Serious Fraud Office. He will take over as chairman of the audit committee following the retirement of Toby Hayward. He is a chartered engineer and currently non- executive chairman of Kelda Group and Yorkshire Water, to which he was appointed in 2010 after eight years as chief executive officer of both companies. In 2013 he was appointed chairman of the privately owned NG Bailey. Prior to his current role at Kelda Group, he held positions including chief executive officer of the National Rivers Authority, regional director of the Environment Agency, as well as a number of senior positions within British Coal. He was previously chairman for Wales and West Gas Networks (UK) Limited, and has been a trustee for WaterAid UK. He will take over as the senior independent non-executive director following the retirement of Keith Elliott as previously announced, effective from 19 July 2014. Keith Elliott Non-executive director Toby Hayward Non-executive director Following the year-end, Keith resigned as a non-executive director with effect from 18 July 2014. He served as a non-executive director for 15 years, including as senior independent non-executive director and chairman of the remuneration committee. Following the year-end, Toby resigned as a non- executive director with effect from 18 July 2014. He served as a non-executive director for six years, including three years as non- executive chairman and three years as chairman of the audit committee. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance48 Executive committee 7 9 4 8 5 3 2 6 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201449 Ian Lawson Chief executive officer For details see board of directors on page 46. Derek Randall Executive director and managing director at JSW Severfield Structures Limited For details see board of directors on page 46. 2 Ian Cochrane Chief operating officer For details see board of directors on page 46. 3 Alan Dunsmore Group finance director For details see board of directors on page 46. 4 Jim Martindale Managing director at Severfield (Design & Build) Limited Jim Martindale joined Severfield (Design & Build) Limited, formerly Atlas Ward Structures, in 1994 as a design engineer, which saw him heavily involved with the commercial department. He became engineering manager in 2002, design director in 2007 and deputy managing director in 2010, a role that he performed until his appointment as managing director in January 2014. Jim has been involved in the successful delivery of many major projects throughout the UK during his 20-year career with Atlas Ward (which was acquired in 2005). He is also an associate member of the Institution of Structural Engineers. 5 Brian Keys Managing director at Severfield (NI) Limited 8 Sian Evans Group HR director Sian Evans joined the Group in January 2013 in the role of HR director. Sian’s career in human resources started at William Morrison Supermarkets in 1990 and covers a wide range of industry sectors including HR roles at Ciba Specialty Chemicals, Redcats UK and Callcredit Information Group where Sian was group HR director from 2008 to 2011. She is a fellow of the Chartered Institute of Personnel and Development. 9 Lee Mills Group SHE director Lee Mills was appointed as the Group’s safety, health and environment director in April 2014. Having previously worked in nuclear, offshore and petrochemical safety, Lee joined Alfred McAlpine in 1999 as head of its policy and compliance unit. Between this and taking up his most recent role at Stewart Milne prior to joining the Group, Lee held responsible positions within several major construction companies. At Stewart Milne he was health, safety, environmental and quality director, which also involved providing consultancy services to the National House Building Council. Brian Keys joined Severfield (NI) Limited, formerly Fisher Engineering, in 1986 as production manager, moving to project management in 2001 for a period of six years. Just prior to the acquisition of Fisher Engineering in 2007, Brian became production director, a role which he performed until his appointment as managing director in March 2013. Brian has been involved in the successful delivery of many major projects throughout Ireland and the UK during his 27-year career at Severfield (NI) Limited. 6 Steven Day Deputy managing director at Severfield (UK) Limited Steven Day joined Severfield in 2002 following the acquisition of Tubemasters, a business which he built and ran for 18 years previously. With more than 35 years of experience in the UK structural steelwork market at all levels, he has considerable knowledge of the industry. 7 Mark Sanderson Group legal director and Company secretary Mark Sanderson was appointed as the Group’s legal director and Company secretary in September 2013. His previous role was as group legal director for utility specialist, Enterprise plc, until its acquisition by Ferrovial in April 2013. He also worked in private practice as a projects partner, most recently at Walker Morris from 2006 to 2009, and prior to that Pinsent Masons, where he fulfilled this role for over a decade. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance50 Chairman’s review John Dodds Non-executive chairman The Group is committed to applying the highest standards of corporate governance. Dear shareholder I am pleased to introduce the Group’s corporate governance report on behalf of our board of directors (‘the board’). We are committed to maintaining high standards of corporate governance to enhance performance and for the protection of our shareholders. At Severfield, good governance involves establishing appropriate policies, procedures and guidelines to ensure that the Group’s businesses are managed effectively resulting in the delivery of long-term shareholder value. The corporate governance report which follows is intended to give shareholders an understanding of the Group’s corporate governance arrangements and how they operated during the year ended 31 March 2014, including how the Group managed its affairs in compliance with the principles and provisions of the 2012 UK Corporate Governance Code (‘the Code’). I am pleased to report that, with one exception which is explained in the corporate governance report (an enforced period of seven months where I acted as executive chairman), we have complied in full with the Code. Leadership and effectiveness Ian Lawson was appointed as chief executive officer during the year following a rigorous selection process which involved Korn/Ferry International, an external executive search agency. During the period from 1 April 2013 to 31 October 2013 I continued to act as executive chairman pending Ian’s appointment on 1 November 2013. As explained in the 2013 annual report this was a temporary arrangement, designed to facilitate clear leadership until a chief executive officer was appointed. The board deemed such measures necessary for the successful stewardship of the Group during that period and that these extraordinary measures were justified in order to provide the Group with clear leadership in challenging circumstances. Following the successful transition of executive responsibilities to Ian, I have reverted to my previous role of non- executive chairman. This has resulted in a I am committed to ensuring that we have a strong board with the correct balance of skills and mix of experience.” 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201451 Find out more about strategy on pages 18 and 19 Find out more about risk management on pages 40 and 43 every ten years. This is not a mandatory requirement under the Code given the Group’s current status outside the FTSE 350. However, for the reasons highlighted above, we consider a tender process to be appropriate. Remuneration During the year the changes indicated in last year’s remuneration report to the Group’s performance share plan and the introduction of the deferred share bonus plan were implemented. Diversity We recognise the importance of diversity in board effectiveness and remain committed to ensuring that appointments are ultimately made on merit and against the agreed selection criteria. Further details of our diversity considerations are set out in the board committees section on page 56. Relationships with shareholders We remain committed to sharing information with our shareholders. The Group actively solicits feedback from investors and feedback from shareholder meetings is reported to the board, including the non-executive directors. Further details regarding this engagement with our shareholders are set out in the board effectiveness section on page 54. As ever, I very much look forward to meeting shareholders at the annual general meeting (‘AGM’) on 2 September 2014 and as always, along with all of your directors, remain available to answer or respond to your questions, concerns and suggestions at any time. Overall I think your board is effective and working well and, whilst there remains work to do, we have effective governance throughout the Group. John Dodds Non-executive chairman 11 July 2014 return to the more traditional structure of a non-executive chairman and chief executive officer to better align with the requirements of the Code. In addition to the appointment of a new chief executive officer, two of the key areas of focus for the directors during the year have been further developing the Group’s strategy and strengthening the management team to ensure that the Group is ideally positioned for the return of growth to the UK construction market. In particular, the executive committee has been strengthened with the appointment of Ian Cochrane as chief operating officer in June 2013, Mark Sanderson as Group legal director and Company secretary in September 2013, and following the year-end, Lee Mills as Group SHE director. Following the year-end, Toby Hayward and Keith Elliott resigned as non-executive directors with effect from 18 July 2014. Alun Griffiths joined the board as a non-executive director with effect from 1 May 2014 and Kevin Whiteman and Tony Osbaldiston will join the board on 19 July 2014 with Kevin assuming the responsibilities of senior independent non-executive director, Alun becoming the chairman of the remuneration committee and Tony becoming the chairman of the audit committee. In combination, they bring to the board a wealth of experience and their appointments provide a firm foundation for continued oversight and scrutiny of the Group’s activities. Keith served as a director for 15 years, including as chairman of the remuneration committee and senior independent non- executive director and Toby served as a director for six years including periods as chairman and as chairman of the audit committee. We thank them for their valued contribution to the Group. Audit tender We intend to conduct a tender of the external audit contract during the course of the coming year, with the successful firm being appointed for the year ending 31 March 2016. We consider this good governance given the length of Deloitte’s existing audit tenure and taking into account recent EU guidance that requires listed companies to rotate their auditors at least 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance52 Corporate governance report Statement of compliance LEADERSHIP The September 2012 edition of the UK Corporate Governance Code (‘the Code’), a copy of which is available from the Financial Reporting Council’s website (www.frc.org. uk), applied to the Company throughout the year ended 31 March 2014. The board has carried out a detailed review of the provisions of the Code, having regard to the need to comply not just with the principles but also with the spirit of the Code and also keeping in mind guidance issued by the FRC, such as the FRC guidance to audit committees. A summary of how the Company has applied the main principles of the Code is set out below. Save as referred to below, the board has complied with the provisions of the Code throughout the year ended 31 March 2014 and up to the date of this report. The board did not comply in full with provision A.2.1 of the Code which requires the board to operate with a separate chairman and chief executive officer. From 1 April 2013 until 31 October 2013, John Dodds, who previously operated as non-executive chairman until 23 January 2013, was acting in the role of executive chairman. As explained in the previous year, this was a temporary arrangement designed to facilitate clear leadership until the appointment of a new chief executive officer. Ian Lawson was appointed as chief executive officer on 1 November 2013, restoring compliance with this provision. Structure of the board The Company is controlled through the board of directors which comprises four executive and four non-executive directors, all of whom are considered as independent. From 19 July 2014, the board will comprise four executive and five independent non- executive directors. The membership of the board is stated on page 46. Ian Cochrane and Ian Lawson were appointed as executive directors on 5 June 2013 and 1 November 2013, respectively. As described above, John Dodds reverted to his previous role as non-executive chairman from 1 November 2013, having served as executive chairman from 23 January 2013 to 31 October 2013. Peter Emerson retired as an executive director on 5 June 2013. Alun Griffiths was appointed as a non- executive director on 1 May 2014. Kevin Whiteman and Tony Osbaldiston have been appointed as non-executive directors from 19 July 2014. Keith Elliott and Toby Hayward will retire as non-executive directors with effect from 18 July 2014. Ian Lawson has board level responsibility for corporate and social responsibility and employment matters; Ian Cochrane has board level responsibility for health and safety matters. Role of the chairman, chief executive officer and senior independent director Since 1 November 2013 the board has had a separate chairman and chief executive officer in line with the Code. The posts of chairman and chief executive officer are separate and their roles and responsibilities are clearly established, set out in writing and agreed by the board. The chairman, John Dodds, is mainly responsible for managing the business of the board, evaluating its performance and setting the agenda for board meetings to ensure that adequate time is allocated to the discussion of all agenda items, facilitating the effective contribution of all directors. The chairman acts as an ambassador for the Company and provides effective communication between the board and its shareholders. As the senior executive of the Company, Ian Lawson is responsible to the chairman and the board for directing and prioritising the profitable operation and development of the Group. The chief executive officer is responsible for the day-to-day management of the operational activities of the Group, assessing and implementing strategy and implementing the board’s decisions. The chief executive officer chairs an executive committee consisting of the members indicated on pages 48 and 49. This committee assists the main board by focusing on strategic and operational performance matters relating to the business and meets formally on a monthly basis. He also, together with the Group finance director and chief operating officer, holds quarterly meetings with each of the three divisional boards to review all operational issues and meets with an executive risk committee comprising himself, the Group finance director, chief operating officer and the Group legal director on a weekly basis on any key issues affecting the business. In addition, he chairs a safety leadership team (‘SLT’) consisting of members across the organisation, which meets formally on a monthly basis. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201453 Keith Elliott has acted as senior independent non-executive director and will continue to do so until the appointment of Kevin Whiteman on 19 July 2014. The role of the senior independent director is to provide a sounding board for the chairman and to serve as an alternative source of advice to the chairman for the other non-executive directors. The senior independent director is available to shareholders if they request a meeting or have concerns, which contact through the normal channels has failed to resolve, or where such contact is inappropriate. He also leads the performance review of the chairman, taking into account the views of the executive directors. Independence All of the non-executive directors are considered by the board to be independent in character and judgement and no cross- directorships exist between any of the directors. No director has any material interest in any contract of significance with the Group during the period under review. The directors have put in place procedures to ensure the board collectively, and the directors individually, comply with the disclosure requirements on conflicts of interest set out in the Companies Act 2006. The interests of the directors in the share capital of the Company and its subsidiary undertakings and their interests under the performance share plan and other share schemes are set out in the remuneration report on page 77. Keith Elliott has continued in his role as senior independent non-executive director to date and until the appointment of Kevin Whiteman on 19 July 2014, notwithstanding that he had served as a director for 15 years. He has also continued with his chairmanship of the remuneration committee and will continue to do so until his retirement on 18 July 2014. The board recognises that whilst Keith and Toby were technically non-independent due in Keith’s case to his length of tenure and in Toby’s case his having previously served as chairman, their concurrent tenure, representing the average period for which they served on the board contemporaneously with the executive directors, was significantly reduced following the resignation of Tom Haughey and the retirement of Peter Emerson in 2013. Furthermore, the board believes that they have continued to act independently and recognises their high levels of commitment and effective contribution to the board’s decision making process. Directors to stand for election The Company’s articles of association require the directors to offer themselves for re-election at least once every three years. Notwithstanding this, and in accordance with the recommendations of the Code, the Company has decided that all of the directors will now retire at each AGM and may offer themselves for re- election by shareholders. Accordingly, all of the existing directors whose biographies are set out on pages 46 and 47 will be standing for re-election at the 2014 AGM. The board is satisfied that the performance of all of the remaining non-executive directors continues to be effective and that they continue to show commitment to their respective roles. Non-executive directors are not appointed for a fixed term. The terms and conditions of appointment of non-executive directors will be available for inspection at the AGM. BOARD EFFECTIVENESS Operation of the board The role of the board is to set the strategic direction of the Group, to review all significant aspects of the Group’s activities, to oversee the executive management and to review the overall system of internal control and risk management. The board has a formal schedule of matters reserved for it. It is responsible for overall Group strategy, acquisition and divestment policy, approval of major capital expenditure projects and consideration of significant financing matters. It monitors the exposure to key business risks including environmental and health and safety issues. It reviews the strategic direction of individual trading subsidiaries, codes of conduct, annual budgets, progress towards achievement of those budgets, significant capital expenditure programmes and the annual and half year results. The board also considers employee issues and key appointments. It also ensures that all directors receive appropriate training on appointment and then subsequently as appropriate. Other specific responsibilities are delegated to the board’s committees described below. The chairman, together with the Company secretary, ensures that the directors receive clear information on all relevant matters in a timely manner. Board papers are circulated sufﬁciently in advance of meetings for them to be thoroughly digested to ensure clarity of informed debate. The board papers contain the chief executive officer’s written report, the Group finance director’s and chief operating officer’s written reports, high level papers on each business area, key metrics and speciﬁc papers relating to agenda items. The board papers are accompanied by a management information pack containing detailed ﬁnancial and other supporting information. The board receives occasional ad hoc papers on matters of particular relevance or importance. The board also receives presentations from various business units. Board meetings The directors’ attendance record at the scheduled board meetings and board committee meetings for the year ended 31 March 2014 is shown in the table below. For board and board committee meetings, attendance is expressed as the number of meetings that each director attended out of the number that they were eligible to attend. In addition to those scheduled meetings, ad hoc meetings were also arranged to deal with matters between scheduled meetings as appropriate. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance54 Corporate governance report continued Non-attendance by directors at meetings was due to either conflicting commitments previously agreed or illness. Board meetings are held at various locations in London, the Group’s head office in Dalton, North Yorkshire and at the offices of the Group’s other operating subsidiaries to provide non-executive directors the opportunity to increase their knowledge and understanding of the Group’s operations. Director John Dodds Keith Elliott Toby Hayward Chris Holt Ian Lawson Ian Cochrane Alan Dunsmore Derek Randall Main board Audit committee Remuneration committee Nomination committee 9/9 8/9 9/9 9/9 4/4 7/7 9/9 7/9 2/2 3/3 3/3 2/3 n/a n/a n/a n/a n/a 4/4 4/4 4/4 n/a n/a n/a n/a 1/1 4/4 4/4 4/4 n/a n/a n/a n/a Note: Ian Lawson, Ian Cochrane and John Dodds attended all required meetings during their tenure as executive directors. Board evaluation The board considers that the balance of relevant experience amongst the various board members enables the board to exercise effective leadership and control of the Group. It also ensures that the decision making process cannot be dominated by any individual or small group of individuals. The Code attaches importance to boards having processes for individual and collective performance evaluation. The performance of individual directors is evaluated annually in conjunction with the remuneration review. The chairman meets with the non-executive directors at least annually to review their performance and the senior independent director leads an evaluation process of the performance of the chairman taking into account the views of the executives. A formal evaluation of board effectiveness was conducted during the year. Details of significant changes to the composition of the board are set out on page 52. Professional development Appropriate training and briefing is provided to all directors on appointment to the board, taking into account their individual qualifications and experience. This is supplemented with visits to the Group’s operations and meetings with senior divisional management to develop the directors’ understanding of the business. Training and updating in relation to the business of the Group and the legal and regulatory responsibilities of directors was provided throughout the year by a variety of means to board members including presentations by executives, visits to business operations and circulation of brieﬁng materials. Individual directors are also expected to take responsibility for identifying their training needs and to ensure they are adequately informed about the Group and their responsibilities as a director. Non-executive directors are continually updated on the Group’s business, its markets, social responsibility matters, changes to the legal and governance environment and other changes impacting the Group. During the year, the directors received updates on various best practice, regulatory and legislative developments, including changes to the UK Corporate Governance Code and directors’ remuneration reporting requirements. All directors have access to the advice and services of the Group legal director and Company secretary who ensures that board processes are followed and good corporate governance standards are maintained. Any director who considers it necessary or appropriate may take independent, professional advice in furtherance of their duties at the Company’s expense. No directors sought such advice in the year. The board is conﬁdent that all its members have the knowledge, ability and experience to perform the functions required of a director of a listed company. Relations with shareholders The Company encourages two-way communication with both its institutional and private investors and attempts to respond quickly to all queries received verbally or in writing. The executive directors undertake a programme of regular communication with institutional shareholders and with analysts covering the Group’s activities, its performance and strategy. John Dodds, Ian Lawson and Alan Dunsmore attended several meetings with institutional shareholders, private investors and analysts during the year, at the time of the announcements of the Group’s annual and half year results, during visits to the Group’s head office in North Yorkshire and on an ad hoc basis as required. In addition, a capital markets event took place on 25 April attended by approximately 30 analysts and investors. Feedback from those meetings is reported to the board, including the non- executive directors. Direct discussions took place during the year between shareholders’ representatives and Keith Elliott with particular reference to the directors’ remuneration report. The board has sought to use the AGM to communicate with private investors and encourages their participation. The notice of the AGM, detailing all proposed resolutions, is posted to shareholders at least 20 workings days before the meeting. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201455 BOARD COMMITTEES Remuneration committee The board has established three standing committees, all of which operate within defined terms of reference, which are available from the Company secretary by request and will be available for inspection at the AGM. The remuneration committee comprises the non-executive directors and is chaired by Keith Elliott. Subsequent to the year-end, Alun Griffiths was appointed chairman of the committee following Keith Elliott’s resignation. The committees established are the audit committee, the remuneration committee and the nominations committee. Trading companies are managed by separate boards of directors. Any matters of a material nature concerning the trading companies are reported to the board on a monthly basis. Audit committee The audit committee comprises the non- executive directors. At 31 March 2014, the committee members were Toby Hayward, John Dodds, Chris Holt and Keith Elliott. Toby Hayward has served as chairman of the committee throughout the year. Effective subsequent to the year-end, Alun Griffiths and Kevin Whiteman were appointed as members of the committee and Tony Osbaldiston was appointed chairman of the committee; Keith Elliott and Toby Hayward resigned as committee members. The committee members have been selected to provide the wide range of financial and commercial expertise necessary to fulfil the committee’s duties; Toby Hayward, Chris Holt and Tony Osbaldiston are chartered accountants. On invitation, the chief executive officer, Group finance director, other executive directors, executive committee members, senior management and the internal and external auditors attend meetings to assist the committee fulfil its duties. Meetings are held at least three times per annum and additional meetings may be requested by the auditor. The committee met on three occasions during the year with full attendance by all members except for Chris Holt who was unable to attend one meeting. The audit committee report is set out on pages 58 to 60. This committee, which meets at least twice per year, is responsible for making recommendations to the board concerning the compensation of senior executives. It also determines, within the agreed terms of reference, the specific remuneration packages for each of the executive directors and the chairman, as well as the level and structure of remuneration for senior management. New Bridge Street (NBS) (an AON Hewitt Company) are appointed as the Group’s remuneration consultants. NBS are a member of the Remuneration Consultants Group and comply with its code of conduct. NBS has no other connection with the Company. The committee met on four occasions during the year with full attendance. Shareholders are required to approve all new long-term incentive plans and significant changes to existing plans. Further details of these plans, as well as the activities undertaken by the committee during the year, can be found in the directors’ remuneration report as set out on pages 66 to 80. Nominations committee The nominations committee comprises the non-executive directors and is chaired by John Dodds. Whilst John was acting as executive chairman it was chaired by Chris Holt. The principal task of the committee is to deal with key appointments to the board, and related employment matters. The committee is responsible for proposing candidates for appointment to the board, having regard to the balance and structure of the board, and meets as and when required. The committee met on four occasions during the year with full attendance. In 2013/14, the committee’s work programme entailed recommending to the board the appointment of a new chief executive officer, in place of Tom Haughey who resigned in January 2013, and three new non-executive directors, two of whom will replace Toby Hayward and Keith Elliott. In seeking suitable candidates for these vacancies, Korn/Ferry International, an external executive search agency, was engaged. Korn/Ferry has no other connection with the Company. The nominations committee considered a list of potential candidates and the balance of skills, knowledge, independence, diversity (including gender) and experience on the board to ensure that a suitable balance was maintained. Ian Lawson was appointed as chief executive officer in November 2013. Ian’s wealth of plc board experience and understanding of the construction market were factors in the board’s decision. The committee also recommended to the board the appointments as non- executive directors of Alun Griffiths on 1 May 2014 and Kevin Whiteman and Tony Osbaldiston with effect from 19 July 2014. Their other significant commitments were disclosed to the board before their appointments. The board was and continues to be satisfied that they would allocate sufficient time to the Company to discharge their responsibilities effectively. The committee was also unanimous in appointing Ian Cochrane, formerly managing director of Severfield (NI) Limited, to the board as chief operating officer in June 2013. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance56 Corporate governance report continued Diversity We recognise the importance of diversity in board effectiveness and remain committed to ensuring that appointments are ultimately made on merit and against agreed selection criteria. We support the Davies report’s aspiration to promote greater female representation on listed company boards. The Group, however, does not believe in the concept of gender quotas, our preferred approach being much more directed at merit, experience and skill. In the sectors in which the Group operates female representation at a senior level is rare and as at 31 March 2014, the board had no female directors. As and when board appointments arise, and where practicable, we will look to follow the procedures recommended by the Davies report and by the Code to maintain a balanced board. No suitable female candidates were identified, for example, as part of the recent recruitment exercise for new non-executive directors. The board also recognises that gender diversity below board level remains an issue, particularly in management and technical roles within the construction industry. Succession planning The nominations committee ensures the continued effectiveness of the board through appropriate succession planning. The board from 19 July 2014 onwards will consist of nine directors, only four of whom have been directors of the Company for more than 13 months. More work will be done in the next 12 months to formalise the process of ongoing succession planning. ACCOUNTABILITY Risk management The board is responsible for determining the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. An ongoing process has been established for identifying, evaluating and managing the significant risks faced by the Group. A Group assurance map is used to co-ordinate the various assurance providers within the Group. During the year, there was significant investment in, and assessment of, the Group’s risk management process resulting in improved risk management understanding, assessment and reporting. The process was underpinned by risk identification workshops, facilitated by an independent risk management consultant, which were attended by senior management, the executive committee and the board. Senior management from all key disciplines and businesses within the Group are involved in the process of risk assessment in order to identify and assess Group objectives, key issues and controls. Further reviews are performed to identify those risks relevant to the Group as a whole. This assessment encompassed all aspects of risk, including operational, compliance, financial and strategic. Identified risk events, their causes and possible consequences are recorded in risk registers. Their likelihood and potential business impact and the control systems that are in place to manage them are analysed and, if required, additional actions are developed and put in place to mitigate or eliminate unwanted exposures. Individuals are allocated responsibility for evaluating and managing these risks within an agreed timetable. The Group establishes its risk appetite through use of delegated authorities so that matters considered higher risk require the approval of senior management or the board. These include, but are not limited to, tender pricing, bid submissions, approval of contract variations and final account settlements, capital requirements, procurement, and certain legal and strategic matters. Ongoing risk management and assurance is provided through various monitoring reviews and reporting mechanisms, including the executive risk committee (chaired by Ian Lawson) which convenes on a weekly basis and has the primary responsibility to identify, monitor and control significant risks to an acceptable level throughout the Group. The committee receives information on relevant risk matters from a variety of sources on a regular basis. Subsidiary company meetings consider and report on risk on a monthly basis as part of the monthly business review process. This process is followed to ensure that, as far as possible, the controls and safeguards are being operated in line with established procedures and standards. On a quarterly basis, the significant risks identified by the Group’s businesses are discussed in detail with each management team. The outcome of these discussions is collated and reported to the executive committee. The risk registers of each business are updated and, together with a consolidated Group risk register compiled by the executive committee, are reported to the audit committee twice yearly, to ensure that adequate information in relation to risk management matters is available to the board and to allow board members the opportunity to challenge and review the risks identified. The audit committee undertakes an annual review of the appropriateness of the risk management processes to ensure that they are sufficiently robust to meet the needs of the Group. Details of the Group’s principal risks, together with the controls and procedures in place to mitigate the risks, can be found on pages 40 to 43. Annual report The board is responsible for the preparation of the annual report and the financial statements to ensure that the annual report taken as a whole is fair, balanced and understandable. The annual report is drafted by executive management with reviews undertaken by third-party advisers as required. Additional steps have been built into the reporting timetable to ensure that directors are given sufficient time to review, consider and comment on the annual report. Our external auditor reviews the narrative sections of the annual report to identify any material inconsistencies between their knowledge acquired during the audit and the directors’ ‘fair, balanced and understandable’ statement and whether the annual report appropriately discloses those matters that they have communicated to the audit committee. A substantially final draft is reviewed by the audit committee prior to consideration by the board. Internal control The board formally acknowledges its overall responsibility for reviewing the effectiveness of internal control. It believes that senior management within the Group’s operating businesses should also contribute in a 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201457 substantial way and this has been built into the process. There are inherent limitations in any system of internal control and, accordingly, even the most effective system can provide only reasonable, and not absolute, assurance against material misstatement or loss. The system is designed to manage rather than eliminate the risk of failure to achieve the Group’s objectives. The system of internal control, which includes financial, operational and compliance controls, is based on a process of identifying, evaluating and managing risks. This process has been in place for the full financial year and up to the date of the approval of these financial statements and is regularly reviewed by the board. The process is subject to continuous improvement and has been enhanced as the Group has implemented greater formality and standardisation, which allows for better oversight by the board. This process is in accordance with the guidance provided by the Turnbull report. The key features of the Group’s system of internal control are as follows: Financial reporting system The Group operates a comprehensive budgeting and forecasting system. Budgets and forecasts include income statements (including detailed contract- by-contract information), cash flow statements and balance sheets. Risks are identified and appraised throughout the annual process of preparing budgets. The annual budget and quarterly forecasts are approved by the board. A formal quarterly review of each business’s year-end forecast, business performance, risk and internal control matters is carried out by the directors of each division with the chief executive officer, Group finance director and chief operating officer in attendance. Detailed management accounts are prepared for each business and the Group on a monthly basis which, as a matter of routine, compare actual results with budget and the latest forecast. Material variances from budget and forecast are thoroughly investigated. A detailed monthly Group management information pack is prepared which covers the performance of each business and contains detailed consolidated results and other financial information for the Group as a whole. This information pack is subsequently presented to the executive committee and the board. Standard financial control procedures operate throughout the Group to ensure the integrity of the Group’s financial statements. Project management procedures Project risk is managed throughout the life of a contract from the tender stage to completion. The Group has taken steps to implement stronger contracting processes and disciplines during the year. Individual tenders for projects are subject to detailed review with approvals required at relevant levels and at various stages from commencement of the tender process through to contract award. Tenders above a certain value and those involving an unusually high degree of technical or commercial risk must be approved at a senior level within the Group. Robust procedures exist to manage the ongoing risks associated with contracts. Regular monthly contract reviews to assess contract performance, covering both financial and operational issues, form an integral part of contract forecasting procedures. Authorisation procedures The Group operates an established management structure, with clearly defined levels of responsibility and a clear system of delegated authorities. These procedures are relevant across Group operations and provide for successive assurances to be given at increasingly higher levels of management and, finally, to the board. All significant investment decisions, including capital expenditure, are referred to the board, the executive directors or senior management, depending on the value and/or nature of the proposed investment. Capital expenditure requests are supported by detailed investment appraisals. Cash and working capital management Cash flow forecasts are regularly prepared to ensure that the Group has adequate funds and resources for the foreseeable future and is in compliance with banking covenants. Each business reports its cash position daily. Actual cash performance is compared to forecast on a weekly basis. Internal audit During the course of the year, KPMG was engaged as an outsourced internal audit and assurance provider to deliver specific expertise, experience and resource. The scope of the internal audit work focuses on critical business financial processes and other areas of perceived high business risk. KPMG’s findings are reported to the executive and audit committees on a regular basis. Health and safety Safety, health and environmental issues and risks are continually monitored at all sites and are reviewed on a monthly basis by senior management and the board. The Group has a well-developed health and safety management system for the internal and external control of health and safety risks which is managed by the Group SHE director. This includes the use of risk management systems for the identiﬁcation, mitigation and reporting of health and safety management information. Whistleblowing procedures The Group operates a comprehensive ‘whistleblowing’ policy. Accordingly, staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. The audit committee reviews adherence with this policy on an ongoing basis. Information included in the directors’ report Certain information that fulfils the requirements of the corporate governance statement can be found in the directors’ report in the sections headed ‘significant shareholdings’, ‘share capital’, ‘amendment of articles of association’, ‘appointment and replacement of directors’ and ‘powers of the directors’ and is incorporated into this corporate governance section by reference. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance58 Audit committee report Toby Hayward Chairman of the audit committee “During the year, we have scrutinised the appropriateness of the Group’s system of internal controls and risk management processes, along with the internal and external audit processes.” Role • To make recommendations to the board Activities of the committee The primary function of the committee is to assist the board in fulfilling its oversight responsibilities. This includes reviewing the financial reports and other financial information before publication. The committee assists the board in achieving its obligations under the Code in areas of risk management and internal control, focusing particularly on areas of compliance with legal requirements, accounting standards and the Listing Rules, and ensuring that an effective system of internal financial and non-financial controls is maintained. The committee also reviews the accounting and financial reporting processes, along with reviewing the roles of and effectiveness of the external auditor. The ultimate responsibility for reviewing and approving the annual report remains with the board. The responsibility of the committee principally falls into the following areas: • To monitor the integrity of the financial statements and formal announcements and to review significant financial reporting judgements. • To review the Group’s internal financial controls. in relation to the appointment and removal of the external auditor and to approve its remuneration and its terms of engagement. • To review the nature of non-audit services supplied and non-audit fees relative to the audit fee. • To provide independent oversight over the external audit process through agreeing the suitability of the scope and approach of the external auditor’s work, assessing its objectivity in undertaking its work and monitoring its independence taking into account relevant UK professional regulatory requirements and the auditor’s period in office and compensation. • To oversee the effectiveness of the internal audit process. • To oversee the effectiveness of the external audit process particularly with regard to the quality and cost- effectiveness of the auditor’s work. • To report to the board how it has discharged its responsibilities. • Reviewed and discussed with the external auditor the key accounting considerations and judgements reflected in the Group’s interim results for the period ended 30 September 2013. • Reviewed and agreed significant accounting risks and principal business risks for the year ended 31 March 2014. • Reviewed and agreed the external auditor’s audit planning report in advance of the audit for the year ended 31 March 2014. • Discussed the report received from the external auditor regarding the audit of the results for the year ended 31 March 2014. This report included the key accounting considerations and judgements reflected in the Group’s year-end results, comments on findings on internal control and a statement on independence and objectivity. • Reviewed the need for an internal audit function and approved KPMG’s appointment as the Group’s internal auditor. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201459 • Reviewed the internal audit plan and internal audit reports prepared by KPMG covering various aspects of the Group’s operations, controls and processes. • Reviewed the Group’s risk register. • Reviewed progress in the development of a Group finance manual including the formalisation of Group accounting policies. • Reviewed and approved external audit fees for the year ended 31 March 2014. • Reviewed the effectiveness of the external audit process. • Reviewed the need for an audit tender process. The committee has considered the annual report in the context of the new ‘fair, balanced and understandable’ statement and is in a position to report to the board that the 2014 annual report taken as a whole is fair, balanced and understandable on the basis that the description of the business agrees with their own understanding, the discussion of performance properly reflects the events of the year and that there is a clear and well-articulated link between all areas of disclosure. Risk management and internal control The committee is responsible for reviewing the design and effectiveness of the Group’s system of internal control. The committee is also responsible for reviewing the adequacy and effectiveness of the Group’s ongoing risk management systems and processes. Taking into account the processes that have been designed and implemented during the year ended 31 March 2014, the board, with the advice of the committee, has reviewed the internal control systems and risk management processes. Further steps are being undertaken to embed internal control and risk management further into the operations of the Group and to deal with areas of improvement which are brought to the attention of management and the board. Further details of the Group’s internal control process are set out in the corporate governance report on pages 56 and 57. Further details of the Group’s principal risks and uncertainties are set out on pages 40 to 43. Internal audit In conjunction with management, the committee reviewed the need for an internal audit function. A number of options were considered including the establishment of an in-house internal audit department, outsourced arrangements and co-sourced arrangements. After considering several providers, KPMG was engaged. Financial reporting and significant financial issues The committee assesses whether suitable accounting policies have been adopted and whether management has made appropriate estimates and judgements. The committee reviews accounting papers prepared by management which provide details on the main financial reporting judgements. For example, during the year the committee reviewed the significant contract judgements made by management and the judgemental areas of the carrying values of goodwill and the Indian joint venture. The committee also reviews reports by the external auditor on the full year and half year results which highlight any issues associated with the work undertaken on the audit. The two significant issues considered during the year are detailed below: • Contract valuation, revenue and profit recognition: The committee reviewed the report of the Group finance director that set out the main contract judgements associated with the Group’s significant contracts. The significant areas of judgement include the timing of revenue and profit recognition, the estimation of the recoverability of contract variations and claims and the estimation of future costs to complete. The external auditor performed detailed audit procedures on revenue and profit recognition and reported the findings to the committee. • Review of carrying value of goodwill and the investment in the Indian joint venture: The committee considered the carrying value of goodwill and the investment in the Indian joint venture and the assumptions underlying the impairment review. The judgements in relation to impairment largely relate to the assumptions underlying the identification of the Group’s cash- generating units (CGUs) (for goodwill only) together with the calculation of the value in use of the business being tested for impairment, primarily the achievability of long-term business plans and macroeconomic assumptions underlying the valuation process. The impairment reviews were identified as significant risks by the external auditor, who reported the findings to the committee. The committee was satisfied that each of the matters set out above had been fully and adequately addressed by management, appropriately tested and reviewed by the external auditor and that the disclosures made in the annual report were appropriate. In addition, the committee has considered a number of other judgements which have been made by management, none of which had a material impact on the Group’s results. These include the recoverability of deferred tax assets and the valuation of pension scheme liabilities. External auditor The committee has responsibility for making a recommendation on the appointment, reappointment and removal of the external auditor. The committee also advises the board on the external auditor’s remuneration for audit and non-audit work, independence and objectivity and discusses the nature, scope and results of the audit with them. Deloitte LLP was reappointed auditor of the Group at the AGM held in September 2013. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governanceThere are no specific types of non-audit work from which the auditor is specifically excluded but the committee may reserve the right to insist that the auditor be excluded from tendering for work that may present a potential conflict of interest. The auditor complies with the Accounting Practices Board (APB) Ethical Standards applying to non-audit services. In other circumstances, proposed assignments are put out to tender and decisions to award work taken on the basis of demonstrable competence and cost- effectiveness. Details of the auditor’s fees, including non-audit fees, of £307,000 paid to Deloitte LLP, are shown in note 4 to the consolidated financial statements. Toby Hayward Chairman of the audit committee 11 July 2014 60 Audit committee report continued The effectiveness of the external audit process is dependent on appropriate risk identification at the start of the audit cycle. These significant risks are identified in the external auditor’s planning report to the committee and comprise contract valuation, revenue and profit recognition and the review of the carrying value of goodwill and the investment in the Indian joint venture. Throughout the year, the committee monitored these risks and the associated work undertaken by Deloitte has been evaluated. The effectiveness of the external audit process is currently assessed by the committee based on discussions with those involved in the process. The chairman of the audit committee also meets with the external audit partner outside the formal committee process throughout the year. In assessing the effectiveness of the external audit process during the year, the committee reviewed the following: • The experience, qualifications and expertise of the external auditor; • The achievement of the agreed audit plan and the communication of any changes to the plan; • The competence with which significant accounting and audit issues were handled and how these were communicated to the committee; and • The external auditor’s compliance with relevant regulatory, ethical and professional guidance on the rotation of audit partners. The committee is satisfied that the audit continues to be effective and provides an appropriate independent challenge to the Group’s management. Audit tendering Deloitte LLP and its predecessor firms have been the external auditor of the Group since their appointment in 1983. The external auditor is required to rotate the audit partner responsible for the Group and subsidiary audits at least every five years and a new lead audit partner was appointed for the year ended 31 March 2014. The committee has noted the recent changes to the UK corporate governance code including the provision for FTSE 350 companies to rotate the external audit contract at least every ten years. Despite this provision not being applicable to the Group given its current status outside of the FTSE 350, the committee recognises that the length of tenure of auditors is under increasing scrutiny. In view of this, and taking into account recent EU guidance that also requires listed companies to tender their audit at least every ten years, the committee intends to conduct a tender process during the course of the coming year. The successful firm will be appointed for the year ending 31 March 2016. There are no contractual obligations that restrict the choice of the external auditor. Non-audit services The committee recognises that, given its knowledge of the business, there are often advantages in using the auditor to provide certain non-audit services. The committee is satisfied that the independence of the auditor has not been impaired by providing these services. Non- audit services provided by the auditor during the year ended 31 March 2014 represented corporation tax compliance advice only. The committee has a policy of limiting fees to the auditor for non-audit services to 100 per cent of the audit fee and requiring competitive tender for all work with a fee over £30,000, other than for routine tax compliance work. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201461 The other significant commitments of the chairman were unchanged during the year and consist of acting as non-executive director of Lagan Construction Holdings Limited and Newbury Racecourse plc. Significant shareholdings As at 1 July 2014, the Group had been notified of the following voting rights to the Company’s shares in accordance with the Disclosure Rules and Transparency Rules of the UK Listing Authority: Ordinary 2.5p share 1 M&G Investments 46,889,416 2 JO Hambro Capital % 15.76 Management 3 Standard Life Investments 4 Threadneedle Investments 44,332,047 14.90 25,941,128 8.72 23,382,337 7.86 5 River & Mercantile Asset Management 15,802,632 5.31 6 Legal & General Investment Management 7 Henderson Global 14,119,905 4.75 Investors 10,568,906 3.55 Share capital The Company has a single class of share capital which is divided into ordinary shares of 2.5p each. Rights attaching to shares The rights attaching to the ordinary shares are defined in the Company’s articles of association. The articles of association may be changed with the agreement of shareholders. A shareholder whose name appears on the Company’s register of members can choose whether his shares are evidenced by share certificates (i.e. in certificated form) or held in electronic (i.e. uncertificated) form in CREST (the electronic settlement system in the UK). Subject to any restrictions below, shareholders may attend any general meeting of the Company and, on a show of hands, every shareholder (or his representative) who is present at a general meeting has one vote on each resolution and, on a poll, every shareholder (or his representative) who is present has one vote on each resolution for every ordinary share of which they are the registered shareholder. A resolution put to the vote of a general meeting is decided on a show of hands unless before, or on the declaration of the result of, a vote on a show of hands, a poll is demanded by the chairman of the meeting, or by at least five shareholders present in person or by proxy and having the right to vote, or by any shareholders present in person or by proxy having at least ten per cent of the total voting rights of all shareholders, or by any shareholders present in person or by proxy holding ordinary shares in which an aggregate sum has been paid up of at least one-tenth of the total sum paid up on all ordinary shares. Shareholders can declare final dividends by passing an ordinary resolution but the amount of the dividends cannot exceed the amount recommended by the board. The board can pay interim dividends on any class of shares of the amounts and on the dates and for the periods they decide the distributable profits of the Company justify such payment. Any dividend which has not been claimed for 12 years after it became due for payment will be forfeited and will then belong to the Company, unless the directors decide otherwise. Directors’ report Introduction The directors present their report together with the audited consolidated financial statements for the year ended 31 March 2014. The Companies Act 2006 requires the directors to present a fair review of the business during the year to 31 March 2014 and of the position of the Group at the end of the financial year along with a description of the principal risks and uncertainties. The Disclosure and Transparency Rules require certain information to be included in a corporate governance statement. The strategic report on pages 2 to 43 and the corporate governance report on pages 46 to 81, including the audit committee report, form part of this directors’ report. Disclosures elsewhere in the annual report are cross-referenced where appropriate. Taken together, they fulfil the combined requirements of company law, the Disclosure and Transparency Rules and Listing Rules. Details of significant events since the balance sheet date are contained in note 32 to the financial statements. An indication of likely future developments in the business of the Group and details of research and development activities are included in the strategic report. Information about the use of financial instruments by the Company and its subsidiaries is given in note 21 to the financial statements. Dividends The directors did not declare an interim dividend for the six months ended 30 September 2013 (2013: £1.3m, 1.5p per share). The directors do not recommend the payment of a final dividend. Directors The present membership of the board is set out on pages 46 and 47. Details of directors’ interests, including interests in the Company’s shares, are disclosed in the directors’ remuneration report on page 77. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance62 Directors’ report continued If the Company is wound up, the liquidator can, with the sanction of a special resolution passed by the shareholders, divide among the shareholders all or any part of the assets of the Company and he can value any assets and determine how the division shall be carried out as between the members or different classes of members. The liquidator can also transfer the whole or any part of the assets to trustees upon any trusts for the benefit of the members. No shareholders can be compelled to accept any asset which would give them a liability. Voting at general meetings Any form of proxy sent by the Company to shareholders in relation to any general meeting must be delivered (subject to the provisions of the articles of association) to the Company, whether in written form or in electronic form, not less than 48 hours before the time appointed for holding the meeting or adjourned meeting at which the person named in the appointment proposes to vote. No shareholder is, unless the board decides otherwise, entitled to attend or vote either personally or by proxy at a general meeting or to exercise any other right conferred by being a shareholder if he or any person with an interest in shares has been sent a notice under section 793 of the Companies Act 2006 (which confers upon public companies the power to require information with respect to interests in their voting shares) and he or any interested person failed to supply the Company with the information requested within 14 days after delivery of that notice. The board may also decide (where the shares represent at least 0.25 per cent in nominal value of the issued shares of the same class) that no dividend is payable in respect of those default shares and that no transfer of any default shares shall be registered. These restrictions end seven days after receipt by the Company of a notice of an approved transfer of the shares or all the information required by the relevant section 793 notice, whichever is the earlier. Transfer of shares General meetings The board may refuse to register a transfer of a share which is not fully paid, provided that the refusal does not prevent dealings in shares in the Company from taking place on an open and proper basis. The board may also refuse to register a transfer of a certificated share unless: (i) the instrument of transfer is lodged, duly stamped (if stampable), at the registered office of the Company or any other place decided by the board, accompanied by a certificate for the share to which it relates and such other evidence as the board may reasonably require to show the right of the transferor to make the transfer; (ii) is in respect of only one class of shares; and (iii) is in favour of not more than four transferees. Transfer of uncertificated shares must be carried out using CREST and the board can refuse to register a transfer of an uncertificated share in accordance with the regulations governing the operation of CREST. There are no other limitations on the holding of ordinary shares in the Company. Variation of rights If at any time the capital of the Company is divided into different classes of shares, the special rights attaching to any class may be varied or revoked either: i. with the written consent of the holders of at least 75 per cent in nominal value of the issued shares of the class; or ii. with the sanction of a special resolution passed at a separate general meeting of the holders of the shares of the class. The Company can issue new shares and attach any rights to them. If there is no restriction by special rights attaching to existing shares, rights attaching to new shares can take priority over the rights of existing shares. A resolution is to be proposed at the forthcoming AGM that a general meeting of the Company, other than an AGM, can be called on not less than 14 clear days’ notice. Change of control There are no agreements between the Group and its directors or employees providing for compensation for loss of office or employment that occurs because of a takeover bid. The Group’s banking arrangements which expire in November 2016 can be terminated upon a change of control of the Group. Appointment and replacement of directors In accordance with the Company’s articles, directors shall be no less than two and no more than 12 in number. Subject to applicable law, a director may be appointed by an ordinary resolution of shareholders in general meeting following nomination by the board or a member (or members) entitled to vote at such a meeting, or following retirement by rotation if the director chooses to seek re-election at a general meeting. In addition, the directors may appoint a director to fill a vacancy or as an additional director, provided that the individual retires at the next AGM. A director may be removed by the Company as provided for by applicable law, in certain circumstances set out in the Company’s articles of association (for example bankruptcy, or resignation), or by a special resolution of the Company. We have decided this year to adopt voluntarily the practice that all directors stand for re- election on an annual basis, in line with the recommendations of the Code. Powers of the directors The business of the Company is managed by the board who may exercise all the powers of the Company subject to the provisions of the Company’s articles of association, the Companies Act 2006 (‘the Act’) and any ordinary resolution of the Company. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201463 Directors’ indemnities Employee involvement External auditor Deloitte LLP has expressed its willingness to continue in office as external auditor and a resolution to reappoint it will be proposed at the forthcoming AGM. Annual general meeting The notice concerning the AGM to be held at Aldwark Manor Hotel, York at noon on Tuesday 2 September 2014, together with explanatory notes on the resolutions to be proposed and full details of the deadlines for exercising voting rights, is contained in a circular to be sent to shareholders with this report. The directors’ report from pages 61 to 63 inclusive was approved by the board and signed on its behalf by: Mark Sanderson Company secretary 11 July 2014 The articles entitle the directors of the Company to be indemnified, to the extent permitted by the Act and any other applicable legislation, out of the assets of the Company in the event that they suffer any loss or incur any liability in connection with the execution of their duties as directors. In addition, and in common with many other companies, the Company had during the year and continues to have in place directors’ and officers’ insurance in favour of its directors and other officers in respect of certain losses or liabilities to which they may be exposed due to their office. Amendment of articles of association Any amendments to the articles may be made in accordance with the provisions of the Act by way of special resolution. Political contributions No contributions were made to any political parties during the current or preceding period. Greenhouse gas emissions All disclosures on the Group’s greenhouse gas emissions, as required to be disclosed under the Companies Act 2006 (Strategic Report and Directors’ Report Regulations 2013), are contained in the corporate social responsibility report on page 32. Employment of disabled persons The Company gives full and fair consideration to applications for employment made by disabled persons, having regard to their particular aptitudes and abilities. In the event of an employee becoming disabled every effort is made to ensure that their employment within the Company continues and that appropriate training is arranged where necessary. It is the policy of the Company that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees. The Group places considerable value on the involvement of its employees and has continued its practice of keeping them informed on matters affecting them as employees, for example, eligibility to join Company share schemes, and on the various factors affecting the performance of the Group. Communication is made using the Group’s internal communications newsletter and through regular meetings with, and presentations by, senior management. Details of employee share-based payment schemes are set out in note 22. Going concern After making enquiries, the directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing the financial statements. The key factors considered by the directors in making the statement are set out in the financial review on pages 28 to 31. Disclosure of information to the external auditor The directors who held office at the date of approval of this directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Company’s auditor is unaware and each director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Act. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance64 Directors’ remuneration report Keith Elliott Chairman of the remuneration committee On behalf of the board I am pleased to present the directors’ remuneration report for the year ended 31 March 2014, our first under the Accounts and Reports Regulations. The report is set out in two sections: the directors’ remuneration policy at pages 66 to 73 and the annual report on remuneration at pages 73 to 80. Dear shareholder Performance and remuneration in 2013/14 2013/14 was a difficult and transitional year. Performance problems on several major projects had seen the incumbent chief executive officer step down at the end of the previous year. Our chairman took control of the business as executive chairman until November 2013 when a new chief executive officer was appointed. Mid-year a new chief operating officer was also appointed following the retirement of the previous incumbent. A successful rights issue at the start of the year rebuilt the balance sheet and the performance problems and value at risk on projects were brought under control by year-end. We have returned to underlying profitability and the expectation of future growth and stability for next year and beyond. Executive salaries are set at the same levels as set out in last year’s annual report and we were able to secure the services of our new chief executive officer, Ian Lawson and new chief operating officer, Ian Cochrane during the year on comparable salaries to their respective predecessors. The Group-wide performance targets set under the bonus plan for the whole year were not met and amongst the current executive directors bonuses will be only paid for this year to Ian Cochrane whose performance target for UK profitability was met and to Ian Lawson whose personal objectives were met. In addition, no PSP awards vested in relation to performance for the year ended 31 March 2014. As predicted in last year’s annual report no awards under that scheme have vested now for four consecutive years. A one-off discretionary bonus payment to John Dodds for the period during which he acted as executive chairman was made. Key remuneration issues for 2013/14 Unconnected with performance problems the committee undertook during 2013/14 an overhaul of directors’ remuneration policy resulting in significant changes. Our guidelines were best practice compliance, consistency (with shareholder interests), market alignment and simplification. The resultant changes included: 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201465 Ensuring that the current remuneration policy and incentive arrangements properly meet the requirements of the Group remains high on the committee’s agenda.” Shareholders’ views I wrote to our ten largest shareholders in July/August 2013 to seek their views on the proposed changes identified in our remuneration policy and the feedback I received was broadly supportive. The committee will continue to maintain an open and constructive dialogue with shareholders on an ongoing basis. Handing over This report will be my last as chairman of the remuneration committee and the Company is fortunate to have found such a suitable replacement in Alun Griffiths. I have consulted with Alun since his appointment on 1 May 2014 and I know that this policy and the contents of this report have his approval. Keith Elliott Chairman of the remuneration committee 11 July 2014 • Deferment: 50 per cent of annual bonus to be paid in shares deferred for three years. • Introduction of clawback provisions for incentive based remuneration. • Standardisation of pensions and benefits in line with market norms. • New service agreements for all directors incorporating current best practice. Changes in remuneration policy for 2014/15 and beyond The committee continuously reviews directors’ remuneration policy to test its fitness for purpose in the context of attraction, retention and motivation of the high quality executives who can deliver our strategies and provide returns to our shareholders. Our remuneration policy is linked to our key objectives as set out in the strategic report. The performance targets for our incentive based remuneration are linked to profit and health and safety, reflecting the primacy of those criteria in meeting our business objectives. Based on the changes implemented in 2013/14 we are satisfied that current policy is fit for purpose for the coming year. Looking ahead three years we foresee no major changes to the structure but will refine the operation of the policy within the approved parameters to align with performance, market conditions and shareholder returns. Any significant changes to the policy would only be made after consultation with our major shareholders and approval at the annual general meeting. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance66 Directors’ remuneration report continued What is in this report This report sets out details of the remuneration policy for executive and non-executive directors, describes the implementation of that policy and discloses the amounts paid relating to the year ended 31 March 2014. The report complies with the provisions of the Companies Act 2006 and Schedule 8 of The Large and Medium- sized Companies and Groups (Accounts and reports) (Amendment) Regulations 2008 as amended in 2013. The report has been prepared in line with the recommendations of the UK Corporate Governance Code and the requirements of the UKLA Listing Rules. The remuneration committee has also taken into consideration guidelines published by institutional investor advisory bodies such as the ABI and the NAPF. The directors’ remuneration policy (set out on pages 66 to 73) will be put to shareholders for approval in a binding vote at the AGM. The effective date of the policy is 2 September 2014 which is the date shareholder approval is being sought for the policy for the first time under the new reporting rules. The policy remains consistent with that operated during the 2013/14 financial year and approved at the 2013 AGM under the previous reporting framework, following extensive consultation with shareholders. In practice the policy will be applied from 1 April 2014. It is intended this policy will remain in place for three years until the 2017 AGM. The annual statement by the chairman of the remuneration committee (set out on pages 64 and 65) and the annual report on remuneration (set out on pages 73 to 80) will be subject to an advisory vote at the AGM. The regulations require the auditor to report to the Group’s shareholders on the auditable part of the directors’ remuneration report and to state whether, in its opinion, that part of the report has been properly prepared in accordance with the Companies Act 2006. The relevant sections subject to audit have been highlighted in the annual report on remuneration. OUR REMUNERATION POLICY What we are trying to achieve The remuneration committee has responsibility for determining remuneration for the executive directors and the chairman and for oversight of reward strategy and policy for the Group. The committee aims to recruit and retain executives and ensure they are properly motivated to perform in the interests of the Company and its shareholders whilst paying no more than is necessary and operating within an appropriate risk profile. How executive director remuneration policy relates to the wider Group In setting remuneration for the executive directors, the committee takes account of market practice for companies of a similar size and complexity, the responsibilities of each individual role, individual performance and an individual’s experience. Salary reviews (in percentage terms) will be set in the context of those of the wider workforce. The overall remuneration of executive directors is more heavily weighted towards Group performance than the wider workforce whose pay is less variable and long-term incentives are restricted to those most able to directly influence overall Group performance. Wider employee share ownership is encouraged through the use of an all-employee share scheme. How we take into account views of employees and shareholders The committee does not formally consult with employees on executive pay but is periodically updated by the Group HR director on any developments in pay and employee relations and takes employees’ views into account. The committee considers developments in institutional investors’ best practice expectations and the views expressed by shareholders with whom we have regular dialogue. In particular, we consulted extensively with our major shareholders before last year’s AGM on our proposed changes to the remuneration policy and they were supportive of these changes which are now reflected in this policy. If any of our major shareholders were opposed to our remuneration policy we would endeavour to meet with them, as appropriate, to understand and respond to any issues they might have. How remuneration is structured The following table should be read in conjunction with the recruitment policy on page 72 and the implementation of policy for 2014/15 section of the annual report on remuneration on pages 79 and 80. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201467 Executive directors Base salaries Purpose and link to strategy To provide the core reward for the role. Sufficient to recruit and retain directors of the calibre necessary to execute the Group’s strategy. Operation Base salaries are normally reviewed annually by the committee, with changes effective from 1 July. Our review takes into account levels of increase across the broader workforce, changes in responsibility, and a periodic remuneration review for comparable companies. Performance conditions The committee considers individual salaries each year having due regard to the factors noted in operation of the policy. No recovery provisions apply to salary. Maximum opportunity There is no prescribed maximum. Current salaries are disclosed in the annual report on remuneration. Increases (as a percentage of salary) are generally limited to the range set for the wider workforce. However, further increases may be awarded where there have been significant changes in the scope and/or responsibilities of the role or a material change in the size and scale of the Group. Benefits Purpose and link to strategy Cost-effective benefits, sufficient to recruit and retain directors of the calibre necessary to execute the Group’s strategy. Operation The Company currently provides the following employee benefits: • Life assurance at four times salary • Medical insurance for self with option to purchase for family • Company car and fuel allowance Relocation expenses would be paid as appropriate for new recruits or a change in role. In circumstances where an executive is deployed on an international assignment, their arrangements will be managed in a way that is consistent with good practice for international organisations. Additional allowances may also be paid e.g. to cover any increase in cost of living, tax equalisation and/or additional accommodation costs. The committee may wish to offer executive directors other employee benefits on broadly similar terms as those offered to other employees from time to time, provided within the maximum opportunity limit. Maximum opportunity The value of insured benefits can vary from year to year based on the costs from third party providers. Performance conditions No performance conditions or recovery provisions apply to benefits. The total value of benefits (excluding relocation and international assignment allowances) will not exceed more than 15 per cent of salary in any year. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance68 Directors’ remuneration report continued Pension Purpose and link to strategy Cost-effective long-term retirement benefits, sufficient to recruit and retain directors of the calibre necessary to execute the Group’s strategy. Operation Company contribution to defined contribution scheme (own or the Company’s), a cash supplement or a combination of both up to the maximum value. Performance conditions No recovery provisions apply to pension benefits. Director has no obligation to match Company contributions. Maximum opportunity 20 per cent of base salary contribution/cash supplement for chief executive officer and 18 per cent of salary for others up to a maximum of £50,000 (with the exception that for executive directors commencing service before 1 November 2013 the Company pays a fixed contribution/cash supplement of £50,000 p.a.). For international assignments the Company may be required to make additional payments to comply with local statutory requirements. Annual bonus Purpose and link to strategy To focus attention on achieving short-term corporate objectives, incentivise outperformance of targets and provide a deferred element to reinforce the impact of long-term performance. Operation Any annual bonus award is made 50 per cent in cash and 50 per cent in shares deferred for three years under the rules of the Company’s deferred share bonus plan (‘DSBP’) which incorporates a clawback mechanism for instances of financial misstatement, error or gross misconduct. Dividends may accrue on deferred bonus shares. Maximum opportunity Maximum 100 per cent of base salary per annum. Performance conditions The committee will review the appropriateness of performance measures on an annual basis and consider whether there is a need to re-balance or amend the performance measures and weightings to reflect the business objectives at the time. However, the majority of the annual bonus will be subject to financial targets. Currently the business uses a combination of underlying profit before tax (‘PBT’) targets and accident frequency ratio (‘AFR’) targets. A minority of bonus will be payable for threshold levels of performance. The actual measures and weightings are set out in the annual report on remuneration on page 79. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201469 Performance share plan (‘PSP’) (approved by shareholders in 2007) Purpose and link to strategy Incentivise and reward for long-term, sustainable performance linked to corporate strategy and provide alignment with shareholders’ interests. Operation Annual grant of performance shares which will, in normal circumstances, vest subject to continued service and the achievement of performance conditions over a three year period. There is a clawback mechanism for instances of financial misstatement, error or gross misconduct. Dividends may accrue on vested awards. Maximum opportunity Maximum annual award level is 150 per cent of salary. The current award policy is, in normal circumstances, for awards of 100 per cent of salary for the chief executive officer and 75 per cent of salary for other executive directors. Performance conditions The committee will determine each year the appropriate award levels and performance conditions based on the corporate strategy at the time. However, a financial measure such as underlying earnings per share (‘EPS’) will be used for at least half of any award. Currently the awards are subject to an EPS growth target, the details of which are set out in the annual report on remuneration. No more than 25 per cent of an award will vest for performance at the lower threshold of EPS targets. All-employee share plan Purpose and link to strategy To foster wider employee share ownership. Operation The Group currently operates a share incentive plan and may introduce a sharesave scheme subject to shareholder approval. Participation in any all-employee share plans operated by the Group is in line with HMRC guidelines. Executive directors are entitled to participate on the same basis as for other eligible employees. Maximum opportunity The Group has discretion under the all-employee share plans to issue awards up to the HMRC approved limits as set from time to time. Performance conditions No recovery provisions apply to all-employee share awards. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance70 Directors’ remuneration report continued Choice of performance conditions and metrics Our role as the remuneration committee includes the establishment of performance goals through long-term incentive plans which are challenging but achievable through superior performance, thereby incentivising and rewarding success. The discretions retained by the committee in operating the annual bonus and the PSP The committee will operate the annual bonus (including the deferred share element) and the PSP according to their respective rules and in accordance with the Listing Rules where relevant. The performance metrics that are currently used for our annual bonus and PSP are selected to reflect the Group’s key performance indicators which include safety and profitability. Financial targets (such as profitability) are set based on a sliding scale that takes account of relevant commercial factors, internal budgeting and external forecasts as necessary. Only modest rewards are available for delivering threshold performance levels with maximum rewards requiring substantial outperformance of our challenging plans. Other measures (such as safety) are incorporated into the annual bonus plan to reflect their operational importance and the key short-term priorities of the Group at that time. The targets are based on internal plans/budgets and in line with a wider commercial perspective. The long-term incentive plan currently incorporates an EPS performance measure, which is a key financial metric which is aligned with shareholder interests. The committee has considered and taken advice on alternative performance measures, such as total shareholder return (‘TSR’), to substitute for (all or part of) the use of the EPS range used in the past. Lack of a suitable peer group of similar listed companies made this approach impracticable and to date we have found no better benchmark. No performance targets are set for any share incentive plan or sharesave plan awards since these form part of all-employee arrangements that are purposefully designed to encourage employees across the Group to purchase shares in the Company. Details of all the outstanding share awards granted to existing executive directors are set out in the annual report on remuneration. Any use of the above discretions would, where relevant, be explained in the annual report on remuneration and may, as appropriate, be the subject of consultation with the Company’s major shareholders. The use of any discretion in relation to the Company’s share incentive plan and any sharesave plan will be as permitted under HMRC rules and the Listing Rules. The PSP, under which the share awards are granted, was approved by shareholders in 2007. Further details on how the awards are structured and operated are set out in the plan rules which are available on request from the Company. Details of share awards granted to existing executive directors which have not vested or lapsed are set out on page 76 of the annual report on remuneration. These remain eligible to vest based on their original award terms. The committee retains discretion, consistent with market practice, in a number of regards to the operation and administration of these plans. These include, but are not limited to, the following in relation to the annual bonus and PSP: • • • the participants; the timing of grant/payment of an award; the size of an award (subject to the limits set out in the policy table); • the determination of vesting/payment; Illustration of application of the policy • discretion required when dealing with a change of control or restructuring of the Group; • determination of the treatment of leavers based on the rules of the plan and the relevant circumstances; A significant proportion of remuneration is linked to performance, particularly at maximum performance levels. The charts on page 71 show how much each executive director could earn under Severfield’s remuneration policy (as detailed above) under different performance scenarios. • adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends); and • the annual review of performance measures and weighting, and targets for the annual bonus and to apply to future PSP awards. In relation to both the Group’s PSP and annual bonus plan, the committee retains the ability to adjust the targets and/or set different measures if events occur (e.g. material acquisition and/or divestment of a Group business) which cause it to determine that the conditions are no longer appropriate and the amendment is required so that the conditions achieve their original purpose and are not materially less difficult to satisfy. The following assumptions have been made: • Minimum (performance below threshold) — Fixed pay only with no vesting under the annual bonus or PSP. • Target (performance in line with expectations) — Fixed pay plus a bonus at the mid-point of the range (i.e. 50 per cent of the maximum opportunity) and a PSP award of 100 per cent of salary for the chief executive officer and 75 per cent of salary for other executives vesting at 50 per cent of the maximum. • Maximum (performance meets or exceeds maximum) — Fixed pay plus maximum bonus and maximum PSP award vesting. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201471 Fixed pay comprises: • Salaries — salary effective as at 1 July 2014; • Benefits — amounts expected to be received by each executive director in the 2014/15 financial year; • Pension — amount that will be received by each executive director in the 2014/15 financial year based on the policy set out in the table above. The scenarios do not include any share price growth or dividend assumptions. All- employee share incentives have been excluded. Chief executive officer Maximum performance On-target performance Minimum performance 39% 56% 100% 31% 30% 22% 22% 0 £250 £500 £750 £1,000 £1,250 Chief operating officer Maximum performance On-target performance Minimum performance 43% 33% 24% 60% 23% 17% 100% 0 £250 £500 £750 £1,000 £1,250 Group finance director Maximum performance On-target performance Minimum performance 43% 33% 24% 60% 23% 17% 100% 0 £250 £500 £750 £1,000 £1,250 Executive director Maximum performance On-target performance Minimum performance 43% 33% 24% 60% 23% 17% 100% 0 £250 £500 £750 £1,000 £1,250 Total fixed pay Annual bonus Long-term incentive plan Executive directors’ service agreements All executive directors signed new contracts during the year which incorporate current best practice, supersede all existing agreements and will be used consistently for future agreements. The new service contracts of executive directors run on a rolling basis. Notice periods of 12 months are required to be given by all parties. Payment to be made in lieu of notice on termination is equal to 12 months’ salary. For details of the contracts of each director including the date, unexpired term and any payment obligations on early termination are available from the Company secretary at the annual general meeting. Provision on payment for loss of office If an executive director’s employment is to be terminated, the committee’s policy in respect of the contract of employment, in the absence of a breach of the service agreement by the director, is to agree a termination payment based on the value of base salary that would have accrued to the director during the contractual notice period. The policy is that, as is considered appropriate at the time, the departing director may work, or be placed on gardening leave, for all or part of his notice period, or receive a payment in lieu of notice in accordance with the service agreement. The committee will consider mitigation to reduce the termination payment to a leaving director when appropriate to do so, having regard to the circumstances. In addition, where the director may pursue a claim against the Company in respect of his/her statutory employment rights or any other claim arising from the employment or its termination, the Company will be entitled to negotiate settlement terms (financial or otherwise) with the director that the committee considers to be reasonable in all the circumstances and in the best interests of the Company. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance72 Directors’ remuneration report continued The payment of any annual bonus will be at the committee’s discretion and will be based on the circumstances of the termination. Any bonus payment will be calculated based after assessing the relevant performance conditions and will only be in relation to the service period worked. The rules of the PSP and DSBP set out what happens to share awards if a participant ceases to be an employee or director of the Company before the end of the vesting period. Generally, any outstanding share awards will lapse on such cessation, except in certain circumstances. If the executive director ceases to be an employee or director of the Company as a result of death, disability, retirement, the sale of the business or company that employs the individual or any other reason at the discretion of the committee, then they will be treated as a ‘good leaver’ under the plan rules. Under the DSBP, the shares for a good leaver will normally vest in full on the normal vesting date (or on cessation of employment in the case of death). Under the PSP, a good leaver’s unvested awards will vest (either on the normal vesting date or the relevant date of cessation, as determined by the committee) subject to achievement of any relevant performance condition, with a pro rata reduction to reﬂect the proportion of the vesting period served (although the committee has the discretion to disapply time prorating if it considers it appropriate to do so). Beneﬁts will be provided in line with those offered to other employees, with relocation expenses/arrangements provided for if necessary. Should it be appropriate to recruit a director from overseas, ﬂexibility is retained to provide beneﬁts that take account of those typically provided in their country of residence (e.g. it may be appropriate to provide beneﬁts that are tailored to the unique circumstances of such an appointment). Pension contributions or a cash supplement up to the maximum level indicated in the policy table will be provided, although the committee retains the discretion to structure any arrangements as necessary to comply with the relevant legislation and market practice if an overseas director is appointed. The aggregate ongoing (i.e. after the year of appointment) incentive opportunity offered to new recruits will be no higher than that offered under the annual bonus plan and the PSP policy to the existing executive directors. In the year of appointment the annual bonus opportunity will be no higher than that offered to existing executive directors, prorated for the period of service (i.e. 100 per cent of salary on an annualised basis). The committee may award up to 150 per cent of salary under the PSP although in exceptional circumstances in order to facilitate the buy-out of existing awards the committee may go above this limit (see below). In determining whether an executive director should be treated as a good leaver and the extent to which their award may vest, the committee will take into account the circumstances of an individual’s departure. Different performance measures may be set initially for the annual bonus, taking into account the responsibilities of the individual, and the point in the ﬁnancial year that they joined. In the case of an external hire, if it is necessary to buyout incentive pay or beneﬁt arrangements (which would be forfeited on leaving the previous employer), this would be provided for taking into account the form (cash or shares) and timing and expected value (i.e. likelihood of meeting any existing performance criteria) of the remuneration being forfeited. Replacement share awards, if used, will be granted using the Company’s existing share plans to the extent possible (including the use of the exceptional limit under the PSP), although awards may also be granted outside of these schemes if necessary and as permitted under the Listing Rules. In the case of an internal hire, any outstanding variable pay awarded in relation to the previous role will be allowed to pay out according to its terms of grant (adjusted as relevant to take into account the board appointment). On the appointment of a new chairman or non-executive director, the fees will be set taking into account the experience and calibre of the individual and the expected time commitments of the role. Where speciﬁc cash or share arrangements are delivered to non-executive directors, these will not include share options or other performance-related elements. How are the non-executive directors paid? The chairman and non-executive directors receive an annual fee (paid in monthly instalments by payroll). The fee for the chairman is set by the remuneration committee and the fees for the non- executive directors are approved by the board, on the recommendation of the chairman and chief executive officer. The above policy applies to both an internal promotion to the board or an external hire. Our recruitment remuneration policy Base salary levels will be set in accordance with our remuneration policy, taking into account the experience and calibre of the individual and the relevant market rates at the time. Where it is appropriate to offer a lower salary initially, progressive increases (possibly above those of the wider workforce as a percentage of salary) to achieve the desired salary positioning may be given over the following few years subject to individual performance and continued development in the role. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201473 Element Fees Purpose and link to strategy Operation (including maximum levels) To attract and retain a high-calibre chairman and non-executive directors by offering market competitive fee levels. Current fee levels are disclosed in the annual report on remuneration. The chairman is paid an all-inclusive fee for all board responsibilities. The other non-executive directors receive a basic board fee, with supplementary fees payable for additional board responsibilities. Non-executive directors will be reimbursed for any normal business related expenses and any taxable benefit implications that may result. The non-executive directors do not participate in any of the Company’s incentive arrangements or Group’s pension scheme. The fee levels are reviewed on a periodic basis, and may be increased, taking into account factors such as the time commitment of the role and market levels in companies of comparable size and complexity. Fee increases may be greater than those of the wider workforce in a particular year, reflecting the periodic nature of increases and that they take into account changes in responsibility and/or time commitments. No beneﬁts or other remuneration are provided to non-executive directors. Advisers to the committee The committee retained New Bridge Street (an Aon plc company) as an independent adviser to the remuneration committee throughout the period. New Bridge Street are a member of the Remuneration Consultants Group and are a signatory to its code of conduct. Neither New Bridge Street nor any other part of Aon plc provided other services to the Group during the year. The fees paid to New Bridge Street in respect of work carried out in the 12 months to 31 March 2014 totalled £40,000. What are the terms of appointment of the non-executive directors? IMPLEMENTATION OF POLICY FOR 2013/14 The chairman and non-executive directors’ terms of appointment are recorded in letters of appointment. The required notice from the Company is one month in all cases. The non-executive directors are not entitled to any compensation on loss of ofﬁce. Shareholding guideline Executive directors are required to retain shares acquired under equity incentive schemes until such time they have built up a holding equivalent in market value (at the date of vesting) to the executive’s base salary. Thereafter, the executive directors will be under a continuing obligation to maintain at least such a holding. The requirement underscores the committee’s policy to align executive director remuneration and shareholder interests. ANNUAL REPORT ON REMUNERATION In this section, we report on the implementation of our policies in the year ended 31 March 2014 as well as how the policy will be implemented for 2014/15. Remuneration committee Membership, meetings and attendance The Group has an established remuneration committee which is constituted in accordance with the recommendations of the UK Corporate Governance Code. The members of the remuneration committee who served during the year are shown below together with their attendance at remuneration committee meetings: Number of meetings attended Keith Elliott (chairman) Toby Hayward Chris Holt 4/4 4/4 4/4 The Group considers all members of the committee to be independent. Executive directors may attend remuneration committee meetings at the invitation of the committee chairman, but do not take part in any discussion about their own remuneration. The terms of reference for the remuneration committee are available from the Company secretary. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance74 Directors’ remuneration report continued Directors’ earnings for the 2013/14 ﬁnancial year (audited) Remuneration received by the directors £000 Salary Bonus Fees Benefits Pension LTIPs TOTAL Year ended 31 March 2014 Executives Ian Lawson (from 1/11/13)2 John Dodds (until 1/11/13)1 Ian Cochrane (from 5/6/13) Peter Emerson (until 5/6/13) Alan Dunsmore Derek Randall Non-executives John Dodds (from 1/11/13)1 Toby Hayward4 Keith Elliott4 Chris Holt3 Total 146 204 227 81 226 226 — — — — 1,110 50 85 169 — — — — — — — 304 — — — — — — 42 60 60 45 207 8 — 1 4 25 8 — — — — 46 29 — 41 — 50 50 — — — — 170 — — — — — — — — — — — 233 289 438 85 301 284 42 60 60 45 1,837 Taxable benefits include the provision of company cars, fuel for company cars, car allowances and private medical insurance. PSP awards reflect those vesting based on performance to 31 March 2014. 1. John Dodds operated as executive chairman until 1 November 2013 when he reverted to his previous role of non-executive chairman. The salary he received as an executive director and the fees he received as a non-executive director have been disclosed separately. Ian Lawson has reached his lifetime pension limit and receives a cash alternative of 20 per cent of basic salary in lieu of pension contributions. 2. 3. Chris Holt served as chairman of the nomination committee for part of the year for which he was paid an additional fee of £5,000. 4. Retired from the board on 18 July 2014. £000 Salary Bonus Fees Benefits Pension LTIPs TOTAL 15 month period ended 31 March 2013 Executives Tom Haughey (until 23/1/13)1 John Dodds (from 23/1/13)2 Peter Emerson (until 5/6/13) Alan Dunsmore Derek Randall Non-executives John Dodds (until 23/1/13)2 Toby Hayward Keith Elliott Chris Holt Geoff Wright (until 31/12/12) Total 367 61 341 281 281 — — — — — 1,331 — — — — — — — — — — — — — — — — 99 75 75 51 45 345 29 1 32 32 34 — — — — — 128 54 — — 63 63 — — — — — 180 — — — — — — — — — — — 450 62 373 376 378 99 75 75 51 45 1,984 Taxable benefits include the provision of company cars, fuel for company cars, car allowances and private medical insurance. PSP awards reflect those vesting based on performance to 31 March 2013. 1. Tom Haughey received compensation for loss of office of £423,000 (which includes pension contributions and other taxable benefits of £82,000) on his resignation as chief executive officer on 23 January 2013. These payments represent amounts to which the Group was contractually obliged. 2. John Dodds operated as non-executive chairman from 1 January 2012 until 23 January 2013 when he was appointed executive chairman. The fees he received as a non-executive director and the salary he received as an executive director have been disclosed separately. Past directors/loss of office payments (audited) There have been no payments made to past directors (including Peter Emerson) or any payment for loss of office. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201475 In the case of John Dodds and as reported last year his agreement included for a performance related bonus of £50,000 payable on transition to a permanent chief executive officer, which occurred on 1 November 2013. Given that he performed the executive duties for longer than anticipated (i.e. a period of over nine months) and to reflect his exceptional performance during that time he was paid a cash bonus of £85,000. When making this determination the committee considered his leadership and performance during a difficult time for the Company, in particular in driving the Company through a successful rights issue and rebuilding the balance sheet. PSP No PSP awards vested in 2013/14. The 2011 PSP award was subject to an EPS performance condition measured over the three financial years ended 31 March 2014. The minimum EPS figure required for vesting of 25 per cent of the award was 6.51p (as adjusted after the rights issue in March 2013) which equates to a PBT of c.£24m. This target was not achieved and the awards have lapsed. Given that Ian Lawson was only in post for the final five months of the financial year, it was not felt appropriate to measure the financial element of the bonus against a budget PBT set at the beginning of the year. Therefore, the financial element of Ian Lawson’s bonus (80 per cent of the maximum)was set against a combination of personal and business objectives which related to completing the restructuring of the business for growth and establishment of a new management team. The element subject to the AFR target was not met and therefore is not payable. The committee took a broad assessment of performance against the personal and business objectives and determined that a prorated bonus of £50,000 (or 42.9 per cent of the maximum for this element of the bonus) was payable, of which 50 per cent would be paid in shares deferred for three years. In the case of Ian Cochrane, his role and responsibilities as Group chief operating officer from appointment on 5 June 2013, were defined as excluding India. Therefore, the committee set his PBT performance target based on the PBT budget for the Group excluding India. As actual UK PBT exceeded the target by over 17 per cent the remuneration committee determined that he should be paid 93.5 per cent of this element of his bonus pro rata for the period that he served in that capacity (i.e. 300 out of 365 days in the financial year). The element subject to the AFR target was not met and therefore would not be payable. The calculation of his bonus was accordingly that £169,068 was payable of which 50 per cent of the bonus would be paid in shares deferred for three years. How pay linked to performance in 2013/2014 Bonus The past year has been one of transition for the Group as the balance sheet was rebuilt, the executive team strengthened and the business restructured. This is reflected in the decisions reached by the committee with respect to the bonuses paid to the executive directors. No bonus was awarded to Derek Randall or Alan Dunsmore. Ian Lawson and Ian Cochrane received a bonus of £50,000 and £169,068 respectively, of which 50 per cent has been paid in shares deferred for three years. John Dodds was paid a bonus of £85,000 in relation to his interim executive position. As reported last year the bonus plan applicable to the executive directors at the time (Alan Dunsmore and Derek Randall) had two separate performance conditions. Eighty per cent was payable based on achieving Group-wide budget PBT with the entry point being 95 per cent of Group- wide budget PBT, rising to 50 per cent of this element being payable for achieving budget and full payout for achieving 120 per cent of budget. Actual Group-wide PBT of £4m was not sufficient to meet the budget set at the beginning of the year so this element of the bonus was not earned. Twenty per cent was payable based on achieving a target AFR. The actual AFR at the year-end was higher than the target so this element was not earned either. The budget PBT and the AFR target and actual result are considered to be commercially sensitive as they could be used by non-listed peers to gain a competitive advantage and therefore have not been disclosed. If commercial concerns are alleviated in the future, the committee will disclose the targets and actual performance. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance76 Directors’ remuneration report continued PSP awards granted to directors in 2013/14 (audited) Share awards were made in the year under the PSP scheme for the three year period expiring on 31 March 2016. Details of the awards made to the executive directors are summarised below. Type No. of shares Ian Lawson Ian Cochrane Alan Dunsmore Derek Randall Nil-cost option Nil-cost option Nil-cost option Nil-cost option 549,020 429,688 353,359 353,359 Face value1 (Percentage of salary) Performance condition2 Performance period £350,000 £206,250 £169,613 £169,613 (100%) (75%) (75%) (75%) EPS 3 financial years ending 31 March 2016 % receivable for minimum performance 25% 1. Face value calculated based on the pre-grant date share price of 48p on 5 June 2013 for all except Ian Lawson which was based on the pre-grant date share price of 63.75p on 31 October 2013. 2. Performance conditions for all these awards are aligned, with an EPS range from 2.15p (minimum performance — 25 per cent of award vests) to 4.87p (maximum performance — 100 per cent of award vests) with linear interpolation in between. This equates to a likely PBT range of c.£8m to £17m. Outstanding share awards at the year-end (audited) Details of share awards under the PSP to anyone who was an executive director during 2013/14 and which were outstanding at the year-end are shown in the following tables: Performance condition* No. of shares at 31 March 20132 Shares granted in year Shares lapsed in year Shares vested in year No. of shares at 31 March 2014 Outstanding share awards Year of award Ian Lawson Ian Cochrane Ian Cochrane Ian Cochrane Ian Cochrane Ian Cochrane total Alan Dunsmore Alan Dunsmore Alan Dunsmore Alan Dunsmore Alan Dunsmore total Derek Randall Derek Randall Derek Randall Derek Randall Derek Randall total Peter Emerson Peter Emerson Peter Emerson Peter Emerson total3 2013 2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 2013 2010 2011 2012 Vesting date1 (June) 2016 2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 2016 2013 2014 2015 EPS EPS EPS EPS EPS EPS EPS EPS EPS EPS EPS EPS EPS EPS EPS EPS — 70,686 120,058 153,181 — 343,925 125,613 213,350 272,209 — 611,172 70,686 213,350 272,209 — 556,245 151,471 298,427 328,248 778,146 549,020 — — — 429,688 429,688 — — — 353,359 353,359 — — — 353,359 353,359 — — — — — 70,686 — — — 70,686 125,613 — — — 125,613 70,686 — — — 70,686 151,471 — — 151,471 * Performance conditions are all based on a range of EPS targets as follows: 2011 2012 2013 — — — — — — — — — — — — — — — — — — — 549,020 — 120,058 153,181 429,688 702,927 — 213,350 272,209 353,359 838,918 — 213,350 272,209 353,359 838,918 — 298,427 328,248 626,675 Threshold (25% vests) Maximum (100% vests) 6.51p 6.51p 2.15p 13.01p 11.71p 4.87p 1. 2010 awards lapsed in June 2013 and 2011 awards lapsed in June 2014. 2. 2011 and 2012 awards were adjusted in August 2013 to take account of the dilutive impact of the rights issue. 3. Peter Emerson retired on 5 June 2013 and was treated as a good leaver under the PSP rules whereby his awards will be allowed to vest subject to performance being tested at the end of the performance period and prorated to reflect his period of employment. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201477 The directors’ current shareholdings (audited): The following table provides details on the directors’ beneficial interests in the Company’s share capital as at 31 March 2014: John Dodds Ian Lawson (from 1/11/13) Ian Cochrane (from 5/6/13) Alan Dunsmore Derek Randall Keith Elliott Toby Hayward Chris Holt Number1 228,833 82,431 2,708,979 50,000 50,000 383,088 100,000 35,240 SIP2 — — 7,154 7,154 4,667 — — — PSP3 — 549,020 702,927 838,918 838,918 — — — Total4 228,833 631,451 3,419,060 896,072 893,585 383,088 100,000 35,240 Includes shares owned by connected persons. 1. 2. SIP shares are unvested and held in trust. 3. PSP shares are in the form of conditional awards which will only vest if at all on the achievement of the performance conditions prescribed at date of grant. 4. As at 31 March 2014, in respect of the Company’s shareholding guideline referred to on page 73 Ian Cochrane satisfies the guideline. The other executive directors will be required to retain a proportion of any net of tax shares which may vest from equity based plans until the guideline is achieved. Position against dilution limits Severfield plc complies with the ABI Principles of executive remuneration. These principles require that commitments under all of the Company’s share ownership schemes (including the SIP and the PSP) must not exceed ten per cent of the issued share capital in any rolling ten year period. The Company’s position against its dilution limit as at 31 March 2014 was well under the maximum ten per cent limit at 2.17 per cent. Performance graph The following graph shows the Group’s performance, measured by total shareholder return, compared with the performance of the FTSE Small Cap Index. It is based on the change in the value of a £100 investment made on 31 March 2009 over the five-year period ended 31 March 2014. This index was selected as it represents a broad equity market index and an appropriate comparator group of companies over the period. 200 150 100 50 0 Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 FTSE Small Cap Index Severfield plc 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance78 Directors’ remuneration report continued Chief executive officer remuneration change The table below shows the total remuneration ﬁgure for the chief executive officer role over the same ﬁve year period. Performance pay includes bonus and the value of PSP awards vesting in relation to performance that ended that year (at the share price at which they vested). The figures for 2013 and 2014 reflect the fact that from 23 January 2013 to 31 October 2013 John Dodds acted as executive chairman and that financial year 2013 was a 15 month period. 2009 Tom Haughey 2010 Tom Haughey 2011 Tom Haughey 2013‡ 2013 2014 2014 Tom Haughey John Dodds* John Dodds* Ian Lawson† Total remuneration (£000) Annual bonus (%) LTIP vesting (%) 1,265 94.8% 100.0% 640 50.1% 0.0% 701 60.5% 0.0% 450 0.0% 0.0% 62 N/A N/A 289 N/A N/A 233 34.0% N/A * John Dodds was appointed executive chairman in an interim capacity following Tom Haughey’s resignation as chief executive officer on 23 January 2013 and prior to the appointment of Ian Lawson as chief executive officer on 1 November 2013. During this time he was awarded a discretionary bonus (no maximum was set) but not entitled to any PSP award. These figures do not include his fees as non-executive chairman. † Appointed on 1 November 2013. ‡ Tom Haughey also received compensation for loss of office in accordance with his contract of £423,000. How the change in chief executive officer pay for the years compare to that for the Company’s employees The table below shows the percentage change in salary, beneﬁts and annual bonus earned between the year ended 31 March 2014 and the 15 month period ended 31 March 2013 for the chief executive officer compared to the percentage change of each of those components of pay for a group of employees. The committee has selected salaried employees in mainland UK as this geography provides the most appropriate comparator. Chief executive officer Salary Benefits Bonus Average employees Salary Benefits Bonus 2014 £000 350 8 135 13,301 1,206 665 2013 £000 428 30 — 15,691 1,707 107 % change -18.2% -73.3% N/A -15.2% -29.3% 519.6% Relative importance of spend on pay The following table shows the actual spend on pay for all employees relative to revenue and underlying operating profit before the results of JVs and associates: Staff costs Revenue Underlying operating profit/(loss) Distribution to shareholders 2014 £000 50,551 231,312 7,621 — 2013* £000 66,967 318,256 (19,218) 4,462 % change -24.5% -27.3% 139.6% -100.0% * The comparative period represents the 15 month period ended 31 March 2013. Shareholder voting The results below show the response to the 2013 AGM shareholder voting for the directors’ 2013 remuneration report: For Against Total votes cast (for and against) Withheld votes Total votes (including withheld votes) Total number of votes1 % of votes cast 238,538,261 234,977 238,773,238 1,699,902 240,473,140 99.9% 0.1% 100% N/A N/A 1. A vote abstention is not a vote in law and is not counted in the calculation of the proportion of votes cast ‘for’ and ‘against’ a resolution. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201479 IMPLEMENTATION OF POLICY FOR 2014/15 The executive directors’ current salaries Following a review in April 2014 the committee determined that salary increases of 2.25 per cent would be made to executive directors, effective 1 July 2014. These increases are aligned with the overall salary increase budget for the wider workforce. The executive directors’ salaries for the 2014/15 ﬁnancial year are as follows: £ Ian Lawson Ian Cochrane Alan Dunsmore Derek Randall 1. Or on appointment. Benefits and pension 1 July 2014 salary 1 July 2013 salary1 357,900 281,200 231,250 231,250 350,000 275,000 226,150 226,150 Change +2.25% +2.25% +2.25% +2.25% All executive directors will be entitled to a car allowance of £15,000 (chief executive officer: £18,000), a fuel allowance, life insurance cover and medical insurance. A pension contribution of £50,000 will be offered to each executive director, with the exception of Ian Lawson who will be offered 20 per cent of basic salary. Rewards for performance in 2014/2015 Bonus The annual bonus for 2014/2015 will operate on the same basis as for 2013/2014 (although all directors will be subject to Group-wide targets)* and will be consistent with the policy detailed in the remuneration policy section of this report in terms of the maximum bonus opportunity, deferral and clawback provisions. The measures have been selected to reﬂect a range of ﬁnancial and operational goals that support the key strategic objectives of the Group. The performance measures and weightings will be as follows: Profit performance-based component — 80 per cent The sliding scale range for bonus targets in 2014/15 is as follows: Maximum bonus based on actual PBT versus budget PBT % of budget 95 or below 100 120 or better % of award — 50 100 The committee believes that the budget PBT figures are commercially sensitive metrics and therefore are not disclosed at this time. Actual target figures will be disclosed on a retrospective basis when these sensitivities have been removed. * Whilst Derek Randall remains in India the profit performance-based component of his bonus will be split 50/50 between PBT (UK) and PBT (India). Other performance-based component — 20 per cent AFR (accident frequency ratio) will again be used throughout the Group.† AFR is an industry recognised and measurable target. The pre-set targets have not been disclosed due to commercial sensitivities. Actual target figures will be disclosed on a retrospective basis when these sensitivities have been removed. † Whilst Derek Randall remains in India the AFR component of his bonus will be based on AFR (India). 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance80 Directors’ remuneration report continued PSP It is the committee’s intention to grant PSP awards of 100 per cent of salary for the chief executive officer and 75 per cent of salary for other executive directors. This year we will set a performance condition for a three year period commencing on 1 April 2014 and ending on 31 March 2017. While we have a good order book, an extensive prospects list and a strong balance sheet helped by the successful rights issue in April 2013, the risks and uncertainties in a three year forecast are clearly substantial. At the lower threshold, below which no awards will vest, we have set a target EPS equivalent to PBT of £12m. If this level is achieved 25 per cent of the shares granted will vest. At the higher end the target EPS is set at EPS equivalent to PBT of £24m. If this is achieved, 100 per cent of the shares granted will vest. Vesting at EPS levels between the lower and upper thresholds will be calculated by linear interpolation. These targets will require management to deliver strong, sustainable performance over the period. How will the non-executive directors be paid in the 2014/15 ﬁnancial year? The fees for the chairman and non-executive directors will be as follows: £ Chairman1 Basic fee for other non-executive directors Fees for SID role2 Chairman of the audit, nomination and remuneration committees3 2015 85,000 40,000 5,000 5,000 2014 85,000 40,000 15,000 5,000 1. The figure for chairman reflects the basic agreed fee for the chairman and does not account for the actual payments made to John Dodds during 2013/14 due to his continued performance of the role of executive chairman from 1 April 2013 to 31 October 2013. 2. The lower figure represents the fee agreed with Kevin Whiteman for performance of the role from 19 July 2014 onwards. Keith Elliott’s fee is payable until his retirement on 18 July 2014. In 2014 Toby Hayward received a discretionary additional payment of £15,000 per annum as chairman of the audit committee. 3. Approval This report was approved by the board of directors and signed on behalf of the board. Keith Elliott Chairman of remuneration committee 11 July 2014 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201481 The directors consider that the annual report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s and the Group’s performance, business model and strategy. Each of the directors listed on pages 46 and 47 confirms that, to the best of their knowledge: • • the consolidated and parent company financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and the directors’ report on pages 61 to 63 includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the board Ian Lawson Chief executive officer 11 July 2014 Alan Dunsmore Group finance director Directors’ responsibilities statement The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare 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 accounts 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 the parent company financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. In preparing the consolidated financial statements, International Accounting Standard 1 requires that directors: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and • make an assessment of the Group’s ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Company to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur governance82 Severfield plc Annual report and accounts for the year ended 31 March 2014 ® 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.com Stock code: SFR Our financials 83 83 ® Our financials Independent auditor’s report Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the consolidated financial statements Five year summary Financial calendar 84 87 88 89 90 91 92 121 121 Project: London Bridge Station Location: London Tonnage: 4,000 Client: Network Rail Main contractor: Costain Completion: 2018 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials84 Independent auditor’s report to the members of Severfield plc Opinion on financial statements of Severfield plc In our opinion: • • • • the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 March 2014 and of the Group’s loss for the year then ended; the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The Group financial statements comprise the consolidated income statement, the consolidated statement of changes in equity, the consolidated balance sheet, the consolidated statement of comprehensive income, the consolidated cash flow statement and the related notes 1 to 32. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The parent company financial statements comprise the parent company balance sheet and the related notes 1 to 15. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Going concern As required by the Listing Rules we have reviewed the directors’ statement contained within the strategic report on page 31 that the Group is a going concern. We confirm that: • we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate; and • we have not identified any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Risk How the scope of our audit responded to the risk Contract valuation, revenue and profit recognition in relation to the final outcome of material construction contracts We have focused our audit procedures on material contracts based on the following principal criteria: The judgements made in relation to the stage of completion of contracts including: the recoverability of unagreed variations and claims; the estimates of future costs to complete; and • • • a) the balance sheet carrying value; b) the contribution to profit in the year; c) the stage of completion; d) the value at risk identified by management; and e) our assessment of the degree of judgement involved in the the outcome of other uncertain future events can have a material impact on the financial statements. contract accounting. We have: • reviewed the design and implementation of management’s internal controls over contract accounting; and • performed the following substantive audit procedures: agreed revenue recognised on contracts to evidence of third party certifications and cash receipts; challenged management on any revenues recognised which exceed the certified revenue, particularly in relation to unagreed variations and claims, and on their estimates of future costs to complete. This included the inspection of variation instructions, enquiries of quantity surveyors and contract managers, liaison with internal and external legal advisers, review of the detailed forecast cost to complete schedules, including agreeing estimates of future costs and critical assumptions to supporting evidence, such as agreed third party quotes for site work and materials price lists; performed a retrospective review of previous judgements on contracts to understand the historical forecasting accuracy; and performed a review of subsequent events on contracts that may have a material impact on the financial statements up to the date of signing this auditor’s report. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201485 Risk How the scope of our audit responded to the risk Impairment of goodwill and other non-current assets We have: The consolidated balance sheet includes: • goodwill and intangible assets of £63.9m; • • the investment in the Indian joint venture of £3.3m; and the fair value of a financial guarantee associated with the Indian joint venture of £2.2m. Management has made its annual assessment of the impairment risk in relation to these carrying values, which includes a number of important judgements on uncertain future events. The most subjective judgements relate to the forecast financial performance of the cash-generating units (‘CGU’), including the growth rates, operating margins and the appropriate discount rates for future cash flows. • assessed management’s assumptions (described in notes 11 and 15 to the financial statements) included in its impairment model for goodwill and intangible assets, and the joint venture. These include the trading and cash flow projections, the growth and perpetuity rates and the discount factors applied; • compared these to external medium term growth rate projections for the UK and India, the historical trading and cash flow performance of the business units, and the discount rates of relevant comparator companies; • taken into account the Group’s historical budgeting accuracy, including comparing the operating profit margin assumed in the order book with historical performance and reviewing the prospects list and conversion assumptions with the historical performance of the business units. The audit committee’s consideration of these risks is set out on page 59. Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters. Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. In recent years the Group has reported both profits and losses, and has made adjustments to highlight non-underlying items included in its statutory results. In the absence of a stable profit base, we have used Group revenue to determine materiality of £1m by applying 0.5 per cent to turnover for the year. We also sense-checked this materiality threshold by reference to the scale of underlying profits and losses in recent years and the directors’ expectation of future profits. We agreed with the audit committee that we would report to the committee all audit differences in excess of £20,000, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the audit committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. The Group and parent company audits are performed at the Group’s head office at Dalton, North Yorkshire. All of the subsidiaries are based in three locations in the UK, together with a joint venture based in India and an associate based in South Yorkshire. Full scope audits are completed on all the businesses located in the UK. The joint venture is audited by Deloitte Mumbai and is a full scope audit to a component materiality. The associate business is scoped out of our Group audit procedures on the grounds of materiality. The audits of the UK subsidiaries were executed to a component materiality which is less than Group materiality. The Group audit team continued to follow a programme of planned visits that has been designed so that the senior statutory auditor attends the principal financial reporting locations in the UK and the Indian joint venture each year including attendance at the audit close meetings. 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 strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: • we have not received all the information and explanations we require for our audit; or • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials86 Independent auditor’s report continued Respective responsibilities of directors and auditor Scope of the audit of the financial statements As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the 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. We also comply with International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied. Our quality controls and systems include our dedicated professional standards review team and independent partner reviews. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. 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 and 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 and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Paul Feechan (Senior statutory auditor) for and on behalf of Deloitte LLP Chartered accountants and statutory auditor Newcastle, United Kingdom 11 July 2014 Directors’ remuneration Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and returns. We have nothing to report arising from these matters. Corporate governance statement Under the Listing Rules we are also required to review the part of the corporate governance statement relating to the Company’s compliance with nine provisions of the UK corporate governance code. We have nothing to report arising from our review. Our duty to read other information in the annual report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • otherwise misleading. In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit and the directors’ statement that they consider the annual report is fair, balanced and understandable and whether the annual report appropriately discloses those matters that we communicated to the audit committee which we consider should have been disclosed. We confirm that we have not identified any such inconsistencies or misleading statements. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201487 Consolidated income statement Year ended 31 March 2014 Before other items 2014 £000 Note Other items 2014 £000 Total 2014 £000 Before other items 2013 £000 Other items 2013 £000 Total 2013 £000 3 231,312 — 231,312 318,256 — 318,256 (217,830) (2,017) (219,847) (330,945) 13,482 541 (2,432) (3,970) (2,017) 11,465 (12,689) — (79) (5,633) 541 (2,511) (9,603) 993 (2,912) (4,610) (1,766) (1,766) — — (332,711) (14,455) 993 (2,912) (5,664) (10,274) Continuing operations Revenue Cost of sales Gross profit/(loss) Other operating income Distribution costs Administrative expenses Movements in the valuation of derivative financial instruments Operating profit/(loss) before share of results of JVs and associates Share of results of JVs and associates Operating profit/(loss) Finance income Finance expense Profit/(loss) before tax Taxation Profit/(loss) for the period attributable to the equity holders of the parent 4 7 7 8 — — — — 104 104 (108) (19,218) (7,326) (26,544) (310) — (310) (19,528) (7,326) (26,854) 7,621 (3,038) 4,583 7 (565) 4,025 (1,427) (7,729) (353) (8,082) — — (8,082) 2,844 (3,391) (3,499) 7 (565) 10 (2,014) (4,057) (21,532) 1,417 3,057 — — (7,326) 2,674 10 (2,014) (28,858) 5,731 2,598 (5,238) (2,640) (18,475) (4,652) (23,127) Earnings per share:* Basic Diluted 10 10 0.88p 0.88p (1.77p) (1.77p) (0.89p) (0.89p) (10.78p) (10.78p) (2.71p) (2.71p) (13.49p) (13.49p) * Earnings per share for the period ended 31 March 2013 has been restated to take account of the impact of the discount element of the rights issue which completed in April 2013 (see note 10). The comparative period represents the 15 month period ended 31 March 2013. Further details of other items are disclosed in note 5 to the consolidated financial statements. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials88 Consolidated statement of comprehensive income Year ended 31 March 2014 Actuarial loss on defined benefit pension scheme* Tax relating to components of other comprehensive income* Other comprehensive income for the period Loss for the period from continuing operations Total comprehensive income for the period attributable to equity holders of the parent * These items will not be subsequently reclassified to the consolidated income statement. Note 30 20 Year ended 31 March 2014 £000 Period ended 31 March 2013 £000 (1,261) (101) (1,362) (2,640) (2,824) 458 (2,366) (23,127) (4,002) (25,493) 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014Consolidated balance sheet At 31 March 2014 Assets Non-current assets Goodwill Other intangible assets Property, plant and equipment Investment property Interests in JVs and associates Deferred tax asset Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Current liabilities Trade and other payables Financial liabilities — borrowings Financial liabilities — finance leases Current tax liabilities Non-current liabilities Retirement benefit obligations Financial liabilities — finance leases Deferred tax liabilities Total liabilities Net assets Equity Share capital Share premium Other reserves Retained earnings Total equity 89 At 31 March 2014 £000 At 31 March 2013 £000 Note 11 12 13 13 15 20 16 18 19 21 21 30 21 20 23 24 54,712 9,845 74,128 3,870 3,315 1,780 54,712 15,100 76,141 3,910 3,168 1,840 147,650 154,871 5,842 60,801 5,525 72,168 219,818 8,214 71,599 671 80,484 235,355 (51,322) (5,000) (181) (1,422) (70,894) (41,461) (194) 5 (57,925) (112,544) (12,533) (11,811) (25) (5,937) (18,495) (76,420) (206) (8,393) (20,410) (132,954) 143,398 102,401 7,437 85,702 770 49,489 143,398 2,231 46,152 527 53,491 102,401 The consolidated financial statements were approved by the board of directors on 11 July 2014 and signed on its behalf by: Ian Lawson Chief executive officer Alan Dunsmore Group finance director 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials 90 Consolidated statement of changes in equity Year ended 31 March 2014 At 1 April 2013 Loss for the year (attributable to equity holders of the parent) Proceeds from shares issued Equity settled share-based payments Actuarial loss on defined benefit pension scheme Deferred income taxes on defined benefit pension scheme At 31 March 2014 Note 22 30 20 Share capital £000 2,231 — 5,206 — — — Share premium £000 46,152 — 39,550 — — — 7,437 85,702 Other reserves £000 527 — — 243 — — 770 Retained earnings £000 53,491 (2,640) — — Total equity £000 102,401 (2,640) 44,756 243 (1,261) (1,261) (101) (101) 49,489 143,398 The increase in share capital and share premium reflect the 7:3 rights issue of 208,252,511 new ordinary shares at 23p per share which was approved by shareholders on 18 March 2013. The rights issue completed on 5 April 2013, with the Group receiving net proceeds of £44,756,000 consisting of gross proceeds of £47,898,000 offset by transaction costs of £3,142,000. At 1 January 2012 Loss for the period (attributable to equity holders of the parent) Dividends paid Equity settled share-based payments Actuarial loss on defined benefit pension scheme Deferred income taxes on defined benefit pension scheme At 31 March 2013 Note 9 22 30 20 Share capital £000 2,231 Share premium £000 46,152 Other reserves £000 469 — — — — — — — — — — 2,231 46,152 — — 58 — — 527 Retained earnings £000 83,446 (23,127) (4,462) — Total equity £000 132,298 (23,127) (4,462) 58 (2,824) (2,824) 458 53,491 458 102,401 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014Consolidated cash flow statement Year ended 31 March 2014 Net cash flow from operating activities Cash flows from investing activities Interest received Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Purchases of intangible fixed assets Investment in JVs and associates Net cash used in investing activities Cash flows from financing activities Interest paid Dividends paid New finance leases Repayment of obligations under finance leases New borrowings Repayment of borrowings Proceeds from shares issued Net cash generated from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 91 Year ended 31 March 2014 £000 2,522 Period ended 31 March 2013 £000 804 Note 25 7 746 (2,218) — (3,538) (5,003) (766) — — (194) 5,000 (41,461) 44,756 7,335 4,854 671 5,525 10 1,343 (2,311) (402) (3,031) (4,391) (1,687) (4,462) 275 (230) 8,098 — — 1,994 (1,593) 2,264 671 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials92 Notes to the consolidated financial statements Year ended 31 March 2014 1. Significant accounting policies General information Severfield plc (‘the Company’) is a Company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is provided on page 130. The registered number of the Company is 1721262. The nature of the Group’s operations and its principal activities are set out on pages 8 to 17. These financial statements are presented in sterling which is the currency of the primary economic environment in which the Group operates. Basis of accounting The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have also been prepared in accordance with IFRS adopted for use in the European Union and therefore comply with Article 4 of the EU IAS Regulation. The consolidated financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. The principal accounting policies adopted are set out below. During the year certain new standards and a number of amendments to IFRS became effective. These are IFRS 13, ‘Fair value measurement’, IAS 36 (amended), ‘Recoverable amount disclosures for non-financial assets’, amendments to IAS 19, ‘Employee benefits’, amendments to IAS 1, ‘Presentation of financial statements’ and amendments to IFRS 7, ‘Financial instruments: disclosures’. The Group has considered the above new standards and amendments and has concluded that they are either not relevant to the Group or that they do not have a significant impact on the Group’s financial statements. The Group has not applied the amended IAS 19 retrospectively since the impact on the prior accounting period is not significant but has instead disclosed the financial impact in the paragraphs below. The changes to the standard require the Group to calculate its annual pension charge as the current service cost plus or minus the discount rate applied to the net pension liability. This replaces the previous calculation which was the current service cost, plus the unwinding of the discount rate on liabilities, less the expected return on plan assets. In effect, this requires the Group to replace its long-term rate of return on assets assumption with its discount rate. The retrospective application would result in an increase in operating profit of £87,000 in the 15 month period ended 31 March 2013 with a corresponding adjustment to the actuarial movement on the retirement benefit liability recorded in the consolidated statement of comprehensive income. There is, therefore, no balance sheet impact. A number of other new and amended IFRS were issued during the year which do not become effective until after 31 March 2014. These include IFRS 9, ‘Financial instruments’, IFRS 10, ‘Consolidated financial statements’, IFRS 11, ‘Joint arrangements’ and IFRS 12, ‘Disclosures of interests in other entities’. None of the new and amended standards have been adopted early by the Group and none of the new and amended standards are likely to have a significant impact on the Group’s future results. Going concern After making enquiries, the directors have formed a judgement at the time of approving the consolidated financial statements that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt the going concern basis in preparing the consolidated financial statements. The key factors considered by the directors in making the statement are set out within the financial review on pages 28 to 31. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and the entities controlled by the Company made up to the reporting date each year. Control is achieved where the Company has the power over the investee, is exposed or has rights to variable return from its involvement with the investee and has the ability to use its power to affect its returns. Where relevant, the results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201493 1. Significant accounting policies continued Other items Other items have been separately identified to provide a better indication of the Group’s underlying business performance. They are not considered to be ‘business as usual’ items and have a varying impact on different businesses and reporting periods. They have been separately identified as a result of their magnitude, incidence or unpredictable nature. These non-underlying items are presented as a separate column within their related consolidated income statement category. Their separate identification results in the calculation of an underlying profit measure in the same way as it is presented and reviewed by management. Items that may give rise to classification as non-underlying include, but are not limited to, restructuring items, the amortisation of acquired intangible assets, movements in the valuation of derivative financial instruments, the costs of refinancing the Group’s credit facilities and certain non-recurring legal and consultancy costs. Restructuring items include income and expenses arising from Group restructuring activities including redundancy costs, onerous contract and lease provisions and asset gains and impairments. Further details of other items are disclosed in note 5 to the consolidated financial statements. Business combinations The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition related costs are expensed as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 are recognised at their fair value at the acquisition date. Investments in joint ventures and associates An associated company is an entity over which the Group is in a position to exercise significant influence, but not control, through participation in the financial and operating policy decisions of the investee. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control over those policies. A joint venture is an entity over which the Group is in a position to exercise joint control. The Group has adopted the equity method of accounting (as discussed below) for joint ventures and associated companies (together ‘JVs and associates’), in accordance with IAS 31. The results and assets and liabilities of JVs and associates are incorporated in these financial statements using the equity method of accounting unless it meets the exceptions described in IAS 28. Investments in JVs and associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group’s share of their net assets, less any impairment in the value of individual investments. Losses in excess of the Group’s interest in those JVs and associates are not recognised unless, and only to the extent that, the Group has incurred legal or constructive obligations on their behalf. Any excess of the cost of acquisition over the Group’s share of the fair values of the identifiable net assets of the JVs and associates at the date of acquisition is recognised as goodwill. Any deficiency of the cost of acquisition below the Group’s share of the fair values of the identifiable net assets of the JVs and associates at the date of acquisition (i.e. discount on acquisition) is credited in the consolidated income statement in the period of acquisition. The consolidated income statement includes the Group’s share of the JVs and associates profit less losses while the Group’s share of the net assets of the JVs and associates is shown in the consolidated balance sheet. Goodwill The Group recognises goodwill at cost less accumulated impairment losses. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately as a loss and is not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Negative goodwill arising on acquisition is recognised immediately in the consolidated income statement. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials94 Notes to the consolidated financial statements continued 1. Significant accounting policies continued Revenue recognition Revenue is measured at the fair value of the consideration received or receivable for goods and services provided, net of sales taxes, rebates and discounts, after eliminating revenue within the Group. Revenue from construction contracts is recognised in accordance with the Group’s accounting policy on construction contracts (see below). Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. Construction contracts Revenue represents the gross value of work performed (including retentions) during the reporting period and is normally determined by qualified management assessment, taking into account customer certifications to date. The general principles for profit recognition are as follows: • Revenues on contracts are recognised on a percentage of completion basis when the contract’s outcome can be estimated reliably. • Provision is made for total losses incurred or foreseen in bringing the contract to completion as soon as they become apparent. • Variations are included in forecast contract revenues when it is considered probable that the customer will approve the variation and the amount of revenue arising from the variation, and the amount of revenue can be reliably measured. • Incentive payments are included in forecast contract revenues when the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of the incentive payment can be reliably measured. • Claims receivable are recognised as income when negotiations have reached an advanced stage such that it is probable that the customer will accept the claim, and the amount that it is probable will be accepted by the customer can be measured reliably. • Rectification work which is reasonably foreseeable is provided for as a cost of the contract and taken into account when assessing its overall profitability. Claims for rectification arising after the end of a contract and which have not been provided for, are recognised as losses as they arise. When determining whether a contract’s outcome can be estimated reliably, management considers a number of indicators including the stage of completion of the contract to provide assurance over the reliability of costs to complete, cumulative cash received and agreed certifications, the inherent risk in certain industry sectors and whether certain contract milestones have been satisfied. All costs relating to contracts are recognised as expenses in the period in which they are incurred, except where they relate to future activity on a contract, in which case they are recognised as an asset provided it is probable that they will be recovered. Where the outcome of a contract cannot be reliably estimated, contract revenue is recognised only to the extent that contract costs incurred are expected to be recovered. Percentage of completion is determined by reference to the contract costs incurred to date (the proportion that estimated total contract costs are accounted for by contract costs incurred for work performed to date). Only those contract costs that reflect work performed are included in costs incurred to date. Total expected contract costs are initially determined by the estimating function during the contract tender process. At launch, responsibility for the contract is handed over to the commercial function (consisting of qualified quantity surveyors) which, on an ongoing basis, reassesses the expected contract costs as the contract progresses, taking into account the risks identified in contract risk registers. The assessment of the final outcome of each contract is determined by regular review of the revenues and costs to complete that contract. Regular monthly contract reviews form an integral part of the contract forecasting procedures. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201495 1. Significant accounting policies continued Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Amounts payable under operating leases are charged to the income statement on a straight-line basis over the lease term. Property, plant and equipment acquired under finance leases are capitalised in the balance sheet at fair value and depreciated in accordance with the Group’s accounting policy. The capital element of the leasing commitment is included as obligations under finance leases. The rentals payable are apportioned between interest, which is charged to the income statement, and capital, which reduces the outstanding obligation. Retirement benefit obligations The Group operates two defined contribution pension schemes and costs of these schemes are charged to the income statement in the period in which they are incurred. The Group has a defined benefit scheme which is now closed. The liability in respect of this scheme is the present value of the defined benefit obligation at the balance sheet date, less the fair value of the plan assets. The finance cost of liabilities and interest income of assets are included within cost of sales in the consolidated income statement. The actuarial gain or loss is charged through the consolidated statement of comprehensive income and is made up of the difference between the expected return on assets and those actually achieved, the difference between the actuarial assumptions for liabilities and actual experience in the period and any changes in the assumptions used in the valuations. The pension scheme deficit is recognised in full and presented on the face of the consolidated balance sheet. The associated deferred tax asset is recognised within the net deferred tax liability within non-current liabilities in the consolidated balance sheet. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. These are determined based on future changes in tax rates that have been enacted rather than simply future changes that have been proposed but not enacted. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Dividends Dividends are recorded in the consolidated financial statements in the period in which they are declared, appropriately authorised and no longer at the discretion of the Company. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials96 Notes to the consolidated financial statements continued 1. Significant accounting policies continued Property, plant and equipment Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, and plant and machinery are currently stated at cost in the balance sheet. Depreciation on buildings is charged to income. Depreciation is provided on other property, plant and equipment to write off the cost of each asset over its estimated useful life at the following rates: Freehold buildings/investment properties Plant and machinery Fixtures, fittings and office equipment Computer equipment Motor vehicles Site safety equipment 1 per cent straight-line 10 per cent straight-line 10 per cent written down value 20 per cent straight-line 25 per cent written down value 20 per cent straight-line Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in income. Investment property Investment property, which is property held to earn rentals and/or for capital appreciation, is stated at cost less provision for impairment. Depreciation will be charged annually based on the Group’s stated depreciation policy together with an annual impairment review. Where properties have been impaired below cost and are being held at directors’ valuation the directors have taken appropriate external guidance on the likely current value of properties. No investment properties have been subject to formal external valuation. Intangibles The Group recognises intangible assets at cost less accumulated amortisation and impairment losses. Intangible assets acquired through acquisitions arise as a result of applying IFRS 3 which requires the separate recognition of intangible assets from goodwill. Other acquired intangible assets include software costs. Intangible assets are amortised on a straight-line basis over their useful economic lives as follows: Customer relationships Brands Know-how Software costs Amortisation period 10 years 25 years 10 years 7 years Impairment of tangible and intangible assets excluding goodwill At each balance sheet date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201497 1. Significant accounting policies continued Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual provisions of the instrument. Trade receivables Trade receivables are classified as loans and receivables, and therefore measured at amortised cost using the effective interest method. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for in the income statement using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest over the relevant period. Trade payables Trade payables are initially measured at fair value, and are subsequently measured at amortised cost. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. Share-based payment transactions The Group issues equity settled share-based payments. These share-based payments are measured at fair value at the date of grant based on the Group’s estimate of shares that will eventually vest. The fair value determined is then expensed in the consolidated income statement on a straight-line basis over the vesting period, with a corresponding increase in equity. Further details regarding the determination of the fair value of equity settled share-based transactions are set out in note 22. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date, and, as appropriate, are discounted to present value where the effect is material. Derivative financial instruments The Group enters into certain foreign exchange forward contracts to manage its exposure to currency movements. Further details of derivative financial instruments are disclosed in note 21. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials98 Notes to the consolidated financial statements continued 2. Critical accounting judgements and estimates The preparation of financial statements under IFRS requires management to make judgements, assumptions and estimates that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expense. Actual results may differ from these estimates. Assumptions and estimates are reviewed on an ongoing basis and any revisions to them are recognised in the period in which they are revised. The following items are those that management consider to be critical due to the level of judgement and estimation required: Revenue and profit recognition Recognition of revenue and profit is based on judgements made in respect of the ultimate profitability of a contract. Such judgements are arrived at through the use of estimates in relation to the costs and value of work performed to date and to be performed in bringing contracts to completion. These estimates are made by reference to recovery of pre-contract costs, surveys of progress against the construction programme, changes in work scope, the contractual terms under which the work is being performed, including the recoverability of any unagreed income from variations and the likely outcome of discussions on claims, costs incurred and external certification of the work performed. The Group has appropriate internal control procedures over the determination of each of the above variables to ensure that profit take as at the balance sheet date and the extent of future costs to contract completion are reasonably and consistently determined and subject to appropriate review and authorisation. Impairment of goodwill and other non-current assets Goodwill is tested at least annually for impairment, along with the finite life intangible assets and other assets of the Group’s cash-generating units. As a result of the significant loss recorded during the year, the Group’s investment in its Indian joint venture has also been reviewed for impairment. Determining whether goodwill or other non-current assets are impaired requires an estimation of the value in use of the business being tested for impairment and of the cash-generating units to which these assets have been allocated. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit, taking into account the achievability of long- term business plans and macroeconomic assumptions underlying the valuation process, and a suitable discount rate in order to calculate present value. The discount rates used are based on the Group’s weighted average cost of capital adjusted to reflect the specific economic environment of the relevant cash-generating unit. The carrying amount of goodwill at the balance sheet date was £54,712,000 and of intangible assets arising from acquisitions was £9,193,000. The carrying value of the Group’s investment in the Indian joint venture was £3,315,000 at the balance sheet date. Recognition of deferred tax assets The carrying values of deferred tax assets on the balance sheet are dependent on the estimates of future taxable profits arising from the Group’s operations. The realisation of deferred tax assets is dependent on the generation of sufficient future taxable profits. The Group recognises deferred tax assets where it is more likely than not that the benefit will be realised. The carrying amount of deferred tax assets at the balance sheet date was £1,780,000. Retirement benefit obligations The Group’s defined benefit pension scheme has been valued in accordance with IAS 19 ‘Employee benefits’. The benefit obligation is calculated using a number of assumptions including increases in pension benefits, mortality rates and inflation and the future investment returns from the scheme’s assets. The present value of the benefit obligations is calculated by discounting the benefit obligation using market rates on relevant AA corporate bonds at the balance sheet date. The scheme’s assets are valued at market rates at the balance sheet date. Effects of changes in the actuarial assumptions underlying the benefit obligation, discount rates and the difference between expected and actual returns on the scheme’s assets are classified as actuarial gains and losses. The defined benefit obligation recognised at the balance sheet date was £12,533,000. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 20143. Revenue and segmental analysis Revenue An analysis of the Group’s revenue is as follows: Revenue from construction contracts Total revenue Other operating income Interest received Total income Segmental results 99 2014 £000 231,312 231,312 541 7 2013 £000 318,256 318,256 993 10 231,860 319,259 Following adoption of IFRS 8, the Group has identified its operating segments as those upon which the executive committee (the chief operating decision maker) regularly assesses performance. The Group has deemed it appropriate to aggregate its operating segments into one reported segment. The constituent operating segments have been aggregated as they have businesses with similar products and services, production processes, types of customer, methods of distribution, regulatory environments and economic characteristics. Revenues by product group All revenue is derived from construction contracts is related assets. Geographical information The Group’s revenue from external customers is detailed below: Revenue by destination: United Kingdom Republic of Ireland and mainland Europe Other countries 2014 £000 2013 £000 218,916 307,631 9,867 2,529 7,734 2,891 231,312 318,256 All revenue originated from the United Kingdom and all non-current assets of the Group are located in the United Kingdom. Information about major customers In the year ended 31 March 2014, no single customer individually contributed to more than ten per cent of Group revenue. Included in prior period revenue is £104,300,000 in relation to sales from two major customers (customer one; £68,800,000, customer two: £35,500,000) which individually contributed to more than ten per cent of Group revenue. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials100 Notes to the consolidated financial statements continued 4. Operating profit/(loss) Operating profit/(loss) for the year has been arrived at after crediting: Rent receivable Unrealised gains on derivative financial instruments Gain on sale of property, plant and equipment and after charging: Amortisation of intangible assets (note 12) Retirement of acquired intangible asset (note 12) Depreciation of owned assets Depreciation on assets held under finance lease Depreciation of investment property (note 13) Auditor’s remuneration — audit — other services Rentals under operating leases — hire of plant and machinery — other operating leases Staff costs (note 6) The analysis of auditor’s remuneration is as follows: Fees payable to the Company’s auditor for the audit of the Company’s annual accounts Fees payable to the Company’s auditor and their associates for other services to the Group — The audit of the Company’s subsidiaries pursuant to legislation Total audit fees Audit-related assurance services Taxation compliance services Other taxation advisory services Corporate finance services Total non-audit fees 2014 £000 422 — 96 2,885 2,370 3,496 85 40 165 142 2013 £000 691 104 507 3,529 — 4,826 105 50 174 447 1,744 1,857 50,551 2,837 1,634 66,967 2014 £000 17 148 165 30 45 67 — 142 2013 £000 17 157 174 50 45 20 332 447 Fees payable to Deloitte LLP and their associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements are required to disclose such fees on a consolidated basis. Corporate finance services provided during the prior period were incurred in the preparation of working capital and other reports in support of the rights issue which completed in April 2013. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 20145. Other items Amortisation of acquired intangible assets (note 12) Restructuring and redundancy costs Retirement of acquired intangible asset (note 12) Impairment of investment in associates (note 15) Refinancing related transaction costs Contract legal costs and provision movements Movements in the valuation of derivative financial instruments Other items before tax Tax on other items Other items after tax 101 2013 £000 (3,435) (767) — — (2,139) (1,089) 104 (7,326) 2,674 (4,652) 2014 £000 (2,748) (2,611) (2,370) (353) — — — (8,082) 2,844 (5,238) Restructuring and redundancy costs have arisen on the reorganisation of the Group’s largest businesses (Severfield–Rowen Structures and Watson Steel Structures) which commenced trading as a single entity, Severfield–Watson Structures, from January 2013. A comprehensive review since then resulted in changes to the senior operating management structure. In May 2013, a further reorganisation of Severfield– Watson Structures was announced, resulting in the reduction in factory capacity by approximately ten per cent and a reduction in headcount of 84 people. On 30 May 2014, Severfield–Watson Structures changed its name to Severfield (UK) Limited. The retirement of the acquired intangible asset for the Fisher Engineering brand has arisen following the recent rebranding exercise undertaken by the Group. Refinancing related transaction costs in the prior period consist of all costs associated with the amendment of the Group’s banking facilities, including the write-off of all costs relating to the November 2011 refinancing. Tax on other items includes the impact of a reduction in future corporation tax rates that have been substantively enacted on the Group’s deferred tax liability. 6. Staff costs Details of directors’ remuneration for the period are provided in the audited part of the directors’ remuneration report on page 74. The average number of persons employed by the Group (including executive directors) during the period was: Production and site Sales and administration The aggregate payroll costs of these persons were as follows: Wages and salaries Social security costs Other pension costs Employee remuneration costs under share-based payment schemes are set out in note 22. 2014 Number 1,105 98 1,203 2014 £000 43,929 4,938 1,684 50,551 2013 Number 1,173 92 1,265 2013 £000 58,181 6,637 2,149 66,967 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials102 Notes to the consolidated financial statements continued 7. Finance income and expense Finance income — interest receivable 2014 £000 7 2013 £000 10 Finance expense — interest and other costs in relation to bank borrowings (565) (2,014) Net finance expense 8. Taxation a) The taxation credit comprises: Current tax UK corporation tax Adjustments to prior years’ tax provisions Deferred tax Current period credit (note 20) Impact of reduction in future years’ tax rates Adjustments to prior years’ provisions Total tax credit b) Tax reconciliation The credit for the year can be reconciled to the loss per the income statement as follows: Loss before tax Tax on ordinary activities at standard UK corporation tax rate Expenses not deductible for tax purposes Tax effect of share of results of JVs and associates Unprovided deferred tax movement Adjustments to prior years’ provisions Rate differences Income tax credit for the year (558) (2,004) 2014 £000 1,025 (7) 1,018 (1,319) (1,066) (50) (2,435) (1,417) 2014 £000 (4,057) (933) 374 657 (392) (57) (1,066) (1,417) 2013 £000 (1,429) (135) (1,564) (3,299) (886) 18 (4,167) (5,731) 2013 £000 (28,858) (7,041) 162 76 2,075 (117) (886) (5,731) Corporation tax was calculated at 23 per cent (2013: 24.4 per cent) of the estimated taxable loss for the year. Rate differences arise through the enacted reduction in corporation tax rates from 23 per cent to 20 per cent effective from April 2015 reducing the level of the Group’s deferred tax liabilities. This item is treated as non-underlying. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 20149. Dividends Amounts recognised as distributions to equity holders in the period: Final dividend for the period ended 31 March 2013 of nil (31 December 2011: 3.5p) per share Interim dividend for the year ended 31 March 2014 of nil (31 March 2013: 1.5p) per share Proposed final dividend for the year ended 31 March 2014 of nil (31 March 2013: nil) per share 10. Earnings per share Earnings per share is calculated as follows: Earnings for the purposes of basic earnings per share being net loss attributable to equity holders of the parent company Earnings for the purposes of underlying basic earnings per share being underlying net profit/(loss) attributable to equity holders of the parent company 103 2013 £000 3,123 1,339 4,462 — 2013* £000 2014 £000 — — — — 2014 £000 (2,640) (23,127) 2,598 (18,475) Number Number Number of shares Weighted average number of ordinary shares for the purposes of basic earnings per share Weighted average number of ordinary shares for the purposes of diluted earnings per share 295,791,922 171,455,780 295,791,922 171,455,780 Basic earnings per share Underlying basic earnings per share Diluted earnings per share Underlying diluted earnings per share Reconciliation of earnings Net loss attributable to equity holders of the parent company Other items Underlying net profit/(loss) attributable to equity holders of the parent company Further details of other items are provided in note 5. (0.89p) 0.88p (0.89p) 0.88p (13.49p) (10.78p) (13.49p) (10.78p) 2014 £000 2013 £000 (2,640) (23,127) 5,238 2,598 4,652 (18,475) * Earnings per share for the period ended 31 March 2013 has been restated to take account of the impact of the discount element of the rights issue which completed in April 2013. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials104 Notes to the consolidated financial statements continued 11. Goodwill The carrying value of goodwill is allocated to cash-generating units (‘CGUs’) as follows: On the Fisher Engineering acquisition in 2007 On the Atlas Ward acquisition in 2005 On the Watson Steel Structures acquisition in 2001 £000 47,980 6,571 161 54,712 The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. During the year, the Group determined that the cash flows of the legacy Fisher Engineering and Severfield–Watson Structures operations were now so closely related that they should be treated as a group of CGUs for the purposes of goodwill impairment testing. The recoverable amounts of goodwill are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the year. The directors estimate discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the CGUs. Changes in selling prices and direct costs are based on past practices and expectations on future changes in the market. It is anticipated that sales volumes in the UK will not increase materially over the next three years. The Group prepares forecast cash flows based on the following year’s budget, approved by the directors, together with cash flows based on budgets for the following two years which are derived from the directors’ views on revenue prospects until March 2017. After this period, cash flows have been extrapolated using a growth rate of 1.5 per cent (2013: 1.5 per cent) which does not exceed the long-term growth rate for the relevant markets. The cash flow forecasts have been discounted using a pre-tax discount rate of ten per cent (2013: nine per cent). Following the impairment reviews performed by the Group, no impairment charge was recorded in the year ended 31 March 2014. Management considers that no reasonably possible change in the key assumptions would cause the goodwill attached to the above CGUs to fall below their carrying value at 31 March 2014. 12. Other intangible assets Cost At 1 January 2012 Additions At 1 April 2013 Additions At 31 March 2014 Amortisation At 1 January 2012 Charge for the period At 1 April 2013 Charge for the year Retirements At 31 March 2014 Carrying amount At 31 March 2014 At 31 March 2013 Intangible assets acquired on acquisition £000 Other intangible assets £000 39,000 — 39,000 — 39,000 21,254 3,435 24,689 2,748 2,370 29,807 9,193 14,311 481 402 883 — 883 — 94 94 137 — 231 652 789 Total £000 39,481 402 39,883 — 39,883 21,254 3,529 24,783 2,885 2,370 30,038 9,845 15,100 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014105 12. Other intangible assets continued The intangible assets acquired on acquisition arise as a result of applying IFRS 3 which requires the separate recognition of acquired intangibles from goodwill. The Group’s acquired intangible assets are as follows: Cost At 1 April 2013 and 31 March 2014 Amortisation At 1 January 2012 Charge for the period At 1 April 2013 Charge for the year Retirements At 31 March 2014 Net book value At 31 March 2014 At 31 March 2013 Customer relationships £000 Brands £000 Order book £000 Know-how £000 Total £000 25,800 3,200 9,600 400 39,000 10,942 3,225 14,167 2,580 — 16,747 9,053 11,633 542 160 702 128 2,370 3,200 — 2,498 9,600 — 9,600 — — 9,600 — — 170 50 220 40 — 260 140 180 21,254 3,435 24,689 2,748 2,370 29,807 9,193 14,311 During the year, the intangible asset of £2,370,000 relating to the Fisher Engineering brand was retired as a result of the rebranding of the Group and the renaming of its main operating businesses. Amortisation and retirement of acquired intangibles is included in the consolidated income statement as part of administrative expenses and is classified within the middle column entitled ‘other items’. The amortisation period for each category of intangible asset is disclosed in the statement of significant accounting policies on page 96. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials106 Notes to the consolidated financial statements continued 13. Property, plant and equipment (including investment property) Cost At 1 January 2012 Additions Disposals At 1 April 2013 Additions Disposals At 31 March 2014 Accumulated depreciation Depreciation At 1 January 2012 Charge for the period Disposals At 1 April 2013 Charge for the year Disposals At 31 March 2014 Carrying amount At 31 March 2014 At 31 March 2013 Investment property £000 6,197 — — 6,197 — — 6,197 2,237 50 — 2,287 40 — 2,327 3,870 3,910 Freehold and long leasehold land and buildings £000 65,383 806 — 66,189 164 (169) 66,184 2,351 590 — 2,941 503 — 3,444 Plant and machinery £000 Fixtures, fittings and office equipment £000 31,633 952 (2,238) 30,347 1,895 (776) 31,466 16,903 3,708 (1,525) 19,086 2,680 (459) 21,307 1,580 280 — 1,860 75 — 1,935 879 205 — 1,084 154 — 1,238 697 776 62,740 63,248 10,159 11,261 Motor vehicles £000 2,190 276 (514) 1,952 84 (556) 1,480 1,059 428 (391) 1,096 244 (392) 948 Total £000 106,983 2,314 (2,752) 106,545 2,218 (1,501) 107,262 23,429 4,981 (1,916) 26,494 3,621 (851) 29,264 532 856 77,998 80,051 The net book value of the Group’s plant and machinery includes £589,000 (2013: £675,000) in respect of assets held under finance leases. The investment property represents land and buildings held in Leeds. In the prior year, the Group entered into a five-year lease agreement for the property which included an initial one-year rent free period, followed by four annual rental receipts of £320,000. On 23 June 2014, the Group sold this investment property for a gross consideration of £3,830,000 (see note 32). The property is subject to an annual depreciation charge of one per cent on a straight-line basis in accordance with Group policy. The directors consider that the carrying value of the investment property approximates to its fair value. No independent valuation by an appropriately qualified surveyor was obtained during the current or prior periods. 14. Subsidiaries The Company has investments in the following significant subsidiary undertakings. All of the companies listed are registered in England and Wales. Severfield (UK) Limited (formerly Severfield–Watson Structures Limited) Severfield (Design & Build) Limited (formerly Atlas Ward Structures Limited) — steel fabrication Severfield (NI) Limited (formerly Fisher Engineering Limited) — steel fabrication and construction — steel fabrication and construction The Company owns the whole of the issued share capital of the subsidiaries noted above. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014107 15. Interests in JVs and associates The Group has an interest in an associated company and a joint venture as follows: Associated companies: Fabsec Limited — development of fire beam Joint venture: JSW Severfield Structures Limited — structural steelwork serving the Indian market Holding % 25.0 50.0 Class of capital Ordinary Ordinary On 17 November 2008 a formal agreement was signed in India with JSW Building Systems Limited (a subsidiary of JSW Steel Limited of India) to form a 50/50 joint venture, JSW Severfield Structures Limited, to create a structural steelwork business in Bellary and Mumbai, India, serving primarily the Indian market. During the year, Kennedy Watts Partnership Limited, a company which specialised in steelwork design and in which the Group had a holding of 25.1 per cent, went into administration. Accordingly, an impairment charge of £353,000 was recognised as a one-off item representing the Group’s historical investment in the associate. JSW Severfield Structures Limited is registered in India, and during the year the Group invested a further £3,538,000 (2013: £3,031,000) in the joint venture. As a result of the significant loss recorded during the year, the Group’s investment in the Indian joint venture of £3,315,000 has been reviewed for impairment. The recoverable amount of the investment is determined from value in use calculations which are based on the following year’s budget, together with financial projections for 2016 to 2018. The calculations assume a long-term growth rate of 1.5 per cent from 2019 onwards and a pre-tax discount rate of ten per cent. Following this review, no impairment charge was recorded in the year ended 31 March 2014. Management considers that no reasonably possible change in the key assumptions would result in an impairment; however, the achievement of the forecasts is dependent on the move to a sustainable profit position following the actions taken in the current year to improve the order book, to reduce overheads and to implement a new business development plan and operational improvement programme. Share of net assets/ (liabilities) £000 Loans to associate undertaking £000 Goodwill £000 At 1 January 2012 Net assets acquired Losses retained At 1 April 2013 Net assets acquired Losses retained Impairment of investment in associates At 31 March 2014 251 — — 251 — — (251) — The Group’s share of the retained loss for the year of JVs and associates is made up as follows: Share of results Summarised financial information in respect of the Group’s JVs and associates is as follows: 125 3,031 (310) 2,846 3,538 (3,038) (31) 3,315 Fabsec Limited £000 — Current assets Non-current assets Current liabilities Non-current liabilities Net assets Group’s share of JVs and associates net assets Revenue Loss after tax Group’s share of JVs and associates loss after tax for the period 71 — — 71 — — (71) — JSW Severfield Structures Limited £000 Total £000 447 3,031 (310) 3,168 3,538 (3,038) (353) 3,315 Total £000 (3,038) (3,038) 2014 £000 22,002 23,984 (26,672) (16,848) 2,466 1,575 27,911 (5,871) (3,038) 2013 £000 21,453 25,032 (25,937) (14,103) 6,445 3,369 40,444 (515) (310) There were no contingent liabilities or capital commitments (2013: none) associated with the Group’s JVs and associates. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials108 Notes to the consolidated financial statements continued 16. Inventories Raw materials and consumables Work-in-progress 17. Construction contracts Contracts-in-progress at balance sheet date: Amounts due from construction contract customers included in trade and other receivables Amounts due to construction contract customers included in trade and other payables Contract costs incurred plus recognised profits less recognised losses to date Less: progress billings received 18. Trade and other receivables Amounts due from construction contract customers (note 17): — Current amounts receivable in respect of progress billings — Retentions due within one year — Retentions due after one year Total Other receivables Prepayments and accrued income Amounts due from JVs and associates 2014 £000 3,832 2,010 5,842 2014 £000 2013 £000 5,986 2,228 8,214 2013 £000 55,154 (386) 54,768 63,228 (5,702) 57,526 412,310 (357,542) 54,768 556,377 (498,851) 57,526 2014 £000 50,361 2,822 1,971 55,154 2,531 2,841 275 2013 £000 58,511 2,901 1,816 63,228 294 6,849 1,228 60,801 71,599 Other receivables include the fair value of a financial guarantee of £2,200,000, representing the likely equity payments during the year ending 31 March 2015 to the Indian joint venture (JSW Severfield Structures Limited). A corresponding liability of £2,200,000 is included within other creditors (see note 19). In the prior period, prepayments and accrued income included the transaction costs of £3,142,000 associated with the rights issue which completed in April 2013. These costs were transferred to equity in the year ended 31 March 2014. The average credit period taken on revenue, calculated on a count-back basis to make appropriate allowance for monthly revenue phasing, is 70 days (2013: 84 days). No interest is charged on receivables. The directors consider that the carrying amount of trade and other receivables approximates to their fair value. Before accepting any new customer, the Group uses an external credit rating agency to assess the potential customer’s credit quality and defines credit limits by customer. It is Group policy that adequate credit insurance is taken out on all customers to manage the exposure that may arise as the contractual work proceeds. Accordingly, no bad debt provisions are held or expenses incurred. The Group’s executive risk committee reviews situations where adequate credit insurance on the Group’s customers cannot be purchased in the present economic climate as required. Due to the nature of the business involving applications for payment, contractually overdue amounts within trade and other receivables are limited to retentions. The Group has rigorous procedures in place for monitoring and obtaining settlement of retentions in a prompt manner. Amounts overdue at 31 March 2014 in respect of retentions were £0.1m (31 March 2013: £nil). 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201419. Trade and other payables Trade creditors Other taxation and social security Other creditors and accruals Payments in advance (note 17) 109 2014 £000 34,554 3,136 13,246 386 51,322 2013 £000 47,994 4,341 12,857 5,702 70,894 During the year, the Group provided an undertaking, not exceeding £3,500,000, to secure a loan facility of the Indian joint venture (JSW Severfield Structures Limited) until 31 March 2016. Other creditors include the fair value of this financial guarantee of £2,200,000 which represents the likely equity payments to the joint venture during the year ending 31 March 2015 (see note 18). The directors consider that the carrying amount of trade payables approximates to their fair value. The average credit period taken for trade purchases, calculated on a count-back basis to make appropriate allowance for monthly revenue phasing, is 59 days (2013: 66 days). 20. Deferred tax liabilities The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and prior reporting period. Deferred tax liabilities Deferred tax assets Deferred tax is disclosed in the balance sheet as follows: Deferred tax liabilities Deferred tax asset — trading losses The net deferred tax liability is made up as follows: Excess capital allowances Other timing differences Trading losses Acquired intangible assets Retirement benefit obligations 2014 £000 (8,443) 4,286 (4,157) 2014 £000 (5,937) 1,780 (4,157) 2014 £000 (6,387) (218) 1,780 (1,838) 2,506 (4,157) 2013 £000 (11,228) 4,675 (6,553) 2013 £000 (8,393) 1,840 (6,553) 2013 £000 (7,937) 120 1,840 (3,292) 2,716 (6,553) 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials110 Notes to the consolidated financial statements continued 20. Deferred tax liabilities continued At 1 January 2012 Credit to income statement Credit to equity Effect of change in tax rate At 1 April 2013 Reclassification Credit to income statement Charge to equity Effect of change in tax rate At 31 March 2014 Asset amortisation and depreciation £000 Short-term timing differences and tax losses £000 Retirement benefit obligations £000 (13,730) 1,411 — 1,090 (11,229) — 1,327 — 1,677 (8,225) 64 1,819 — (5) 1,878 — (174) — (245) 1,459 2,388 61 458 (191) 2,716 — 245 (101) (354) 2,506 Other £000 101 (11) — (8) 82 62 (29) — (12) 103 Total £000 (11,177) 3,280 458 886 (6,553) 62 1,369 (101) 1,066 (4,157) The deferred tax assets reducing the deferred tax liability relate to 20 per cent (2013: 23 per cent) of the Group’s deficit on its defined benefit retirement scheme, trading losses carried forward and other timing differences. The tax losses on which a deferred tax asset has been recognised do not expire. Deferred tax assets are recognised for tax loss carry-forwards to the extent that the utilisation of the related tax benefit through future taxable profits is probable. In determining the amounts of deferred tax assets to be recognised, management uses historical profitability information and, if relevant, forecasted operating results, based on approved budgets and forecasts, including a review of the eligible carry forward periods, tax planning opportunities and other relevant considerations. Unrecognised deferred tax assets in respect of trading losses amounted to £1,474,000 (2013: £2,131,000). These have not been recognised as a result of the unpredictability of future profit streams against which these losses may be utilised. The Government announced in March 2013 that it intended to reduce the rate of corporation tax from 23 per cent to 20 per cent and the Finance Act 2013, which was substantively enacted on 2 July 2013, included provisions to reduce the rate of corporation tax to 21 per cent with effect from 1 April 2014 and 20 per cent with effect from 1 April 2015. Accordingly, deferred tax balances have been revalued to the lower rate of 20 per cent in these accounts, which has resulted in a credit to the consolidated income statement of £1,066,000 and the consolidated statement of comprehensive income of £354,000. 21. Financial instruments Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while optimising the return to stakeholders. The capital structure of the Group consists of debt, which includes borrowings, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings. Gearing ratio The board reviews the capital structure of the Group on a semi-annual basis. As part of this review, it considers the cost of capital and the risks associated with each class of capital. The gearing ratio at the year-end is as follows: Borrowings Cash and cash equivalents Finance leases Net funds/(debt) Equity Net debt to equity ratio 2014 £000 (5,000) 5,525 (206) 319 143,398 N/A 2013 £000 (41,461) 671 (400) (41,190) 102,401 40.2% Equity includes all capital and reserves of the Group attributable to equity holders of the parent. There are no externally imposed capital requirements. The gearing ratio has improved significantly in the current year on completion of the rights issue in April 2013. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201421. Financial instruments continued Categories of financial instruments Financial assets Cash and cash equivalents Amounts due from construction contract customers (note 17) Financial liabilities Trade creditors (note 19) Other creditors and accruals (note 19) Borrowings Finance leases 111 Carrying value 2014 £000 5,525 55,154 (34,554) (13,246) (5,000) (206) 2013 £000 671 63,228 (47,994) (12,857) (41,461) (400) The Group’s financial instruments consist of borrowings, cash, items that arise directly from its operations and derivative financial instruments. Cash and cash equivalents, trade and other receivables and trade and other payables generally have short terms to maturity. For this reason their carrying values approximate to fair value. The Group’s borrowings relate principally to amounts drawn down against its revolving credit facility, the carrying amounts of which approximate to their fair values by virtue of being floating rate instruments. The Group is required to analyse financial instruments that are measured subsequent to initial recognition at fair value, grouped into levels 1 to 3 based on the degree to which the fair value is observable: • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). Derivative financial instruments are the only instruments valued at fair value through profit or loss, and are valued as such on initial recognition. These relate to foreign currency forward contracts measured using quoted forward exchange rates and yield curves matching the maturities of the contracts. These derivative financial instruments are categorised as level 2 financial instruments. Except for derivative financial instruments, the carrying amounts of financial assets and financial liabilities are recorded at amortised cost in the consolidated financial statements. General risk management principles The board has overall responsibility for the establishment and oversight of the Group’s risk management framework. A formal risk assessment and management framework for assessing, monitoring and managing the strategic operational and financial risks of the Group is in place to ensure appropriate risk management of its operations. Internal control and risk management systems are embedded in the operations of the divisions. Financial risks and management The Group has exposure to a variety of financial risks through the conduct of its operations. Risk management is governed by the Group’s operational policies, which are subject to periodic review by the board of directors. Credit risk The Group’s primary exposure to credit risk arises from the potential for non-payment or default from construction contract debtors. The degree to which the Group is exposed to this credit risk depends on the individual characteristics of the contract counterparty and the nature of the project. The Group’s credit risk is also influenced by the general macroeconomic conditions. The Group does not have significant concentration of risk in respect of amounts due from construction contract customers at the reporting date with them being spread across a wide range of customers. Due to the nature of the Group’s operations, it is normal practice for customers to hold retentions in respect of contracts completed. Retentions held by customers at 31 March 2014 were £4,793,000 (31 March 2013: £4,717,000). The Group manages its exposure to credit risk through the application of its credit risk management policies which specify the minimum requirements in respect of the creditworthiness of potential customers, assessed through reports from credit agencies, and the timing and extent of progress payments in respect of contracts. In addition, before accepting any new customer adequate credit insurance is taken out as reported in note 18. Where credit insurance is difficult to acquire, the executive risk committee determines the appropriate exposure for the Group to take with a customer. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials112 Notes to the consolidated financial statements continued 21. Financial instruments continued The Group manages the collection of retentions through its post-completion project monitoring procedures and ongoing contact with customers so as to ensure that potential issues that could lead to the non-payment of retentions are addressed as soon as they are identified. Amounts outstanding from construction contract customers are due with reference to the payment terms for each particular contract but the majority would be receivable within four months from the end of the reporting period. Amounts due for settlement after 12 months are disclosed in note 17. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as and when they fall due. The ultimate responsibility for liquidity risk rests with the board. The Group generates cash through its operations and aims to manage liquidity by ensuring that it will always have sufficient financing facilities to meet its liabilities when due, under both normal and stress conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Forecast and actual cash flow is continuously monitored. Borrowings represent the Group’s revolving credit facility from the Royal Bank of Scotland and Yorkshire Bank, a member of National Australia Bank Group, jointly which provides credit support of up to £35,000,000 at an interest rate of between 2.5 per cent and 4.0 per cent above LIBOR subject to the ratio of Group net debt to EBITDA. This facility was refinanced in April 2013, on completion of the rights issue and expires in November 2016. As at 31 March 2014, £5,000,000 was drawn down on this facility with £30,000,000 of further facility not drawn but available. Up to £10,000,000 of this facility is available by way of an overdraft. Borrowings outstanding, net of associated issue costs, at 31 March 2014 amounted to £5,000,000 (2013: £41,461,000). In accordance with IFRS 7, the following tables detail the Group’s remaining contractual maturity for its financial liabilities. Liabilities – 2014 Trade and other payables Financial liabilities — borrowings1 Financial liabilities — finance leases Liabilities – 2013 Trade and other payables Financial liabilities — borrowings1 Financial liabilities — finance leases Maturity analysis Carrying value £000 47,800 5,000 206 53,006 60,851 41,461 400 Less than 3 months £000 43,250 — 49 43,299 55,375 — 48 102,712 55,423 3 months to 1 year £000 3,166 — 132 3,298 5,414 — 146 5,560 1–2 years £000 1,035 — 25 1,060 60 — 181 241 2–5 years £000 349 5,000 — 5,349 2 41,461 25 Total £000 47,800 5,000 206 53,006 60,851 41,461 400 41,488 102,712 1. Details of the conditions applying to these borrowings are provided above. The Group’s revolving credit facility, which is disclosed as a current liability in the balance sheet, is presented as maturing in two to five years since the facility expires in November 2016. Market risk The Group’s activities expose it primarily to the financial risks of changes in credit risks described above, in foreign currency exchange rates and interest rates. The Group has entered into certain derivative financial instruments to manage its exposure to foreign currency risk. Market risk exposures are monitored and are supplemented by sensitivity analysis. There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014113 21. Financial instruments continued Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies. Hence, exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The Group seeks to minimise the effects of currency risks by using derivative financial instruments when appropriate to hedge these risk exposures against contracted sales. The use of financial derivatives is governed by the Group’s policies approved by the board of directors. The Group does not enter into or trade financial instruments, including derivative financial instruments for speculative purposes. The carrying value of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: Euro US dollar Foreign currency sensitivity analysis The Group is only significantly exposed to the euro. Liabilities Assets 2014 £000 (132) — (132) 2013 £000 (73) — (73) 2014 £000 4,148 5 4,153 2013 £000 4,901 948 5,849 The following table details the Group’s sensitivity to a ten per cent increase and decrease in sterling against the relevant foreign currencies. Ten per cent is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and derivative financial instruments, and adjusts their translation at the year-end for a ten per cent change in foreign currency rates. A positive number below indicates an increase in profit and other equity where sterling strengthens ten per cent against the relevant currency. For a ten per cent weakening of sterling against the relevant currency, there would be an equal and opposite impact on the profit and other equity, and the balances below would be negative. Profit or loss and equity Euro currency impact 2014 £000 324 2013 £000 434 At present the Group’s translation exposure to the Indian rupee via its Indian joint venture is not significant. As the business grows, this exposure is expected to become more significant. Forward foreign exchange contracts It is the policy of the Group to enter into forward foreign exchange contracts to cover future euro and US dollar currency receipts on relevant contracts. At 31 March 2014, the Group had forward exchange contracts held for the sale of 8.8m euros (2013: 10.8m euros) and nil US dollars (2013: 1.5m US dollars) at an average exchange rate of 1.206 euros/£ (2013: 1.176 euros/£) and nil US dollars/£ (2013: 1.514 US dollars/£) to the pound and maturing within 12 months of the year-end. Interest rate risk management The Group is exposed to interest rate risk as described under the borrowings paragraph earlier in this note. The Group does not currently hedge any of its interest rate exposure. Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the exposure to interest rates at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the gross amount of liability outstanding at balance sheet date was outstanding for the whole period. A 0.5 per cent increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. If interest rates had been 0.5 per cent higher and all other variables were held constant, the Group’s profit for the year ended 31 March 2014 and the Group’s equity at that date would decrease by £25,000 (2013: £259,000). This is attributable to the Group’s exposure to interest rates on its variable rate borrowings. If the £35,000,000 facility is fully utilised the exposure increases to £175,000. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials114 Notes to the consolidated financial statements continued 22. Share-based payments The Group operates a share-based incentive scheme open to all employees of the Group although the current intention is that only the Company’s executive directors (being both board directors and certain members of the executive committee) and selected senior employees will participate in the scheme. Further details are given in the directors’ remuneration report on pages 64 to 80. Performance share plan The vesting of awards is subject to performance conditions set by the remuneration committee. The Group recognised a total charge of £162,000 for the year (2013: credit of £145,000) with a corresponding entry to reserves. The weighted average fair value of share options granted during the year was £0.45 per share. Three outstanding awards had been granted to 31 March 2014: • During the year ended 31 December 2011 the remuneration committee granted 804,416 ordinary shares of 2.5p each at nil value to the executive directors. The vesting of these awards was dependent on the Group’s underlying earnings per share performance over the three year period from 1 January 2011 to 31 December 2013. As a result of the Group’s change of year-end to 31 March, these awards were deferred until 31 March 2014. The following vesting schedule applies: Underlying EPS performance‡ for year ended 31 December 2013† Equal to less than 6.5p Equal to 13.0p or better Between 6.5p and 13.0p % of award vesting 0% 100% Pro rata between 25% and 100% The assumptions used to measure the fair value of the shares granted are as follows: Share price on date of grant Exercise price Expected volatility (using historic performance) Risk-free rate Dividend Actual life £2.45* nil 50% 2.0% 10.0p three years * Granted on 14 April 2011. † Now deferred to 31 March 2014. ‡ The original EPS targets have been adjusted by a factor of 1.92105. This adjustment is based on the relationship between the last day cum rights issue share price (73p) and the theoretical ex rights price (38p). The Black–Scholes pricing model produced, using the above assumptions, an annual charge of £nil (2013: credit of £145,000). • During the period ended 31 March 2013 the remuneration committee granted 1,113,508 ordinary shares of 2.5p each at nil value to the executive directors. The vesting of these awards will be dependent on the Group’s underlying earnings per share performance over the three year period from 1 January 2012 to 31 December 2014. As a result of the Group’s change of year-end to 31 March, these awards were deferred until 31 March 2015. The following vesting schedule applies: Underlying EPS performance‡ for year ending 31 December 2014† Equal to less than 6.5p Equal to 11.7p or better Between 6.5p and 11.7p % of award vesting 0% 100% Pro rata between 25% and 100% The assumptions used to measure the fair value of the shares granted are as follows: Share price on date of grant Exercise price Expected volatility (using historic performance) Risk-free rate Dividend Actual life £2.00* nil 50% 1.7% 5.0p three years * Granted on 7 March 2012. † Now deferred to 31 March 2015. ‡ The original EPS targets have been adjusted by a factor of 1.92105. This adjustment is based on the relationship between the last day cum rights issue share price (73p) and the theoretical ex rights price (38p). 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014115 22. Share-based payments continued The Black–Scholes pricing model produced, using the above assumptions, an annual charge of £nil (2013: £nil). • During the year ended 31 March 2014 the remuneration committee granted 1,602,495 ordinary shares of 2.5p each at nil value to the executive directors. The vesting of these awards will be dependent on the Group’s underlying earnings per share performance over the three year period from 1 April 2013 to 31 March 2016, with the following vesting schedule to apply: Underlying EPS performance for year ending 31 March 2016 Equal to less than 2.2p Equal to 4.9p or better Between 2.2p and 4.9p The assumptions used to measure the fair value of the shares granted are as follows: Share price on date of grant Exercise price Expected volatility (using historic performance) Risk-free rate Dividend Actual life * Granted on 5 June 2013. % of award vesting 0% 100% Pro rata between 25% and 100% £0.48* nil 98% 2.7% 1.0p three years The Black–Scholes pricing model produced, using the above assumptions, an annual charge of £162,000. Share incentive plan During 2010 the Group implemented a share incentive plan for Group employees. As part of the scheme 202,384 new ordinary shares of 2.5p were issued which are being held in trust for a three year period on behalf of 973 Group employees. The vesting of these awards will be subject to continued employment for each of the relevant employees. Options are forfeited if the employee leaves the Group before the options vest. The share price on the date of issue of the shares (29 October 2010) was £2.41 and the fair value was measured based on the market price of the shares at the date of grant. The aggregate of the estimated values of the awards granted in 2010 is £488,000. A charge of £81,000 (2013: £203,000) was recognised in the current year. 23. Share capital Issued and fully paid: 2014 £000 2013 £000 297,503,587 ordinary shares of 2.5p each (2013: 89,251,076 ordinary shares of 2.5p each) 7,437 2,231 There are no share options outstanding as at 31 March 2014 (31 March 2013: nil). The increase in share capital reflects the 7:3 rights issue of 208,252,511 new ordinary shares at 23p per share which completed on 5 April 2013. 24. Other reserves At 1 January 2012 Share-based payments charge At 1 April 2013 Share-based payments charge At 31 March 2014 Share-based payment reserve £000 330 58 388 243 631 Other reserves £000 139 — 139 — 139 Total £000 469 58 527 243 770 The movement in the share-based payment reserve represents the share-based payment charge of £243,000 (2013: £58,000) (see note 22). 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials116 Notes to the consolidated financial statements continued 25. Net cash flow from operating activities Operating loss from continuing operations Adjustments: Depreciation of property, plant and equipment Depreciation of investment property (note 13) Gain on disposal of property, plant and equipment (note 4) Amortisation of intangible assets (note 12) Retirement of acquired intangible asset (note 12) Movements in pension scheme Share of results of JVs and associates (note 15) Share-based payments (note 22) Movement in valuation of derivatives Operating cash flows before movements in working capital Decrease in inventories Decrease in receivables (Decrease)/increase in payables Decrease in provisions Cash generated from operations Tax received/(paid) Net cash flow from operating activities 26. Analysis of net funds/(debt) Cash and cash equivalents Financial liabilities — borrowings Financial liabilities — finance leases 27. Capital commitments Contracted for but not provided in the financial statements 28. Contingent liabilities 2014 £000 2013 £000 (3,499) (26,854) 3,581 40 (96) 2,885 2,370 (539) 3,391 243 — 8,376 2,372 10,798 (19,433) — 2,113 409 2,522 2014 £000 5,525 (5,000) (206) 319 2014 £000 750 4,930 50 (507) 3,528 — (565) 310 58 (104) (19,154) 871 17,562 4,448 (600) 3,127 (2,323) 804 2013 £000 671 (41,461) (400) (41,190) 2013 £000 — The Company and its subsidiaries have provided unlimited multilateral guarantees to secure any bank overdrafts and loans of all other Group companies. At 31 March 2014 these amounted to £25,000,000 (2013: £40,000,000). The Group has also given performance bonds in the normal course of trade. During the year, the Group provided an undertaking, not exceeding £3,500,000, to secure a loan facility of the Indian joint venture (JSW Severfield Structures Limited) until 31 March 2016 (see note 19). 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014 29. Operating lease arrangements The Group as lessee The Group leases a number of its premises under operating leases which expire between 2014 and 2032. The total future minimum lease rentals are as follows: Minimum lease rentals due: — Within one year — After one year and within five years — After five years 2014 £000 1,076 3,779 12,231 17,086 The Group also leases certain items of plant and machinery and vehicles whose total future minimum lease rentals are as follows: Minimum lease rentals due: — Within one year — After one year and within five years — After five years The Group as lessor 2014 £000 1,172 1,450 105 2,727 117 2013 £000 1,381 4,754 12,897 19,032 2013 £000 1,572 1,672 — 3,244 Property rental income earned on owned properties during the year was £422,000 (2013: £691,000). The properties held have committed tenants for the next one to five years. All operating lease contracts contain market review clauses in the event that the lessees exercise the options to renew. The lessees do not have an option to purchase the property at the expiry of the lease period. As at the balance sheet date the Group had contracted with tenants for the following future minimum lease payments: — Within one year — After one year and within five years 2014 £000 397 919 1,316 2013 £000 409 1,324 1,733 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials118 Notes to the consolidated financial statements continued 30. Retirement benefit obligations Defined contribution schemes The Group operates two defined contribution retirement benefit schemes. The assets of the schemes are held separately from those of the Group in funds under the control of trustees. The total cost charged to income of £1,357,000 (2013: £1,691,000) represents contributions payable to these schemes by the Group at rates specified in the rules of the plans. As at 31 March 2014, contributions of £183,000 (2013: £200,000) due in respect of the current reporting period had not been paid over to the schemes. Defined benefit schemes The Group has a defined benefit scheme which is now closed to new members and no defined benefit membership rights will accrue under the scheme. The scheme exposes the Group to actuarial and other risks, the most significant of which are considered to be: Investment risk Interest risk Longevity risk Salary risk The present values of the scheme liabilities are calculated using a discount rate determined by reference to corporate bond yields; if the return on scheme assets is below this rate, it will create a plan deficit. The Group holds a significant proportion of growth assets (bonds, gilts and equities) to leverage the return generated by the scheme. A decrease in the corporate bond interest rate will increase the scheme liabilities, although this will be partially offset by an increase in the return on the scheme’s assets. The present values of the scheme liabilities are calculated by reference to the best estimate of the mortality of scheme participants which reflect continuing improvements in life expectancy. An increase in the life expectancy of the scheme participants will increase the scheme’s liabilities. The present values of the defined benefit scheme liabilities are calculated by reference to the future salaries of scheme participants. As such, an increase in the salary of the scheme participants will increase the scheme’s liabilities. The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out at 5 April 2011 by Mr Christopher Hunter, Fellow of the Institute of Actuaries. The present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method. Key assumptions used: Discount rate Inflation (RPI) Expected rate of salary increases Future pension increases 2014 % 4.4 3.2 — 3.1 2013 % 4.2 3.0 — 2.9 When considering mortality assumptions a male life expectancy to 85 at age 65 has been used for the year ended 31 March 2014 (2013: 85). Impact on scheme liabilities of changes to key assumptions: Assumption Discount rate Rate of mortality Change in assumption Increase/decrease by 0.25% Increase by 1 year Impact on scheme liabilities Decrease/increase by 4.3% Increase by 3.0% Amounts recognised in income in respect of these defined benefit schemes are as follows: Interest cost Expected return on scheme assets 2014 £000 1,290 (815) 475 2013 £000 1,607 (972) 635 The charge for the year has been included in cost of sales. Actuarial gains and losses have been reported in the statement of comprehensive income. The cumulative actuarial gains and losses recognised amount to a loss of £9,509,000 (2013: £8,248,000). The actual return on scheme assets was a gain of £300,000 (2013: £1,933,000). 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014119 30. Retirement benefit obligations continued The amount included in the balance sheet arising from the Group’s obligations in respect of the defined benefit retirement scheme is as follows: Present value of defined benefit obligations Fair value of scheme assets Deficit in scheme liability recognised in the balance sheet The major categories of scheme assets as a percentage of the total scheme assets are as follows: Equities Bonds and gilts Cash Property Other 2014 £000 (32,395) 19,862 (12,533) 2013 £000 (31,061) 19,250 (11,811) 2014 % 21.5 62.3 5.5 8.8 1.9 100.0 2013 % 22.6 62.0 5.3 8.2 1.9 100.0 Bonds and gilts include a mixture of corporate and government bonds and fixed and index-linked gilts. Approximately nine per cent of bonds have a sub-investment grade credit rating (BB+ or lower) and approximately 64 per cent of gilts are index-linked with 36 per cent being fixed. Movements in the present value of defined benefit obligations were as follows: At start of period Interest cost Actuarial losses Benefits paid At end of period 2014 £000 (31,061) (1,290) (746) 702 2013 £000 (26,800) (1,607) (3,785) 1,131 (32,395) (31,061) Actuarial losses arising from changes in demographic assumptions, changes in financial assumptions and gains or losses arising from experience were losses of £768,000 (2013: £nil), gains of £127,000 (2013: losses of £4,209,000) and losses of £105,000 (2013: gains of £424,000) respectively. Movements in the fair value of scheme assets were as follows: At start of period Expected return on scheme assets Actuarial (losses)/gains Employer contributions Benefits paid At end of period 2014 £000 2013 £000 19,250 17,248 815 (515) 1,014 (702) 19,862 972 961 1,200 (1,131) 19,250 The Group expects to contribute £83,000 per month to its defined benefit pension scheme in the year to 31 March 2015. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials120 Notes to the consolidated financial statements continued 30. Retirement benefit obligations continued History of experience of gains and losses: Experience gains/(losses) on scheme assets (£000) Percentage of scheme assets Experience (gains)/losses on scheme liabilities (£000) Percentage of the present value of scheme liabilities Total amount recognised in the consolidated statement of comprehensive income (£000) Percentage of the present value of scheme liabilities 2014 (515) (2.6%) (105) (0.3%) 2013 961 5.0% 424 1.4% 2011 243 1.4% (512) (1.9%) 2010 (34) (0.2%) 1,013 4.1% 2009 377 2.5% (223) (1.0%) (1,261) (3.9%) (2,824) (9.1%) (1,369) (5.1%) (440) (1.8%) (2,091) (8.9%) The weighted average period over which benefits are expected to be paid, or the duration of the liabilities is currently 18 years. 31. Related party transactions The remuneration of the directors is provided in the audited part of the directors’ remuneration report on page 74. In addition to the board of directors, members of the executive committee are also considered as key management personnel of the Group. Information about the remuneration of the additional directors who belong to the executive committee is as follows: Short-term employee benefits Contributions into pension schemes 2014 £000 852 112 964 2013 £000 1,311 150 1,461 Short-term employee benefits include salary, bonus, social security contributions, the provision of company cars, fuel for company cars and private medical insurance. The charge in relation to share-based payments is provided in note 22 and relates to executive directors and members of the executive committee. Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its associated undertakings are disclosed below. During the year the Group purchased services in the ordinary course of business from Kennedy Watts Partnership Limited at a cost of £324,000 (2013: £823,000). The amount outstanding at 31 March 2014 was £nil (2013: £172,000). Kennedy Watts Partnership Limited went into administration during the year. During the year the Group purchased services in the ordinary course of business from Fabsec Limited at a cost of £105,000 (2013: £199,000). The amount outstanding at 31 March 2014 was £16,000 (2013: £32,000). During the year the Group incurred additional operating costs in relation to the day-to-day running of the joint venture in India of £595,000 (2013: £1,357,000). Those costs were recharged to the joint venture company during the year and the amount outstanding at 31 March 2014 was £275,000 (2013: £1,228,000). 32. Post-balance sheet events On 23 June 2014, the Group sold its sole investment property in Leeds for a gross consideration of £3,830,000. This resulted in a small loss on disposal after taking into account transaction costs. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014Five year summary Results Revenue Underlying* operating (loss)/profit Underlying* (loss)/profit before tax Non-underlying items (Loss)/profit attributable to equity holders of Severfield plc Assets employed Non-current assets Net current assets/(liabilities) Non-current liabilities Net assets Key statistics Earnings per share: Basic — underlying* Basic Diluted — underlying* Diluted Dividends per share Dividend cover (times) — underlying* basis Share price — high — low 121 2014 £000 2013† £000 2011 £000 2010 £000 2009 £000 231,312 318,256 267,778 266,692 349,417 7,621 4,025 (8,082) (19,218) (21,532) (7,326) 14,193 10,117 (3,335) 16,204 15,283 (4,176) 51,828 50,814 (6,723) (2,640) (23,127) 5,822 7,633 31,313 147,650 14,243 (18,495) 143,398 154,871 156,940 165,013 170,731 (32,060) (20,410) (3,059) (21,583) (11,739) (22,331) (12,732) (25,524) 102,401 132,298 130,943 132,475 0.88p (0.89p) 0.88p (0.89p) — — 65.50p 38.00p (10.78p) (13.49p) (10.78p) (13.49p) 1.50p (13.8) 114.26p 35.40p 4.19p 3.39p 4.19p 3.39p 5.00p 1.6 6.51p 4.46p 6.51p 4.46p 7.50p 1.3 333.50p 150.00p 313.20p 177.20p 21.40p 18.40p 21.30p 18.30p 15.00p 2.7 243.00p 119.50p Key statistics for prior years have been restated to reflect the 7:3 rights issue in April 2013. * The basis of stating results on an underlying basis is set out on page 93. † Represents the 15 month period ended 31 March 2013. Financial calendar Preliminary announcement of full year results Publication of annual report Annual general meeting Announcement of interim results (provisional) 3 June 2014 28 July 2014 2 September 2014 25 November 2014 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials 122 Severfield plc Annual report and accounts for the year ended 31 March 2014 23372.04 16 July 2014 10:30 AM PROOF 8 Annual report and accounts for the year ended 31 March 2014www.severfield.com Stock code: SFR Our financials 123 Our financials Company balance sheet Notes to the Company financial statements Shareholder information Addresses and advisers 124 125 130 Project: Cardiff Energy From Waste Plant Location: Cardiff Tonnage: 2,475 Client: Viridor Waste Management Main contractor: Lagan Construction Completion: 2014 23372.04 16 July 2014 10:30 AM PROOF 8 Stock code: SFR124 Company balance sheet At 31 March 2014 Fixed assets Tangible assets Intangible assets Investments Current assets Debtors Cash at bank and in hand Creditors — amounts falling due within one year Net current liabilities Total assets less current liabilities Capital and reserves Share capital Share premium Other reserves Profit and loss account Equity and total shareholders’ funds Note 2014 £000 2013 £000 4 5 6 7 9 10 11 12 60,760 652 98,959 160,371 63,021 — 63,021 (115,879) (52,858) 107,513 7,437 85,702 620 13,754 107,513 61,376 789 96,360 158,525 67,121 — 67,121 (173,874) (106,753) 51,772 2,231 46,152 377 3,012 51,772 The financial statements were approved by the board of directors on 11 July 2014 and signed on its behalf by: Ian Lawson Chief executive officer Alan Dunsmore Group finance director Severfield plc Registered in England No: 1721262 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014125 Notes to the Company financial statements Year ended 31 March 2014 1. Significant accounting policies Basis of accounting The separate financial statements of the Company are presented as required by the Companies Act 2006. They have been prepared under the historical cost convention and in accordance with applicable UK accounting standards (‘UK GAAP’). Going concern After making enquiries, the directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the directors continue to adopt a going concern basis in preparing the financial statements. The key factors considered by the directors in making the statement are set out within the financial review on pages 28 to 31. Cash flow The Company is exempt from the requirements of Financial Reporting Standard No. 1 (Revised) ‘Cash flow statements’. Tangible fixed assets Freehold and long leasehold land is held at cost and not depreciated. Depreciation is provided on other fixed assets to write off the cost of each asset over its estimated useful life at the following rates: Freehold buildings 1 per cent straight-line Intangible fixed assets Intangible fixed assets relate to capitalised software costs. Intangible assets are amortised on a straight-line basis over their useful economic lives as follows: Software costs 7 years Investments Fixed asset investments are shown at cost less provision for impairment. Taxation Current tax, including UK corporation tax and foreign 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 provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax is not provided on timing differences arising from the revaluation of fixed assets where there is no commitment to sell the asset, or on unremitted earnings of subsidiaries and associates where there is no commitment to remit these earnings. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted. Share-based payments Share-based payments are accounted for as described in the Group accounting policies on page 97. Related party transactions The Company has taken advantage of the exemption granted by paragraph 3(b) of FRS 8 ‘Related party disclosures’ not to disclose transactions with other wholly-owned Group companies. 2. Operating profit The auditor’s remuneration for audit services to the Company was £17,000 (2013: £17,000). The Company has no employees other than the directors whose remuneration was borne by subsidiary undertakings. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials126 Notes to the Company financial statements continued 3. Profit of the Company The Company has taken advantage of Section 408 of the Companies Act 2006 and consequently its profit and loss account is not presented as part of these accounts. The profit of the Company for the financial year amounted to £10,742,000 (2013: £2,828,000). Dividends paid and proposed are disclosed in note 9 to the consolidated financial statements. 4. Tangible fixed assets Cost At 1 April 2013 Additions Disposals At 31 March 2014 Depreciation At 1 April 2013 Charge for the year Disposals At 31 March 2014 Net book value At 31 March 2014 At 31 March 2013 Freehold and long leasehold land and buildings £000 64,304 120 (168) 64,256 3,030 483 — 3,513 Motor vehicles 235 — (170) 65 133 17 (102) 48 Total 64,539 120 (338) 64,321 3,163 500 (102) 3,561 60,743 61,274 17 102 60,760 61,376 The Company’s freehold and long leasehold land and buildings includes those which are occupied and used by some of the Company’s subsidiary undertakings. 5. Investments Investment in subsidiaries Investment in associated companies Investment in joint ventures Investment in subsidiaries 2014 £000 86,950 — 12,009 98,959 2013 £000 87,354 535 8,471 96,360 The Company has investments in the following significant subsidiary undertakings. All of the companies listed are registered in England and Wales. Severfield (UK) Limited (formerly Severfield–Watson Structures Limited) Severfield (Design & Build) Limited (formerly Atlas Ward Structures Limited) — steel fabrication Severfield (NI) Limited (formerly Fisher Engineering Limited) — steel fabrication and construction — steel fabrication and construction The Company owns the whole of the issued share capital of the subsidiaries noted above. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 20145. Investments continued Cost At 1 April 2013 Liquidation of dormant companies At 31 March 2014 Provision for impairment At 31 March 2013 and 2014 Net book value At 31 March 2014 At 31 March 2013 127 £000 107,554 (404) 107,150 20,200 86,950 87,354 During the year, the Company liquidated four dormant companies resulting in a loss of £404,000, representing the historical investment in those companies. Investment in associates The Company has an interest in associated companies as follows: Fabsec Limited — development of fire beam Holding % Class of capital 25.0 Ordinary During the year, Kennedy Watts Partnership Limited, a company which specialised in steelwork design and in which the Company had a holding of 25.1 per cent, went into administration. Accordingly, an impairment charge of £535,000 was recognised which represents the Company’s historical investment in the associate. Cost At 1 April 2013 and 31 March 2014 Provision for impairment At 1 April 2013 Charge for the year At 31 March 2014 Net book value At 31 March 2014 At 31 March 2013 Investment in joint ventures £000 535 — 535 535 — 535 On 17 November 2008 a formal agreement was signed in India with JSW Building Systems Limited (a subsidiary of JSW Steel Limited of India) to form a 50/50 joint venture, JSW Severfield Structures Limited, to create a structural steelwork business in Bellary and Mumbai, India, serving primarily the Indian market. JSW Severfield Structures Limited is registered in India and, during the year, the Company invested indirectly £3,538,000 (2013: £3,031,000) in the joint venture. The investment is carried in Severfield–Rowen Mauritius Limited, a wholly-owned subsidiary of the Company. Cost At 1 April 2013 Additions At 31 March 2014 £000 8,471 3,538 12,009 As a result of the significant loss recorded during the year, the Company’s investment in the Indian joint venture of £12,009,000 has been reviewed for impairment. The recoverable amount of the investment is determined from value in use calculations which are based on the following year’s budget, together with financial projections for 2016 to 2018. The calculations assume a long-term growth rate of 1.5 per cent from 2019 onwards and a pre-tax discount rate of ten per cent. Following this review, no impairment charge was recorded in the year ended 31 March 2014. Management considers that no reasonably possible change in the key assumptions would result in an impairment; however, the achievement of the forecasts is dependent on the move to a sustainable profit position following the actions taken in the current year to improve the order book, to reduce overheads and to implement a new business development plan and operational improvement programme. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials128 Notes to the Company financial statements continued 6. Debtors Other debtors Amounts owed by subsidiary undertakings Deferred tax asset (note 8) Corporation tax recoverable 7. Creditors — amounts falling due within one year Bank borrowings Other creditors and accruals Amounts owed to subsidiary undertakings Deferred tax liability (note 8) 2014 £000 493 61,699 — 829 2013 £000 3,433 62,531 287 870 63,021 67,121 2014 £000 8,873 2,797 2013 £000 42,347 6,759 103,931 124,768 278 — 115,879 173,874 Borrowings represent the Group’s revolving credit facility from the Royal Bank of Scotland and National Australia Bank jointly as disclosed in note 21 to the consolidated financial statements. The facility is available until November 2016. 8. Deferred tax Excess capital allowances Short-term timing differences Deferred tax — movement for the year At 1 April 2013 Current year charge At 31 March 2014 9. Share capital Issued and fully paid: Amount provided Amount unprovided 2014 £000 385 (107) 278 2013 £000 (182) (105) (287) 2014 £000 — — — 2014 £000 2013 £000 — — — £000 (287) 565 278 2013 £000 297,503,587 ordinary shares of 2.5p each (2013: 89,251,076 ordinary shares of 2.5p each) 7,437 2,231 There are no share options outstanding as at 31 March 2014 (2013: nil). The increase in share capital and share premium reflect the 7:3 rights issue of 208,252,511 new ordinary shares at 23p per share which completed on 5 April 2013. 10. Share premium At start of year Proceeds from shares issued At end of year 2014 £000 46,152 39,550 85,702 2013 £000 46,152 — 46,152 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 201411. Other reserves At start of year Share-based payment charge At end of year 2014 £000 377 243 620 The movement in the share-based payment reserve represents the share-based payment charge of £243,000 (2013: £58,000). 12. Profit and loss account At start of year Dividends paid Net profit for the year At end of year 13. Movement in shareholders’ funds At start of year Proceeds from shares issued Dividends paid Net profit for the year Movement in share-based payment reserve At end of year 14. Capital commitments Contracted for but not provided in the financial statements 15. Contingent liabilities 2014 £000 3,012 — 10,742 13,754 2014 £000 51,772 44,756 — 10,742 243 107,513 2014 £000 — 129 2013 £000 319 58 377 2013 £000 4,646 (4,462) 2,828 3,012 2013 £000 53,348 — (4,462) 2,828 58 51,772 2013 £000 — The Company has provided an unlimited guarantee to secure any bank overdrafts and loans of all other Group companies. At 31 March 2014 these amounted to £nil (2013: £nil). During the year, the Company provided an undertaking, not exceeding £3,500,000, to secure a loan facility of the Indian joing venture (JSW Severfield Structures Limited) until 31 March 2016. 23372.04 16 July 2014 10:30 AM PROOF 8 www.severfield.comStock code: SFROur financials130 Addresses and advisers Registered office and headquarters Severfield plc Severs House Dalton Airfield Industrial Estate Dalton, Thirsk North Yorkshire YO7 3JN Operational businesses Severfield (UK) Limited Severs House Dalton Airfield Industrial Estate Dalton, Thirsk North Yorkshire YO7 3JN JSW Severfield Structures Limited Office No. 302, Naman Centre 3rd Floor, Plot No. C-31 Bandra Kurla Complex Bharat Nagar, Bandra East Mumbai 400 051 India Advisers Auditor Deloitte LLP Chartered Accountants and Statutory Auditor 1 City Square Leeds, LS1 2AL Solicitors Ashurst LLP Broadwalk House 5 Appold Street London, EC2A 2HA Irwin Mitchell LLP 21 Queen Street Leeds, LS1 2TW Stockbrokers Jefferies International Limited Vintners Place 68 Upper Thames Street London, EC4V 3BJ Severfield (Design & Build) Limited Severfield (NI) Limited Ward House Sherburn Malton North Yorkshire YO17 8PZ Fisher House Ballinamallard Enniskillen Co Fermanagh BT94 2FY Registrars Computershare Investor Services PLC PO Box 82 The Pavilions, Bridgwater Road Bristol, BS99 7NP Public Relations Bell Pottinger 6th Floor, Holborn Gate 330 High Holborn London, WC1V 7QD Bankers The Royal Bank of Scotland plc 3rd Floor 2 Whitehall Quay Leeds, LS1 4HR National Australia Bank Limited (Yorkshire Bank) 94 Albion Street Leeds, LS1 6AG 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plcAnnual report and accounts for the year ended 31 March 2014This Annual Report has been printed on recycled coated Board and Paper by an FSC® (Forest Stewardship Council) certified printer using vegetable based inks. 23372.04 16 July 2014 10:30 AM PROOF 8 Severfield plc Severs House Dalton Airfield Industrial Estate Dalton, Thirsk North Yorkshire YO7 3JN Tel: (01845) 577896 Fax: (01845) 577411 www.severfield.com 23372.04 16 July 2014 10:30 AM PROOF 8

Continue reading text version or see original annual report in PDF format above