Annual Report • Dec 31, 2011
Annual Report
Open in ViewerOpens in native device viewer
Mears Group PLC / Annual report and accounts 2011
We maintain and improve homes as well as care for the people who live in them.
Every day we carry out more than 4,000 repairs to people's homes. We also deliver over 8 million hours of care and support every year to vulnerable people, helping them to live in their own homes for longer.
| How do we do this? | Read more |
|---|---|
| By operating a successful and sustainable business model that delivers an effective integrated service to the people and communities with whom we partner. |
page 02 |
| By continuing to see significant growth opportunities flowing from our differentiated quality focused market position. |
page 06 |
| By developing a focused strategy based on our core values by working towards growing our business, expanding our geographic coverage and innovating |
page 10 |
through existing partnerships.
26.01p Diluted earnings per share (p)**
* Before exceptional items and before amortisation of acquisition intangibles.
Read our Finance review in full on page 22
** Based on normalised earnings before exceptional items and the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge.
| Highlights | 01 |
|---|---|
| Our business model | 02 |
| Chairman's statement | 04 |
| Our markets | 06 |
| Chief Executive's review | 08 |
| Financial review | 22 |
| Risk management | 26 |
| Corporate social responsibility | 28 |
| Board of Directors | 30 |
|---|---|
| Shareholder and corporate information | 32 |
| Report of the Directors | 33 |
| Statement of Directors' responsibilities | 36 |
| Corporate governance statement | 37 |
| Remuneration report | 44 |
| Report of the independent auditor | 56 |
|---|---|
| Principal accounting policies – Group | 58 |
| Consolidated income statement | 68 |
| Consolidated statement of comprehensive income | 69 |
| Consolidated balance sheet | 70 |
| Consolidated cash flow statement | 71 |
| Consolidated statement of changes in equity | 72 |
| Notes to the financial statements – Group | 73 |
| Company accounts | 102 |
| Principal accounting policies – Company | 103 |
| Parent company balance sheet | 105 |
| Notes to the financial statements – Company | 106 |
Review of the year / Our business model
Our focus is on maintaining excellence in service delivery. This drives our increasing market share and strong financial output.
Our success is built on strong, long-term partnerships with Local Authorities and Housing Associations, as well as with community groups, supply chain partners, staff and our investors.
Our approach is based on the development of outstanding partnerships with employees, clients, tenants, service users, their families and the wider community. Success enables us to create great opportunities for our employees and sustainable value for our shareholders.
We focus on long-term outcomes for people and invest in innovations that make a positive impact on their quality of life and on their communities' social, economical and environmental wellbeing.
The challenges of delivering service improvements at lower costs require innovative thinking and extensive consultation between all stakeholders. Mears is unique in providing a range of services that help address some of the major challenges our country faces: quality social housing, building communities, caring for the vulnerable and sustainability.
Read our CSR review for more on page 28
Mears today employs almost 11,500 people in every region of the UK. Health and wellbeing, socialisation and community integration and homes fit for purpose are all key elements in keeping people living happily, safely and securely at home.
Integrating our range of services brings distinct advantages: care-services workers are uniquely placed to identify potential problems or hazards that could cause an accident and giving them direct access to a complete range of services enables preventative measures to be taken quickly.
Read more about our care and repair developments on page 16
>4,000 Repairs made every day
>8 million Hours of care delivered per year
Mears is uniquely place to benefit from the expected growth in both our core markets of Social Housing and Care and Support. As leaders in these sectors, we will continue to innovate both in improving service quality and in finding long-term value for money solutions.
With several growth drivers in Social Housing, including consolidation of Landlords and Housing Associations, this trend leads to increasing opportunities for organisations such as Mears.
The future of care is very positive. Demographic changes mean 1.7m more adults will require care over the next 20 years. A key factor is the increasing role of the NHS is taking in joint commissioning. Read case studies
£23.9m Social Housing operating profit* Care and Support operating profit
2010: £7.5m
2010: £22.9m
+4%
* Before exceptional items and pre amortisation of acquisition intangibles.
Learn more about our markets and their opportunities on page 14
...across key target markets... ...creating a seamless, integrated service.
We believe the future requires new partnerships to be built that link together housing, social care and the NHS. These partnerships will provide integrated services that improve customer outcomes as well as meet the financial challenges that exist.
about how we're actively applying our integrated services in communities on pages 15 and 16
www.mearsgroup.co.uk
Review of the year / Chairman's statement
"We continue to place great emphasis on winning good quality contracts that can provide clear and sustainable margins, whilst at the same time providing a first class service and value offering for our clients."
Bob Holt / Chairman
"We will grow through further contract wins, underpinned by our market‑leading service delivery and, where appropriate, regional in‑fill acquisitions."
Both profits and revenue have risen for the sixteenth consecutive year. Our Social Housing and Care revenues grew by 9% and 8% respectively. Profit before tax, amortisation and non-recurring items rose to £31.5m (2010: £28.9m) on revenue of £589.0m (2010: £523.9m). The normalised diluted earnings per share increased by 11% to 26.01p (2010: 23.38p). The Board is recommending a final dividend of 5.35p per share (2010: 4.85p), making 7.50p per share for the year, an increase of 11%.
Cash generated from operations as a proportion of the profit for the year (before tax and amortisation) amounted to 91% (2010: 97%), reflecting the strength of our working capital management.
We are extremely pleased with this robust set of results given both the continuing impact of the current economic situation and, critically, in the wake of the sudden decision by the UK Government to accelerate the reduction in the Feed-in Tariff subsidy for solar photovoltaic (PV) installations.
This year, three things stand out for me in particular. First and foremost, our already market-leading service delivery performance continued to be recognised by tenants and customers alike. Second, we demonstrated how we can make a real difference in challenging times, as we transformed the contracts we have inherited from failed businesses. Third, in a support services sector, where many well established businesses have struggled to deliver significant organic growth, we have managed to reap the rewards from our investment over the years in high quality customer service with strong organic growth.
The PV Tariff decision was reached without consultation and has been a disaster for the industry that had been heralded as a major boost to the economy and the environment.
The Government has been found to have acted unlawfully by the Court of Appeal; consequently, the industry is somewhat in 'limbo'. Pending clarification on the longer-term outlook, we took the prudent view to mothball our solar panel operations and to write off the costs expended to date in the 2011 financial year. Whilst PV formed only a small add-on to our core Social Housing business, the speed of the Government change resulted in a disproportionate impact.
As stakeholders begin tackling the underlying challenges in social housing and care in a sustainable fashion, I am confident that our differentiated quality-focused market position will see us reap the rewards for which we have worked hard.
Our order book stands at £2.9 billion. The demand for our services continues to be very strong with a bid pipeline in excess of £3.0 billion with an immediate bidding opportunity for contracts due to start in the course of the next twelve months in excess of £2.0 billion. We enter the current year with visibility of 94% of the £649m consensus revenue forecast for 2012. Moreover, we have visibility over 80% of the £686m consensus revenue forecast for 2013 which demonstrates our strong position and reflects the long-term nature of our business.
We are well placed to benefit from the immediate bid pipeline and the wider contracting opportunity in both our core growth markets. Our relationship with our customers continues to be strong and our partnering ethos is recognised and appreciated widely. We are delighted that customers feel able to award, as well as renew, contracts to the Group across an array of activities.
7.50p Total dividend +11%
2010: 6.75p
£2.9bn Order book 2010: £2.7bn +7%
We have been broadening our care and support offerings to our clients. The acquisition of the Supported Living division of Choices Care brings the Group capabilities in providing a supported living service to adults with learning disabilities, autism and mental health needs, in their own homes. These adults tend to require a more complex care support package than is often offered in the traditional domiciliary care area. The acquisition of a group of home improvement agencies from Anchor Housing further strengthens our capability to help keep people in their own homes for longer. Home improvement agencies contract with Local Authorities to provide primarily home adaptation and handyman services to vulnerable owner-occupiers in local communities. Together, these two acquired businesses are an excellent complement to our existing operations; both have reported growth since acquisition.
Progressive social housing customers continue to seek innovative solutions to their needs. The Group has been active in developing new propositions around 'in-sourcing' and 'new homes'. Our unique integrated care and housing offering continues to resonate with customers. Our first integrated service operation is up and running in Wigan. Irrespective of the current uncertainty over PV, we will continue to strive to provide solutions to our customers and clients to address the challenges of fuel poverty.
I commend our employees for their commitment and energy throughout another significant year for the Group. I continue to be impressed by the quality, professionalism and loyalty displayed by our people. We will return this faith with
appropriate investment in our people. Given we work in some of the most deprived communities in the UK, we take our responsibilities regarding employment extremely seriously. We have 208 people enrolled in Apprenticeship and Job Experience programmes within Mears. We are proud of the many practical and local opportunities we are able to create in these challenging times.
Both social housing and care are robust defensive sectors where spend is largely non-discretionary. We continue to place great emphasis on winning good quality contracts that can provide clear and sustainable margins, whilst at the same time providing a first class service and value offering for our clients. We will continue to differentiate ourselves through financial robustness, tenant-centric customer service and proposition innovation developed in partnership with our customers.
We expect our Social Housing business will grow through further contract wins, underpinned by market-leading service delivery and, where appropriate, regional in-fill acquisitions. In our Care business we will seek acquisitions that increase our ability to respond to growing opportunities from health and social care outsourcing and implementation of new localised commissioning models. We will look to enhance and broaden our offering through partnerships and acquisitions.
I look forward to bringing you news of further success during the coming year.
Bob Holt [email protected] Chairman 27 March 2012
"We will seek acquisitions that increase our ability to respond to growing opportunities from health and social care outsourcing and implementation of new localised commissioning models. We will look to enhance further and broaden our offering through partnerships and acquisitions."
Review of the year / Our markets
We will continue to differentiate ourselves through financial robustness, tenant-centric customer service and proposition innovation developed in partnership with our clients.
Growth drivers and opportunities
www.mearsgroup.co.uk
Within Social Housing, opportunities for greater local investment in stock have been created by the reform of the Housing Revenue Account. The Government has also increased the incentives to build new stock to help address the huge backlog in demand for Social Homes. We have seen weakness in our direct competitors, which has helped improve our already good bid win rates, with an increasing demand from Social Landlords for innovative solutions given their financial pressures.
Within Care and Support, we see opportunities in the planned reform of the health and social care system, in improved commissioning approaches and in the general consolidation of the market towards larger, more efficient suppliers. We believe the move towards personalisation plays to our service quality strength, as does the opportunity created by this for more integrated housing and care services.
Review of the year / Chief Executive's review
"We have focused on further enhancing our market-leading bidding and service delivery capabilities through both senior management recruitment and training and process improvement."
David Miles / Chief Executive Officer
The Social Housing business has performed well, reporting growth of 9%. The Social Housing operating margin reported a small reduction to 5.8% (2010: 6.0%).
The Care division reported growth of 8%. The operating margin has increased to 8.0% (2010: 7.5%). The growth in margin has been achieved through identifying further synergies together with a change in sales mix as the division commenced delivering more acute and higher margin services.
Other Services predominantly comprises the M&E operation. This division has experienced a significant upturn in activity over the year with revenues increasing 48%. Whilst the trading environment remains competitive and is expected to continue to be so in the short term, the division has full visibility of forecast revenues for the 2012 year and is already focused at developing the order book for 2013.
I am pleased to report a year of significant progress across the Group in what has been a challenging year. We have seen the Group further consolidate its market-leading positions in both the Social Housing and Care sectors. The continued focus on providing first class value for money customer service through our partnership ethos has once again been rewarded with considerable new contract bidding success.
Group revenues increased by 12% to £589.0m. The Group's overall operating margin reduced from 6.0% to 5.7% predominantly driven by a shift in the sales mix with our lower margin Other Services division having a larger share of the whole. This is reviewed in greater detail below.
I am delighted that our Social Housing division continues to report improving service delivery notwithstanding the high standards already being achieved. The proportion of customers rating our service as excellent stands at 80% (2010: 79%). Typically others in the sector measure only customer satisfaction whereas our drive has always been for excellence. We also had the lowest ever level of complaints as a percentage of work carried out at 0.30% (2010: 0.32%). Service quality remains our key differentiator. Whilst I am delighted at the strong performance delivered in terms of both new contract bidding and ultimately the financial outputs, it is important to remember that it is service quality that has always underpinned our success.
The Social Housing business has performed well, reporting revenue growth of 9%. As expected, we have seen a reduction of £31.5m in our capital projects revenues as the Decent Homes programme moves towards its natural conclusion. This masks the continued strong growth within our core maintenance activities which registered an increase of 14%. We would anticipate a final reduction of around £30m from Decent Homes revenue in 2012. We remain optimistic that we can continue to deliver solid double-digit organic growth in both the short and medium term.
The Social Housing bid pipeline remains robust, which further supports our confidence that we will continue to deliver strong growth in our core Maintenance business. The impact of the acquisitions of Jackson Lloyd and the home improvement agencies added £20.3m to our Maintenance revenues. The contribution to Group revenues through the relationships acquired with the Bristol Social Housing division of Rok contributed £5.3m to our Projects revenue.
At a divisional level, operating profit is reported before amortisation, exceptional items and share option costs. The Government's announcement in October 2011 to significantly reduce both the level and the timing of the PV feed-in tariff was extremely disappointing. The Board considered that the prudent course of action was to cease these activities immediately. This resulted in the write off of costs relating to the site set-up, system design and installation amounting to £2.0m. This cost has been excluded from the Group's headline financial performance indicators and is categorised as exceptional.
| £m | Social Housing total |
Core maintenance |
Capital projects |
|---|---|---|---|
| 2010 revenue | 379.4 | 289.0 | 90.4 |
| Impact of 2011 acquisitions | 25.6 | 20.3 | 5.3 |
| Decent Homes expiry | (31.5) | — | (31.5) |
| Organic growth in core maintenance | 41.5 | 41.5 | — |
| 2011 revenue | 415.0 | 350.8 | 64.2 |
| Organic growth | 14% |
2010: £523.9m
The Social Housing operating profit increased to £23.9m (2010: £22.9m), with the operating margin reporting a small reduction to 5.8% (2010: 6.0%). The continuing reduction in works relating to Decent Homes does inevitably add a challenge to margin in both 2011 and 2012, given that these contracts generated a solid margin and are being replaced by revenues that, through their early stages, will generate a reduced margin. Typically the Group anticipates a low margin from a new contract during its mobilisation phase, a time when it is critical to ensure that the necessary processes are put in place while at the same time focusing on excellent customer service. It is important to note that Mears does not capitalise any of these start-up costs and the losses associated with new mobilisations are fully expensed in the period.
Whilst there have always been competitors with a greater appetite for revenue growth at the expense of margin, we remain highly selective and there is no shortage of opportunities where potential clients are willing to focus on quality and not simply the price paid to Mears. The high number of recent contract successes will provide the foundations for delivering robust growth in 2012. The first quarter of 2012 will see the most intense period of new contract mobilisation in our history with five significant new contracts due to start on or around 1 April 2012 with an annual value of £50m. We continue to invest heavily in our infrastructure to ensure that we can deliver on these new contracts whilst maintaining the high quality of our overall service delivery.
In the last twelve months we have been awarded new social housing contracts valued at £590m (including extensions) representing 43% by value of all contracts bid in the last twelve months. The key contract awards, which are all due to commence in 2012, are detailed below:
A ten-year contract with Barnet Homes. The contract is valued at £69m over the ten-year period to provide responsive repairs, void maintenance and cleaning services to approximately 11,100 properties.
A seven-year contract valued at £52m over the initial seven-year period to provide responsive repairs, voids, capital works, aids and adaptations services. There is an option to extend the contract for a further seven years, taking the total opportunity to £104m. Waverley owns and manages in excess of 5,000 properties in Surrey.
A seven-year contract with Home Group to cover properties in their South West region. The contract is worth £35m for the initial seven-year term and there is an option to extend for a further two years. We will be providing responsive repairs, voids, gas servicing and planned maintenance services. Home Group owns and manages circa 3,200 properties in their South West region.
A five-year contract to provide responsive repairs and void maintenance, together with a range of reinvestment works. The contract is valued at £40m over the initial five-year period and includes an option to extend for a further two years, giving a total contract value of £56m including extensions. We have been appointed as sole partner to deliver these services to 4,500 properties.
A three-year partnership contract to provide responsive repairs, void services, gas servicing, cyclical maintenance and adaptations services. The contract is valued at £60m for the initial three-year period, with an option to extend for a further two years, giving a total contract value of £100m including extensions. We have been appointed as sole partner to deliver these services to 21,000 properties.
Our new contract successes have increased our Social Housing order book to £2.4 billion. Our bid pipeline remains robust and in excess of £3.0 billion, with the immediate bidding opportunity for contracts due to start over the course of the next twelve months in excess of £2.0 billion.
Review of the year / Chief Executive's review: Our strategy
We have a clear and effective strategy to strengthen and leverage our two existing growth platforms of Social Housing and Care and Support.
www.mearsgroup.co.uk
Percentage of people rating service as excellent
Customer complaints
New contract bidding success rate
Contract retention levels
Customer satisfaction levels where our services are integrated
Number of community projects carried out
Number of apprenticeships and job experience opportunities
Levels of waste recycled
Operating margins
Normalised diluted earnings per share
Review of the year / Chief Executive's review continued
In Care, our new contract bidding success rate (by value) is 70% of all contracts bid for in the last twelve-month period amounting to a total value of £70m.
This once again reflects the ongoing trends in awarding consolidating contracts to providers with an excellent quality reputation and a capability to deliver against the emerging personalisation agenda. The most significant new contract awards include the following:
The most significant single award has been with Wirral Council. The contract has an expected value of £14m with a term of five years. Wirral Council is an existing Mears Care client and, having retained our existing business, we added further specialist services, which is representative of our strategy to increase work in the higher-end care areas.
The five-year contract with Sefton Council has an estimated value of £7m with an estimated volume of 2,300 hours per week with Mears being named one of four providers.
The three-year contract with Liverpool City Council has an estimated value of £3.5m. Of the eight existing main providers for Liverpool, Mears is one of only three that have been retained. The estimated volume is 1,900 hours per week, which represents an increase on existing work levels.
The three-year contract with Rotherham Metropolitan Borough Council has an estimated value of £5.8m. This contract award represents a key existing contract retention.
A contract with South Gloucestershire Council for the provision of extra care and support services at a newly built extra care scheme which will be home to older people and those with learning disabilities, physical disabilities, mental health, sensory impairment, dementia, alcohol/substance misuse issues and those with HIV. The five-year contract is valued at £3m.
The Care division reported growth of 8% with revenues increasing to £108.5m (2010: £100.4m). This growth in Care revenues includes the full-year impact of the acquisition of Supporta plc, which was acquired in January 2010, and the revenues acquired from Choices Community Care (in administration) which came online in August 2011. The underlying organic growth was 2%. Whilst the level of organic growth is well below our stated target of double-digit growth, the continuing improvement in operating margin is particularly pleasing in a sector which continues to see such an important service procured predominantly on price. The operating margin has increased to 8.0% (2010: 7.5%). The growth in margin has been achieved through identifying further synergies together with a change in sales mix as the division has commenced delivering more acute and higher-margin services. I am delighted at the performance of our Care division in terms of the quality of service delivery together with its strong financial performance.
Care remains an environment where services continue to be purchased predominantly on price. We remain optimistic that this will change over the medium term. It is a fine balance between growing our top line whilst at all times protecting our operating margin. I do believe at times we have been a little too risk averse when bidding for new Care contract opportunities and this is an area that is under constant review. Certainly as we start to offer more acute services, this will provide more flexibility in terms of a growth and margin trade-off. I continue to believe that double-digit organic growth in Care is a very achievable target.
2010: £31.3m
* Before exceptional items and pre amortisation of acquisition intangibles.
Our current focus is to complete the roll-out of our new Care IT platform. The IT development was completed during 2011 using the skills and experience learnt from the Social Housing division to generate opportunities for efficiencies for both ourselves and our clients and provide significant competitive advantage. We remain determined to reinvest those savings into our care workforce who provides quality care services for a relatively low wage and remain undervalued when considering the responsibility and social contribution of their roles.
Equally important is Mears new partnership with Tunstall for the implementation of telecare and telehealth systems within the home environment. Telecare and telehealth, when combined with effective personal care and support, can both improve service and reduce costs. The results of the Department of Health study into the use of telecare and telehealth were extremely positive. Through the Mears partnership with Tunstall, we are already implementing the largest telecare project in the UK in Birmingham, across an anticipated 24,000 homes, and we see an acceleration of these opportunities through 2012 and 2013.
Mears' Other Services predominantly comprises its Mechanical & Electrical (M&E) operation. This division has experienced a significant upturn in activity over the year with revenues increasing 48% to £65.4m. Whilst the trading environment remains competitive and is expected to continue to be so in the short term, the division does have full visibility of forecast revenues for the 2012 year and is already focused on developing the order book for 2013. Whilst it is pleasing to report this significant increase in new works, the M&E environment is currently highly competitive and pricing is keen. I am delighted at the performance of the M&E operation and it is a credit to the quality of the team that it has continued to generate profits and meet budget expectations in what has been a challenging period.
"Whilst I am delighted at the strong performance delivered in terms of both new contract bidding and ultimately the financial outputs, it is service quality that has always underpinned our success."
Since my appointment as Chief Executive, I have focused on further enhancing our market-leading operational capabilities through both senior management recruitment and training and process improvement. We have the right management team in place to take our business forward and capitalise on the many opportunities in our growth markets.
Another great year for Mears: accidents rates down, recycling rates increased, waste costs reduced and quality standards introduced across the group to improve standards further. This has been complemented with improved training and committed management teams. This has been further affirmed by RoSPA with 2012 being the tenth consecutive year in which Mears have been awarded the Gold Award and also achieved the 18001 accreditation.
Our environmental performance continues to improve. In 2011 we teamed up with our waste partner Network Waste and in the last 10 months we reduced our overall cost for disposing of waste by 10% and improved our recycling from 76% to 88%. I hope to be able to report further improvements in a year from now.
Our environmental performance continues to improve. In 2011 we teamed up with our waste partner Network Waste and in the last ten months we reduced our overall cost for disposing of waste by 10% and improved our recycling from 76% to 88%. I hope to be able to report further improvements in a year from now.
Our training commitments continued in 2011 including further refresher training for all operatives and carers. Specific on-the-job training included scaffold, lifting and working at height training and these are all contributing to our improved safety performance.
We are delighted that through periods of employee growth we have retained our accreditation with Investors in People. We have opted for annual assessment and our 2011 report provided very positive feedback. In addition to this we now carry out annual employee satisfaction surveys which provide valuable information.
In 2011 our apprentice and trainee numbers increased by 95, 13 of which transferred from other companies as a result of contract wins and the remaining were newly created opportunities. At the end of 2011 we launched our apprentice programme in Care. During the same year we retained 85% of apprentices and trainees that had completed their training programme.
In January 2011 we launched a new leadership training programme, which 76 senior managers completed. The results have been positive with all managers stating that they felt more confident, particularly in respect of people management and presentations. On average every employee receives five days of training per year in areas of people management, health and safety, customer services and trade skills.
We have operations throughout the UK and all our branches are dedicated to helping to improve people's lives. We work in some of the most socially deprived areas of the country and so we feel a strong sense of responsibility toward the wider community. Helping a community thrive increases the quality of life for residents and supports community cohesion and development.
[email protected] Chief Executive Officer 27 March 2012
Review of the year / Market development review
"Changes in both our core growth sectors of Social Housing and Care continue to be driven by Government legislation, demographics and austerity measures. We see these changes as extremely positive and believe they will provide further growth opportunities."
Changes in both our core growth sectors of Social Housing and Care continue to be driven by Government legislation, demographics and austerity measures. We see these changes as extremely positive and believe they will provide further growth opportunities.
Social Housing has several key growth drivers including the continued consolidation both in terms of the number of contractors and in the number of Registered Social Landlords. This trend is observed within Housing Associations and Councils and in turn leads to increasing opportunities for organisations such as Mears who operate at a local level but who bring the economies of a national player.
The public services white paper, published by the Cabinet Office in July last year, re-affirmed the Government's guiding principles for public services as being choice for public service users, decentralised decision making, diversity of supply, fair access to services and that public services should be accountable to users and taxpayers. We support fully this development as it plays to our strengths of working with clients and service users alike to maximise the positive impact of what we do whilst managing our costs very tightly. For Local Authorities 2012 will see the management and finance of council house operations being brought onto a similar footing as housing associations. This decentralised decision making, which applies from
April 2012, will put Local Authorities be in the driving seat for determining the future of the local housing offer they will make to their community. For housing associations we see 2012 as a year of consolidation in respect of the application of the new affordable rent regime which allows uplift in rents on new tenancies to 80% of market rents to assist in the finance of new, much-needed social housing. Most landlords appear to be implementing rental increases of around 8% for this year. For all social landlords and for the majority of tenants the changes to the housing benefit arrangements, still being finalised, will require careful consideration as they come on stream. As in previous years we will be very careful which opportunities we pursue to ensure that we maintain our commitment to high quality, reliable services to both existing and new clients and residents alike.
The ongoing mortgage lending constraints and the broader pressures on the economy are reinforcing the demand for affordable rented accommodation whether in the social or the private sector. Everywhere we work, demand for social housing outstrips supply especially where the costs of buying, or sometimes renting privately, are well beyond local wage levels.
This year will see the first of the new affordable rent homes become available as the Government's new scheme for the production of new social housing comes into being. It will also see, we believe, more social housing landlords looking to add to the supply of affordable homes through new and innovative
approaches being adopted by Local Authorities and Housing Associations alike. The review commissioned by the Government into the prospects of increased institutional investment in the private rented sector, chaired by Sir Adrian Montague, will also be worth following.
The service provision connections between housing supply, housing management and maintenance, personal social care and the provision of health services at a local level will all be examined in greater detail as everyone strives to minimise waste and maximise effectiveness within and between each of these service streams. We at Mears will ensure that our service complements, wherever possible, this new and necessary approach that we are beginning to see develop at a local level.
In line with the Government's approach to public services as set out in its white paper in July we expect more diversity in how service packages are put together. The financial pressures on public service bodies at an individual service, organisation or locality level will mean that not only will there be traditional opportunities for service provision but an increasingly wide range of bespoke arrangements.
The Government will finalise its approach to tackling fuel poverty and carbon reduction challenges in housing in the first quarter of 2012. The flagship policy for this is the Green Deal, which will include a new Energy Company Obligation (ECO), to replace the existing CESP and CERT schemes. ECO for social housing will largely focus on hard-to-treat properties, for example where the property has solid walls. The broader Green Deal enables householders to receive loans to fund a wide range of energy efficiency improvement measures. The energy savings from the improvements made have to exceed the cost of the improvements. No up front investment is made by the householder/tenant, with the cost of the improvements being paid back directly through future energy bills. Uniquely, the loan is linked to the property and will pass to the next resident if the initial resident moves on. Social Landlords are being encouraged by central Government to become Green Deal providers. Mears will look closely at opportunities when the details of the scheme are finalised.
We will be careful in our selection of opportunities, as we have been in past years, but will also want to expand our repertoire where we can add to our portfolio of approaches. On occasion we can see this being joint approaches with other strategic partners, especially where we have strong working arrangements in place and there is a clear synergy in our long-term view for a sustainable service provision.
Although some of these opportunities will continue to be single-entity arrangements at local, regional and national levels, we anticipate more opportunities being multi-service, multi-client based which may be predominantly locally co-located as service commissioners work on an increasingly collaborative basis.
Mears Wirral is running a Rapid Access contract with Wirral PCT to provide an emergency cover care service to get people who are fit for discharge home from hospital without delay. The service is for older people or those with a physical or mental disability. Mears commits to providing emergency care calls within 24 hours of discharge and for a period of up to two weeks until permanent care provision is in place.
Mears assessors visit the patient in hospital to ensure all the necessary information and paperwork is in place. This also serves to establish understanding and communication between the care teams, the ward managers and the PCT. The success of this scheme is facilitating a more integrated service between local care and healthcare services.
Review of the year / Market development review continued
Colebrooke House, which is situated in the grounds of the Royal Military Academy in Greenwich, is a groundbreaking Extra Care Housing Scheme (ECHS) with its care and repair services both delivered by Mears. Mears provides the on-site care with the building maintenance being undertaken by our London and Quadrant operation based in Greenwich.
Each of the scheme's 56 residents has their own tenancy with light and airy rooms that are purpose-designed with, for example, wheelchair-friendly doorways and wet rooms. Communal facilities include a hairdresser, a restaurant and social areas for clubs and events.
Colebrooke House is the first scheme of its kind in the borough and is designed to allow its residents to live independently in their own homes with different levels of care support from Mears depending on each individual's needs.
through the provision of an integrated service.
The long-term opportunities for Mears within Care and Support continue to be excellent. The ageing population and the fundamental desire of people to stay in their own home remain the foundations for this sector. Economic necessity is of course the third driver, which has led to never-seen-before levels of political activity in 2011, which will continue into 2012 with the anticipated publishing of the Government's white paper on the future of social care in the spring of 2012.
The reform of social care is also being set during a period of continuing political turmoil around the future of the NHS. There is all-round agreement that there needs to be shift from primary care to care in the community, but the pathway for the implementation of this policy remains disputed. We are now seeing greater joint working and commissioning between NHS Authorities and social care at a local level but the pace of this has been slower than hoped. Through acquisitions such as Choices in 2011, Mears is increasing its capability to handle more complex cases as a means to be well positioned for emerging opportunities in this area.
The Dillnot Review commissioned by the Department of Health last year to look at the future funding of adult care reported in the autumn. If accepted in full, this would lead to an additional initial spend on Care and Support of £1.3 billion, rising to as much as £3 billion in future years. Realistically, the Government may well scale back on this ambition within the Spring white paper but the direction of travel should be positive. The Government faces significant lobbying from numerous organisations concerning the state of care, most recently from the Equality and Human Rights Commission report of November 2011.
"The care and support system, as well as the whole healthcare system, is going through a period of change, the like of which has never been seen before. This does of course present short-term challenges to Mears but we have built a capability that is unique in the market and one that is very well placed to meet the longer-term opportunities that exist."
Proposals to replace previous quality rating systems and new advice mechanisms are in development. Mears has been active in providing practical suggestions to all political parties on how to cost effectively improve the quality of care, in particular around opportunities to link together the care of the individual with the care of the home in which they live.
One of these opportunities is for utilising more technology in the support of care delivery within the home. Mears' new integrated Care management system will speed up work allocation, provide better controls and reduce the significant amount of unnecessary paperwork within the system. Equally important is Mears' new partnership with Tunstall, for the implementation of telecare and telehealth systems within the home environment. Telecare and telehealth, when combined with effective personal care and support, can both improve service and reduce costs. The results of the Department of Health study into the use of telecare and telehealth were extremely positive indicating that a 14% reduction in A&E admissions through to a startling 45% reduction in mortality rates could be achieved. Through the Mears partnership with Tunstall, we are already implementing the largest telecare project in the UK in Birmingham, across an anticipated 24,000 homes, and we see an acceleration of these opportunities through 2012 and 2013.
The connection between housing quality and speed at which care requirements develop is strong and one which we observe through all of our operations. Whether that be a care worker noticing a faulty kettle plug or a joiner being told about an older neighbour who has not been seen for a couple of days, our front line staff are at this interface every day.
We, in response, take our responsibilities seriously, using our knowledge, experience and technology to bring added value to our work with the elderly whether in a repair, care or home improvement agency setting. Mears has a unique proposition to support people remaining independent in their own homes for longer. No other care company is also able to provide advice, home adaptations, handyperson services, telecare and personal care under one roof. Integrated services have real potential to save money and help vulnerable people to make an informed and better choice as to which products and services will help them the most.
In summary, the care and support system, as well as the whole healthcare system, is going through a period of change, the like of which has never been seen before. This does of course present short-term challenges to Mears but we have built a capability that is unique in the market and one that is well placed to meet the longer-term opportunities that exist.
[email protected] Chief Executive Officer
[email protected] Executive Director 27 March 2012
Review of the year / Chief Executive's review: Key performance indicators
We use the following KPIs to monitor our performance. Our strong financial performance is a result of our differentiated service delivery.
Customer complaints
Why we measure it
service as excellent
The sector in general collects customer satisfaction data and reports on the percentage of customers who rate the service as satisfactory. Given that we are service leaders, it is not sufficient to benchmark ourselves by these standards. Our measurement is based on the percentage of people who rate the service as excellent. We conduct around 80,000 surveys per year by phone and directly with the customer via our operatives' hand-held device (PDAs).
Whilst we achieve high levels of service excellence, it is important that we monitor carefully the number of poor service incidents, that we deal effectively with each individual complaint and that we learn from underlying trends. We measure the number of complaints as a percentage of repair jobs delivered in the period.
Delivering to our promises is at the heart of Mears. Each of our contracts has specific targets around job completion time based on the nature of the work. Emergency jobs are typically undertaken same day while routine work will be scheduled in into overall work plans. Having agreed the standards by type of work, it is obviously important that we stick to them.
Outcome
Order book growth (£bn)
We tender between £1–2 billion of new opportunities each year. The average contract length is around six years in length. In order to achieve our organic growth forecasts, we monitor the proportion of new contracts secured as a proportion of total tendered works.
Included in this performance measure are contract retentions on re-bid whilst being awarded contracts from new customer relationships are key in order to achieve sustained growth.
We typically secure long-term contracts with our clients. Typically our Social Housing contract average six years in duration. Our Care contracts are typically shorter at around three years. Our order book places an aggregate value of the future revenues that have been secured relating to services that will be delivered over future financial years. We only place a value against orders which are contractually secure and where the delivery of the works are highly probable. We do not include Social Housing framework arrangements within our order book as the value is considered uncertain. The order book valuation excludes indexation. The order book, which includes contract extensions, stretches to 2032.
Revenue secured (%)
We typically secure long-term contracts with our clients, with Social Housing and Care contracts on average six years and three years in duration respectively. Typically there is a period of around three months between the notification of the award and commencement. It is therefore imperative that at the start of any financial year, a significant proportion of that year's orders are already secured.
Review of the year / Chief Executive's review: Key performance indicators continued
Social Housing – operating margin Social Housing maintenance revenue – organic revenue growth
Revenue represents the amounts due for services provided during the year. In order to measure organic growth, we deduct revenue derived from assets that have been acquired. Whilst acquisitions form part of our growth aspirations in Social Housing, we believe that organic growth gives a better indication of business performance, as it is a purer aggregation of market growth, success in new contract bidding and contract retention. We also exclude the impact of revenues from the Decent Homes initiative as this area of the business is short term in nature. Our key focus continues to be our long-term, non-discretionary, maintenance revenues.
Social Housing operating margin gives a strong indication of profitability. We continually monitor our operating margin and manage our costs base to ensure that our services are delivered efficiently. Operating margin is struck before amortisation, share-based payment charges and exceptional items. We have consistently delivered a higher margin than our competitors. This has been due in part to being selective as to which new contract opportunities we tender. Our desire is to work with clients who focus on quality and value for money, and not simply the base price. The margin is also an indication as to the quality of our people and the quality of our systems.
Revenue represents the amounts due for goods and services provided during the year. Our strategy in Care is to grow our existing business organically whilst making further strategic acquisitions to increase the services that we can offer to our clients. Our ambition is to be in a position to provide a complete solution for our service users. Typically, we look to acquire a small, regional operation that possesses a required specialism. We then look to use that acquisition as a platform to tender more contracts of this nature across the rest of the UK. We believe that the revenue growth and operating margin performance indicators cannot be considered singularly. It is a fine balance between growing the top line whilst maintaining our operating margin. Whilst revenue growth is a key performance measure, the quality of our service delivery and our operating margin will always take precedence.
The Care operating margin gives a strong indication of profitability. We continually monitor our operating margin and manage our costs base to ensure that our services are delivered efficiently. Operating margin is struck before amortisation, share-based payment charges and exceptional items. Care remains an environment where services continue to be purchased predominantly on price. We believe therefore that the revenue growth and operating margin performance indicators cannot be considered singularly. It is a fine balance between growing the top line whilst at all times protecting our operating margin. The acquisition of the Supported Living division of Choices Care provides the Group the capabilities to deliver more acute services that typically command a higher margin.
The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group closely monitors the conversion of profit into cash. The key measure is cash inflow from operating activities as a proportion of EBITA.
Normalised earnings are stated before exceptional costs and exclude the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge. We believe that a normalised diluted EPS measure gives a true assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. The number of shares in issue allows for the potentially diluting impact of outstanding share options.
Review of the year / Financial review
"The Group has completed a refinancing of its banking facilities. This provides significant additional funding capacity, lower debt pricing and higher operational flexibility. Our ability to achieve such a refinancing in the current economic environment is a testament to the continued strong performance of the business and the strength of the longstanding banking relationship."
Andrew Smith / Finance Director
"The Board remains confident in the future opportunities in its growth markets and consequently expects to be able to continue to follow a progressive dividend policy."
This Financial Review provides further key information in respect of the financial performance and financial position of the Group, to the extent that this is not already covered within the Chief Executive's Review. See table opposite.
Costs of £3.1m (2010: £2.5m) were considered to be non-recurring and exceptional in nature. Notably:
A charge for amortisation of acquisition intangibles of £7.8m (2010: £10.1m) arose in the period. The majority of this charge is in respect of the Group's Care division and represents the amortisation of the identified intangible assets acquired in respect of a number of Care acquisitions. In addition, the Social Housing division has completed a number of small acquisitions, typically of distressed businesses, over recent years. The decrease in the charge in the year reflects the Group's prudent approach in respect of identifying intangibles and their subsequent release. In 2010, the intangibles identified in respect of the acquisition of certain
trade and assets of Connaught Partnership Limited and Rok Building Limited were written off entirely in the period resulting in a particularly high charge in that year.
The finance cost in respect of bank borrowings was £2.4m (2010: £2.0m). The increase in interest cost reflects an increase in the average core debt following the acquisitions of Supporta plc, Jackson Lloyd Limited and Choice Care. The net interest credit in respect of the defined benefit pension scheme was £0.3m (2010: £0.3m charge).
A tax charge of £3.7m has been provided (2010: £1.6m). The effective current corporation tax rate recognised in the income statement before adjustments for deferred tax is 22.1% (2010: 14.3%). The effective current corporation tax rate was unusually low in the prior year due to a deferred tax credit in respect of the amortisation of acquisition intangibles of £2.8m and a non-taxable pension benefit of £3.7m. Historically the Group's effective tax rate is lower than the headline rate of corporation tax, which for 2011 is 26.5%, given the Group receives a corporation tax deduction in respect of the exercise of share options. It is anticipated that this trend will continue.
Normalised basic EPS increased by 8.8% to 27.16p (2010: 24.96p). The normalised diluted EPS, which allows for the potential diluting impact of outstanding share options, was up 11.3% to 26.01p (2010: 23.38p). Normalised earnings are stated before exceptional costs and exclude the amortisation of acquisition intangibles together with an adjustment to reflect a full tax charge of 26.5% (2010: 28.0%). We believe that this normalised diluted EPS measure better allows the assessment of operational performance, the analysis of trends over time, the comparison of different businesses and the projection of future performance. See table opposite.
Group revenue
£589.0m
Group operating profit*
* Before exceptional items and pre amortisation of acquisition intangibles.
The Board remains confident in the future opportunities in its growth markets and consequently expects to be able to continue to follow a progressive dividend policy. The Board has recommended a final dividend of 5.35p per share which, combined with the interim dividend, gives a total dividend for the year of 7.50p (2010: 6.75p), an 11.1% increase. The dividend is payable on 3 July 2012 to shareholders on the register on 15 June 2012. The dividend is covered 3.5 times by underlying earnings per share.
The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group's conversion of profit for the year before tax and pre amortisation to cash in the period was 91.1% (2010: 96.7%). The Group has consistently set high standards of working capital management and high levels of conversion of profit before tax into cash with an average conversion rate during the last five years of 84.3% against its stated target of 80%. Over the same period, the business has more than doubled through organic growth.
Our net debt position at 31 December 2011 was £13.4m (2010: £12.2m). Whilst the year end cash position was pleasing, typically the accounting period end reports a low debt balance when compared to the rest of the year. A far more important metric is the Group's daily net debt balances which provide a better indication of working capital management. The average net debt over the year amounted to £58.5m (2010: £48.5m). This increase is predominantly due to the acquisitions completed during 2010 and 2011 which increased net debt by in excess of £35m over the last two years. Given the timing of the non-trading outflows, the true underlying core debt at the year end is in the region of £60m (2010: £59m). We have always been and remain conservative in respect of our appetite for debt and, whilst the Group has ambitions for making acquisitions through 2012, our expectation would be to work to a net debt to EBITDA ratio of no greater than two times. See table opposite.
| 2011 £m |
2010 £m |
Change % |
|
|---|---|---|---|
| Group revenue | 589.0 | 523.9 | +12% |
| Operating profit before exceptional items* | 33.6 | 31.3 | +7% |
| Profit before tax and before exceptional items* | 31.5 | 28.9 | +9% |
| Profit before tax* | 28.4 | 26.5 | +7% |
| * Pre amortisation of acquisition intangibles. |
| 2011 | 2010 | Change | |
|---|---|---|---|
| p | p | % | |
| Normalised diluted earnings per share* | 26.01 | 23.38 | +11% |
| Dividend per share | 7.50** | 6.75 | +11% |
* Before exceptional items and pre amortisation of acquisition intangibles and based on a normalised tax charge of 26.5%. ** Including a proposed final dividend of 5.35p per share.
| 2011 | 2010 | |
|---|---|---|
| Cash conversion (PBT)* | 91.1% | 96.7% |
| Cash conversion (EBITA)* | 84.7% | 88.9% |
| Net debt at balance sheet date | £13.4m | £12.2m |
| Average daily net debt | £58.5m | £48.5m |
* Cash inflow from operating activities before taxation and before the effect of acquired contracts.
| 2011 £m |
2010 £m |
Change % |
|
|---|---|---|---|
| Goodwill and intangible assets | 127.5 | 124.5 | |
| Property, plant and equipment | 12.7 | 12.1 | +5% |
| Inventories | 12.5 | 12.1 | +3% |
| Trade receivables | 127.5 | 111.6 | +14% |
| Trade payables | (104.0) | (95.8) | +8% |
| Net debt | (13.4) | (12.2) | |
| Deferred consideration | (2.9) | (2.8) | |
| Cash flow hedge | (1.7) | — | |
| Pension | (5.8) | (7.7) | |
| Taxation | (0.6) | (0.2) | |
| Total assets | 151.8 | 141.6 |
Review of the year / Financial review continued
"The efficiency with which the Group manages working capital remains a cornerstone of our business. The Group has consistently set high standards of working capital management and high levels of conversion of profit into cash."
The value of goodwill and other identified intangibles carried within the balance sheet is £127.5m, of which over three quarters relates to the Group's Care division. A balance of £7.8m of amortisation was charged to the Income Statement during the period. Two acquisitions were completed during the year adding a further £6.3m to intangibles and are detailed below:
During the period January to April 2011, Mears completed the acquisition of a group of home improvement agencies from Anchor Housing for a nominal fee. Home improvement agencies are currently contracted by Local Authorities to provide primarily home adaptation and handyman services to vulnerable owner-occupiers in local communities. We consider this purchase to be an excellent complement to our existing operations and one which extends our geographic footprint into a number of Local Authorities where we previously had no presence.
The main business of Choices is the provision of a supported living service to adults with learning disabilities, autism and mental health needs, in their own homes. Service recipients tend to have a more complex care support package than can be seen in the more traditional domiciliary care area, due to the higher acuity needs of the individual.
The Board's strategy is to broaden the diversity of Mears' care offering and to begin supplying services to individuals with higher acuity needs in their own homes. The acquisition of Choices fits well with these criteria and is consistent with our strategy of targeting growth in higher need care areas.
Mears acquired the trade and certain assets of the Supported Living division for an initial cash consideration of £7.40m, which included a significant refundable deposit dependent upon the successful novation of the acquired contracts. Since completion, the Group has been repaid a sum of £2.1m in respect of two contracts that were not novated, leaving a net consideration paid of £5.3m.
The Group has completed a refinancing of its banking facilities with a new £120m unsecured revolving credit facility and an additional accordion mechanism allowing the facility to be increased to a maximum of £160m. This provides significant additional funding capacity for the Group. The new facility will mature in July 2016 and its terms include lower debt pricing and higher operational flexibility than under the previous facility. This new arrangement replaces the Group's previous £85m secured bank facility. Our ability to achieve such a refinancing in the current economic environment is a testament to the continued strong performance of the business and the strength of the longstanding relationship we have with both Barclays and HSBC.
The Group capital expenditure of £4.0m (2010: £2.9m) relates to IT hardware, other office equipment and the refurbishment of new office premises. Predominantly all our plant and machinery is hired and motor vehicles are subject to operating leases and hence are not included within capital expenditure or recognised as an asset within the balance sheet.
A balance of £2.4m (2010: £1.9m) is included within non-current trade and other receivables. This relates to sales retentions in relation to our M&E activities within our Other Services division. This is normal practice within that sector, where a small percentage of the contract sum is withheld for a short period. This is typically settled twelve months after the completion of works.
26.01p
* Before exceptional items and pre amortisation of acquisition intangibles and based on a normalised tax charge of 26.5%.
Dividend per share*
7.50p
* Including a proposed final dividend of 5.35p per share.
Cash conversion (EBITA)*
* Cash inflow from operating activities before taxation and before the effect of acquired contracts.
| 2011 £m |
2010 £m |
|
|---|---|---|
| Income statement – pension costs | ||
| Current service cost | 2.7 | 2.4 |
| Past service cost | — | (3.7) |
| Interest on obligation | (0.3) | 0.3 |
| Total defined benefit pension cost charged to the result for year | 2.4 | (1.0) |
| Balance sheet – pension liability | 5.8 | 7.7 |
Trade receivables have increased by 14% to £127.5m (2010: £111.6m), slightly ahead of our top-line growth of 12%. Whilst cash inflows within our two core sectors are consistent with historical sales cycle, cash conversion has been slower within our M&E division, in particular in relation to the Athletes' Village project in support of London 2012 which is now at a practically complete stage.
Trade payables have increased by 10% to £104.0m (2010: £95.8m), which is slightly behind the growth in top-line growth. This is in line with our expectations given the entire provision of Care services is self-delivered, which inevitably means that whilst revenue growth is mirrored with an increase in trade receivables, it is not supported by a similar increase in its outstanding creditor balances.
All costs relating to tender, contract set-up and the initial inefficiencies during the period of contract mobilisation are written off as they are incurred.
Total shareholders' equity rose by £10.2m to £151.8m at 31 December 2011. The increase in net assets is primarily due to retained profits.
The Group participates in a principal Mears Group pension scheme together with a further 14 individual defined benefit schemes where the Group has received Admitted Body Status in a Local Government pension scheme. At the point of tendering for new contract opportunities, the Group seeks to minimise its exposure to future changes in the required pension contribution rates and to future liabilities resulting from scheme deficits.
Net pension charges amounting to £2.4m have been made to the income statement (2010: £1.0m credit). The current service cost has increased due to an increase in membership on the back of new contract awards. In the previous year, past service cost included a credit relating to the change in the measurement of future pension increases being linked to CPI rather than RPI. The reduced interest charge on the obligation reflects the higher expected return on scheme assets.
The latest actuarial valuations for the schemes as at 31 December 2011 reported a reduction of the pension deficit by £1.9m reducing the carrying value of the liability from £7.7m to £5.8m. This reduction is caused by a reduction in the anticipated future pension payments. The Group has also agreed a repayment plan with the trustees of the Mears Group scheme at £0.9m per annum for a period of seven years with a view to the scheme being fully funded by 2020. See table above.
Mears has reported strong growth over its sixteen years as a listed company. Fundamental to this success has been our ability to identify and manage both risks and opportunities in a constantly changing environment. Over the course of 2011, significant resource has been directed towards corporate governance, with particular focus being given to significantly enhancing the Group risk management process that will ensure a uniform approach across all our businesses to identify and mitigate risk. This is covered in greater detail in pages 26 and 27.
[email protected] Finance Director 27 March 2012
Review of the year / Risk management
The effective management of risks is a key feature in the continuing success of the Mears Group. Our approach is to identify principal risks and robustly mitigate the impact of these risks through a Group risk management process.
| Risk and description | Mitigation |
|---|---|
| Macroeconomy Mears' primary markets are subject to Government legislation and are dependent on the political environment, local or national, including public sector policy and funding. Any changes in policy or legislation that reduce expenditure during the life of contracts could have a detrimental affect on the Company's business. Also other market factors could damage business, e.g. economic failures, stock levels. |
// Awareness of and responsiveness to market developments, e.g. developing managed in-sourcing and JV products to give choice to clients // Business strategy – diversity of markets expanding from the original social housing sector business // Innovation around Government policy, e.g. proactive on tenants' cash back scheme // Pensions policy including client risk share |
| People The Mears Group is dependent on the management team and a skilled and motivated workforce, otherwise the delivery of business objectives will be jeopardised. Mears Group sees sound commercial management of contracts and the business as a whole as essential to our objectives. |
// Recruitment and selection criteria for all appointments // High quality people to be secured and retained in key positions // Training programmes supplied and we have Investor in People certification // Formal assessment/capability testing for key management appointments // Succession planning for key positions |
| Management expertise is retained to maintain the right balance between our customer-centric culture and our commercial requirements. We always want to provide value for money as well as legitimately bill our clients and at the same time achieve operating efficiency drawing from best practice. |
// Appointment of additional Executive Directors to increase the capacity of the Group's senior management team to cope with existing and new business // Business unit budgets and regular monitoring of profit and loss performance and cash conversion // Group and divisional risk mitigation plans showing branch and region lines of defence |
| Reputation The ultimate success of the Mears Group relies upon maintaining a positive reputation in the public and amongst all stakeholders. |
// Strong corporate governance // Clear communications policy and strategy including cascading team brief and Mears Matters // Internal auditing of KPI reporting |
| Negative actions, behaviour, service and results will damage the business reputation and will affect the future of the Mears Group. This includes risk of negative publicity from actions of employees and suppliers. This could arise, amongst other reasons from inappropriate communications, inaccurate client reporting or poor care and poor attention to vulnerable customers. |
// Care risk plan for dealing with vulnerable customers // Comprehensive health and safety policy and safe systems of working // Compliance management of bribery and corruption legislation, whistleblowing policy, internal audit resources |
| Liquidity There is a noticeable increase in client and market focus in the financial strength of the companies trading within the Group's core business sectors due to a number of main peer contractors going into liquidation. |
// New funding facility secured in 2011 to service the Group's needs until 2016, target refinance one year before maturity // Business unit budgets and regular monitoring of financial performance // Long-term liquidity – annual cash flow forecasts for visibility of funding and |
| Various stakeholders require reassurance that the Company has strong liquidity risk management including a long-term funding facility and the generation of sufficient cash from trading. Risks arise from short-term cash flow movements and renewal risk on maturity of facilities. |
compliance with banking covenants // Short-term liquidity – weekly three-month rolling cash flow forecast and detailed variance analysis // Robust management of work in progress and debt // Proactive identification of potential bad debt and management plans put in place between operations and finance teams |
The Board is committed to a strong process of risk identification and management process.
Learn about our risk identification and management process in our governance section on pages 42 to 43
| Risk and description | Mitigation |
|---|---|
| Health and safety Mears' services and operations involve a series of high risk activities ranging from dealing with vulnerable customers in need of care to our building related services, e.g. working at heights, working with gas and electricity and dealing with asbestos. Failure to have robust and safe systems of work could lead to serious personal injury or fatality. |
// Strong Group and regional safety, health and environmental teams // Comprehensive safe systems of work and risk mitigation plans // Internal SHE auditing and third party external validation // Regular SHE communication and a national conference // Training of operations staff and the involvement of subcontractors // Annual Group SHE strategy and plan // Close involvement with regional and branch management |
| Business retention and new business A strong bid pipeline and order book are both essential to the success of the business. Risk management planning is needed to ensure new tenders are won and existing contracts are retained. Successful re-tendering requires a combination of competitive pricing and client confidence in quality proposals based on evidence of historical delivery. |
// Strong Group Business Development team // Bid project management process with assigned bid leader // Expanding bid governance process under consolidated scheme of delegated authority including audits // Risk plan to respond to sub-optimal market pricing // Commercial review of efficiency of delivery model for re-tendering and a plan to achieve best efficiency rates // Regional Managing Directors' performance review and client/management relationships // Contract development/improvement plans |
| Business continuity Mears Group recognises that there are considerable risks of business continuity in certain locations within our markets which could be caused by rioting, terrorism and natural catastrophe. In addition there are geographical risks that could threaten our business infrastructure, e.g. telecommunications failures. Vulnerable people depend upon our services; hence we must have disaster recovery and business continuity plans. |
// IT disaster recovery plan and back-up systems facility remote to business units // Business continuity plans for each regional/business unit in progress // Disaster scenario management training // Data back-up facility and protocol // Disaster recovery and business continuity plans to be tested annually |
| Legal and regulatory The Group is subject to numerous tax, legal and regulatory requirements. A breach of any of these could result in legal proceedings, imposition of financial and other penalties or investigations, taking management focus away from core business and therefore disrupting the business. |
// Provision of information across the business about new laws and regulations // Head of legal services remit with an expanded team and external support // Induction of staff // Training of key staff on developments including the Bribery Act 2010 // Policies and procedures issued and controls to comply with laws and regulations // Risk assessments // Internal governance control and audits |
| Integrity, ethics, anti-bribery and corruption There are inherent risks of bribery, fraud and corruption in some of the sectors we work in. It is important that we have an internal control framework and means of communication to be proactive where any risks materialise. |
// Group internal audit team // Confidential whistleblowing policy // Regular communication about policy in Company – monthly journal (Mears Matters) and team briefings and use of intranet // Comprehensive investigations and robust action on any negative findings // Business ethics code of conduct // Auditing of legitimate work valuation/billing from subcontractors and to our clients // Risk plan to implement controls for the anti-bribery and anti-corruption legislation |
Review of the year / Corporate social responsibility
424 projects were undertaken by volunteering Mears staff in 2011 to help improve the communities in which we work.
Improving the lives of the people living within our communities.
Reducing prejudice and improving the understanding of differences within our diverse communities.
Providing career and skills development to those needing them the most.
Being a positive contributor to our environment.
In 2011, Mears can again reported continued improvements in its environmental performance. A successful partnership with Network Waste has helped Mears to achieve 88% recycling rates and more than a 10% reduction in waste costs. In order to achieve this we have invested in new compactors to reduce the cost of waste transportation, re-negotiated costs with suppliers and implemented better waste management processes.
We continue to be active in supporting a range of activities to help address fuel poverty and reduce carbon emissions within the communities in which we work and this will remain a priority for us in 2012.
Mears has once again retained its Investors in People accreditation (IIP). We have held this accreditation since 1994. Our annual employee survey highlighted the pride our staff have in the business with staff morale being significantly ahead of that within the majority of UK businesses.
During 2011 our apprentice and trainee numbers increased by 95. Importantly the Group has been able to retain 85% of apprentices and trainees who completed their training programme. This is a statistic which is well ahead of the industry norm. We currently have 213 apprentices and trainees in our repair and maintenance business, of which 20 are female. A similar programme has been launched in our care business.
In 2011 we launched a leadership training programme, which 76 of our senior managers completed. The feedback from this was highly positive with all managers stating that the course gave them more confidence in their people management and presentations skills. On average each employee receives five days of training per year covering areas such as people management, health and safety, customer services and trade skills.
The Mears Foundation was established in 2010 to help improve the lives of vulnerable or disadvantaged people in the UK and abroad by offering practical support and intervention. The Foundation works with groups and individuals who share Mears' values and aims to empower and assist them to develop skills and maximise their potential.
During 2011 The Mears Foundation supported projects and charities both in the UK and abroad, including:
In 2011 staff volunteered 18,087 hours and delivered 424 projects in their communities around the UK.
This national campaign, endorsed and supported by the Carbon Monoxide Awareness charity, both raised awareness and gave people practical advice on what to do should they suspect they are at risk from CO poisoning. During the week staff from Mears, supported by clients, British Gas and people in its
communities, took the message out to the public with a series of events held in public places across the UK. Staff distributed 27,000 leaflets to the public and door-to-door to tenants and care service users and the campaign was widely publicised using social networks such as Twitter and local media.
The initiative was widely applauded and throughout the week our events were visited by people who had personal experience and had suffered bereavements as a result of CO poisoning.
Staff from Mears care in Brighton raised money throughout 2011 to put on a Christmas party for the residents of an extra care housing scheme where they provide care services. The local Brighton maintenance team also supported this initiative.
The money raised covered the cost of a three-course Christmas lunch and prizes for a raffle. Teams from both care and repair and maintenance served lunch, entertained the residents and also arranged for other care service users living in the community to join them for the day.
Operatives Mo Danji and Kevin Larrington, who are employed on the Cross Keys contract in Peterborough, are teaching bricklaying to a group of 15 local students who had been at risk of being excluded from school. With the support of Mears the school set up a construction skills course for children who were not engaging in the classroom. Mo and Kevin spend three hours at the school every week working with the youngsters and passing on valuable skills.
Teacher Stuart Lawrence from Thomas Deacon Academy says, 'It soon became evident that the students were not only learning some valuable skills and a trade, but also learning essential life skills and qualities that have helped them to get them back on track in their school work. Mo and Kevin have made a real impact in these students' lives'.
Bowmont House, an extra care housing scheme in Newcastle where Mears provides care for the residents, had its garden transformed by Mears in a local volunteering initiative by the care and home improvement teams. The scheme has links with a local school, Brunton First. Mears invited a team of Year One students to help residents plant hanging baskets and raised beds with flowers and vegetables. For many of the children this was their first experience of gardening and this gave the older residents the opportunity to pass on their knowledge and experience to the interested children.
As well as work done on the garden, including putting up trellis, building raised beds and installing seating, bird tables and boxes, Mears donated a Wii Fit to Bowmont House which the children are showing the residents how to use.
Providing our employees with a safe working environment is paramount. In 2008, Mears introduced its own in-house training course that was accredited by the British Safety Council and has been a major factor in achieving the impressive reduction in accidents. Our AFR is calculated as the number of fatalities or reportable incidents divided by the number of hours works multiplied by 100,000. Over the last five years, Mears has seen year-on-year improvement.
Target – Year-on-year improvement.
Corporate governance / Board of Directors
Bob Holt / 57 Chairman
Bob had a controlling interest in Mears at the time of flotation in October 1996. He has a background in developing support service businesses. He has operated in the service sector since 1981, initially in a financial capacity then moving into general management.
David J Miles / 46 Chief Executive Officer
David joined Mears in May 1996 and, prior to his appointment to the Board in January 2007, was Managing Director of the Mears Social Housing division. Prior to joining Mears, David held a senior position with the MITIE Group. His background is in electrical engineering.
Andrew joined Mears in December 1999 and, prior to his appointment to the Board, was Finance Director covering all the Mears Group's subsidiaries. Andrew qualified as a Chartered Accountant in 1994 and worked in professional practice prior to joining Mears.
Peter F Dicks / 69 Non-Executive Deputy Chairman
Peter has been active in the venture capital and investments fields for a number of years. He is currently a Director of a number of companies. He joined Mears in 2008 and is Chairman of the Remuneration Committee.
David L Hosein / 48 Non-Executive Director
David has over 17 years' consulting experience, the last five of which have been at OC&C Strategy Consultants Limited where David is a Partner. David has worked extensively in the support services sector for corporate and private equity clients. Previously, he was a partner in Arthur Andersen. He joined Mears in 2008.
Davida Marston / 58 Non-Executive Director
Davida had a 30 year career in international banking, working in the UK, Spain and North and South America. She is a Non-Executive Director of several companies including one of the largest general insurers in the UK. She chaired the Audit and Risk Committee of Midland Heart and its predecessor Keynote Housing and was a member of the Audit Committee of Family Mosaic Housing.
Alan Long / 49 Executive Director
Alan joined Mears in 2005 and, prior to his appointment to the Board in August 2009, he was Managing Director of Careforce, the Group's Care business, having previously held the position of Group Sales and Marketing Director. Prior to joining Mears, Alan held senior roles for Britannia Building Society, Mars and Smith and Nephew.
Michael G Rogers / 70 Non-Executive Director
Michael founded Careforce in 1999 and has over 30 years' experience in healthcare services and care provision. In 1976 he joined Nestor Medical Group Limited as Managing Director and went on to become Chief Executive of Nestor Healthcare Group plc from 1986 to 1996. From 1996 to 1999 he worked as a consultant to a number of healthcare related organisations.
Rory Macnamara / 57 Non-Executive Director
Rory is a Chartered Accountant with a wide range of corporate finance transaction experience. He was previously Vice Chairman and Head of Mergers and Acquisitions at Deutsche Morgan Grenfell and latterly a Managing Director at Lehman Brothers. He is currently a consultant to various companies and holds a number of directorships including Izodia Plc, Carpathian Plc, Dunedin Income Growth Investment Trust Plc and Private Equity Investor Plc. He is Chairman of the Group's Nomination Committee.
Reginald B Pomphrett / 68 Company Secretary
Reg has been involved in corporate finance for over 30 years and is Director of a number of companies. He is a Chartered Secretary and a member of the Securities Institute. He joined Mears in 1996.
Annual General Meeting 6 June 2012
Record date for final dividend 15 June 2012
Dividend warrants posted to shareholders 3 July 2012
Interim results announced 14 August 2012
1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Tel: 01452 634600 www.mearsgroup.co.uk
3232863
Reginald B Pomphrett
1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Tel: 01452 634600
Wales and South West Business Banking PO Box 119 Park House Newbrick Road Stoke Gifford Bristol BS34 8TN Tel: 01452 365353
West & Wales Corporate Banking Centre 3 Rivergate Temple Quay Bristol BS1 6ER Tel: 0845 583 9796
BPE St James' House St James' Square Cheltenham GL50 3PR Tel: 01242 224433
Registered Auditor Chartered Accountants Hartwell House 55–61 Victoria Street Bristol BS1 6FT Tel: 0117 305 7600
2 Gresham Street London EC2V 7QP Tel: 020 7597 2000
88 Wood Street London EC2V 7QR Tel: 020 7523 8000
Neville House 18 Laurel Lane Halesowen West Midlands B63 3DA Tel: 0121 585 1131
Gable Communications 34 Lime Street London ECM 7AT
The Group operates a website which can be found at www.mearsgroup.co.uk. This site is regularly updated to provide information about the Group. In particular all of the Group's press releases and announcements can be found on the site.
Any enquiries concerning your shareholding should be addressed to the Company's Registrar. The Registrar should be notified promptly of any change in a shareholder's address or other details.
Requests for further copies of the Annual Report and Accounts, or other investor relations enquiries, should be addressed to the registered office.
The Directors present their report together with the consolidated financial statements for the year ended 31 December 2011.
The principal activities of the Group are the provision of a range of outsourced services to the public and private sectors. The principal activity of the Company is to act as a holding company.
The Company is required to set out a fair review of the business of the Group during the reporting period. The information that fulfils this requirement can be found in the At a Glance section, the Chairman's Statement, the Chief Executive Officer's Review, the Market Development Review and the Financial Review. The results of the Group can be found within the Consolidated Income Statement.
The final dividend in respect of 2010 of 4.85p per share was paid in July 2011. An interim dividend in respect of 2011 of 2.15p was paid to shareholders in November 2011. The Directors recommend a final dividend of 5.35p per share for payment on 3 July 2012 to shareholders on the Register of Members on 15 June 2012. This has not been included within the consolidated financial statements as no obligation existed at 31 December 2011.
A statement on the Group's Corporate Governance is set out on pages 37 to 43.
We focus on a range of key indicators to assess our performance. Our performance indicators are both financial and non-financial and ensure that the Group targets its resources around its customers, employees, operations and finance. Collectively they form an integral part of the way that we manage the business to deliver our strategic goals. Our primary performance indicators are detailed on pages 18 to 21.
The present membership of the Board is set out with the biographical detail on pages 30 and 31.
D J Miles, A C M Smith and M G Rogers retire by rotation and, being eligible, offer themselves for re-election at the Annual General Meeting (AGM) in June 2012.
The beneficial interests of the Directors in the shares of the Company at 31 December 2011 and 31 December 2010 are detailed within the Remuneration Report on pages 50, 52 and 53.
The process governing the appointment and replacement of Directors is detailed within the Corporate Governance Report on pages 40 and 41.
A review of the Group's activities during the year and its outlook are set out in the Chairman's Statement and Chief Executive Officer's Review on pages 4 to 21. The financial position of the Group is described on pages 22 to 25. Our two growth markets, Social Housing and Care, are defensive sectors where spend is largely non-discretionary and our contracts tend to be long-term partnerships.
The Group had net debt of £13.4m at 31 December 2011 and total funding headroom at that date of £106.6m which it considers sufficient to fund current trading plans. The Group has completed a refinancing of its banking facilities with a new £120m unsecured revolving credit facility with an additional accordion mechanism allowing the facility to be increased to a maximum of £160m. This provides significant additional funding capacity for the Group and will mature in July 2016. Our ability to achieve such a refinancing in the current economic environment is a testament to the continued strong performance of the business and the strength of the longstanding relationship we share with both Barclays and HSBC.
The Directors consider that, as at the date of approving the financial statements, there is a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.
The Company's Articles of Association can be amended only by a special resolution of the members, requiring a majority of not less than 75% of such members voting in person or by proxy.
The 2010 AGM held in June 2011 authorised:
Further details of these authorisations are available in the notes to the 2010 Notice of AGM. Shareholders are also referred to the 2011 Notice of AGM which contains similar provisions in respect of the Company's equity share capital as detailed below.
The 2011 AGM will be held at the offices of Investec Bank PLC, 2 Gresham Street, London EC2V 7QP on 6 June 2012 at 9.30am and a formal Notice of Meeting and Form of Proxy are enclosed. The ordinary business to be conducted will include the re-appointment of Directors who retire by rotation.
The special business will comprise the following resolutions:
Risk is an accepted part of doing business. The Group's financial risk management is based upon sound economic objectives and good corporate practice. The Board has overall responsibility for risk management and internal control within the context of achieving the Group's objectives. Our process for identifying and managing risks is set out in more detail within the Corporate Governance Statement. The key risks and mitigating factors are set out on pages 26 and 27. Details of financial risk management is given in Note 21 on pages 90 to 93.
The Group is party to significant contracts within each segment of its business. The Directors do not consider that any one of those contracts is essential in its own right to the continuation of the Group's activities.
The Company acts purely as a holding company and as such is non-trading. Accordingly, no payment policy has been defined. However, the policy for Group trading companies is to set the terms of payment with suppliers when entering into a transaction and to ensure suppliers are aware of these terms. Group trade creditors during the year amounted to 64 days (2010: 55 days) of average supplies for the year.
The Group is financed through both equity share capital and debt. Details of changes to the Company's share capital are given in note 23 to the financial statements. The Company has a single class of shares – ordinary 1p shares – with no right to any fixed income and with each share carrying the right to one vote at the general meetings of the Company. Under the Company's Articles of Association, holders of ordinary shares are entitled to participate in any dividends pro-rata to their holding. The Board may propose and pay interim dividends and recommend a final dividend for approval by the shareholders at the AGM. A final dividend may be declared by the shareholders in a general meeting by ordinary resolution, but such dividend cannot exceed the amount recommended by the Board.
As at 2 March 2012 the Company has been notified of, or is aware of, the following shareholders holding 3% or more of the issued share capital of the Company:
| Holding (millions) |
% | |
|---|---|---|
| Majedie Asset Management | 8.29 | 9.7% |
| Artemis Investment Management | 7.91 | 9.2% |
| Legal & General Investment Management | 5.42 | 6.3% |
| Invesco Perpetual | 4.59 | 5.3% |
| Schroder Investment Management | 4.47 | 5.2% |
| Heronbridge Investment Management | 3.79 | 4.4% |
| Four Capital Partners | 2.79 | 3.3% |
| Highclere International Investors | 2.61 | 3.0% |
Applications for employment by disabled persons are always fully considered, bearing in mind the aptitudes of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and that appropriate training is arranged. It is the policy of the Group that the training, career development and promotion of disabled persons should, as far as possible, be identical to that of other employees.
The Group has received recognition under the 'Investors in People' award. The Group continues to involve its staff in the future development of the business. Information is provided to employees through a quarterly newsletter, the Group website and the intranet to ensure that employees are kept well informed of the performance and objectives of the Group.
CREST is the computerised system for the settlement of share dealings on the London Stock Exchange. CREST reduces the amount of documentation required and also makes the trading of shares faster and more secure. CREST enables shares to be held in an electronic form instead of the traditional share certificates. CREST is voluntary and shareholders can keep their share certificates if they wish. This may be preferable for shareholders who do not trade in shares on a frequent basis.
Grant Thornton UK LLP offers itself for re-appointment as auditor in accordance with Section 489 of the Companies Act 2006.
On behalf of the Board
R B Pomphrett Secretary 27 March 2012
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 Group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Group and the Company for that period. In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and the Company and enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
In so far as each of the Directors is aware:
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
To the best of my knowledge:
By order of the Board
Finance Director 27 March 2012
Corporate governance / Corporate governance statement
The Board is responsible for the Group's system of corporate governance and is ultimately accountable for the Group's activities, strategy and financial performance. The Board is dedicated to upholding and achieving good standards of corporate governance, integrity and business ethics for all activities.
The Board continues to be committed to maintaining the Group's operations in accordance with the highest standards of corporate governance as set out in The UK Corporate Governance Code issued in June 2010 and has complied with it throughout the year.
As at 31 December 2011, the Board had nine members, comprising the Chairman, Chief Executive, Group Finance Director, Executive Director, and five independent Non-Executive Directors. P F Dicks is the Senior Independent Non-Executive Director. The Directors' biographical details are set out on pages 30 and 31. These indicate the high level and range of business experience which enables the Group to be managed effectively. Their mix of skills and business experience is a major contribution to the proper functioning of the Board and its committees, ensuring that matters are fully debated.
The Board's prime objective is to ensure ongoing commercial and financial success of the Group. The Board provides entrepreneurial leadership of the Group within a framework of prudent and effective controls which enable risk to be assessed and managed. The Board sets the Group's strategic aims, ensures that the necessary financial and human resources are in place for the Group to meet its objectives and reviews management performance. The Board sets the Group's values and standards and ensures that the Group's obligations to its shareholders and others are understood and met.
The Board considers that each of the Non-Executive Directors who served during the year are independent in terms of judgement and character and free from any relationship which might materially interfere with the exercise of independent judgement. Notwithstanding this opinion and for the sake of completeness, below is a summary of relationships which may appear to affect their judgement:
The Non-Executive Directors provide a strong independent element to the Board and bring experience at a senior level of business operations and strategy, constructively challenging and helping develop proposals on strategy. A summary of the terms and conditions of appointment of the Non-Executive Directors is available on request from the Company Secretary.
All Directors act in what they consider to be the best interests of the Company, consistent with their statutory duties.
The Board maintains and regularly reviews a full list of matters and decisions which are reserved to, and can only be approved by, the Board. These are reviewed annually and include but are not limited to:
Whilst the Board has specific responsibility for those matters reserved for its consideration, in certain areas, specific responsibility is delegated to committees of the Board within defined terms of reference. The activities of these committees are discussed in more detail later in this report.
Corporate governance / Corporate governance statement continued
The Chairman, R Holt, is responsible for the leadership of the Board and ensuring its effectiveness on all aspects of its role. The Chairman sets the Board's agenda and ensures that adequate time is available for discussion of all agenda items, in particular strategic issues. The Chairman promotes a culture of openness and debate by facilitating the effective contribution of Non-Executive Directors, in particular ensuring constructive relationships between Executive and Non-Executive Directors. The Chairman is also responsible for ensuring that the Directors receive accurate, timely and clear information.
The division of responsibilities between the Chairman and the Chief Executive is clearly established and agreed by the Board. The Chief Executive, D J Miles, manages the day-to-day business operations of the Group as Chief Executive. A central part of his role includes recommending and implementing key strategies as agreed with the Board, communicating to shareholders and allocating decision making and responsibilities accordingly. He takes a leading role, with the Chairman, in the relationship with all external agencies and in promoting Mears Group PLC.
As part of their role, the Non-Executive Directors constructively challenge and develop proposals on strategy. The Non-Executive Directors scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. They satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible. They determine appropriate levels of remuneration of Executive Directors and have a prime role in appointing and, where necessary, removing Executive Directors, and in succession planning.
The Board meets regularly throughout the year as well as on an ad hoc basis, as required by time critical business needs. The Board receives detailed financial information and regular presentations from Executives on Mears' business performance. Directors are supplied with an agenda and supporting papers for all Board meetings on a timely basis along with minutes of previous Board and Committee meetings. This enables the Directors to make informed decisions on corporate and business issues under consideration. When Directors are unable to attend a meeting, they are advised of the matters to be discussed and given an opportunity to make their views known to the Chairman prior to the meeting.
During the year, six scheduled Board meetings were held.
The Non-Executive Directors meet independently without the Chairman present, and also meet with the Chairman independently of management, on a regular basis. The Non-Executive Directors also independently meet each of the Executive Directors formally once a year.
The Directors delegate responsibilities for the day-to-day operational and financial management of the Group to the Senior Management Team, which comprises Senior Executives across each of the Group's operational divisions and support functions and is the principal forum for directing the operational and financial business of the Group and for delivering the strategy set by the Board.
| Board | Audit Committee | Nomination Committee | Remuneration Committee | |||||
|---|---|---|---|---|---|---|---|---|
| Number of meetings | Potential | Actual | Potential | Actual | Potential | Actual | Potential | Actual |
| R Holt | 6 | 6 | — | — | — | — | — | — |
| D J Miles | 6 | 6 | — | — | — | — | — | — |
| A C M Smith | 6 | 6 | — | — | — | — | — | — |
| A Long | 6 | 6 | — | — | — | — | — | — |
| M G Rogers | 6 | 6 | — | — | — | — | — | — |
| M A Macario | 2 | 2 | 2 | 2 | — | — | 2 | 2 |
| P F Dicks | 6 | 6 | 4 | 4 | 2 | 2 | 3 | 3 |
| D L Hosein | 6 | 6 | — | — | — | — | — | — |
| D Marston | 6 | 6 | 4 | 4 | — | — | — | — |
| R Macnamara | 6 | 5 | 4 | 3 | 2 | 2 | 3 | 3 |
All Directors are expected to allocate sufficient time to the Company to discharge their responsibilities effectively and, where possible, attend all Board meetings. Any time commitment matters would be addressed by the Chairman and the Director concerned.
Performance evaluation of the Board, its committees and individual Directors takes place on an annual basis with the support of the Company Secretary. The Board undertakes formal evaluation of its own performance and the Board committees assess their respective roles, performance and terms of reference and report accordingly to the Board. The Board assesses the reviews of each Committee.
The performance evaluation process included: a review of the areas of Board responsibility; the structure and composition of the Board and its committees and the performance of the committees; the quantity, quality and scope of information provided to the Board; the content of Board meetings and presentations to meetings; and the openness of communications between the Board members and Executive management. The Board members concluded that appropriate actions had been identified to address areas that could be improved and that, overall, the Board and its committees continued to operate effectively.
The performance of the Chairman was reviewed separately in a process led by the Senior Independent Director.
Following the performance evaluation of individual Directors, the Chairman has confirmed that the Non-Executive Directors standing for re-election at this year's AGM continue to perform effectively and demonstrate commitment to their roles. In particular the Board is strongly of the opinion that by their actions and conduct they demonstrate their independence. It is the Board's intention to continue to annually review its performance and that of its committees and individual Directors. A decision is taken each year on the performance evaluation process to be used.
The Senior Management Team, which comprises Senior Executives across each of the Group's operational divisions and support functions, is the principal forum for directing the operational and financial business of the Group and for delivering the strategy set by the Board.
Any Director, on appointment and throughout their service, receives an induction and is entitled to receive any training which is considered necessary to fulfil their responsibilities effectively. The Chairman regularly meets with each Director to review and agree any training and development needs.
All Directors have access to the Company Secretary who is responsible for ensuring that Board procedures and applicable rules and regulations are observed.
The Board delegates certain responsibilities to its principal committees. The Audit Committee ensures the integrity of financial information, the effectiveness of the financial controls and the internal control and risk management systems. The Nomination Committee recommends the appointment of Directors and conducts a review of succession planning at Board and Operating Board levels. The Remuneration Committee sets the remuneration policy for Executive Directors and determines their individual remuneration arrangements.
The Chairperson of each Committee provides a report of any meeting of that Committee at the next Board meeting. Each Committee comprises Non-Executive Directors, as required by the UK Corporate Governance Code 2008.
The Chairperson of each Committee is present at the AGM to answer questions from shareholders.
| Audit Committee | Board committees continued |
|---|---|
| Chair | D Marston from 8 June 2011 following retirement by M A Macario. |
| Membership | P F Dicks and R Macnamara. |
| The Audit Committee is comprised of financially literate members having the necessary ability and experience to understand financial statements. |
|
| The committee has access to the financial expertise of the Group and its auditor and can seek further professional advice at the expense of the Group, if required. |
|
| Role | The Audit Committee is responsible for monitoring and reviewing: |
| // the integrity of the interim and annual financial statements, including a review of the significant financial reporting judgements contained in them; |
|
| // the effectiveness of the Group's internal control and risk management and control over financial reporting; | |
| // the Group's overall approach to ensuring compliance with laws, regulations and Company policies in areas of risk, accounting standards and generally accepted accounting principles; |
|
| // the Group's relationship with the external auditor, including its independence and management's response to any major external audit recommendations; |
|
| // the Group's policy in relation to the provision of non-audit services by the auditor; | |
| // the fees and objectivity of the Group's auditor are considered by the Committee; | |
| // the appointment and review of the Group Risk Officer; and | |
| // the preservation of good financial practices throughout the Group. |
During the year, the Audit Committee received detailed presentations from the Group's auditor and reviewed the findings of the external auditor from its audit of the annual financial statements.
The Audit Committee is committed to ensuring the independence and objectivity of the external auditor. During the year the Committee assessed the qualifications, expertise, resources and independence of the external auditor, as well as its ongoing effectiveness and considered the audit process on the basis of meetings and an internal review with finance, audit staff and other senior management. In reviewing the independence of the external auditor, the Audit Committee considered a number of factors, including: the standing, experience and tenure of the external audit partner; the nature and level of services provided by the external auditor; and confirmation from the external auditor that it has complied with relevant UK independence standards. This is particularly important in light of the tax compliance and advice being performed by the same firm. This is safeguarded through a review of the level of non-audit work which is given to the audit firm. The Committee also reviews the term of office of the external auditor. The Audit Committee is satisfied with the performance of the external auditor and, after due consideration, has recommended the re-appointment of Grant Thornton UK LLP.
The Audit Committee has monitored and reviewed the effectiveness of the internal systems and controls in place, taking into account the key business and financial risks and mitigation towards these.
The Audit Committee considers the need for an internal audit function annually. After due consideration the Committee has recommended to the Board that a formal internal audit function is not considered necessary due to the regular involvement of central functions such as business analysts and the regional finance team in branch activities. This position is subject to an ongoing review. The Committee has recommended to the Board that the independent team which continues to investigate any allegations brought to its attention through the Group's whistleblowing procedure is enlarged. This team operated throughout 2011 and remains in place.
There is a formal, rigorous and transparent procedure for the appointment of new Directors to the Board. The search for Board candidates is conducted, and appointments made, on merit, against objective criteria and with due regard for the benefits of Diversity on the Board, including gender. All Directors are able to allocate sufficient time to the Company to discharge their responsibilities. The Board has plans in place for orderly succession for appointments to the Board and to Senior Management. These plans aim to maintain an appropriate balance of skills and experience within the Company and on the Board and ensure progressive refreshing of the Board.
| Board committees continued | |
|---|---|
| Nomination Committee continued | |
| Chair | R Macnamara. |
| Membership | P F Dicks, M A Macario (until his retirement in June 2011) and D L Hosein (appointed December 2011). |
| Role | The Nomination Committee's responsibilities include: |
| // keeping under review the composition of the Board and succession to it and succession planning for senior management positions within the Group; |
|
| // making recommendations to the Board concerning appointments to the Board, whether of Executive or Non-Executive Directors, having regard to the balance of skills, knowledge, experience and diversity of the Board; |
|
| // making recommendations to the Board concerning the re-appointment of any Non-Executive Director at the conclusion of his/her specified term and the re-election of any Director by shareholders under the retirement provisions of the Company's Articles of Association; |
|
| // managing a formal, rigorous and transparent procedure for any appointments of new Directors to the Board; |
|
| // prior to the appointment of a Director, requires that the proposed appointee discloses any other business interests that may result in a conflict of interest and report and future business interests that could result in a conflict of interest; and |
|
| // ensures that on appointment to the Board, Non-Executive Directors receive a formal letter of appointment setting out clearly what is expected of them in terms of time commitment, committee service and involvement outside of Board meetings. |
|
The committee met twice during the year and all members of the committee were present at each meeting. During the year, the committee considered the membership of each sub-committee of the Board, updated its succession planning and confirmed its previous recommendations to the Board in respect of memberships of sub-committees following the retirement of M A Macario.
There is a formal and transparent procedure for developing policy on Executive remuneration and for determining the remuneration of individual Directors.
| Chair | P F Dicks | ||
|---|---|---|---|
| Membership | R Macnamara, M A Macario (until his retirement in June 2011) and M G Rogers (appointed in December 2011) | ||
| Role | The Remuneration Committee is responsible for: | ||
| // determining and agreeing with the Board the broad remuneration policy for: | |||
| // the Chairman, the Executive Directors and senior management; and |
|||
| // the Executive Directors' remuneration and other benefits and terms of employment, including performance related bonuses and share options; and |
|||
| // approving the service agreements of each Executive Director, including termination arrangements. | |||
| No Director is involved in determining his/her own remuneration. |
Full details of the remuneration committee's activities during the year are given in the Remuneration Report on pages 44 to 54.
The Group places a great deal of importance on communication with its shareholders. The Board is committed to maintaining an ongoing dialogue with its shareholders through the provision of regular Interim and Annual Reports and regular trading reports.
There is regular dialogue with individual institutional shareholders as well as general presentations after the interim and preliminary results. Throughout the year the Group arranged a number of site visits for shareholders and other City commentators with the aim of providing them with increased exposure to our operations and management.
The principal methods of communication with private investors remain the Annual Report and Accounts, the interim statement, the quarterly newsletters and the Group's website (www.mearsgroup.co.uk), where the Group highlights the latest key business developments.
Corporate governance / Corporate governance statement continued
The UK Corporate Governance Code requires that the Directors review the effectiveness of the Group's system of internal control. This extends the Directors' review to cover all material controls, including operational, compliance and financial controls and risk management systems. The Directors are satisfied that procedures are in place to ensure that the Group complies with the Turnbull Committee guidance published by the Institute of Chartered Accountants in England and Wales and that the procedures have been applied during the year.
The Board is responsible for the Group's system of internal control and for reviewing its effectiveness. The Board has delegated some of these responsibilities to the Audit Committee who has reviewed the effectiveness of the system of internal control and ensured that any remedial action has or is being taken on any identified weaknesses. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss. It includes all controls including financial, operational and compliance controls and risk management procedures.
The Board confirms that the Group has in place an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The Group endeavours to ensure that the appropriate controls, systems and training are in place and has established procedures for all business units to operate appropriate and effective risk management.
The processes used to assess the effectiveness of the internal control systems are ongoing, allowing a cumulative assessment to be made, and include the following:
The Board has reviewed these procedures and considers them appropriate given the nature of the Group's operations. The system of internal control and risk management is embedded into the operations of the Group and the actions taken to mitigate any weaknesses are carefully monitored.
The key controls in place are:
During 2011, the Audit Committee commissioned a review of risk governance to ensure that it met the FRC guidance on best practice. The Mears Senior Management Team members, together with the assistance of external advisers, all played an integral part in this review. The key outcomes included:
The principal risks and uncertainties are detailed further on pages 26 and 27.
Additionally, in line with The UK Corporate Governance Code, the Group has arranged appropriate insurance cover in respect of legal action against its Directors.
The Company has in place internal control and risk management systems in relation to the Company's financial reporting process and the Group's process for the preparation of consolidated accounts. The consolidated financial statements are produced by the Group finance function which is responsible for the review and compilation of reports and financial results from each of the operating subsidiaries in accordance with the Group reporting procedures. The consolidated financial statements are supported by detailed workings papers. The Audit Committee is responsible for overseeing and monitoring these processes, which are designed to ensure that the Company complies with relevant regulatory reporting and filing provisions. As at the end of the period covered by this report, the Audit Committee, with the participation of the Chief Executive and Finance Director, evaluated the effectiveness of the design and operation of disclosure controls and procedures designed to ensure that information required to be disclosed in financial reports is recorded, processed, summarised and reported within specified time periods.
This report was approved by the Board and has been signed on its behalf by:
P F Dicks Senior Independent Non-Executive Director 27 March 2012
Corporate governance / Remuneration report
This report has been prepared in accordance with SI 2008/410 Schedule 8 (the 'Regulations'). The report also meets the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the Board has applied the principles and complied with the provisions of the 2011 UK Corporate Governance Code ('Combined Code') relating to Directors' remuneration. As required by the Regulations, an advisory resolution to approve the report will be proposed at the AGM of the Company at which the financial statements will be approved.
The auditor is required to report on the 'auditable' part of this report and to state whether, in their opinion, that part of the report has been properly prepared in accordance with the Companies Act 2006. The report is therefore divided into separate sections for audited and unaudited information.
The Directors who were members of the Remuneration Committee (the 'Committee') during the year are shown on page 41.
In 2011, the Committee continued to engage PwC and received wholly independent advice on Executive compensation.
The Committee is formally constituted with written terms of reference and its main responsibilities are detailed in the Corporate Governance Statement on page 41.
In summary, the Committee determines the total individual remuneration packages of each Executive Director of the Group and certain other senior employees (and any exit terms) and recommends to the Board the framework and broad policies of the Group in relation to Senior Executive remuneration. The Committee determines the targets for all of the Group's performance related remuneration and exercises the Board's powers in relation to all of the Group's share and incentive plans.
The Committee met three times during 2011 and discussed, amongst others, the issues set out in the table below:
| Meeting | Key issues discussed | Attendees |
|---|---|---|
| April | – A review of Executive Directors' and senior management's base salaries and pension provision | All Committee members |
| – Consideration of bonus payments for Executive Directors | ||
| – Approval of the 2010 Directors' Remuneration Report | ||
| August | – Structure and performance targets of LTIP | All Committee members |
| – Deferral of 2011 LTIP awards pending outcome of review in conjunction with advisers | ||
| December | – Review of Executive Directors' bonus structure for 2012 | All Committee members |
| – Review of pension contributions made in respect of Executive Directors | ||
| – Executive Directors' base salaries to be reviewed annually in April |
The Committee has continued to work to build investor confidence with regard to its Executive remuneration policies and is committed to the following actions:
Notwithstanding the above, the Committee recognises that the success of the Group is down to the efforts of key individuals and that they should be fairly rewarded for their efforts and contributions in making Mears the success it is. The following section details how remuneration is structured.
The Committee has adopted the following remuneration principles in supporting its primary objective of ensuring that the Group has in place a remuneration structure that is able to incentivise and retain highly skilled and motivated individuals who are the cornerstone of the continued success of the Group:
| Remuneration policy | How is this achieved? |
|---|---|
| Levels of remuneration should be appropriate to retain and motivate the Executive talent required to meet the Group's objectives. |
Provide threshold level of remuneration which reflects the individual's experience, role and contribution within the Group. Remuneration levels are reviewed annually with due consideration afforded to the Mears' remuneration policy and external benchmarks and market practices. |
| Incentive arrangements for key individuals should | The Executive Directors' remuneration package is designed to ensure that variable components of an |
| be capable of providing exceptional levels of total | Executive Director's remuneration package amounts to one third for target performance and half for |
| payment if outstanding performance is achieved. | stretching performance. |
| The significant component of each Executive's | Around half of the Executive Directors' remuneration package is based on long-term performance. |
| total compensation should be delivered through | The Group operates a long-term incentive scheme in which awards vest subject to the achievement |
| performance related pay and the provision of equity. | of challenging EPS and TSR growth targets. |
| A commitment to fostering a strong performance | Performance targets are set which are motivating and directly aligned to the Group's strategic KPIs |
| culture that aligns an individual's rewards with the | and underlying performance. |
| key corporate metrics which drive shareholder | The Committee also ensures that the remuneration package does not lead to irresponsible |
| value creation. | behaviours and that it takes appropriate account of risk. |
The charts below indicate the target remuneration as a percentage of total remuneration for each Executive Director's remuneration package in line with the current policy.
The charts below demonstrate the balance between fixed and variable pay for target and maximum performance for Executive Director's remuneration in 2012 in line with the current policy:
Salary
The purpose of the base salary is to:
The Committee reviews base salaries annually in order to ensure that Executive Directors remain competitively aligned with external market practices. In 2012 and future years, with the exception of the Chairman, salaries will be reviewed in April, which is in line with when salaries are reviewed throughout the Group.
The Committee will retain the discretion to increase an individual's salary (other than that of the Chairman) where there is a significant difference between current levels and a market competitive rate. However, in determining whether to increase levels the Committee will take the following into consideration:
As communicated in last year's Remuneration Report, the Committee is committed to reducing the salary level for the Chairman, which historically reflected his combined role of Chairman and Chief Executive. Since the separation of roles in late 2010, the Committee has progressively reduced his base salary to levels which are aligned with salaries received by Executive Chairmen at similar size companies. In 2011 his base salary was reduced from £450,000 to £350,000. A further reduction to £250,000 is proposed for 2012. The Committee will continue to regularly review the Chairman's salary level and ensure that it remains appropriate based on his ongoing role and responsibilities.
As a result of David Miles' appointment to CEO, a re-assessment of the duties of Andrew Smith and Alan Long and following a consultation process with major shareholders and other bodies, the Committee adjusted the salary levels in 2011 from £230,000 to £330,000 for David Miles, £170,000 to £220,000 for Andrew Smith and £160,000 to £180,000 for Alan Long. The consultation process included a benchmarking calculation using a peer group and companies of similar size and the increases reflected the lower of these two comparator groups. The net effect when taking into account the reduction in the Chairman's salary was an increase of 7% for 2011. This should be considered in the context of the pending salary review for Executive Directors and a further reduction in the Chairman's salary for 2012, which is likely to show no increase in total Executive Directors' salaries over a two-year period.
The table below shows the Executive Directors' salaries for 2011. As indicated above, with the exception of the Chairman, salaries will be reviewed in (and changes, if any, will be effective from) April 2012:
| Base salary 2012 |
Base salary 2011 |
|
|---|---|---|
| R Holt | £250,000 | £350,000 |
| D J Miles | £330,000 | £330,000 |
| A C M Smith | £220,000 | £220,000 |
| A Long | £180,000 | £180,000 |
The Chairman's base salary for 2012 will be £250,000.
R Holt is a Non-Executive Director of Green Compliance PLC and Inspired Energy PLC and receives fees totalling £61,000.
Annual bonus
The Group offers Executive Directors and senior management the opportunity to earn performance related bonuses.
The purpose of the annual bonus is to incentivise Executive Directors and senior management to achieve financial, strategic, operational and individual targets during a one-year period and reward ongoing stewardship of the Group and contribution to core values.
Maximum bonus levels and the proportion payable for on-target performance are considered in the light of market bonus levels for similar roles among our competitors and in the quoted support services sector.
The maximum bonus potential for the Executive Directors for 2012 and subsequent years will continue to be limited to 75% of salary (reduced from 110% in 2010). It should be noted that bonus payments are not pensionable. With effect from 2012, it is the intention that a significant portion of any bonus payments due to Executive Directors will be paid in shares rather than cash.
In 2011, the Committee set clear objectives for each individual Executive Director relating to Group KPIs, plus individual (where relevant) divisional and strategic targets, taking into account where an individual has particular influence and responsibility. The performance against the Group KPIs is measured using a balanced scorecard approach which is applied to each of the Executive Directors.
Such targets included:
For 2011 and future years, annual bonuses will be based on a combination of performance measures:
| Measure | Proportion | Objective | ||||
|---|---|---|---|---|---|---|
| The Group's financial performance | Profit before tax and amortisation (PBTA) |
Threshold | Budget | Maximum | ||
| Financial performance | is measured against annual 2/3 budgets that drive corporate |
Achievement | <100% | 100% | 110% | |
| performance | Payment – % of salary | 0% | 26.67% | 50% | ||
| Typical KPIs include: Business development Bid wins ratios |
Below target | Target | Maximum | |||
| Personal objectives | 1/3 | Performance is measured annually against agreed personal objectives that will support the achievement of the Group's business goals |
Working capital control Service ratings Margins Complaint ratios Jobs completed on time ratios People development HSE targets Revenue growth |
Aggregate payout is 0% |
Aggregate payout is 13.33% |
Aggregate payout is 25% |
| Total bonus (as % of base salary) | — | 40% | 75% |
The proportion of the bonus awarded that is based on an individual's personal objectives is conditional upon the achievement of the budget performance target, at which point this part of the award will be subject to the performance targets indicated in the table above.
In respect of the 2011 financial year, as a result of the financial performance (PBTA) budget target not being achieved, no bonus payments were made to Executive Directors. The Committee recognises and appreciates the efforts and contributions of the Executive Directors and all employees of the Group in a challenging economic environment.
No changes are being proposed to the annual bonus arrangements in 2012, subject to the intention to pay a significant portion of any payments due to Executive Directors in shares going forward.
The Executive Directors receive additional benefits including a company provided car or an allowance in lieu, life assurance and private medical insurance. Benefits-in-kind are not pensionable.
All Executive Directors receive a contribution into their respective defined contribution plans which are subject to periodic review to ensure that they remain in line with rates applicable in the market. Only the base salary is pensionable. The Committee reviewed the pension contribution rates paid in respect of Executive Directors at its meeting in December 2011 and agreed to increase these rates to 15% per annum, which is in line with the current market. This increase became effective from January 2012.
The contribution rates, together with the amounts paid into the defined contribution plans, are set out in the audited section of this report on page 52.
The Committee's policy is to provide market competitive annual share grants to Executives Director and certain members of the Senior Management Team.
The Committee believes that share awards under the LTIP enable the Group to provide a competitive incentive and retention tool which is also cost effective in respect of both shareholder dilution and Income Statement expense. This structure demonstrates the Committee's desire to correlate incentive arrangements with the achievement of sustained performance.
The main terms and conditions of the LTIP are set out in the following table:
| Feature | Terms and conditions |
|---|---|
| Maximum individual limit | 200% of salary p.a. |
| Awards made annually in the form of 1p options. | |
| Performance conditions | 75% of the award vests based on the growth in Group EPS performance over a three-year performance period. EPS targets are set by reference to consensus analyst forecasts with maximum payout at a significant stretch to this level. Awards are underpinned by a comparative TSR measure whereby the Group's growth in TSR must at least exceed the return of an appropriate comparator group. |
| 25% of the award is subject to the Group's TSR growth against the return of an appropriate comparator group over a three-year performance period. |
|
The two conditions are measured independently. Awards will be released on the third anniversary of the date of grant subject to the achievement of the relevant performance conditions over the same period.
Pending a review of the structure and performance targets of the LTIP, the Committee did not grant LTIP awards to the Executive Directors during the 2011 financial year. However, the Committee intends to grant LTIP awards in respect of the 2011 financial year as soon as possible and in line with the principles set out above.
The Committee has undertaken a detailed review of the LTIP structure and, as a consequence of this review, has concluded that the LTIP structure is still fit for purpose and is an effective tool with which to motivate its Executive Directors and members of the Senior Management Team and to focus on the long term strategic performance of the Group and, in line with its terms of reference, will review this on an annual basis.
Share awards continued
Long-term Incentive Plan (LTIP) continued
The following table sets out the level of vesting based on performance to date for all outstanding LTIP awards:
| Year of grant | Percentage of award vesting | ||
|---|---|---|---|
| Performance period | TSR | EPS Total vesting |
|
| 2008 | October 2008–October 2011* | — | 53% 27% |
| 2009 | October 2009–October 2012** | — | — — |
| 2010 | August 2010–August 2013** | — | 10% 8% |
* Actual.
** Projected given performance to date.
Although the policy on equity incentives is through the provision of the LTIP Awards, Executive Directors and Senior management hold share options in the Company which were granted prior to adoption of the LTIP.
The tables on pages 52 and 53 set out the number of share awards held by the Executive Directors. There were no share option awards in 2011.
The Group encourages share ownership by employees and, accordingly, it operates an all-employee share plan.
Under the terms of the Sharesave Plan all UK employees can save up to £250 per month and receive three or five-year options to acquire the Company's shares priced at a discount of up to 20%. In December 2011 invitations were issued to all eligible employees (other than Directors) at an option price of 178p which resulted in applications for 1,357,977 options from 664 employees, all of which were accepted in full.
In accordance with the Association of British Insurers' guidelines, the Company can issue a maximum of 10% of its issued share capital in a rolling ten-year period to employees under all its share plans. In addition, of this 10% the Company can only issue 5% to satisfy awards under discretionary or Executive plans. The Company operates all its share plans within these guidelines.
Details of the service contracts of the Executive Directors of the Company are as follows:
| Name | Notice period |
Contract date |
|---|---|---|
| R Holt | 6 months | June 2008 |
| D J Miles | 12 months | June 2008 |
| A C M Smith | 12 months | June 2008 |
| A Long | 12 months | August 2009 |
All Executive Directors' contracts are rolling and, therefore, will continue unless terminated by the written notice set out above. In the event of the termination of an Executive's contract, salary and benefits will be payable during the notice period (there will, however, be no automatic entitlement to bonus payments or share incentive grants during the period of notice other than where normal good leaver provisions apply). The Committee will ensure that there have been no unjustified payments for performance failure on an Executive Director's termination of employment. There are no special provisions in the contracts of employment extending notice periods on the liquidation of the Company or cessation of employment. The maximum notice period on a change of control is twelve months.
Executive Directors have an obligation to inform the Board, specifically the Remuneration Committee, of any Non-Executive positions held or being contemplated and of the associated remuneration package. The Remuneration Committee will consider the merits of each case and carefully consider the work and time commitment required to fulfil the Non-Executive duties and the potential benefit to the Group and then determine whether the remuneration should be retained by the Executive or passed over to the Group.
Corporate governance / Remuneration report continued
Non-Executive Directors' fee level
The remuneration of the Non-Executive Directors is determined by the Board and is within the limits set by the Articles of Association. Assistance is also available from the Group's remuneration advisers.
Each Non-Executive Director was paid an annualised fee of £42,000 for 2010 and 2011. These fees are subject to review in 2012. No additional fees are paid for committee membership or other normal duties and Non-Executive Directors do no participate in any incentive, pension or bonus arrangements.
Details of the current Non-Executive Directors' appointment dates are:
| Name | Effective date of letter of appointment or last renewal |
|---|---|
| D L Hosein | June 2008 |
| M G Rogers | June 2008 |
| P F Dicks | June 2008 |
| D Marston | June 2010 |
| R Macnamara | June 2010 |
Non-Executive Directors do not have service contracts. Letters of appointment run for a rolling six-month period.
The beneficial interests of the Directors in the shares of the Company at 31 December 2011 and 31 December 2010 are detailed below:
| Ordinary shares | ||
|---|---|---|
| 31 December 2011 Number |
31 December 2010 Number |
|
| R Holt | 500,000 | 500,000 |
| D J Miles | 110,000 | 100,000 |
| A C M Smith | 50,000 | 50,000 |
| A Long | 4,108 | 4,108 |
| M G Rogers | 102,420 | 102,420 |
| D L Hosein | — | — |
| P F Dicks | 23,298 | 23,298 |
| D Marston | 15,324 | 10,500 |
| R Macnamara | — | — |
The graph shows the Group's performance, measured by TSR, compared with the constituents of the FTSE All Share Support Service Sector over the last five years. The Index is the most relevant to compare the Group's performance against its peers.
The remuneration of each Director, excluding long-term, share-based incentive awards and pensions, during the year ended 31 December 2011 compared with 2010 is set out in the table below:
| Fees/ | Benefits | 2011 | 2010 | ||
|---|---|---|---|---|---|
| Directors' remuneration | basic salary £'000 |
Bonus £'000 |
-in-kind £'000 |
Total £'000 |
Total £'000 |
| Executive | |||||
| R Holt | 350 | — | 15 | 365 | 465 |
| D J Miles | 330 | — | 9 | 339 | 239 |
| A C M Smith | 220 | — | 6 | 226 | 174 |
| A Long | 180 | — | 10 | 190 | 164 |
| 1,080 | — | 40 | 1,120 | 1,042 | |
| Non-Executive | |||||
| R B Pomphrett* | — | — | — | — | 18 |
| M A Macario* | 21 | — | — | 21 | 42 |
| D L Hosein | 42 | — | — | 42 | 42 |
| M G Rogers | 42 | — | — | 42 | 42 |
| P F Dicks | 42 | — | — | 42 | 42 |
| D Marston | 42 | — | — | 42 | 23 |
| R Macnamara | 42 | — | — | 42 | 23 |
| 231 | — | — | 231 | 232 | |
| Total remuneration | 1,311 | — | 40 | 1,351 | 1,274 |
* M A Macario did not seek re-election at the AGM on 8 June 2011. R B Pomphrett did not seek re-election at the AGM on 9 June 2010.
Corporate governance / Remuneration report continued
Executive Directors' pensions (defined contribution)
| 2011 £'000 |
2011 % |
2010 £'000 |
2010 % |
|
|---|---|---|---|---|
| R Holt | 105 | 30 | 135 | 30 |
| D J Miles | 45 | 14 | 31 | 14 |
| A C M Smith | 22 | 10 | 17 | 10 |
| A Long | 18 | 10 | 16 | 10 |
| 190 | 199 |
The LTIP was approved by shareholders on 1 October 2008. Awards under the LTIP are set out in the table below:
| Date of grant | LTIP Awards to 1 January 2011 |
Granted | Lapsed | LTIP Awards held at 31 December 2011 |
Date of release |
|---|---|---|---|---|---|
| D J Miles | |||||
| 13 October 20081 | 100,000 | — | (73,450) | 26,550 | October 2011 |
| 28 October 20092 | 100,000 | — | — | 100,000 | October 2012 |
| 24 August 20103 | 175,000 | — | — | 175,000 | August 2013 |
| A C M Smith | |||||
| 13 October 20081 | 100,000 | — | (73,450) | 26,550 | October 2011 |
| 28 October 20092 | 100,000 | — | — | 100,000 | October 2012 |
| 24 August 20103 | 130,000 | — | — | 130,000 | August 2013 |
| A Long | |||||
| 13 October 20081 | 100,000 | — | (73,450) | 26,550 | October 2011 |
| 28 October 20092 | 100,000 | — | — | 100,000 | October 2012 |
| 24 August 20103 | 100,000 | — | — | 100,000 | August 2013 |
LTIP Awards are in the form of 1p options. If the relevant EPS and TSR performance conditions attaching to the awards are satisfied then the Director has seven years in which to exercise the award.
As explained above awards in respect of the 2011 financial year were not granted during 2011, but the Remuneration Committee intends to grant these awards to the Executive Directors as soon as possible and their grant will be reported in the 2012 Annual Report and Accounts.
1 The performance applicable to 2008 awards is subject to EPS growth (50% of the award) of 10%, 12.5% and 17.5% p.a. for 10%, 30% and 100% vesting and TSR performance against the FTSE All Share Support Services Sector (50% of the award) where 30% vest for performance equal to the Index and full vesting for outperforming the Index by 10%.
2 The performance applicable to 2009 awards is subject to EPS growth (75% of the award) of 10%, 12.5% and 15% p.a. for 10%, 30% and 100% vesting and TSR performance against the FTSE All Share Support Services Sector (25% of the award) where 30% vest for performance equal to the Index and full vesting for outperforming the Index by 10%.
3 The performance applicable to 2010 awards is subject to EPS growth (75% of the award) of 8%, 12.5% and 15% p.a. for 10%, 30% and 100% vesting and TSR performance against the FTSE All Share Support Services Sector (25% of the award) where 30% vest for performance equal to the Index and full vesting for outperforming the Index by 10%.
Executive Directors hold the following options granted under the Mears Group Share Option Scheme or Special Incentive Plan:
| At | At | Exercise | ||||
|---|---|---|---|---|---|---|
| Date of grant | 1 January 2011 |
Lapsed | Exercised | 31 December 2011 |
price p |
Exercisable dates |
| R Holt | ||||||
| 10 April 2003 | 129,870 | — | (129,870)1 | — | 77 | — |
| 10 April 2003 | 240,642 | — | (240,642)1 | — | 1 | — |
| 1 April 2004 | 30,453 | — | (30,453)1 | — | 1 | — |
| 28 September 2009 | 2,500,000 | — | — | 2,500,000 | 1 | 2010–2019 |
| D J Miles | ||||||
| 1 April 20042 | 30,453 | — | — | 30,453 | 1 | 2007–2014 |
| 8 April 20052 | 7,220 | — | — | 7,220 | 1 | 2008–2015 |
| 21 April 2006 | 10,000 | — | — | 10,000 | 300 | 2009–2016 |
| 21 April 20062 | 6,087 | — | — | 6,087 | 1 | 2009–2016 |
| 28 September 20072 | 50,045 | — | — | 50,045 | 1 | 2010–2017 |
| 20 March 20082 | 151,149 | — | — | 151,149 | 1 | 2011–2018 |
| A C M Smith | ||||||
| 10 April 2003 | 50,000 | — | — | 50,000 | 77 | 2006–2013 |
| 1 April 20042 | 24,363 | — | — | 24,363 | 1 | 2007–2014 |
| 8 April 20052 | 7,220 | — | — | 7,220 | 1 | 2008–2015 |
| 21 April 2006 | 10,000 | — | — | 10,000 | 300 | 2009–2016 |
| 21 April 20062 | 6,087 | — | — | 6,087 | 1 | 2009–2016 |
| 28 September 20072 | 50,045 | — | — | 50,045 | 1 | 2010–2017 |
| 20 March 20082 | 100,766 | — | — | 100,766 | 1 | 2011–2018 |
| A Long | ||||||
| 21 April 2006 | 10,000 | — | — | 10,000 | 300 | 2009–2016 |
| 21 April 20062 | 6,087 | — | — | 6,087 | 1 | 2009–2016 |
| 28 September 20072 | 20,018 | — | — | 20,018 | 1 | 2010–2017 |
| 20 March 20082 | 75,575 | — | — | 75,575 | 1 | 2011–2018 |
1 On the 17 August 2011 R Holt, Chairman of Mears, exercised share options (granted in 2003 and 2004 with a condition of continued employment) over 400,965 ordinary shares in the Company. The resulting shares were sold on the same day at an average price of 271.77p per share.
2 For those options with an exercise price of 1p, these options which were previously market-priced options but were replaced with a lower number of 1p options with the same expected value and terms and conditions. These 1p options can only be exercised if the share price is greater than the original exercise price of the market-priced options.
Corporate governance / Remuneration report continued
Options are exercisable at the prices indicated which are equal to the average quoted market price of the Company's shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire and are forfeited if the Director leaves Mears Group PLC before the option vests.
The agreements covering Directors' options and LTIP Awards are available for inspection at the Group's offices. The Company's Register of Directors' Interests (which is also open to inspection) contains full details of the Directors' shareholdings and options to subscribe.
This report was approved by the Board and has been signed on its behalf by:
P F Dicks Chairman of the Remuneration Committee 27 March 2012
| Report of the independent auditor | 56 |
|---|---|
| Principal accounting policies – Group | 58 |
| Consolidated income statement | 68 |
| Consolidated statement of comprehensive income | 69 |
| Consolidated balance sheet | 70 |
| Consolidated cash flow statement | 71 |
| Consolidated statement of changes in equity | 72 |
| Notes to the financial statements – Group | 73 |
We have audited the financial statements of Mears Group PLC for the year ended 31 December 2011 which comprise the Group principal accounting policies, Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Cash Flow Statement, Consolidated Statement of Changes in Equity, related Group notes, Company principal accounting policies, Parent Company Balance Sheet and related Company notes. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
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.
As explained more fully in the Directors' Responsibilities Statement set out on page 36 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 (United Kingdom and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors.
A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.
In our opinion:
In our opinion:
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
Under the Listing Rules, we are required to review:
The consolidated financial statements of the Group have been prepared in accordance with IFRS as adopted by the European Union. The financial statements are prepared under the historical cost convention.
The accounting policies remain unchanged from the previous year except for the adoption of IAS 24 (Revised) 'Related Party Disclosures' and the adoption of the May 2010 Annual Improvements to IFRS.
IAS 24 (Revised) 'Related Party Disclosures' (effective from 1 January 2011) which introduced certain exemptions for disclosing transactions with government or government related entities. IAS 24 has had no material impact on the Group.
May 2010 Annual Improvements to IFRS (effective 1 January 2011) have been applied but have had no material impact on the Group.
The Directors consider that as at the date of approving the financial statements, there is a reasonable expectation that the Group and Company have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. The Directors have discussed the principal risks and uncertainties of the business in the Report of the Directors on pages 26 and 27.
The Consolidated Balance Sheet includes the assets and liabilities of the Company and its subsidiaries and is made up to 31 December 2011. Entities over which the Group has the ability to exercise control over financial and operating policies are accounted for as subsidiaries. Control is obtained and exercised through voting rights so as to obtain benefits from its activities. Interests acquired in entities are consolidated from the effective date of acquisition and interests sold are consolidated up to the date of disposal.
All significant intercompany transactions and balances between Group enterprises, including unrealised profits arising from intra-group transactions, are eliminated on consolidation; no profit is taken on sales between Group companies.
Business combinations are accounted for using the purchase method. The purchase method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the Consolidated Balance Sheet at their fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill is stated after separating out identifiable intangible assets. Goodwill represents the excess of acquisition cost over the fair value of the Group's share of the identifiable net assets of the acquired subsidiary at the date of acquisition.
Where applicable the consideration for an acquisition includes any assets of liabilities arising from a contingent consideration arrangement, measured at fair value at the acquisition date. Subsequent changes in such fair values are adjusted against the cost of acquisition where they result from additional information obtained up to one year from the acquisition date about facts and circumstances that existed at the acquisition date. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are recognised in accordance with IAS 39, either in the Income Statement or Consolidated Statement of Comprehensive Income.
Costs relating to acquisitions in the year have been expensed.
Any business combinations prior to 1 January 2010 were accounted for in accordance with the standards in place at the time, which differ in the following respects: transaction costs directly attributable to the acquisition formed part of the acquisition costs; contingent consideration was recognised if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable; and subsequent adjustments to the contingent consideration were recognised as part of goodwill.
Items of property, plant and equipment are stated at historical cost, net of depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow into the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the Income Statement during the financial period in which they are incurred.
Freehold land is not depreciated. Depreciation on other assets is calculated to write down the cost less estimated residual value over their estimated useful economic lives. The rates generally applicable are:
| Freehold buildings | – | 2% per annum, straight-line |
|---|---|---|
| Leasehold improvements | – | over the period of the lease, straight-line |
| Plant and machinery | – | 25% per annum, reducing balance |
| Fixtures, fittings and equipment | – | 25% per annum, reducing balance |
| Motor vehicles | – | 25% per annum, reducing balance |
| Assets under construction | – | nil |
Residual values are reviewed annually and updated if appropriate. The carrying value is reviewed for impairment in the period if events or changes in circumstances indicate the carrying value may not be recoverable. An asset's carrying value is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognised within administrative expenses in the Income Statement.
In accordance with IFRS 3 (Revised) 'Business Combinations', an intangible asset acquired in a business combination is deemed to have a cost to the Group of its fair value at the acquisition date. The fair value of the intangible asset reflects market expectations about the probability that the future economic benefits embodied in the asset will flow to the Group. Where an intangible asset might be separable, but only together with a related tangible or intangible asset, the group of assets is recognised as a single asset separately from goodwill where the individual fair values of the assets in the Group are not reliably measurable. Where the individual fair value of the complementary assets are reliably measurable, the Group recognises them as a single asset provided the individual assets have similar useful lives. Intangible assets are amortised over the useful economic life of those assets.
Development costs incurred on software development are capitalised when all the following conditions are satisfied:
Costs incurred making intellectual property available for use (including any associated borrowing costs) are capitalised when all of the following conditions are satisfied:
Development costs not meeting the criteria for capitalisation are expensed as incurred. Careful judgement by management is applied when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any development is uncertain and may be subject to future technical problems at the time of recognition. Judgements are based on the information available at each balance sheet date. In addition, all internal activities related to the research and development of new software are continually monitored by management.
The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce and prepare the asset to be capable of operating in the manner intended by management. Directly attributable costs include employee costs incurred on software development.
Amortisation commences upon completion of the asset and is shown within other administrative expenses. Until completion of the project, the assets are subject to impairment testing only. Development expenditure is amortised over the period expected to benefit.
The identifiable intangible assets and associated periods of amortisation are as follows:
| Order book | – | over the period of the order book, typically three years |
|---|---|---|
| Client relationships | – | over the period expected to benefit, typically five years |
| Development expenditure | – | 25% per annum, straight-line |
| Intellectual property | – | over the period of usefulness of the intellectual property, typically five years |
Goodwill arises on the acquisition of subsidiaries and represents any excess of the cost of the acquired entity over the Group's interest in the fair value of the entity's identifiable assets and liabilities acquired and is capitalised as a separate item. Goodwill is recognised as an intangible asset.
Under the business combinations exemption of IFRS 1, goodwill previously written off direct to reserves under UK GAAP is not recycled to the Income Statement on calculating a gain or loss on disposal.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows: cash-generating units (CGUs). As a result, some assets are tested individually for impairment and some are tested at CGU level. Goodwill is allocated to those CGUs that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management monitors the related cash flows.
Goodwill, other individual assets or CGUs that include goodwill and those intangible assets not yet available for use are tested for impairment at least annually. All other individual assets or CGUs are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognised in the Income Statement for the amount by which the asset or CGU's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell, and value-in-use based on an internal discounted cash flow evaluation. Impairment losses recognised for CGUs, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro-rata to the other assets in the CGU. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist.
Inventories are stated at the lower of cost and net realisable value. Cost is the actual purchase price of materials.
Work in progress is included in inventories after deducting any foreseeable losses and payments on account not matched with turnover. Work in progress represents costs incurred on contracts that cannot be matched with contract work accounted for as turnover. Work in progress is stated at the lower of cost and net realisable value. Cost comprises materials, direct labour and any subcontracted work which has been incurred in bringing the inventories and work in progress to their present location and condition.
Amounts recoverable on contracts are included in trade and other receivables and represent revenue recognised in excess of payments on account.
Income tax comprises current and deferred taxation.
Current tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period that are unpaid at the balance sheet date. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year.
Where an item of income or expense is recognised in the Income Statement, any related tax generated is recognised as a component of tax expense in the Income Statement. Where an item is recognised directly to equity or presented within the Consolidated Statement of Comprehensive Income, any related tax generated is treated similarly.
Deferred taxation is the tax expected to be repayable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method.
Deferred taxation liabilities are generally recognised on all taxable temporary differences in full with no discounting. Deferred taxation assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability, unless the related transaction is a business combination or affects tax or accounting profit.
Deferred taxation is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, provided they are enacted or substantively enacted at the balance sheet date. The carrying value of deferred taxation assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available against which taxable temporary differences can be utilised. Deferred tax is charged or credited to either the Income Statement, the Consolidated Statement of Comprehensive Income or equity to the extent that it relates to items charged or credited.
Revenue is measured in accordance with IAS 18 'Revenue' at the fair value of the consideration received or receivable, for goods and services provided in the normal course of business, net of rebates and discounts and after eliminating sales within the Group.
Revenue is recognised when the outcome of a job or contract can be estimated reliably; revenue associated with the transaction is recognised by reference to the stage of completion of work at the balance sheet date. The outcome of the transaction is deemed to be able to be estimated reliably when all the following conditions are satisfied:
Whilst all Social Housing contracts can fit within the guidelines laid down for revenue and profit recognition as detailed above, the alternative contractual pricing mechanisms do result in different methods of assessing the stage of completion. The Group has therefore recognised revenue dependent on the nature of transactions in line with IAS 18.
There are numerous contractual pricing mechanisms but one can broadly divide these into three types:
There is an element of SOR in approximately two thirds of contracts. At tender stage we enter a price for each of the numerous tasks carried out in respect to property maintenance. Typically we price for uplift or a discount against a pre-priced schedule. This price will, in some cases, be an all-encompassing price for the cost of direct works, the local site overhead, central overhead and profit contribution. In other instances, the SOR tendered may only recover direct works with an alternative mechanism to recover the other elements. Wherever possible, we seek to identify all individual works tickets received individually and capture costs and billing at the individual work ticket level. In so doing, this allows revenue to be recognised with a high degree of accuracy. Typically reactive maintenance works are invoiced within a month of completion, hence the majority of revenue recognised has already been individually valued at the work ticket level and the significant majority has been subsequently settled. The only element of revenue or profit recognition that requires judgement is against those jobs that are part complete or those completed works that have not been subject to a final valuation.
For part completed works, it is probable that the Group will recover the transaction costs incurred. Whether the outcome of the transaction can be estimated reliably needs to be considered contract by contract based on historic outcomes and knowledge of any events that may affect future job profitability. Where the outcome of the transaction cannot be estimated reliably, revenue is recognised only to the extent that the costs incurred are anticipated to be recovered. Where the outcome of the transaction can be estimated reliably, an element of anticipated profit is recognised within revenue to the extent that historic outcomes adjusted for knowledge of any events that may affect future job profitability supports such recognition.
For completed but not yet valued works, the outcome of the individual valued work tickets is not reviewed individually for the purposes of profit and revenue recognition. However, given the high volume of historical data to provide an accurate indication of underlying contract margin at a particular site, the Group considers that the application of an anticipated profit margin on cost to all completed and unbilled works produces a reliable measure.
For completed and valued works, the likely outcome for the individual work ticket can be determined individually for the purposes of profit and revenue recognition. The Group considers that the recognition of the anticipated profit for the individual job within revenue is appropriate.
Typically the open book element of contracts relates to the local site overhead. A priced overhead model is usually provided to a client at tender stage and the client pays the Group a fixed sum for maintaining this local site. This is typically an agreed fixed price. Revenue is recognised in line with cost incurred and similarly the attributable profit recognised against that cost.
Any over or underspends are typically at the risk of the Group. The actual overhead spend is often subject to an open book review which is then used as the basis for agreeing future pricing.
On the rare occasions that a contract does recover costs under a pure 'cost plus' arrangement, revenue is recognised in line with cost incurred and similarly the attributable profit recognised against that cost.
This type of contract is becoming more commonplace. To avoid the onerous burden of administering a high volume, low value activity, the pricing mechanism is reduced to either a price per ticket or a price per property. Historically, many gas servicing and breakdown contracts have been procured on a lump sum basis. However, it is now becoming increasingly common within the reactive maintenance environment. There is typically an exclusions list for works that are not considered repairs and not deemed to fall within the lump sum price. It is normal for this excluded element of the works to be billed under an SOR arrangement.
For practical purposes, in the majority of lump sum contracts, revenue is recognised on a straight-line basis over the contract term. There is not a material impact of seasonality in a client's reactive maintenance spend (in terms of either volume or value of orders received). In terms of the lump sum element of the contract, the revenue is split evenly across the twelve monthly reporting periods. No element of revenue is either advanced or deferred.
There are a small number of lump sum contracts where recognising revenue on a straight-line basis would be inappropriate. These are contracts where the phasing of the works over the contract term varies materially over the period of the contract and there is a mismatch between the delivery of works and the timing of invoicing against those works. For these contracts, the Group has historically reverted to recognising profit based on the proportion of costs incurred to date compared with the estimated total costs of the contract.
Revenue is recognised when the actual care has been delivered. Revenue relating to care delivered and not invoiced is accrued and disclosed under trade and other receivables as amounts recoverable on contracts. Revenue attributable to any unused capacity under block contracts, where the Group is able to invoice for contracted services not provided, is recognised when the recovery of income is considered virtually certain. There is minimal scope for judgement based on the Care process.
Mears Care utilises rostering systems to manage Care. These systems allow for planning a rota for each staff member, together with the corresponding pay and bill rates for the particular service type, length of service and time of delivery. These results are very accurate in the calculation of billable time, income and corresponding employee pay for a particular contract, branch or region.
Accrued income is determined by applying an average historical billing rate to the number of unbilled hours delivered at the balance sheet date. Variances are reviewed in the following month once actual billing is known. The rostering systems allow unbilled hours to be calculated based on planned rostered and actual visits along with the corresponding pay and bill rates for the particular service type, length of service and time of delivery. These results are very accurate in the calculation of billable time, income and corresponding employee pay for a particular contract, branch or region.
Revenue from the Mechanical & Electrical (M&E) sector reflects the contract activity during the year and is measured at the fair value of consideration received or receivable. When the outcome can be assessed reliably, contract revenue and associated costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the balance sheet date. The stage of completion of the contract at the balance sheet date is usually assessed by comparing the proportion of costs incurred to estimated total contract costs. Where this is not representative, contract milestones are used as a basis of assessing the stage of completion. Where the outcome of a construction contract cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable and contract costs are recognised as an expense in the period in which they are incurred.
In the case of a fixed price contract, the outcome of a construction contract is deemed to be estimated reliably when all the following conditions are satisfied:
The gross amount due from customers for contract work is presented as an asset for all contracts in progress for which costs incurred, plus recognised profits (less recognised losses), exceed progress billings. The gross amount due to customers for contract work is presented as a liability for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less losses).
Full provision is made for losses on all contracts in the year in which the loss is first foreseen.
Segment information is presented in respect of the Group's operating segments based upon the format that the Group reports to its chief operating decision makers.
The Group considers that the chief operating decision makers are the Executive Directors and Senior Executives of the business.
Exceptional items are disclosed on the face of the Consolidated Income Statement where these are material and considered necessary to explain the underlying financial performance of the Group. They are either one off in nature or necessary elements of expenditure to derive future benefits for the Group which have not been capitalised in the Consolidated Balance Sheet.
Costs of restructure are only considered to be exceptional where the restructure is transformational and the resultant cost is significant.
Acquisition costs are only considered to be exceptional where the acquisition is significant and the resultant cost is significant.
The Group operates both defined benefit and defined contribution pension schemes as follows:
A defined contribution plan is a pension plan under which the Group pays fixed contributions into an independent entity. The Group has no legal obligations to pay further contributions after payment of the fixed contribution.
The contributions recognised in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognised if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short-term nature.
The assets of the schemes are held separately from those of the Group in an independently administered fund.
The Group contributes to 15 principal defined benefit schemes which require contributions to be made to separately administered funds.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligations for any benefits from this kind of pension plan remain with the Group.
Scheme assets are measured at fair values. Scheme liabilities are measured on an actuarial basis using the projected unit method and are discounted at appropriate high quality corporate bond rates that have terms to maturity approximating to the terms of the related liability. Appropriate adjustments are made for past service costs. Past service cost is recognised as an expense on a straight-line basis over the average period until the benefits become vested. To the extent that benefits are already vested, the Group recognises past service cost immediately.
Actuarial gains and losses are recognised immediately through the Consolidated Statement of Comprehensive Income. The net surplus or deficit is presented with other net assets on the Consolidated Balance Sheet. Any related deferred tax is shown with other deferred tax balances. A surplus is recognised only to the extent that it is recoverable by the Group.
The Group's contributions to the scheme are paid in accordance with the rules of the schemes and the recommendations of the actuary.
In accordance with IFRIC 14, the asset that is recognised is restricted to the amount by which the IAS 19 service cost is expected, over the lifetime of the scheme, to exceed funding contributions payable in respect of accruing benefits.
Where the pension scheme has a contractual right to recover the costs of making good any deficit in the scheme from the Group's client, the fair value of that asset has been recognised and disclosed. The right to recover costs is limited to exclude situations where the Group causes the scheme to incur service costs in excess of those which would have been incurred were the members employed within Local Government. The right to recover costs is also limited to situations where the cap on employer contributions to be suffered by the Group is not set so as to contribute to reducing the deficit in the scheme.
All share-based payment arrangements that were granted after 7 November 2002 and had not vested before 1 January 2005 are recognised in the consolidated financial statements in accordance with IFRS 2.
The Group operates equity-settled share-based remuneration plans for its employees. All employee services received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value (excluding the effect of non-market based vesting conditions) of the share options awarded. Their value is determined at the date of grant and is not subsequently remeasured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using the Binomial and Monte Carlo option pricing models and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period. For SAYE plans, employees are required to contribute towards the plan. This non-vesting condition is taken into account in calculating grant date fair value.
All share-based remuneration is ultimately recognised as an expense in the Income Statement with a corresponding credit to share-based payment reserve.
Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital, with any excess being recorded as share premium.
Modifications to share-based payment arrangements are accounted for in accordance with IFRS 2. The modifications made by the Group in previous years did not increased the fair value of the equity instruments granted and, therefore, there was been no change to the share-based payment charge as a result.
In accordance with IAS 17 'Leases', the economic ownership of a leased asset is transferred to the lessee if they bear substantially all the risks and rewards related to the ownership of the leased asset. The related asset is recognised at the time of inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any, to be borne by the lessee. A corresponding amount is recognised as a finance leasing liability, irrespective of whether some of these lease payments are payable up front at the date of inception of the lease.
Subsequent accounting for assets held under finance lease agreements, i.e. depreciation methods and useful lives, correspond to those applied to comparable acquired assets. The corresponding finance leasing liability is reduced by lease payments less finance charges, which are expensed to finance costs. Finance charges represent a constant periodic rate of interest on the outstanding balance of the finance lease liability.
All other leases are treated as operating leases. Payment on operating lease agreements is recognised as an expense on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.
The Group does not act as a lessor.
Financial assets and liabilities are recognised in the Balance Sheet when the Group becomes party to the contractual provisions of the instrument. The principal financial assets and liabilities of the Group are as follows:
When financial assets are recognised initially under IAS 39 'Financial Instruments: Recognition and Measurement', they are measured at fair value, net of transaction costs other than for financial assets carried at fair value through the Income Statement.
The Group's financial assets are included in the Balance Sheet as current assets, except for maturities greater than twelve months after the balance sheet date, whereupon they are classified as non-current assets. The Group's financial assets comprise 'Trade and other receivables', 'Amounts recoverable on contracts' and 'Cash at bank and in hand' in the Balance Sheet.
Trade receivables, amounts recoverable on contracts and cash at bank and in hand are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Trade receivables and amounts recoverable on contracts are initially recorded at fair value net of transaction costs, being invoiced value less a provisional estimate for impairment. Trade receivables are subsequently remeasured at invoiced value, less an updated provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the Income Statement.
Provisions against trade receivables and amounts recoverable on contracts are made when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of those receivables. The amount of the write down is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows. Individually significant balances are reviewed separately for impairment based on the credit terms agreed with the customer. Other balances are grouped into credit risk categories and reviewed in aggregate.
Cash and cash equivalents include cash at bank and in hand and bank deposits available at less than 24 hours' notice. Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances.
Following initial recognition, financial assets are subsequently remeasured at amortised cost using the effective interest rate method.
The Group's financial liabilities are overdrafts, trade and other payables and finance leasing liabilities. They are included in the Balance Sheet line items 'Short-term borrowings and overdrafts', 'Non-current financial liabilities' and 'Trade and other payables'.
All interest related charges are recognised as an expense in 'Finance cost' in the Income Statement with the exception of those which are directly attributable to the construction of a qualifying asset which are capitalised as part of that asset.
Bank and other borrowings are initially recognised at fair value net of transaction costs. Gains and losses arising on the repurchase, settlement or otherwise cancellation of liabilities are recognised respectively in finance revenue and finance costs. Borrowing costs are recognised as an expense in the period in which they are incurred with the exception of those which are directly attributable to the construction of a qualifying asset which are capitalised as part of that asset.
Finance lease liabilities are initially measured at the lower of the fair value of the leased property and the present value of the minimum lease payments as determined at the inception of the lease. The initial value is reduced by the capital element of lease repayments over the period of the lease.
Trade payables on normal terms are not interest bearing and are stated at their fair value.
Following initial recognition, financial liabilities are subsequently remeasured at amortised cost using the effective interest rate method.
The Group uses derivative financial instruments to hedge its exposure to interest rate risks arising from operational and financing activities.
Derivative financial instruments are recognised initially and subsequently at fair value, with mark-to-market movements recognised in the Income Statement except where cash flow hedge accounting is applied (see below).
The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties.
In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. However, derivatives that do not qualify for hedge accounting are accounted for as trading instruments. Mark-to-market movements on these derivatives are shown in the Income Statement.
Where an interest rate swap is designated as a hedge of the variability in cash flows of an existing or highly probably forecast loan interest payment, the effective part of any valuation gain or loss on the swap instrument is recognised in other comprehensive income in the hedging reserve. The cumulative gain or loss is removed from equity and recognised in the Income Statement at the same time as the hedged transaction. The ineffective part of any gain or loss is recognised in the Income Statement immediately.
When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss recognised in equity is recognised in the Income Statement immediately.
Financial statements / Principal accounting policies – Group continued
Share capital is determined using the nominal value of shares that have been issued.
Share premium represents the difference between the nominal value of shares issued and the total consideration received.
Equity-settled shared-based employee remuneration is credited to the share-based payment reserve until the related share options are exercised. Upon exercise the share-based payment reserve is transferred to retained earnings.
The hedging reserve represents the effective part of any gain or loss on a cash flow hedge which has not been removed from equity and recognised in the Income Statement.
The merger reserve relates to the difference between the nominal value and total consideration in respect of the acquisition of Careforce Group plc and Supporta plc, where the Company was entitled to the merger relief offered by the Companies Act.
Dividend distributions payable to equity shareholders are included in 'Current financial liabilities' when the dividends are approved in a general meeting prior to the balance sheet date.
The preparation of financial statements requires management to make estimates and judgements that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenditure during the reported period. The estimates and associated judgements are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources.
The estimates and underlying judgements are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
In the preparation of these consolidated financial statements, estimates and judgements have been made by management concerning the selection of useful lives of property, plant and equipment, provisions necessary for certain liabilities, when to recognise revenue on long-term contracts, actuarial judgements, discount rates used within impairment reviews, the underlying share price volatility for valuing equity-based payments and other similar evaluations. Actual amounts could differ from those estimates.
Revenue is recognised based on the stage of completion of job or contract activity. As described in the Revenue Section on page 61, certain types of social housing pricing mechanisms and care require minimal judgement; however, social housing lump sum contracts and construction contracts do require judgements and estimates to be made to determine the stage of completion and the expected outcome for the individual contract.
Determining whether hedge accounting is appropriate in respect of a cash flow hedge requires an assessment of the effectiveness of the cash flow hedge. The purpose of the hedge is to eliminate the income statement effect of interest rate volatility in connection with a portion of forecast borrowings from HSBC/Barclays under the revolving credit facility. The Group wishes to hedge against an increase in LIBOR between now and August 2016. The Directors test the effectiveness of the Group's cash flow hedges on a quarterly basis and consider them to be effective.
Development expenditure is capitalised to the extent that is meets the criteria described in the Intangible assets section on page 59. Careful judgement is exercised by management when deciding whether the recognition requirements for development costs have been met. This is necessary as the economic success of any development is uncertain and may be subject to future technical problems at the time of recognition. Judgements are based on the information available at each balance sheet date.
Determining whether goodwill is impaired requires an estimate of the value-in-use of the CGUs to which goodwill has been allocated. The value-in-use calculation involves an estimate of the future cash flows of the CGUs and also the selection of appropriate discount rates to calculate present values. Future cash flows are estimated using the current one-year budget forecast, extrapolated for a future growth rate. The estimated growth rates are based on past experience and knowledge of the individual sector's markets. Changes in the estimated growth rate could result in variations to the carrying value of goodwill. The Directors consider that the estimates and judgements involved in determining the value-in-use of the Care CGU goodwill are the most significant and have therefore utilised the services of an external consultant to undertake this impairment review. The estimated cash flows and future growth rates are based on past experience and knowledge of the sector. The value-in-use is most sensitive to changes in the terminal growth rate, the explicit growth rate and the discount rate. The sensitivity to changes in these estimations is detailed in note 11.
Defined benefit liabilities
A number of key estimates have been made, which are given below, which are largely dependent on factors outside the control of the Group:
Details of the particular estimates used are included in the pensions note.
Where the Group has a contractual right to recover the costs of making good any deficit in the scheme, the fair value of that asset has been recognised and disclosed. The right to recover costs is limited to exclude situations where the Group causes the scheme to incur service costs in excess of those which would have been incurred were the members employed within Local Government. The Directors have made judgements in respect of whether any of the deficit is as a result of such situations.
The right to recover costs is also limited to situations where the cap on employer contributions to be suffered by the Group is not set so as to contribute to reducing the deficit in the scheme. The Directors, in conjunction with the scheme actuaries, have made judgements in respect of the predicted future service cost and contributions to the scheme to reflect this in the fair value of the asset recognised.
Amendments to IFRS 7 'Financial Instruments: Disclosures' – transfers of financial assets (effective 1 July 2011). The Group will apply this amendment from 1 January 2012.
IAS 19 (revised) 'Employee Benefits' (effective 1 January 2012). The Group will apply this revised standard for the Group's 31 December 2012 financial statements. The revised standard combines interest on obligation and expected return on plan assets and requires the disclosure of the net interest on liability; it also requires the separate disclosure of expenses for running the plan. As a result asset returns will be based on the discount rate instead of the expected rate of return on assets. This is expected to result in a lower expected return in the Income Statement and a higher gain in the Statement of Comprehensive Income. The revised standard will require the restatement of the prior year comparative.
IAS 27 (revised) 'Separate Financial Statements' (effective 1 January 2013). The Group will apply this revised standard for the Group's 31 December 2013 financial statements.
IAS 28 (revised) 'Investments in Associates and Joint Ventures' (effective 1 January 2013). The Group will apply this revised standard for the Group's 31 December 2013 financial statements.
IFRS 9 'Financial Instruments' (effective 1 January 2015) specifies how an entity should classify and measure financial assets, including some hybrid contracts. It requires all financial assets to be classified on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset. It requires financial assets to be initially measured at fair value plus, in the case of a financial asset not at fair value through profit or loss, particular transaction costs and subsequently measured at amortised cost or fair value. The Group will apply this standard for the Group's 31 December 2015 financial statements.
IFRS 10 'Consolidated Financial Statements' (effective 1 January 2013) establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. The Group will apply this standard for the Group's 31 December 2013 financial statements.
IFRS 11 'Joint Arrangements' (effective 1 January 2013) establishes principles for financial reporting by parties to a joint arrangement. The Group will apply this standard for the Group's 31 December 2013 financial statements.
IFRS 12 'Disclosures of Interests in Other Entities' (effective 1 January 2013) requires an entity to disclose information that enables users of financial statements to evaluate the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. The Group will apply this standard for the Group's 31 December 2013 financial statements.
IFRS 13 'Fair Value Measurement' (effective 1 January 2013) explains how to measure fair value for financial reporting. The Group will apply this standard for the Group's 31 December 2013 financial statements.
The Directors do not expect that the adoption of these standards and amendments will have a material impact on the financial statements of the Group in future periods.
| 2011 | 2010 | ||||
|---|---|---|---|---|---|
| Note | £'000 | £'000 | £'000 | £'000 | |
| Sales revenue | 1 | 588,971 | 523,935 | ||
| Cost of sales | (414,207) | (373,402) | |||
| Gross profit | 174,764 | 150,533 | |||
| Other administrative expenses | (141,156) | (119,213) | |||
| Operating result before amortisation of acquisition intangibles and exceptional items | 33,608 | 31,320 | |||
| Exceptional items | 7 | (3,094) | (2,450) | ||
| Amortisation of acquisition intangibles | 12 | (7,783) | (10,119) | ||
| Total administrative costs | (152,033) | (131,782) | |||
| Operating profit | 22,731 | 18,751 | |||
| Finance income | 4 | 484 | 63 | ||
| Finance costs | 4 | (2,633) | (2,462) | ||
| Profit for the year before tax | 2 | 20,582 | 16,352 | ||
| Tax expense | 8 | (3,668) | (1,588) | ||
| Net profit for the year | 16,914 | 14,764 | |||
| Earnings per share | |||||
| Basic | 10 | 19.87p | 17.70p | ||
| Diluted | 10 | 19.03p | 16.57p |
The accompanying accounting policies and notes form an integral part of these financial statements.
| 2011 | 2010 | ||
|---|---|---|---|
| Note | £'000 | £'000 | |
| Net result for the year | 16,914 | 14,764 | |
| Other comprehensive income/(expense): | |||
| Cash flow hedges: | |||
| – losses arising in the year | (1,463) | — | |
| – reclassification to Income Statement | 204 | — | |
| Actuarial gain/(loss) on defined benefit pension scheme | 26 | 846 | (3,651) |
| (Decrease)/increase in deferred tax asset in respect of defined benefit pension schemes | 22 | (479) | 1,022 |
| Other comprehensive expense for the year | (892) | (2,629) | |
| Total comprehensive income for the year | 16,022 | 12,135 | |
| Attributable to: | |||
| – equity holders of the parent | 16,022 | 12,135 |
The accompanying accounting policies and notes form an integral part of these financial statements.
| Note £'000 Assets Non-current Goodwill 11 101,030 Intangible assets 12 26,449 Property, plant and equipment 13 12,681 Deferred tax asset 22 7,379 Trade and other receivables 17 2,384 149,923 Current Inventories 15 12,541 Trade and other receivables 17 125,095 Cash at bank and in hand 46,571 184,207 Total assets 334,130 Equity Equity attributable to the shareholders of Mears Group PLC Called up share capital 23 857 Share premium account 33,554 |
£'000 97,405 27,136 |
|---|---|
| 12,113 | |
| 8,056 | |
| 1,929 | |
| 146,639 | |
| 12,147 | |
| 109,765 | |
| 21,757 | |
| 143,669 | |
| 290,308 | |
| 848 | |
| 33,243 | |
| Share-based payment reserve 2,965 |
2,905 |
| Hedging reserve (1,259) |
— |
| Merger reserve 38,243 |
38,243 |
| Retained earnings 77,425 |
66,315 |
| Total equity 151,785 |
141,554 |
| Liabilities | |
| Non-current | |
| Pension and other employee benefits 26 5,840 |
7,693 |
| Deferred tax liabilities 22 5,297 |
6,983 |
| Financing liabilities 19 1,325 |
— |
| Other liabilities 20 879 |
959 |
| 13,341 | 15,635 |
| Current | |
| Short-term borrowings and overdrafts 60,000 |
34,000 |
| Trade and other payables 18 105,916 |
97,879 |
| Financing liabilities 19 403 |
— |
| Current tax liabilities 2,685 |
1,240 |
| Current liabilities 169,004 |
133,119 |
| Total liabilities 182,345 |
|
| Total equity and liabilities 334,130 |
148,754 |
The financial statements were approved and authorised for issue by the Board of Directors and were signed on its behalf on 27 March 2012.
The accompanying accounting policies and notes form an integral part of these financial statements.
www.mearsgroup.co.uk
| Note | 2011 £'000 |
2010 £'000 |
|
|---|---|---|---|
| Operating activities | |||
| Result for the year before tax | 20,582 | 16,352 | |
| Adjustments | 24 | 14,046 | 17,799 |
| Change in inventories | (394) | 5,588 | |
| Change in trade and other receivables | (13,340) | (13,835) | |
| Change in trade and other payables | 5,026 | 431 | |
| Cash flow from operating activities before taxation before effect of acquired contracts | 25,920 | 26,335 | |
| Change in working capital from acquired contracts | (2,820) | — | |
| Cash flow from operating activities before taxation | 23,100 | 26,335 | |
| Taxes paid | (4,615) | (6,599) | |
| Net cash inflow from operating activities | 18,485 | 19,736 | |
| Investing activities | |||
| Additions to property, plant and equipment | (3,991) | (2,935) | |
| Additions to other intangible assets | (1,419) | (920) | |
| Proceeds from disposals of property, plant and equipment | 208 | 243 | |
| Acquisition of subsidiary undertaking, net of cash | (5,771) | (28,122) | |
| Disposal of business activities, net of cash | — | 986 | |
| Interest received | — | 2 | |
| Net cash outflow from investing activities | (10,973) | (30,746) | |
| Financing activities | |||
| Proceeds from share issue | 320 | 743 | |
| Discharge of finance lease liability | (86) | (557) | |
| Interest paid | (2,970) | (2,851) | |
| Dividends paid | (5,962) | (5,079) | |
| Net cash outflow from financing activities | (8,698) | (7,744) | |
| Cash and cash equivalents, beginning of year | (12,243) | 6,511 | |
| Net decrease in cash and cash equivalents | (1,186) | (18,754) | |
| Cash and cash equivalents, end of year | (13,429) | (12,243) | |
| Cash and cash equivalents is comprised as follows: | |||
| – cash at bank and in hand | 46,571 | 21,757 | |
| – short-term borrowings and overdrafts | (60,000) | (34,000) | |
| Cash and cash equivalents | (13,429) | (12,243) |
The accompanying accounting policies and notes form an integral part of these financial statements.
| Share Share-based premium payment account reserve £'000 £'000 32,505 2,649 — — |
Hedging reserve £'000 — — |
Merger reserve £'000 11,548 |
Retained earnings £'000 58,482 |
Total equity £'000 105,928 |
|---|---|---|---|---|
| — | 14,764 | 14,764 | ||
| 1,022 | ||||
| (3,651) | ||||
| — | — | — | 12,135 | 12,135 |
| — | — | — | 283 | 283 |
| — | — | 26,695 | — | 27,537 |
| 750 | — | — | — | 750 |
| (494) | — | — | 494 | — |
| — | — | — | (5,079) | (5,079) |
| 2,905 | — | 38,243 | 66,315 | 141,554 |
| — | — | — | 16,914 | 16,914 |
| — | (1,259) | — | — | (1,259) |
| — | — | — | (479) | (479) |
| — | — | — | 846 | 846 |
| — | (1,259) | — | 17,281 | 16,022 |
| — | — | — | (349) | (349) |
| — | — | — | — | 320 |
| 200 | — | — | — | 200 |
| (140) | — | — | 140 | — |
| — | — | — | (5,962) | (5,962) |
| 2,965 | (1,259) | 38,243 | 77,425 | 151,785 |
| — — — — — — 738 — — — 33,243 — — — — — — 311 — — — 33,554 |
— — |
— — |
1,022 (3,651) |
The accompanying accounting policies and notes form an integral part of these financial statements.
Financial statements / Notes to the financial statements – Group
Segment information is presented in respect of the Group's operating segments. Segments are determined by reference to the internal reports reviewed by the Board.
The Group operated three operating segments during the year:
All of the Group's activities are carried out within the United Kingdom and the Group's principal reporting to its chief operating decision maker is not segmented by geography.
The principal financial measures used by the chief operating decision maker and the Board to review the performance of the operating segments is that of revenue growth and operating margins in both the core divisions of Social Housing and Care. The operating result utilised within the key performance measures is stated before amortisation of acquisition intangibles, exceptional items and share-based payments.
| 2011 | 2010 | |||||||
|---|---|---|---|---|---|---|---|---|
| Business segments | Social Housing £'000 |
Care £'000 |
Other £'000 |
Total £'000 |
Social Housing £'000 |
Care £'000 |
Other £'000 |
Total £'000 |
| Revenue | 415,000 | 108,518 | 65,453 | 588,971 | 379,400 | 100,358 | 44,177 | 523,935 |
| Operating result pre amortisation of acquisition intangibles, exceptional items and share-based payment |
23,866 | 8,674 | 1,268 | 33,808 | 22,896 | 7,532 | 1,642 | 32,070 |
| Operating margin pre amortisation of acquisition intangibles, exceptional items and share-based payment |
5.8% | 8.0% | 1.9% | 5.7% | 6.0% | 7.5% | 3.7% | 6.1% |
| Share-based payment | (150) | (25) | (25) | (200) | (600) | (50) | (100) | (750) |
| Operating result pre amortisation of acquisition intangibles and exceptional items |
23,716 | 8,649 | 1,243 | 33,608 | 22,296 | 7,482 | 1,542 | 31,320 |
All revenue and all non-current assets arise within the United Kingdom. All of the revenue reported is external to the Group. No revenue in respect of a single customer comprises more than 10% of the total revenue reported.
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Operating result pre amortisation of acquisition intangibles and exceptional items | 33,608 | 31,320 |
| Exceptional items | (3,094) | (2,450) |
| Amortisation of acquisition intangibles | (7,783) | (10,119) |
| Finance costs, net | (2,149) | (2,399) |
| Tax expense | (3,668) | (1,588) |
| Net profit for the year | 16,914 | 14,764 |
Financial statements / Notes to the financial statements – Group continued
In addition the following disclosures have been provided in respect of segmental analysis required by IFRS 8 'Operating Segments':
| 2011 | 2010 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Business segments | Social Housing £'000 |
Care £'000 |
Other £'000 |
Total £'000 |
Social Housing £'000 |
Care £'000 |
Other £'000 |
Total £'000 |
|
| Segment assets | 199,416 | 109,248 | 25,466 | 334,130 | 209,126 | 60,178 | 21,004 | 290,308 | |
| Segment liabilities | (120,289) | (46,383) | (15,673) | (182,345) | (100,979) | (38,029) | (9,746) | (148,754) | |
| Property, plant and equipment acquired | 3,308 | 270 | 413 | 3,991 | 2,314 | 510 | 111 | 2,935 | |
| Depreciation | 2,217 | 806 | 215 | 3,238 | 1,963 | 1,013 | 206 | 3,182 |
Profit for the year before tax is stated after:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Share-based payments | 200 | 750 |
| Depreciation | 3,238 | 3,182 |
| Amortisation | 8,404 | 10,511 |
| Hire of plant and machinery | 3,339 | 2,514 |
| Other operating lease rentals | 19,586 | 14,503 |
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Fees payable to the auditor for the audit of the Group's financial statements | 62 | 61 |
| Other fees payable to the auditor in respect of: | ||
| – auditing of accounts of subsidiary undertakings pursuant to legislation | 167 | 161 |
| – taxation compliance fees | 59 | 38 |
| – taxation advice fees | 1 | 30 |
| Total auditor's remuneration | 289 | 290 |
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Interest charge on overdrafts and short-term loans | (1,994) | (920) |
| Interest charge on interest rate swap | (205) | — |
| Changes in mark to market of interest rate swaps (ineffective hedges) | (103) | (913) |
| Other interest | (86) | (216) |
| Finance costs on bank loans, overdrafts and finance leases | (2,388) | (2,049) |
| Interest charge on defined benefit obligation | (205) | (373) |
| Unwinding of discounting on deferred consideration | (40) | (40) |
| Total finance costs | (2,633) | (2,462) |
| Interest income resulting from short-term bank deposits | — | 2 |
| Interest income resulting from defined benefit obligation | 484 | 61 |
| Finance income | 484 | 63 |
| Net finance charge | (2,149) | (2,399) |
| Interest recognised in other comprehensive income | ||
| Changes in mark to market of interest rate swaps (effective hedges) | (1,679) | — |
Staff costs during the year were as follows:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Wages and salaries | 205,462 | 189,362 |
| Social security costs | 17,758 | 15,721 |
| Other pension costs | 3,818 | 63 |
| 227,038 | 205,146 |
The average number of employees of the Group during the year was:
| 2011 Number |
2010 Number |
|
|---|---|---|
| Site workers | 2,926 | 2,508 |
| Carers | 5,983 | 6,090 |
| Office and management | 2,408 | 2,203 |
| 11,317 | 10,801 |
Remuneration in respect of Directors was as follows:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Emoluments | 1,351 | 1,300 |
| Gains made on the exercise of share options | 987 | — |
| Pension contributions to personal pension schemes 190 |
199 | |
| 2,528 | 1,499 | |
The amounts set out above include remuneration in respect of the highest paid Director as follows:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Emoluments and gains made on the exercise of share options | 1,468 | 465 |
| Pension contributions to personal pension schemes | 105 | 135 |
During the year contributions were paid to personal pension schemes for four Directors (2010: four).
During the year one Director (2010: none) exercised share options.
As at 31 December 2011 the Group maintained six share-based payment schemes for employee remuneration.
Details of the share options outstanding (excluding those issued under the Special Incentive Plan (SIP)) are as follows:
| 2011 | 2010 | ||||
|---|---|---|---|---|---|
| Weighted average |
exercise | Weighted average exercise |
|||
| Number | price | Number | price | ||
| '000 | p | '000 | p | ||
| Outstanding at 1 January | 7,502 | 75 | 7,142 | 126 | |
| Granted | — | — | 875 | — | |
| Forfeited/lapsed | (817) | 34 | (177) | 148 | |
| Exercised | (843) | 37 | (338) | 121 | |
| Outstanding at 31 December | 5,842 | 85 | 7,502 | 75 |
The weighted average share price at the date of exercise for share options exercised during the period was 37p. The options outstanding at 31 December 2011, excluding the SIP Award, were exercisable at prices between 1p and 300p and had a weighted average remaining contractual life of five years.
The fair values of options granted were determined using the Binomial and Monte Carlo option pricing models. Significant inputs into the calculation include the market price at the date of grant and exercise prices. Furthermore, the calculation takes into account the future dividend yield, the share price volatility rate and the risk-free interest rate.
The underlying expected share price volatility was determined by reference to historical data. The Company expects the volatility of its share price to reduce as it matures. The risk-free interest rate was determined by the implied yield available on a zero-coupon Government bond at the date of grant. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions. In the case of the SAYE scheme the expected forfeitures takes account of the requirement to save throughout the life of the scheme. There were no options granted during the year. 0.8m options lapsed during the year. The market price at 31 December 2011 was 220p and the range during 2011 was 205p to 323p.
At 31 December 2011, 4.0m options had vested and were still exercisable at a weighted average exercise price of 123p.
All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options.
The Group recognises the following expenses related to share-based payments:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| LTIP | 120 | 101 |
| Approved share option plan | 1 | 35 |
| Unapproved share option plan | 40 | 108 |
| SAYE | 39 | 20 |
| SIP | — | 486 |
| 200 | 750 |
In total, £0.2m of employee remuneration expense has been included in the Consolidated Income Statement for 2011 (2010: £0.75m), which gave rise to additional share-based payment reserves. No liabilities were recognised due to share-based payment transactions.
The LTIP was introduced in October 2008 following shareholder approval. The award of options is offered to a small number of key senior management. The principal terms of the LTIP are detailed below:
| Principal terms of LTIP | |
|---|---|
| Number of options | Maximum award limit under the plan will be 200% of salary per annum. |
| Exercise price | 1p |
| Performance period | 3 years |
| Performance conditions | There are two performance targets attaching to the LTIP Award. |
| 50% of the LTIP Award will relate to an EPS growth target. The other 50% of the LTIP Award relates to the Company's TSR against the return of the FTSE All Share Support Services Sector. |
|
| Expiry conditions | Options are forfeited if the employee leaves the Group before the options have vested. |
Performance conditions of LTIP
| EPS growth target | TSR target | ||
|---|---|---|---|
| Performance levels | Level of vesting | Performance levels | Level of vesting |
| 10.0% | 10% | Below index return | 0% |
| 12.5% | 30% | Equal to index | 30% |
| 17.5% | 100% | 10% outperformance of the index per annum | 100% |
The LTIP was introduced in October 2008 following shareholder approval. The award of options is offered to a small number of key senior management. The principal terms of the LTIP are detailed below:
| Principal terms of LTIP | |
|---|---|
| Number of options | Maximum award limit under the plan will be 200% of salary per annum. |
| Exercise price | 1p |
| Performance period | 3 years |
| Performance conditions | There are two performance targets attaching to the LTIP Award. |
| 75% of the LTIP Award will relate to an EPS growth target. The other 25% of the LTIP Award relates to the Company's TSR against the return of the FTSE All Share Support Services Sector. |
|
| Expiry conditions | Options are forfeited if the employee leaves the Group before the options have vested. |
Performance conditions of LTIP
| EPS growth target | TSR target | ||
|---|---|---|---|
| Performance levels | Level of vesting | Performance levels | Level of vesting |
| 10.0% | 10% | Below index return | 0% |
| 12.5% | 30% | Equal to index | 30% |
| 15.0% | 100% | 10% outperformance of the index per annum | 100% |
The LTIP was introduced in October 2008 following shareholder approval. The award of options is offered to a small number of key senior management. The principal terms of the LTIP are detailed below:
| Principal terms of LTIP | |
|---|---|
| Number of options | Maximum award limit under the plan will be 200% of salary per annum. |
| Exercise price | 1p |
| Performance period | 3 years |
| Performance conditions | There are two performance targets attaching to the LTIP Award. |
| 75% of the LTIP Award will relate to an EPS growth target. The other 25% of the LTIP Award relates to the Company's TSR against the return of the FTSE All Share Support Services Sector. |
|
| Expiry conditions | Options are forfeited if the employee leaves the Group before the options have vested. |
| EPS growth target | TSR target | ||
|---|---|---|---|
| Performance levels | Level of vesting | Performance levels | Level of vesting |
| 8.0% | 10% | Below index return | 0% |
| 10.0% | 30% | Equal to index | 30% |
| 12.5% | 100% | 10% outperformance of the index per annum | 100% |
Options are exercisable at a price equal to the average quoted market price of the Company's shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Options are forfeited if the employee leaves the Mears Group before the options vest.
Options are exercisable at a price equal to the average quoted market price of the Company's shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Options are forfeited if the employee leaves the Mears Group before the options vest.
Options are exercisable at a price equal to the average quoted market price of the Company's shares on the three dealing days prior to the date of grant. The vesting period is three years. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Options are forfeited if the employee leaves the Mears Group before the options vest. With the introduction of the LTIP in 2008, the Remuneration Committee has decided that no further awards will be made under the unapproved share option plan.
Options are available to all employees. Options are granted for a period of either three or five years. Options are exercisable at a price based on the quoted market price of the Company's shares at the time of invitation, discounted by up to 20%. Options are forfeited if the employee leaves the Mears Group before the options vest which impacts on the number of options expected to vest. If an employee stops saving but continues in employment, this is treated as a cancellation which results in an acceleration of the share-based payment charge.
The SIP was introduced in 2007 to reward the Chief Executive Officer with premium priced options linked to long-term performance. The terms and conditions were subsequently amended on 3 July 2009. The principal terms of the SIP and performance conditions are detailed below:
| Principal terms of SIP | |
|---|---|
| Number of options | 2,500,000 |
| Exercise price | 1p |
| Performance conditions | Average real EPS growth attained over three financial years with the base period for calculating EPS being 31 December 2006. EPS was calculated before amortisation and IFRS 2 costs. The performance was measured at the end of the three-year period. The performance conditions relating to this award were satisfied in full. |
| Vesting conditions The award vested in full in November 2010, 60% became exercisable in November 2010, 20% became exercisable in November 2011 and the remaining 20% will become exercisable in November 2012. |
|
| Performance conditions of SIP | |
| Performance levels | Level of vesting |
| 5% + RPI per annum | 10% |
| 10% + RPI per annum | 50% |
| 15% + RPI per annum | 100% |
Exceptional items are costs incurred in the period which are considered non-trading or non-recurring in nature.
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Costs of acquisitions | 224 | 1,289 |
| Costs of refinancing | 890 | — |
| Costs relating to PV | 1,980 | — |
| Costs of integration | — | 1,161 |
| Exceptional items | 3,094 | 2,450 |
The costs of acquisition in the period relate to the acquisition of the Supported Living division of Choices Care Community Services Limited and the acquisition of the trade of the Home Improvement Agency division of Anchor Trust Limited in the period. The costs of acquisition in the previous period relate to the acquisitions of Supporta plc and Jackson Lloyd Limited.
The costs of refinancing relate to the write off of costs relating to the Group's previous facility.
As a direct result of the Government's decision to substantially reduce the Photovoltaic (PV) Feed-in Tariff (FIT) subsidy, the Board took the decision to cease these activities immediately, as the commercial attractions that led us to explore the PV space, in the short term, no longer exist. The Board has written off costs relating to the site set-up, system design and installation amounting to £1.98m which are now considered irrecoverable.
The costs of integration in the previous period relate to the integration of the Careforce and Supporta Care businesses and re-branding as Mears Care.
Tax recognised in the Income Statement:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| United Kingdom Corporation Tax effective rate 22.1% (2010: 14.3%) | 6,266 | 3,779 |
| Adjustment in respect of previous periods | (206) | (159) |
| Total current tax recognised in Income Statement | 6,060 | 3,620 |
| Deferred taxation charge: | ||
| – on defined benefit pension obligations | 215 | 1,150 |
| – on share-based payments | 54 | (418) |
| – on accelerated capital allowances | — | 69 |
| – on amortisation of acquisition intangibles | (2,661) | (2,833) |
| Total deferred taxation recognised in Income Statement | (2,392) | (2,032) |
| Total tax expense recognised in Income Statement | 3,668 | 1,588 |
| Results for the year before tax | 20,582 | 16,352 |
| Result for the year multiplied by standard rate of Corporation Tax in the United Kingdom for the period of 26.5% (2010: 28%) | 5,454 | 4,579 |
| Effect of: | ||
| – expenses not deductible for tax purposes | 162 | 350 |
| – income not subject to tax | (679) | (1,050) |
| – capital allowances in excess of depreciation | 168 | 155 |
| – tax relief on exercise of share options | (423) | (362) |
| – statutory tax rate changes | (749) | — |
| – tax rate difference | (7) | (9) |
| – utilisation of tax losses | — | (23) |
| – tax relief on purchased goodwill amortisation | (52) | (1,893) |
| – adjustment in respect of prior periods | (206) | (159) |
| Actual tax expense, net | 3,668 | 1,588 |
| Deferred tax recognised directly in equity | ||
| Deferred taxation charge: | ||
| – on defined benefit pension obligations | 479 | (1,022) |
| – on share-based payments | 349 | (283) |
| – on cash flow hedges | (420) | — |
| Total deferred taxation recognised in equity | 408 | (1,305) |
| Total tax | ||
| Total current tax | 6,060 | 3,620 |
| Total deferred tax | (1,984) | (3,337) |
The following dividends were paid on ordinary shares in the year:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Final 2010 dividend of 4.85p (2010: final 2009 dividend of 4.10p) per share | 4,123 | 3,469 |
| Interim 2011 dividend of 2.15p (2010: interim 2010 dividend of 1.90p) per share | 1,839 | 1,610 |
| 5,962 | 5,079 |
The proposed final 2011 dividend of 5.35p per share has not been included within the consolidated financial statements as no obligation existed at 31 December 2011.
| Basic | Diluted | |||
|---|---|---|---|---|
| 2011 | 2010 | 2011 | 2010 p |
|
| p | p | p | ||
| Earnings per share | 19.87 | 17.70 | 19.03 | 16.57 |
| Effect of amortisation of acquisition intangibles | 9.14 | 12.13 | 8.75 | 11.36 |
| Effect of full tax adjustment | (4.52) | (6.98) | (4.33) | (6.54) |
| Effect of exceptional items (including tax impact) | 2.67 | 2.11 | 2.56 | 1.99 |
| Normalised earnings per share | 27.16 | 24.96 | 26.01 | 23.38 |
A normalised EPS is disclosed in order to show performance undistorted by amortisation of intangibles. The Group defines normalised earnings as excluding the amortisation of acquisition intangibles, exceptional items and adjusted to reflect a full tax charge of 26.5%. The profit attributable to shareholders before and after adjustments for both basic and diluted EPS is:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Profit attributable to shareholders: | 16,914 | 14,764 |
| – amortisation of acquisition intangibles | 7,783 | 10,119 |
| – full tax adjustment | (3,848) | (5,824) |
| – exceptional items (including tax impact) | 2,274 | 1,764 |
| Normalised earnings | 23,123 | 20,823 |
The calculation of EPS is based on a weighted average of ordinary shares in issue during the year. The diluted EPS is based on a weighted average of ordinary shares calculated in accordance with IAS 33 'Earnings per Share', which assumes that all dilutive options will be exercised. The additional normalised basic and diluted EPS use the same weighted average number of shares as the basic and diluted EPS.
| 2011 Millions |
2010 Millions |
|
|---|---|---|
| Weighted average number of shares in issue: | 85.14 | 83.42 |
| – dilutive effect of share options | 3.75 | 5.66 |
| Weighted average number of shares for calculating diluted earnings per share | 88.89 | 89.08 |
| Goodwill | |||
|---|---|---|---|
| arising on consolidation |
Purchased goodwill |
Total | |
| £'000 | £'000 | £'000 | |
| Gross carrying amount | |||
| At 1 January 2010 | 51,987 | 406 | 52,393 |
| Additions | 44,378 | — | 44,378 |
| Revision | 996 | — | 996 |
| Disposals | (362) | — | (362) |
| At 1 January 2011 | 96,999 | 406 | 97,405 |
| Additions | 3,593 | — | 3,593 |
| Revision | 32 | — | 32 |
| At 31 December 2011 | 100,624 | 406 | 101,030 |
| Accumulated impairment losses | |||
| At 1 January 2010, at 1 January 2011 and at 31 December 2011 | — | — | — |
| Carrying amount |
| At 31 December 2011 | 100,624 | 406 | 101,030 |
|---|---|---|---|
| At 31 December 2010 | 96,999 | 406 | 97,405 |
Goodwill on consolidation arises on the excess of cost of acquisition over the fair value of the net assets acquired on purchase of a company.
Purchased goodwill arises on the excess of cost of acquisition over the fair value of the net assets acquired on the purchase of the trade and assets of a business by the Company.
Additions to goodwill arising on consolidation are detailed within note 25.
Revisions totalling £0.03m relate to reductions to the estimated fair value of assets acquired. The reduction in fair value of assets acquired relates to costs not accrued at the time of the acquisition. The revisions are not considered sufficiently material to warrant the restatement of the prior year provisional balances.
Goodwill is not amortised but is reviewed for impairment on an annual basis or more frequently if there are any indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of CGUs according to the level at which management monitors that goodwill. Goodwill is carried at cost less accumulated impairment losses.
The carrying value of goodwill is primarily comprised of the following CGUs:
| Goodwill arising on consolidation £'000 |
Purchased goodwill £'000 |
Total £'000 |
|
|---|---|---|---|
| Social Housing | 22,840 | 406 | 23,246 |
| Care | 77,784 | — | 77,784 |
| Other Services | — | — | — |
| 100,624 | 406 | 101,030 |
An asset is impaired if its carrying value exceeds the unit's recoverable amount which is based upon value-in-use. At 31 December 2011 impairment reviews were performed by comparing the carrying value of the CGU with the value-in-use of the CGUs to which goodwill has been allocated. The value-in-use is calculated based upon the cash flow projections of the latest one-year budget forecast extrapolated for nine years by a growth rate applicable to each unit and an appropriate terminal value based on a perpetuity.
The rates used were as follows:
| Post tax discount rate |
Pre tax discount rate |
Growth rates (years 1–5) |
Growth rates (years 6–10) |
Terminal growth rate |
|
|---|---|---|---|---|---|
| Social Housing | 10.5% | 13.2% | 5.0% | 2.5% | 2.5% |
| Care | 10.7% | 13.4% | 5.0% | 2.5% | 2.5% |
The estimated growth rates are based on past experience and knowledge of the individual sector's markets.
The contracts awarded within the Social Housing area are significant in size and the contract terms are typically three to ten years in duration. The record of Mears in retaining contracts on expiry is typically over 90%. The impairment reviews have always taken a particularly prudent stance and incorporated a minimal growth assumption.
Budgeted operating profits during the budget period are estimated by reference to the average operating margins achieved in the period immediately before the start of the budget period. There is no inclusion for any anticipated efficiency improvements.
The Directors consider that reasonably possible changes in these key assumptions would not cause a unit's carrying amount to exceed its recoverable amount.
The table below shows the sensitivity to simultaneous changes in the discount rate and the long-term growth rate.
| Terminal growth rate | |||||
|---|---|---|---|---|---|
| Discount rate | 1.50% | 2.00% | 2.50% | 3.00% | 3.50% |
| 8.5% | 170,075 | 183,242 | 198,602 | 216,753 | 238,533 |
| 9.0% | 153,649 | 164,770 | 177,601 | 192,569 | 210,257 |
| 9.5% | 139,284 | 148,769 | 159,607 | 172,112 | 186,699 |
| 10.0% | 126,618 | 134,776 | 144,020 | 154,583 | 166,771 |
| 10.5% | 115,367 | 122,436 | 130,387 | 139,397 | 149,693 |
| 11.0% | 105,308 | 111,473 | 118,363 | 126,114 | 134,897 |
| 11.5% | 96,261 | 101,671 | 107,681 | 114,398 | 121,954 |
| 12.0% | 88,081 | 92,854 | 98,128 | 103,988 | 110,536 |
| 12.5% | 80,651 | 84,882 | 89,535 | 94,678 | 100,391 |
The table below shows sensitivity to simultaneous changes in the explicit growth rate (2012–2016) and the long-term growth rate.
| Terminal growth rate | |||||
|---|---|---|---|---|---|
| 2012–2016 annual growth rate | 1.50% | 2.00% | 2.50% | 3.00% | 3.50% |
| 1.0% | 95,768 | 101,819 | 108,626 | 116,340 | 125,155 |
| 2.0% | 100,469 | 106,763 | 113,844 | 121,868 | 131,037 |
| 3.0% | 105,301 | 111,846 | 119,208 | 127,551 | 137,085 |
| 4.0% | 110,266 | 117,069 | 124,721 | 133,393 | 143,303 |
| 5.0% | 115,367 | 122,436 | 130,387 | 139,397 | 149,693 |
| 6.0% | 120,607 | 127,949 | 136,207 | 145,565 | 156,260 |
| 7.0% | 125,988 | 133,611 | 142,185 | 151,902 | 163,005 |
| 8.0% | 131,513 | 139,425 | 148,324 | 158,409 | 169,934 |
| 9.0% | 137,185 | 145,393 | 154,627 | 165,090 | 177,048 |
Care
The care market is becoming increasingly sophisticated and the expectation of management is for significant consolidation within the sector, offering an opportunity to achieve significant organic growth. Each year, Local Authorities spend in excess of £2 billion on care. The Directors believe that future growth is underpinned by a number of factors including the increasingly ageing population in the United Kingdom and the increased desire of the elderly to lead independent lives. Local Authorities' expenditure on homecare for the elderly has grown rapidly over recent years, averaging 10% per year since 2003. The amount outsourced to independent providers has also risen sharply from 59% in 2001 to in excess of 81% today. It is the Directors' belief that this trend will continue.
The market is highly fragmented with an estimated 4,900 independent providers of homecare services. The increasing regulation in this sector is also expected by the Directors to continue, leading to increased consolidation. Furthermore, the Directors believe that the care sector will evolve towards a partnership approach similar to that of the Social Housing sector and Mears has already begun to see examples of such an approach with its customers. The Directors believe that stakeholders at all levels could benefit from this long-term investment approach.
The Directors believe that there are a number of developments in Government thinking which are likely to improve the prospects for the Care sector. Most notably, the Dillnot Review commissioned by the Department of Health last year to look at the future funding of adult care reported in the autumn of 2011. If accepted in full, this would lead to an additional initial spend on Care and Support of £1.3 billion, rising to as much as £3 billion in future years. Realistically, the Government may well scale back on this ambition within the Spring White Paper but the direction of travel should be positive. The Government faces significant lobbying from numerous organisations, concerning the state of care, most recently from the Equality and Human Rights Commission report of November 2011.
The impairment reviews have incorporated a growth assumption of 5.0% which the Directors believe to be realistic given the tremendous growth opportunities within Care.
Budgeted operating profits during the budget period are estimated by reference to the average operating margins achieved in the period immediately before the start of the budget period. There is no inclusion for any anticipated efficiency improvements.
The Directors consider that the Care value-in-use is most sensitive to changes in the terminal growth rate. The sensitivity of the calculated value-in-use to changes in explicit growth rate, terminal growth rate and discount rate is shown in the table below. The shaded values indicate situations which would result in impairment.
The table below shows the sensitivity to simultaneous changes in the discount rate and the long-term growth rate.
| Terminal growth rate | |||||
|---|---|---|---|---|---|
| Discount rate | 1.50% | 2.00% | 2.50% | 3.00% | 3.50% |
| 8.7% | 30,346 | 37,269 | 45,310 | 54,760 | 66,028 |
| 9.2% | 22,145 | 28,045 | 34,826 | 42,700 | 51,955 |
| 9.7% | 14,948 | 20,022 | 25,801 | 32,442 | 40,153 |
| 10.2% | 8,581 | 12,980 | 17,951 | 23,611 | 30,115 |
| 10.7% | 2,909 | 6,750 | 11,060 | 15,928 | 21,473 |
| 11.2% | (2,175) | 1,200 | 4,963 | 9,184 | 13,954 |
| 11.7% | (6,759) | (3,776) | (470) | 3,217 | 7,353 |
| 12.2% | (10,913) | (8,263) | (5,340) | (2,100) | 1,513 |
| 12.7% | (14,693) | (12,328) | (9,732) | (6,868) | (3,692) |
It is only when a simultaneous unfavourable change of greater than 0.5% occurs in both the terminal growth rate and the discount rate that the headroom falls below zero.
The table below shows sensitivity to simultaneous changes in the explicit growth rate (2012–2016) and the long-term growth rate.
| Terminal growth rate | |||||
|---|---|---|---|---|---|
| 2012–2016 annual growth rate | 1.50% | 2.00% | 2.50% | 3.00% | 3.50% |
| 1.0% | (8,824) | (5,575) | (1,931) | 2,187 | 6,877 |
| 2.0% | (6,014) | (2,624) | 1,180 | 5,477 | 10,370 |
| 3.0% | (3,122) | 414 | 4,380 | 8,862 | 13,966 |
| 4.0% | (149) | 3,538 | 7,673 | 12,345 | 17,666 |
| 5.0% | 2,909 | 6,750 | 11,060 | 15,928 | 21,473 |
| 6.0% | 6,053 | 10,054 | 14,542 | 19,612 | 25,387 |
| 7.0% | 9,284 | 13,449 | 18,121 | 23,400 | 29,412 |
| 8.0% | 12,604 | 16,938 | 21,800 | 27,293 | 33,549 |
| 9.0% | 16,015 | 20,522 | 25,579 | 31,293 | 37,800 |
It is only when a simultaneous unfavourable change of greater than approximately 1.0% occurs in both the terminal growth rate and the explicit forecast period growth rate that the headroom falls below zero.
| Acquisition intangibles | Other intangibles | ||||||
|---|---|---|---|---|---|---|---|
| Client relationships £'000 |
Order book £'000 |
Total acquisition intangibles £'000 |
Development expenditure £'000 |
Intellectual property £'000 |
Total other intangibles £'000 |
Total intangibles £'000 |
|
| Gross carrying amount | |||||||
| At 1 January 2010 | 18,671 | 7,177 | 25,848 | 1,736 | 224 | 1,960 | 27,808 |
| Acquired on acquisition | 13,466 | 6,453 | 19,919 | — | — | — | 19,919 |
| Additions | — | — | — | 920 | — | 920 | 920 |
| Disposals | (405) | (81) | (486) | — | — | — | (486) |
| At 1 January 2011 | 31,732 | 13,549 | 45,281 | 2,656 | 224 | 2,880 | 48,161 |
| Acquired on acquisition | 4,214 | — | 4,214 | — | — | — | 4,214 |
| Revision | 2,084 | — | 2,084 | — | — | — | 2,084 |
| Additions | — | — | — | 1,419 | — | 1,419 | 1,419 |
| At 31 December 2011 | 38,030 | 13,549 | 51,579 | 4,075 | 224 | 4,299 | 55,878 |
| Accumulated amortisation | |||||||
| At 1 January 2010 | 6,773 | 3,562 | 10,335 | 356 | 45 | 401 | 10,736 |
| Amortisation charge for period | 6,891 | 3,228 | 10,119 | 347 | 45 | 392 | 10,511 |
| Disposals | (184) | (38) | (222) | — | — | — | (222) |
| At 1 January 2011 | 13,480 | 6,752 | 20,232 | 703 | 90 | 793 | 21,025 |
| Amortisation charge for period | 5,535 | 2,248 | 7,783 | 577 | 44 | 621 | 8,404 |
| At 31 December 2011 | 19,015 | 9,000 | 28,015 | 1,280 | 134 | 1,414 | 29,429 |
| Carrying amount | |||||||
| At 31 December 2011 | 19,015 | 4,549 | 23,564 | 2,795 | 90 | 2,885 | 26,449 |
| At 31 December 2010 | 18,252 | 6,797 | 25,049 | 1,953 | 134 | 2,087 | 27,136 |
Development expenditure relates to the development of the Group's Social Housing job management system and the Group's Care management system. This is amortised over its useful economic life of 5.0 years. The weighted average remaining economic life of the asset is 4.1 years (2010: 4.1 years).
Intellectual property is amortised over its useful economic life of 5.0 years. The weighted average remaining economic life is 3.0 years.
Amortisation of development expenditure is included within other administrative expenses. Amortisation of acquisition intangibles is disclosed individually.
The value placed on the order book is based upon the cash flow projections over the contracts in place when a business is acquired. Due to uncertainties with trying to forecast revenues beyond the contract term, the Directors have taken a measure of prudence and value contracts over the contractual term only. The value of the order book is amortised over its remaining life.
The value placed on the customer relationships are based upon the non-contractual expected cash inflows. These cash flow projections assume a customer attrition rate of 5% based upon three-year historic trends.
Additions to intangible assets arising on consolidation are detailed within note 25.
Revisions totalling £2.1m relate to reductions to the estimated fair value of assets acquired in the previous year. A reduction in fair value of assets acquired in respect of the acquisition of Jackson Lloyd Limited of £1.8m relates to provisions and costs not accrued at the time of the acquisition. A reduction of fair value of assets acquired in respect of the acquisition of the social housing business assets of the Bristol social housing division of Rok Building Limited of £0.3m relates to costs not accrued at the time of the acquisition. The revisions are not considered sufficiently material to warrant the restatement of the prior year provisional balances.
Financial statements / Notes to the financial statements – Group continued
| Fixtures, | ||||
|---|---|---|---|---|
| Leasehold | Total | |||
| £'000 | £'000 | £'000 | £'000 | £'000 |
| 5,354 | 2,418 | 15,271 | 3,670 | 26,713 |
| 1,021 | 163 | 1,744 | 7 | 2,935 |
| 1,061 | 754 | 4,152 | 46 | 6,013 |
| (66) | (483) | (553) | (1,005) | (2,107) |
| — | — | (914) | (29) | (943) |
| 7,370 | 2,852 | 19,700 | 2,689 | 32,611 |
| 1,407 | 336 | 2,231 | 17 | 3,991 |
| (564) | — | — | (1,335) | (1,899) |
| 8,213 | 3,188 | 21,931 | 1,371 | 34,703 |
| 1,902 | 1,770 | 7,951 | 2,948 | 14,571 |
| 700 | 115 | 2,227 | 140 | 3,182 |
| 1,016 | 733 | 3,210 | 46 | 5,005 |
| (10) | (469) | (472) | (819) | (1,770) |
| — | — | (461) | (29) | (490) |
| 3,608 | 2,149 | 12,455 | 2,286 | 20,498 |
| 916 | 168 | 2,085 | 69 | 3,238 |
| (564) | — | — | (1,150) | (1,714) |
| 3,960 | 2,317 | 14,540 | 1,205 | 22,022 |
| 4,253 | 871 | 7,391 | 166 | 12,681 |
| 3,762 | 703 | 7,245 | 403 | 12,113 |
| improvements | Plant and machinery |
fittings and equipment |
Motor vehicles |
The figures stated above include assets held under finance leases as follows:
| Plant and | |
|---|---|
| machinery | |
| £'000 | |
| Net book amount | |
| At 31 December 2011 | — |
| At 31 December 2010 | — |
| Depreciation provided in the year | — |
The principal undertakings within the Group at 31 December 2011 are shown below:
| Proportion held | Nature of business | |
|---|---|---|
| Mears Limited | 100% | Provision of maintenance services |
| Haydon Mechanical & Electrical Limited | 100% | Provision of M&E services |
| Scion Technical Services Limited | 100% | Provision of M&E services |
| Scion Estates Limited | 100% | Provision of grounds maintenance |
| Jackson Lloyd Limited | 100% | Provision of maintenance services |
| Mears Home Improvements Limited | 100% | Provision of maintenance services |
| Mears Care Limited | 100% | Provision of care and support |
| Mears Care (Northern Ireland) Limited | 100% | Provision of care and support |
| Mears Care (Scotland) Limited | 100% | Provision of care and support |
| Terraquest Solutions Limited | 100% | Provision of professional services |
| Mears Insurance Captive Limited | 99.99% | Provision of insurance services |
All material subsidiary undertakings prepare accounts to 31 December. All material subsidiary undertakings are registered in England and Wales with the exception of Mears Insurance Captive Limited which is registered in Guernsey, Mears Care (Northern Ireland) which is registered in Northern Ireland and Mears Care (Scotland) which is registered in Scotland.
A full list of subsidiary undertakings is available from the Company Secretary upon request.
| 2011 | 2010 |
|---|---|
| £'000 | £'000 |
| Materials and consumables 2,411 |
1,778 |
| Work in progress 10,130 |
10,369 |
| 12,541 | 12,147 |
The Group consumed inventories totalling £414.2m during the year (2010: £303.3m). No items are being carried at fair value less costs to sell (2010: £nil).
Revenue of £74.2m (2010: £51.4m) relating to construction contracts has been included in the Consolidated Income Statement.
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Contract costs incurred | 59,368 | 38,091 |
| Recognised gross profits | 14,829 | 13,344 |
| Recognised gross losses | — | — |
| 74,197 | 51,435 | |
| Balances outstanding comprise: | ||
| – retentions | 4,965 | 3,976 |
| – due from customers for construction contract work | 5,799 | 1,690 |
| – due to customers for construction contract work | (750) | (72) |
Retentions will be payable upon acceptance of the work performed by the customer. Retentions are included in 'Trade receivables'. The amounts due to customers for construction work are included in 'Trade and other payables'.
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Current assets: | ||
| – trade receivables | 56,940 | 53,543 |
| – amounts recoverable on construction contracts | 5,799 | 1,690 |
| – amounts recoverable on non-construction contracts | 57,880 | 50,235 |
| – prepayments and accrued income | 4,476 | 4,297 |
| 125,095 | 109,765 | |
| Non-current assets: | ||
| – trade receivables | 2,384 | 1,929 |
| Total trade and other receivables | 127,479 | 111,694 |
Trade receivables are normally due within 30 to 60 days and do not bear any effective interest rate. All trade receivables are subject to credit risk exposure. Social Housing customers are typically Local Authorities and Housing Associations where credit risk is minimal. Care customers are typically County Councils where credit risk is minimal. Included in trade receivables is an amount of £2.4m (2010: £1.9m) which is due after more than one year and represents retention balances.
The ageing analysis of trade receivables is as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Neither impaired nor past due | 49,831 | 45,708 |
| Less than three months past due but not impaired | 6,246 | 6,354 |
| More than three months but not impaired | 3,247 | 3,410 |
| Total trade and other receivables | 59,324 | 55,472 |
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Trade payables | 67,898 | 56,103 |
| Accruals and deferred income | 14,502 | 19,612 |
| Social security and other taxes | 17,464 | 15,986 |
| Due to customers for construction contract work | 750 | 72 |
| Due to customers for non-construction contract work | 684 | 607 |
| Other creditors | 4,580 | 5,375 |
| Amounts due under finance lease contracts | 38 | 124 |
| 105,916 | 97,879 |
The fair value of trade payables has not been disclosed as, due to their short duration, management considers the carrying amounts recognised in the Balance Sheet to be a reasonable approximation of their fair value.
The amounts due under construction contract work will generally be utilised within the next reporting period.
The amounts due under finance lease contracts are secured on the assets to which they relate.
Included in other creditors is £1.98m (2010: £1.86m) relating to deferred consideration on acquisitions.
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Current liabilities: | ||
| – cash flow hedge | 403 | — |
| 403 | — | |
| Non-current liabilities: | ||
| – cash flow hedge | 1,325 | — |
| Total financing liabilities | 1,728 | — |
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Other creditors | 879 | 959 |
Included in other creditors is £0.88m (2010: £0.96m) relating to deferred consideration on acquisitions.
The Group uses a limited number of financial instruments comprising cash and liquid resources, borrowings and various items such as trade receivables and trade payables that arise directly from its operations. The main purpose of these financial instruments is to finance the Group's operations. The Group seeks to finance its operations through a combination of retained earnings and borrowings and investing surplus cash on deposit. The Group uses financial instruments to manage the interest rate risks arising from its operations and sources of finance but has no interests in the trade of financial instruments.
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Financial assets | ||
| Loans and receivables | ||
| Trade receivables | 59,324 | 55,472 |
| Amounts recoverable on contracts | 63,679 | 51,925 |
| Cash at bank and in hand | 46,571 | 21,757 |
| 169,574 | 129,154 | |
| Financial liabilities | ||
| Fair value (level 2) | ||
| Interest rate swaps – ineffective | — | (1,030) |
| Interest rate swaps – effective | (1,728) | — |
| Amortised cost | ||
| Short-term borrowings and overdrafts | (60,000) | (34,000) |
| Deferred consideration in respect of acquisitions | (2,861) | (2,820) |
| Trade payables | (67,898) | (56,103) |
| Accruals | (14,502) | (19,612) |
| Other creditors | (2,598) | (3,514) |
| (149,587) | (117,079) | |
| 19,987 | 12,075 |
The IFRS 7 level categorisation relates to the extent the fair value can be determined by reference to comparable market values. The classifications range from level 1, where instruments are quoted on an active market, through to level 3, where the assumptions used to arrive at fair value do not have comparable market data. The fair values of interest rate swaps have been calculated by a third party expert discounting estimated future cash flows on the basis of market expectations of future interest rates (level 2). There have been no transfers between levels during the year.
The fair value of the Group's financial assets and liabilities is as disclosed above and equals the book value with the exception of the deferred consideration in respect of acquisitions where the book value is £2.7m.
The Group's activities expose it to a variety of financial risks: market risk (including interest rate risk and price risk); credit risk; and liquidity risk. The main risks faced by the Group relate to the availability of funds to meet business needs and the risk of credit default by customers. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance.
Risk management is carried out under policies and guidelines approved by the Board of Directors.
The Group's borrowing facilities are drawn on as required to manage its cash needs. Banking facilities are reviewed regularly and extended and replaced in advance of their expiry.
The Group had total borrowing facilities of £120m with Barclays Bank plc and HSBC plc, of which £60m was utilised at 31 December 2011.
The facilities comprise a committed five-year £110.0m revolving credit facility and an unsecured overdraft facility of £10.0m. The undrawn amounts at 31 December 2011 were a £50.0m revolving credit facility and overdraft facility of £10.0m.
The Group's borrowings are secured by a fixed and floating charge over all of the Group's assets.
The Group finances its operations through a mixture of retained profits and bank borrowings from major banking institutions at floating rates of interest based on LIBOR. The Group's exposure to interest rates fluctuations on borrowings is managed through the use of interest rate swaps; hence the fixed rate borrowings relate to floating rate loans where the interest rate has been fixed by a hedging arrangement. The fair value of interest rate exposure on financial liabilities of the Group as at 31 December 2011 was:
| Interest rate | |||||
|---|---|---|---|---|---|
| Fixed | Floating | Zero | Total | ||
| £'000 | £'000 | £'000 | £'000 | ||
| Financial liabilities – 2011 | 55,038 | 5,000 | 2,860 | 62,898 | |
| Financial liabilities – 2010 | 26,064 | 8,060 | 2,820 | 36,944 |
The Group's policy is to accept a degree of interest rate risk, provided the effects of the various potential changes in rates remain within certain prescribed parameters.
Accordingly, the group has hedged the first £55m of the £120m revolving credit facility by entering into interest rate swap arrangements with Barclays and HSBC. This consists of two £27.5m swap contracts expiring in August 2016 with quarterly maturity, matching the underlying facility. The Group has designated this as two separate hedges of £45m and £10m respectively of the underlying borrowing for the purpose of hedge accounting under IAS 39.
The maturity of the interest rate swap contracts is as follows:
| 2011 | 2010 | |||
|---|---|---|---|---|
| Nominal amount hedged £'000 |
Applicable interest rates % |
Nominal amount hedged £'000 |
Applicable interest rates % |
|
| Within one year | — | — | 12,200 | 5.45% |
| 1–2 years | — | — | — | — |
| 2–5 years | 55,000 | 1.95% | 15,000 | 2.95% |
| More than five years | — | — | — | — |
Interest rate swaps with fair value liabilities of £1.7m (2010: £1.0m) and remaining lives of four years eight months have been accounted for in creditors.
The Group's overall average cost of debt, including effective and ineffective interest rate swaps, is 3.6% as at 31 December 2011 (2010: 6.0%). Excluding these swaps the average is 2.8% (2010: 3.2%).
The cash flow hedging reserve comprises all gains and losses arising from the valuation of interest swap contracts which are effective hedges and mature after the year end. These are valued on a mark-to-market basis, are accounted for through the Statement of Comprehensive Income and are recycled through the Consolidated Income Statement when the hedged item affects the Consolidated Income Statement. The interest rate swap contract has quarterly maturity and expires in August 2016.
Movements during the year were:
| £'000 |
|---|
| — |
| — |
| — |
| — |
| — |
| 204 |
| (1,883) |
| 420 |
| 1,259 |
At 31 December 2011 the Group had minimal exposure to movement in interest rates as the remaining interest rate risk was offset by the Group's cash and short-term deposits.
If the interest rates had been 0.5% higher or lower and all other variables were held constant, the Group's profit before taxation for the year ended 31 December 2010 and reserves would decrease or increase by £0.2m.
The main financial risks of the Group relate to the availability of funds to meet business needs.
The Group seeks to manage liquidity risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably.
Management monitors rolling forecasts of the Group's liquidity reserve (comprising undrawn borrowing facilities and cash and cash equivalents) on the basis of expected cash flows. This is generally carried out at a local level in the operating companies of the Group in accordance with practice and limits set by the Group. These limits vary by location and take into account the liquidity and nature of the market in which the entity operates.
The quantum of committed borrowing facilities of the Group is regularly reviewed and is designed to exceed forecasted peak gross debt levels. For short-term working capital purposes, the Group utilises bank overdrafts as required. These facilities are regularly reviewed and are renegotiated ahead of their expiry date.
The table below shows the maturity profile of the Group's financial liabilities:
| Within 1 year £'000 |
1–2 years £'000 |
2–5 years £'000 |
Over 5 years £'000 |
Total £'000 |
|
|---|---|---|---|---|---|
| 2011 | |||||
| Non-derivative financial liabilities: | |||||
| Short-term bank borrowings | 60,000 | — | — | — | 60,000 |
| Finance leases | 38 | — | — | — | 38 |
| Deferred contingent consideration in respect of acquisitions | 1,861 | 879 | — | — | 2,740 |
| Derivative financial liabilities: | |||||
| Interest rate swaps – effective | 403 | 354 | 971 | — | 1,728 |
| Interest rate swaps – ineffective | — | — | — | — | — |
| 2010 | |||||
| Non-derivative financial liabilities: | |||||
| Short-term bank borrowings | 34,000 | — | — | — | 34,000 |
| Finance leases | 124 | — | — | — | 124 |
| Deferred contingent consideration in respect of acquisitions | 1,861 | 959 | — | — | 2,820 |
| Derivative financial liabilities: | |||||
| Interest rate swaps – effective | — | — | — | — | — |
| Interest rate swaps – ineffective | 1,030 | — | — | — | 1,030 |
The Group's credit risk is primarily attributable to its trade receivables, amounts recoverable on contracts and work in progress. The amounts presented in the Balance Sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and the current economic environment.
Trade receivables are normally due within 30 to 60 days. Trade and other receivables included in the Balance Sheet are stated net of a bad debt provision which has been estimated by management following a review of individual receivable accounts. There is no Group-wide rate of provision and provision made for debts that are overdue is based on prior default experience and known factors at the balance sheet date. Receivables are written off against the bad debt provision when management considers that the debt is no longer recoverable.
Social Housing customers are typically Local Authorities and Housing Associations. Care customers are typically County Councils. Any credit risk within the M&E division is insured. Other trade receivables contain no specific concentration of credit risk as the amounts recognised represent a large number of receivables from various customers.
The Group continually monitors the position of major customers and incorporates this information into its credit risk controls. External credit ratings are obtained where appropriate.
Details of the ageing of trade receivables are shown in note 17.
The table below shows the movements in deferred contingent consideration:
| Total | |
|---|---|
| £'000 | |
| At 1 January 2010 | 3,031 |
| Increase due to new acquisitions in the year | 1,000 |
| Adjustments to estimated contingent consideration payable | (1,297) |
| Paid in respect of acquisitions | 46 |
| Unwinding of discounting | 40 |
| At 1 January 2011 | 2,820 |
| Increase due to new acquisitions in the year | 400 |
| Paid in respect of acquisitions | (399) |
| Unwinding of discounting | 40 |
| At 31 December 2011 | 2,861 |
Deferred contingent consideration represents an estimate of future consideration likely to be payable in respect of acquisitions. Deferred contingent consideration is discounted for the likelihood of payment and for the time value of money. Deferred contingent consideration becomes payable based upon the profitability of acquired businesses or in the case of one specific acquisition the utilisation of certain timing differences in respect of Corporation Tax.
Information as to the likely timing of payments in respect of these provisions is provided earlier within this note.
The Group's objectives when managing capital are:
The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The capital structure of the Group consists of net funds as disclosed below and equity as disclosed in the Consolidated Statement of Changes in Equity.
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Cash and cash equivalents is comprised as follows: | ||
| – cash at bank and in hand | 46,571 | 21,757 |
| – short-term borrowings and overdrafts | (60,000) | (34,000) |
| Cash and cash equivalents | (13,429) | (12,243) |
Financial statements / 55–112 Financial statements / Notes to the financial statements – Group continued
Deferred tax is calculated on temporary differences under the liability method.
The Group asset for deferred tax as at 31 December 2011 is £7.4m (2010: £8.1m).
| Pension | Share-based | |||
|---|---|---|---|---|
| scheme | payments | Cash flow | Total | |
| £'000 | £'000 | hedges | £'000 | |
| At 1 January 2010 | 897 | 5,201 | — | 6,098 |
| Acquisition of Supporta plc | 1,385 | — | — | 1,385 |
| (Debit)/credit to Income Statement | (1,150) | 418 | — | (732) |
| Credit to Consolidated Statement of Changes in Equity | — | 283 | — | 283 |
| Credit to Consolidated Statement of Comprehensive Income | 1,022 | — | — | 1,022 |
| At 1 January 2011 | 2,154 | 5,902 | — | 8,056 |
| Debit to Income Statement | (215) | (54) | — | (269) |
| (Debit)/credit to Consolidated Statement of Changes in Equity | — | (349) | 420 | 71 |
| Debit to Consolidated Statement of Comprehensive Income | (479) | — | — | (479) |
| At 31 December 2011 | 1,460 | 5,499 | 420 | 7,379 |
In accordance with IFRS 2 'Share-based Payments', the Group has recognised an expense for the consumption of employee services received as consideration for share options granted. A tax deduction will not arise until the options are exercised. The tax deduction in future periods is dependent upon the Company's share price at the date of exercise. The estimated future tax deduction is based on the options' intrinsic value at the balance sheet date.
The cumulative amount credited to the Income Statement is limited to the tax effect of the associated cumulative share-based payment expense. The excess has been credited directly to equity. This is presented in the Consolidated Statement of Comprehensive Income.
The deferred tax asset that arises on pre 7 November 2002 grants, even though the grants themselves are not accounted for within the Income Statement, is credited directly to equity.
Unused tax losses totalling £25.3m (2010: £17.3m) have not been recognised as the Directors do not consider that it is probable that they will be recovered.
| Acquisition intangibles £'000 |
Accelerated capital allowances £'000 |
Total £'000 |
|
|---|---|---|---|
| At 1 January 2010 | 4,346 | 300 | 4,646 |
| On acquisition intangibles acquired | 5,170 | 69 | 5,239 |
| Released in respect of amortisation | (2,833) | — | (2,833) |
| Provided in respect of accelerated capital allowances | — | (69) | (69) |
| At 1 January 2011 | 6,683 | 300 | 6,983 |
| On change in tax rate | (717) | (32) | (749) |
| On acquisition intangibles acquired | 978 | — | 978 |
| Released in respect of amortisation | (1,947) | — | (1,947) |
| Provided in respect of accelerated capital allowances | — | 32 | 32 |
| At 31 December 2011 | 4,997 | 300 | 5,297 |
Intangible assets acquired as part of a business combination are capitalised at fair value at the date of the acquisition and amortised over their useful economic lives. The UK tax regime calculates tax using the individual financial statements of the members of the Group and not the consolidated accounts. Hence, the tax base of acquisition intangible assets is £nil. The estimated tax effect of this £nil tax base is accounted for as a deferred tax liability which is released over the period of amortisation of the associated acquisition intangible asset.
Called up share capital represents the nominal value of shares that have been issued.
Share premium represents the difference between the nominal value of shares issued and the total consideration received.
Share-based payment reserve represents employee remuneration which is credited to the share-based payment reserve until the related share options are exercised. Upon exercise the share-based payment reserve is transferred to retained earnings.
The merger reserve relates to the difference between the nominal value and total consideration in respect of acquisitions, where the Company was entitled to the merger relief offered by the Companies Act.
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Allotted, called up and fully paid | ||
| At 1 January 84,815,470 (2010: 74,391,610) ordinary shares of 1p each | 848 | 744 |
| Issue of nil (2010: 9,942,323) shares on acquisition of Supporta plc | — | 99 |
| Issue of 843,293 (2010: 481,537) shares on exercise of share options | 9 | 5 |
| At 31 December 85,658,763 (2010: 84,815,470 ) ordinary shares of 1p each | 857 | 848 |
843,293 (2010: 481,537) ordinary 1p shares were issued in respect of share options exercised. The difference between the nominal value of £0.01m and the total consideration of £0.32m has been credited to the share premium account.
During 2010 9,942,323 ordinary 1p shares were issued in respect of the acquisition of Supporta plc, with the difference between the nominal value of £0.9m and the total consideration of £26.7m being credited to the merger reserve.
The following non-operating cash flow adjustments have been made to the pre tax result for the year:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Depreciation | 3,238 | 3,182 |
| Cost of acquisitions | 79 | 748 |
| (Profit)/loss on disposal of property, plant and equipment | (24) | 94 |
| Loss on disposal of investments | — | 115 |
| Amortisation | 8,404 | 10,511 |
| Share-based payments | 200 | 750 |
| Finance income | (485) | (63) |
| Finance cost | 2,634 | 2,462 |
| Total | 14,046 | 17,799 |
The Group acquired the trade of Home Improvement Agency division of Anchor Trust Limited and the Supported Living division of Choices Care Community Services Limited. The acquisitions are disclosed in aggregate as the effect on the Group's assets is not considered to be material. The effect of the acquisitions on the Group's assets was as follows:
| Provisional | |||
|---|---|---|---|
| Book | fair | ||
| value | Adjustments | value | |
| £'000 | £'000 | £'000 | |
| Liabilities | |||
| Current | |||
| Accruals | — | (1,136) | (1,136) |
| Total liabilities | — | (1,136) | (1,136) |
| Net assets acquired | (1,136) | ||
| Intangibles capitalised | 4,214 | ||
| Deferred tax liability recognised in respect of intangibles capitalised | (978) | ||
| Goodwill capitalised | 3,593 | ||
| 5,693 | |||
| Satisfied by: | |||
| – cash | 5,293 | ||
| – deferred contingent consideration | 400 | ||
| 5,693 |
The fair value adjustments above relate to costs not accrued at the time of the acquisition.
The fair value of the liabilities acquired in respect of the Supported Living division of Choices Care Community Services Limited are currently considered to be provisional awaiting further information in respect of certain liabilities. The fair value included above is the Directors' best estimate of liabilities acquired.
On 4 January 2011 the Group acquired the Home Improvement Agency division of Anchor Trust for a nominal fee.
On 4 August 2011 the Group acquired the Supported Living division of Choices Care Community Services Limited for an initial consideration of £5.3m and deferred contingent consideration estimated to be £0.4m. The maximum deferred contingent consideration payable is £0.4m. Deferred consideration is based upon future rental payments. The Directors have considered the likelihood of the consideration being payable and consider that £0.4m is the appropriate carrying value for the liability.
The Supported Living intangible asset is recognised and valued at £3.9m. The values represent the expected value to be derived from the acquired customer relationships. The value placed on these customer relationships is based on the expected cash inflows. The cash flows are discounted using a rate of 16% which the Directors consider is commensurate with the risks associated with capturing returns from the customer relationships. The estimated life is assumed to be the average remaining period of the framework agreements over which earnings from the customer relationships are expected to be generated of three years.
The Directors consider that the value assigned to goodwill represents the workforce acquired and the access to wider geographical supported living services in the UK as a result of this acquisition.
The Home Improvement Agency intangible asset is recognised and valued at £0.3m. The value represents the expected value to be derived from the acquired order book and existing customer relationships. The estimated life is assumed to be the average remaining period of the customer contracts of two years.
In the period ended 31 December 2011, the Supported Living acquisition contributed revenue of £4.2m and £0.9m operating profit before amortisation of intangibles.
In the period ended 31 December 2011, the Home Improvement Agency acquisition contributed turnover of £6.7m and £0.5m operating loss before amortisation of intangibles.
For the year ended 31 December 2011, had the acquisitions taken place on 1 January 2011, the combined Group full-year revenue for the year is estimated at £594.9m and the combined Group result for the year before taxation is estimated at £21.5m.
Analysis of net outflow in respect of the purchase of the subsidiary undertakings:
| Total | |
|---|---|
| £'000 | |
| Cash consideration | (5,293) |
| Costs paid | (79) |
| Cash paid in respect of prior year acquisitions | (399) |
| (5,771) |
During the year the Group paid £0.3m in respect of contingent consideration relating to acquisitions in prior periods.
The Group operates a defined contribution Group personal pension scheme for the benefit of certain employees. The Group contributes to personal pension schemes of certain Directors and senior employees. The Group operates a stakeholder pension plan available to all employees. During the year, the Group contributed £1.7m (2010: £1.4m) to these schemes.
The Group contributes to 15 (2010: 13) principal defined benefit schemes on behalf of a number of employees which require contributions to be made to separately administered funds.
These pension schemes are operated on behalf of Mears Limited, Scion Group Limited, Mears Care Limited and their subsidiary undertakings. The assets of the scheme are administered by trustees in funds independent from the assets of the Group.
In certain cases, the Group will participate under Admitted Body status in the Local Government Pension Scheme. The Group will contribute for a finite period up until the end of the particular contract. The Group is required to pay regular contributions as detailed in the scheme's schedule of contributions. In some cases these contributions are capped and any excess can be recovered from the body from which the employees originally transferred. Where the Pension Scheme has a contractual right to recover the costs of making good any deficit in the scheme from the Group's client, the fair value of that asset has been recognised within the Group's share of the scheme assets and disclosed on page 98. Certain judgements around the value of this asset have been made and are discussed in the judgements and estimates disclosure within the accounting policies.
Following the transfer of a number of employees in respect of new contracts in the year, the Group has gained Admitted Body status for three defined benefit schemes. At the time of admission these schemes had a net deficit of £0.5m. The initial plan assets and liabilities recognised as a result of these admissions are shown as 'Contract transfers' on page 99.
On 1 July 2011 the assets and liabilities of one of the Group's defined benefit schemes, the Scion Group Pension Scheme, were transferred into one of the Group's other defined benefit schemes, the Mears Group Pension Scheme.
The disclosures in respect of the 15 (2010: 13) defined benefit schemes in this note have been aggregated.
Costs and liabilities of the scheme are based on actuarial valuations. The latest full actuarial valuations for the schemes were updated to 31 December 2011 by qualified independent actuaries using the projected unit method.
The principal actuarial assumptions at the balance sheet date are as follows:
| 2011 | 2010 | |
|---|---|---|
| Rate of increase of salaries | 3.0% | 4.2% |
| Rate of increase for pensions in payment | 2.6% | 3.2% |
| Discount rate | 4.9% | 5.2% |
| Inflation | 3.0% | 3.2% |
| Life expectancy for a 65 year old male | 21.4 years | 21.6 years |
| Life expectancy for a 65 year old female | 23.6 years | 23.7 years |
Expected rates of return on investments are:
| 2011 | 2010 | |
|---|---|---|
| % | % | |
| Equities | 7.75 | 7.00 |
| Bonds | 4.70 | 4.70 |
| Property | 7.25 | 6.80 |
| Cash | 3.20 | 3.20 |
The amounts recognised in the Balance Sheet and major categories of plan assets as a percentage of total plan assets are:
| 2011 | 2010 | |||
|---|---|---|---|---|
| % | £'000 | % | £'000 | |
| Equities | 65 | 53,448 | 62 | 51,682 |
| Bonds | 24 | 19,657 | 19 | 16,251 |
| Guarantee | — | 126 | 6 | 4,728 |
| Property | 8 | 7,290 | 10 | 8,798 |
| Cash | 3 | 2,094 | 3 | 2,230 |
| Group's estimated asset share | 82,615 | 83,689 | ||
| Present value of funded scheme liabilities | (81,925) | (90,837) | ||
| Funded status | 690 | (7,148) | ||
| Scheme surpluses not recognised as assets | (6,530) | (545) | ||
| Pension liability | (5,840) | (7,693) |
The amounts recognised in the Income Statement are as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Current service cost | 2,665 | 2,357 |
| Past service cost | — | (3,718) |
| Total operating charge | 2,665 | (1,361) |
| Amount charged to net interest payable: | ||
| – expected return on pension scheme assets | (5,205) | (4,279) |
| – interest on obligations | 4,926 | 4,591 |
| (279) | 312 | |
| Total charged to the result for year | 2,386 | (1,049) |
Changes in the present value of the defined benefit obligations are as follows:
| Present value of obligations at 1 January 90,837 67,006 Current service cost 2,665 2,357 Past service cost — Interest on obligations 4,926 4,591 Plan participants' contributions 865 784 Benefits paid (1,474) Contract transfer 3,948 4,011 Acquisitions — 10,281 Actuarial (gain)/loss (19,842) 6,805 Present value of obligations at 31 December 81,925 90,837 |
2011 | 2010 |
|---|---|---|
| (3,718) (1,280) |
£'000 | £'000 |
Changes in the fair value of the plan assets are as follows:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Fair value of plan assets at 1 January | 83,689 | 64,225 |
| Expected return on plan assets | 5,205 | 4,279 |
| Employers' contributions | 3,393 | 3,041 |
| Plan participants' contributions | 865 | 784 |
| Benefits paid | (1,474) | (1,280) |
| Contract transfer | 3,407 | 4,251 |
| Acquisitions | — | 5,354 |
| Actuarial (loss)/gain | (12,470) | 3,035 |
| Fair value of plan assets at 31 December | 82,615 | 83,689 |
The movements in the net pension liability and the amount recognised in the Balance Sheet are as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Deficit in schemes at 1 January | (7,693) | (3,205) |
| Current service cost | (2,665) | (2,357) |
| Past service cost | — | 3,718 |
| Contributions | 3,393 | 3,041 |
| Other finance income | 279 | (312) |
| Actuarial gain/(loss) | 7,372 | (3,770) |
| Contract transfer | (541) | 240 |
| Acquisitions | — | (4,927) |
| Reduction in actuarial (gain)/loss due to non-recognition of scheme surpluses | (5,985) | (121) |
| Deficit in schemes at 31 December | (5,840) | (7,693) |
Cumulative actuarial gains and losses recognised in equity are as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| At 1 January | (13,204) | (4,626) |
| On TUPE transfer of employees | (541) | (4,687) |
| Actuarial gain/(loss) recognised in the year | 7,372 | (3,770) |
| (6,373) | (13,083) | |
| Reduction in actuarial gain/(loss) due to non-recognition of scheme surpluses | (5,985) | (121) |
| Total at 31 December | (12,358) | (13,204) |
History of experience gains and losses are as follows:
| 2011 £'000 |
2010 £'000 |
2009 £'000 |
2008 £'000 |
2007 £'000 |
|
|---|---|---|---|---|---|
| Fair value of scheme assets | 82,615 | 83,689 | 64,225 | 45,575 | 1,411 |
| Net present value of defined benefit obligations | (81,925) | (90,837) | (67,006) | (42,778) | (1,466) |
| Net surplus/(deficit) | 690 | (7,148) | (2,781) | 2,797 | (55) |
| Asset value not recognised as surplus | (6,530) | (545) | (424) | (3,285) | — |
| Net deficit | (5,840) | (7,693) | (3,205) | (488) | (55) |
| Experience adjustments arising on scheme assets | |||||
| Amount | (12,470) | 3,501 | 9,747 | (8,527) | (45) |
| Percentage of scheme assets | (15.2%) | 4.2% | 15.2% | (18.7%) | (3.2%) |
| Experience adjustments arising on scheme liabilities | |||||
| Amount | 8,500 | 376 | 1,364 | 4 | 88 |
| Percentage of scheme assets | 10.3% | 0.4% | 2.0% | — | 6.0% |
The employers' contributions expected to be paid during the financial year ending 31 December 2012 amount to £3.1m.
Non-cancellable operating lease rentals payable were as follows:
| Land and buildings | ||||
|---|---|---|---|---|
| 2011 £'000 |
2010 £'000 |
2011 £'000 |
2010 £'000 |
|
| Payable | ||||
| Within one year | 2,543 | 1,651 | 9,842 | 9,143 |
| Between two and five years | 6,556 | 5,107 | 14,798 | 9,656 |
| After more than five years | 2,948 | 2,895 | — | — |
Operating lease payments represent rentals payable by the Group for certain of its office properties, the hire of vehicles and the hire of other equipment. These leases have durations ranging from three to 15 years. No arrangements have been entered into in respect of contingent rental payments.
The Group had no capital commitments at 31 December 2011 or at 31 December 2010.
The Group has guaranteed that it will complete certain contracts that it has commenced. At 31 December 2011 these guarantees amounted to £8.6m (2010: £5.73m).
The Group had no other contingent liabilities at 31 December 2011 or at 31 December 2010.
The Group has a related party relationship with its pension schemes, its subsidiaries and with its Directors.
Details of contributions to pension schemes are set out in note 26 to the financial statements.
The Group has a central treasury arrangement in which all subsidiaries participate. The Directors do not consider it meaningful to set out details of transfers made in respect of this treasury arrangement between companies, nor do they consider it meaningful to set out details of interest or dividend payments made within the Group.
The Group has identified key management personnel as the Directors of Mears Group PLC.
Key management personnel held the following percentage of voting shares in Mears Group PLC:
| 2011 | 2010 | |
|---|---|---|
| % | % | |
| Directors | 0.9 | 0.9 |
Key management personnel's compensation is as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Salaries | 1,560 | 1,586 |
| Contributions to defined contribution pension schemes | 190 | 199 |
| Share-based payments | 60 | 592 |
| 1,810 | 2,377 |
Further details of Directors' remuneration are disclosed within the Remuneration Report.
During the year the Group purchased customer care related services from Asert LLP, a company in which Mears Group PLC is a 50% partner, totalling £0.01m (2010: £nil). At 31 December 2011 the Group was owed £0.02m (2010: £nil) by Asert LLP. The Group also purchased call centre related services from Mears 24/7 LLP, a company in which Mears Limited is a 50% partner, totalling £0.3m (2010: £nil). At 31 December 2011 the Group was owed £nil (2010: £nil) by Mears 24/7 LLP.
Financial statements / Company accounts
| Principal accounting policies – Company | 103 |
|---|---|
| Parent company balance sheet | 105 |
| Notes to the financial statements – Company | 106 |
Financial statements / Principal accounting policies – Company
The financial statements have been prepared in accordance with applicable United Kingdom accounting standards and under the historical cost convention.
The principal accounting policies of the Company are set out below. The following accounting policies have remained unchanged from the previous year.
Investments are included at cost net of any provision for impairment.
All share-based payment arrangements that were granted after 7 November 2002 are recognised in the financial statements.
The Group operates equity-settled share-based remuneration plans for its employees. All employee services received in exchange for the grant of any share-based remuneration are measured at their fair values. These are indirectly determined by reference to the fair value of the share options awarded. Their value is determined at the date of grant and is not subsequently remeasured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using the Binomial and Monte Carlo option pricing models and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period.
Share-based remuneration in respect of employees of the Company is ultimately recognised as an expense in the Income Statement with a corresponding credit to share-based payment reserve.
Upon exercise of share options, the proceeds received net of any directly attributable transaction costs up to the nominal value of the shares issued are allocated to share capital with any excess being recorded as share premium.
Deferred tax is recognised on all timing differences where the transactions or events that give the Company an obligation to pay more tax in the future, or a right to pay less tax in the future, have occurred by the balance sheet date. Deferred tax assets are recognised where it is more likely than not that they will be recovered. Deferred tax is measured using rates of tax that have been enacted or substantively enacted by the balance sheet date.
The pension costs charged against profits are the contributions payable to individual policies in respect of the accounting period.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities.
Where the contractual obligations of financial instruments (including share capital) are equivalent to a similar debt instrument, those financial instruments are classed as financial liabilities. Financial liabilities are presented as such in the Balance Sheet. Finance costs and gains or losses relating to financial liabilities are included in the profit and loss account. Finance costs are calculated so as to produce a constant rate of return on the outstanding liability.
Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity.
Trade debtors are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, goods or services directly to a debtor with no intention of trading the debtors. Trade debtors are initially recorded at invoiced value (less a provisional estimate for impairment) and subsequently remeasured at invoiced value, less an updated provision for impairment. Any change in their value through impairment or reversal of impairment is recognised in the profit and loss account.
Cash and cash equivalents include cash at bank and in hand and bank deposits available at less than 24 hours' notice. Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances.
Following initial recognition, financial assets are subsequently remeasured at amortised cost using the effective interest rate method.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged.
The Company uses derivative financial instruments to hedge its exposure to interest rate risks arising from its financing activities. In accordance with its treasury policy the Company does not hold or issue derivative financial instruments for trading purposes. The Company recognises gains or losses on derivatives at fair value through the profit and loss account except where cash flow hedge accounting is applied.
Where an interest rate swap is designated as a hedge of the variability in cash flows of an existing or highly probable forecast loan interest payment, the effective part of any valuation gain or loss on the swap instrument is recognised in equity in the hedging reserve. The cumulative gain or loss is removed from equity and recognised in the profit and loss account at the same time as the hedged transaction. The ineffective part of any gain or loss is recognised in the profit and loss account immediately.
When a hedging instrument or hedge relationship is terminated but the hedged transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in accordance with the above policy when the transaction occurs. If the hedged transaction is no longer probable, the cumulative unrealised gain or loss recognised in equity is recognised in the Income Statement immediately.
| Note | 2011 £'000 |
2010 £'000 |
|
|---|---|---|---|
| Fixed assets | |||
| Intangible assets: | |||
| Goodwill | 5 | 3,876 | — |
| Investments | 6 | 57,048 | 53,345 |
| 60,924 | 53,345 | ||
| Current assets | |||
| Debtors | 7 | 77,141 | 44,173 |
| Cash at bank and in hand | — | 402 | |
| 77,141 | 44,575 | ||
| Creditors: amounts falling due within one year | 8 | (62,547) | (35,107) |
| Net current assets | 14,594 | 9,468 | |
| Total assets less current liabilities | 75,518 | 62,813 | |
| Creditors: amounts falling due after more than one year | 9 | (879) | (880) |
| Provisions for liabilities | |||
| Pension liability | 14 | (3,594) | — |
| 71,045 | 61,933 | ||
| Capital and reserves | |||
| Called up share capital | 10 | 857 | 848 |
| Share premium account | 11 | 33,554 | 33,243 |
| Share-based payment reserve | 11 | 2,965 | 2,905 |
| Hedging reserve | 11 | (1,259) | — |
| Profit and loss account | 11 | 34,928 | 24,937 |
| Equity shareholders' funds | 71,045 | 61,933 |
The financial statements were approved by the Board of Directors on 27 March 2012.
Director Director
R Holt A C M Smith
The accompanying accounting policies and notes form an integral part of these financial statements.
The Parent Company has taken advantage of Section 408 of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The Group profit for the year includes a profit of £16.2m (2010: loss of £2.8m) which is dealt with in the financial statements of the Company. This result is stated after charging auditor's remuneration of £62,000 relating to audit services and £5,000 relating to taxation services.
All staff costs relate to Directors. Staff costs during the year were as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Wages and salaries | 1,351 | 1,300 |
| Social security costs | 209 | 286 |
| Other pension costs | 190 | 199 |
| 1,750 | 1,785 |
The average number of employees of the Company during the year was:
| 2011 | 2010 | |
|---|---|---|
| Number | Number | |
| Office and management | 11 | 10 |
Details relating to the remuneration in respect of the highest paid Director are detailed in note 5 of the consolidated financial statements.
As at 31 December 2011 the Group maintained six share-based payment schemes for employee remuneration. The details of each scheme are included within note 6 to the consolidated financial statements.
All share-based employee remuneration will be settled in equity. The Group has no legal obligation to repurchase or settle the options.
In total, £0.1m of employee remuneration expense has been included in the Company's profit and loss account for 2011 (2010: £0.6m), which gave rise to additional paid-in capital. No liabilities were recognised due to share-based payment transactions.
The following dividends were paid on ordinary shares in the year:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Final 2010 dividend of 4.85p (2010: final 2009 dividend of 4.10p) per share | 4,123 | 3,469 |
| Interim 2011 dividend of 2.15p (2010: interim 2010 dividend of 1.90p) per share | 1,839 | 1,610 |
| 5,962 | 5,079 |
The proposed final 2011 dividend of 5.35p per share has not been included within the financial statements as no obligation existed at 31 December 2011.
| Goodwill £'000 |
|
|---|---|
| Cost | |
| At 1 January 2011 | — |
| Transfer from investments | 6,196 |
| At 31 December 2011 | 6,196 |
| Amortisation | |
| At 1 January 2011 | — |
| Charge for the year | 2,320 |
| At 31 December 2011 | 2,320 |
| Net book value | |
| At 31 December 2011 | 3,876 |
| At 31 December 2010 | — |
The transfers from investments into goodwill represent the cost of investments made in previous years in a number of subsidiary companies which are no longer trading following the transfer of the trade and assets into fellow subsidiary companies.
| Investment in subsidiary undertakings £'000 |
Loans £'000 |
Total £'000 |
|
|---|---|---|---|
| Cost | |||
| At 1 January 2011 | 31,345 | 22,000 | 53,345 |
| Additions | 10,249 | — | 10,249 |
| Disposals | (350) | — | (350) |
| Transfer to goodwill | (6,196) | — | (6,196) |
| At 31 December 2011 | 35,048 | 22,000 | 57,048 |
Additions to investments in subsidiary undertakings relate to the acquisition of Terraquest Solutions Limited. The entire share capital of Terraquest Solutions Limited was transferred from Supporta Limited, a subsidiary of Mears Group PLC, at book value as part of a Group reorganisation.
The transfers from investments into goodwill represent the cost of investments made in previous years in a number of subsidiary companies which are no longer trading following the transfer of the trade and assets into fellow subsidiary companies. The disposal relates to M&T Group Limited which was struck off during the year, the trade and assets having been previously transferred at net book value into a fellow subsidiary.
Details of the principal subsidiary undertakings of the Company are shown in note 14 to the consolidated financial statements.
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Amounts owed by Group undertakings | 75,574 | 43,192 |
| Prepayments and accrued income | 1,147 | 981 |
| Deferred tax asset | 420 | — |
| 77,141 | 44,173 |
The deferred tax asset above of £0.4m is due after more than one year. The recoverability of the deferred tax asset is dependent on future taxable profits. The Company expects to realise sufficient profits to enable the deferred tax asset to be recovered.
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Bank loan | 60,000 | 34,000 |
| Bank overdraft | 588 | — |
| Corporation Tax | — | — |
| Other creditors | 2 | 7 |
| Accruals | 1,957 | 1,100 |
| 62,547 | 35,107 |
Included within accruals is £2.0m (2010: £1.0m) relating to an interest rate hedge.
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Other creditors | 879 | 880 |
Included in other creditors is £0.9m (2010: £0.9m) relating to deferred consideration on acquisitions.
| 2011 | 2010 | |
|---|---|---|
| Allotted, called up and fully paid | £'000 | £'000 |
| 84,815,470 (2010: 74,391,610) ordinary shares of 1p each | 848 | 744 |
| Issue of nil (2010: 9,942,323) shares on acquisition of Supporta plc | — | 99 |
| Issue of 843,293 (2010: 481,537) shares on exercise of share options | 9 | 5 |
| 85,658,763 (2010: 84,815,470) ordinary shares of 1p each | 857 | 848 |
843,293 (2010: 481,537) ordinary 1p shares were issued in respect of share options exercised. The difference between the nominal value of £0.01m and the total consideration of £0.32m has been credited to the share premium account.
During 2012 9,942,323 ordinary 1p shares were issued in respect of the acquisition of Supporta plc. The Company took advantage of merger relief in respect of the difference between the nominal value of £0.09m and the total consideration of £26.7m.
| Share capital £'000 |
Share premium account £'000 |
Share-based payment reserve £'000 |
Hedging reserve £'000 |
Profit and loss account £'000 |
|
|---|---|---|---|---|---|
| At 1 January 2011 | 848 | 33,243 | 2,905 | — | 24,937 |
| Issue of shares | 9 | 311 | — | — | — |
| Share option charges | — | — | 200 | — | — |
| Exercise of share options | — | — | (140) | — | 140 |
| Cash flow hedge | — | — | — | (1,259) | — |
| Profit for the year | — | — | — | — | 16,208 |
| Equity dividends | — | — | — | — | (5,962) |
| Actuarial loss on defined benefit pension scheme net of deferred tax | — | — | — | — | (395) |
| At 31 December 2011 | 857 | 33,554 | 2,965 | (1,259) | 34,928 |
The Company had no capital commitments at 31 December 2011 or at 31 December 2010.
The Company had no contingent liabilities at 31 December 2011 or at 31 December 2010.
The Company contributes to personal pension schemes of the Directors.
The Company operates a defined benefit pension scheme for the benefit of certain employees of its subsidiary companies. The assets of the schemes are administered by trustees in a fund independent from the assets of the Company.
Costs and liabilities of the scheme are based on actuarial valuations. The actuarial valuations were reviewed and updated to 31 December 2011 by a qualified independent actuary using the projected unit method.
The principal actuarial assumptions at the balance sheet date are as follows:
| 2011 | 2010 | |
|---|---|---|
| Rate of increase of salaries | 3.0% | — |
| Rate of increase for pensions in payment | 2.6% | — |
| Discount rate | 4.9% | — |
| Inflation | 3.0% | — |
| Life expectancy for a 65 year old male | 22.4 years | — |
| Life expectancy for a 65 year old female | 23.9 years | — |
Expected rates of return on investments are:
| 2011 % |
2010 % |
|
|---|---|---|
| Equities | 7.75 | — |
| Bonds | 4.7 | — |
| Property | 7.25 | — |
| Cash | 3.2 | — |
The amounts recognised in the Balance Sheet and major categories of plan assets as a percentage of total plan assets are:
| 2011 | 2010 | ||||
|---|---|---|---|---|---|
| % | £'000 | % | £'000 | ||
| Equities | 76 | 6,279 | — | — | |
| Bonds | 20 | 1,661 | — | — | |
| Property | — | 17 | — | — | |
| Cash | 4 | 348 | — | — | |
| Group's estimated asset share | 8,305 | — | |||
| Present value of funded scheme liabilities | (13,097) | — | |||
| Funded status | (4,792) | — | |||
| Related deferred tax asset | 1,198 | — | |||
| Pension liability | (3,594) | — |
The amounts recognised in the profit and loss account are as follows:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Current service cost | 109 | — |
| Past service cost | — | — |
| Total operating charge | 109 | — |
| Amount charged to net interest payable: | ||
| – expected return on pension scheme assets | (454) | — |
| – interest on obligations | 609 | — |
| 155 | — | |
| Total charged to the result for year | 264 | — |
Changes in the present value of the defined benefit obligations are as follows:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| Present value of obligations at 1 January | — | — |
| Current service cost | 109 | — |
| Past service cost | — | — |
| Interest on obligations | 609 | — |
| Plan participants' contributions | 35 | — |
| Benefits paid | (315) | — |
| Change of principal employer | 10,591 | — |
| Transfer in | 2,525 | — |
| Actuarial loss | (457) | — |
| Present value of obligations at 31 December | 13,097 | — |
Changes in the fair value of the plan assets are as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Fair value of plan assets at 1 January | — | — |
| Expected return on plan assets | 454 | — |
| Employers' contributions | 884 | — |
| Plan participants' contributions | 35 | — |
| Benefits paid | (315) | — |
| Change of principal employer | 5,494 | — |
| Transfer in | 2,384 | — |
| Actuarial gain | (631) | — |
| Fair value of plan assets at 31 December | 8,305 | — |
The movements in the net pension liability and the amount recognised in the Balance Sheet are as follows:
| 2011 | 2010 | |
|---|---|---|
| £'000 | £'000 | |
| Deficit in schemes at 1 January | — | — |
| Current service cost | (109) | — |
| Past service cost | — | — |
| Contributions | 884 | — |
| Other finance income | (155) | — |
| Actuarial loss | (174) | — |
| Change of principal employer | (5,097) | — |
| Transfer in | (141) | — |
| Deficit in schemes at 31 December | (4,792) | — |
Cumulative actuarial gains and losses recognised in equity are as follows:
| 2011 £'000 |
2010 £'000 |
|
|---|---|---|
| At 1 January | — | — |
| Change of principal employer | (5,097) | — |
| Transfer in | (141) | — |
| Actuarial loss recognised in the year | (174) | — |
| Total at 31 December | (5,412) | — |
History of experience gains and losses are as follows:
| 2011 £'000 |
2010 £'000 |
2009 £'000 |
2008 £'000 |
|
|---|---|---|---|---|
| Fair value of scheme assets | 8,305 | — | — | — |
| Net present value of defined benefit obligations | (13,097) | — | — | |
| Net deficit | (4,792) | — | — | — |
| Experience adjustments arising on scheme assets | ||||
| Amount | (631) | — | — | — |
| Percentage of scheme assets | (4.8%) | — | — | — |
| Experience adjustments arising on scheme liabilities | ||||
| Amount | — | — | — | — |
| Percentage of scheme assets | — | — | — | — |
The employer's contributions expected to be paid during the financial year ending 31 December 2012 amount to £1.1m.
The Company has taken advantage of the exemption with FRS 8 not to disclose transactions with companies which are 100% owned by the Group.
During the year one of the Company's subsidiaries, Mears Limited, purchased customer care related services from Asert LLP, a company in which Mears Group PLC is a 50% partner, totalling £0.01m (2010: £nil). At 31 December 2011 Mears Limited was owed £0.02m (2010: £nil) by Asert LLP. Mears Limited also purchased call centre related services from Mears 24/7 LLP, a company in which Mears Limited is a 50% partner, totalling £0.3m (2010: £nil). At 31 December 2011 Mears Limited was owed £nil (2010: £nil) by Mears 24/7 LLP.
The group's commitment to environmental issues is reflected in this Annual Report which has been printed on Cocoon Silk 50, a high quality Silk coated paper and board range made from 50% de-inked post consumer waste and 50% FSC® certified virgin fibre and Cocoon Pre-Print 100 a 100% recycled paper made using FSC certified fibres.
This report was printed by Pureprint Group using their environmental print technology which minimises the impact of printing on the environment. Vegetable based inks have been used and 99% of dry waste is diverted from landfill. Pureprint Group is a CarbonNeutral® company.
1390 Montpellier Court Gloucester Business Park Brockworth Gloucester GL3 4AH Tel: 01452 634 600 www.mearsgroup.co.uk
Building tools?
Free accounts include 100 API calls/year for testing.
Have a question? We'll get back to you promptly.