COMMUNISIS PLC ANNUAL REPORT AND FINANCIAL STATEMENTS 2017 SHAPING THE FUTURE OF CUSTOMER COMMUNICATIONS

Transcription

1 COMMUNISIS PLC ANNUAL REPORT AND FINANCIAL STATEMENTS SHAPING THE FUTURE OF CUSTOMER COMMUNICATIONS

2 Strategic report COMMUNISIS IS AN INTEGRATED BUSINESS SERVICES COMPANY WHICH DRIVES CLIENT VALUE AND SUSTAINABLE PROFIT IMPROVEMENT, THROUGH THE PROVISION OF INCREASINGLY DIGITALLY ENABLED SOLUTIONS FOR REGULATED TRANSACTIONAL COMMUNICATION AND MARKETING EXECUTION. STRONG TRADING IN SAW COMMUNISIS GENERATING PROFITABLE GROWTH WITH GOOD LEVELS OF FREE CASH FLOW AND A SIGNIFICANT REDUCTION IN NET DEBT. LONG-TERM CONTRACTS HAVE BEEN SECURED WITH A MAJOR UK BANK AND WITH PROXIMITY LTD TO PROVIDE COMMUNICATION SERVICES TO THE BBC FOR THE TV LICENSING PROGRAMME. A STRATEGY FOR THE GROUP S NEXT PHASE OF GROWTH IS BEING LAUNCHED: A FOCUSED, THREE YEAR PLAN TO CREATE ENHANCED RETURNS TO SHAREHOLDERS AS WE RAISE THE VALUE WE PROVIDE TO OUR CLIENTS. Andy Blundell Chief Executive 8 March 2018 STRATEGIC REPORT 01 Highlights 02 Communisis at a glance 08 Chairman s statement 10 Business model 12 Chief Executive s statement 16 Strategy 18 Risk management and principal risks 22 Financial review 26 Corporate social responsibility report CORPORATE GOVERNANCE 33 Introduction to Corporate governance 34 Board of Directors 36 Corporate governance report 40 Nomination Committee report 42 Audit Committee report 44 Directors remuneration report 60 Directors report 64 Statement of Directors responsibilities FINANCIAL STATEMENTS 66 Independent auditor s report 74 Consolidated income statement 75 Consolidated statement of comprehensive income 76 Consolidated balance sheet 77 Consolidated cash flow statement 78 Consolidated statement of changes in equity 79 Notes to the Consolidated financial statements 116 Company balance sheet 117 Company statement of changes in equity 118 Notes to the Company financial statements SHAREHOLDER INFORMATION 129 Shareholder information CASE STUDY UK MOBILE NETWORK OPERATOR RETAIL INNOVATION To deliver standardisation and simplification for product and POSVM display, the Communisis team needed to come up with a faster, more cost effective and bespoke method for deploying campaigns into stores. The solution was an online store of retail POS materials, allowing managers to log in and order displays tailored to their requirements. REDUCED CAMPAIGN MANAGEMENT FROM 5 DAYS TO 15 MINUTES FIND OUT MORE ONLINE AT COMMUNISIS.COM twitter.com/communisisgroup linkedin.com/company/communisis youtube.com/user/communisisukltd

3 HIGHLIGHTS FINANCIAL HIGHLIGHTS ADJUSTED EARNINGS PER SHARE (EPS) 6.4p (+5%) ADJUSTED PROFIT BEFORE TAX 17.2m (+3%) PROFIT BEFORE TAX 14.4m (+24%) Strategic Report FREE CASH FLOW 12.5m (-3%) NET DEBT 24.3m (-20%) FULL YEAR DIVIDEND 2.66p (+10%) FINANCIAL RESULTS Total revenue ( m) % Adjusted operating profit ( m)* % Adjusted profit before tax ( m)* % Profit before tax ( m) % Adjusted earnings per share (p)* % Proposed final dividend per share (p) % Free cash flow ( m) ** % Net debt ( m) % * Adjusted metrics are stated before exceptional items and the amortisation of acquired intangibles to give a better understanding of the underlying performance of the Group. Adjusted earnings per share is diluted and excludes the after tax effects of exceptional items, amortisation of acquired intangibles and certain tax items in respect of prior years. ** Free cash flow represents net operating cash flow less net capital expenditure. VALUE ENHANCEMENT PROGRAMME (VEP) 2020 THREE YEAR PLAN HIGHLIGHTS The financial target is to create sustainable shareholder value over the next three years ( ) by growing adjusted diluted earnings per share (EPS) within a range of 5-10% CAGR. The VEP is a three-year plan to deliver enhanced returns to our shareholders by raising the demonstrable value we deliver to our clients. There will be a deliberate focus on margin improvement and related pricing initiatives. The VEP will be driven by three key strategic themes: Digital First, Global Reach and Empowered Organisation. The target has now been built into in our senior management remuneration policy and the design of the 2018 Long Term Incentive Plans (LTIPs). OPERATIONAL HIGHLIGHTS Major UK Bank: a new contract was won for marketing communication and an existing contract for transactional communication was renewed, both for five year terms. Proximity: the partnership contract to provide communication services to the BBC for TV Licensing was renewed for a six year term. HMRC (Her Majesty s Revenue and Customs): good progress in the implementation of the contract for all outbound printed customer communication and forms fulfilment. Following successful migration of all fulfilment activity to our Newcastle operation in May, Communisis assumed full accountability for all printed customer communications with the transition of circa 180 million packs annually into our Halifax and Liverpool transactional facilities beginning in October. Overseas sales now represent 30% of total turnover ( 26%). New York: good progress made with our US Editions office established in May to service clients in the financial services sector with content marketing services. Hong Kong: Communisis will open an office in Hong Kong in April 2018 for the sourcing of premiums ; the gifts which accompany many purchases of luxury goods. Technology investment: the programme to install a single platform for the management of our international supply chain for marketing execution is planned to go live in Q OUTLOOK Communisis is at an exciting stage in its development with a bedrock of solid performance and deep client relationships to build upon. The growth strategy for the next phase is highly focused and we already have clear evidence of the themes of Digital First, Global Reach and Empowered Organisation resonating in our key markets. The Board is looking forward to another positive year for the Group. Communisis plc Annual Report and Financial Statements 01

4 Strategic Report COMMUNISIS AT A GLANCE SHAPING THE FUTURE OF CUSTOMER COMMUNICATIONS OUR PURPOSE 2,000+ GROWING VALUE, SUSTAINABLY We measure value by how well our solutions meet our clients needs and how willing they are to pay for them. OVER 2,000 STAFF HELPING DELIVER This is reflected in our ability to earn an improved and CUSTOMER COMMUNICATIONS sustainable margin. Through consistent and predictable 20 performance, we continue to generate free cash which has enabled a strong dividend stream for shareholders. COUNTRIES OUR MISSION To drive client value and sustainable profit improvement through the provision of increasingly digitally enabled solutions for regulated transactional communication and marketing execution. VALUE FOR CLIENTS Across the markets in which we operate, common themes which enable clients to maximise the benefits of the products, services and insight we provide have enabled us to define our strategic priorities and the optimal divisional structure to deliver them. Our clients need innovation in their supply chain, enabling them to future proof, focus on their core activities and grow return on investment and market share. They need simplicity in their supply chain, reducing the number of key suppliers to a smaller number of proactive, strategic partners. Resilience of service and regulatory compliance are critical. Understanding these needs, Communisis delivers security, accuracy, integrity and reliability with the cost competitive scale of our pan-european network and UK operations. We provide multi-channel delivery and digital leadership to our clients as well as our unique expertise. This allows our clients to increase sales at a premium and improve speed to market, being lean, standardised and simplified. We help them stay safe, manage risk, keeping them informed and able to make better decisions. This all builds loyalty and trust. 67 LOCATIONS 22 LANGUAGES SUPPORTED BY OUR BRAND VALUES Being TRUSTED Being a LEADER Being IMAGINATIVE Being AGILE CASE STUDY LEADING FMCG BRAND - EUROPE BRAND CONTROL With such a broad range of products and a wide geographical stretch, it s key for this client to deliver a consistent brand. The Communisis team centralised procurement to control branding and create an online store to allow brand managers to order specific POS for their territories and retail partners. GREATER BRAND CONSISTENCY IN 50 MARKETS ACROSS EMEA 02 Communisis plc Annual Report and Financial Statements

5 Strategic Report HOW WE GENERATE REVENUE THE CUSTOMER EXPERIENCE DIVISION THE BRAND DEPLOYMENT DIVISION Creating lasting and profitable personal customer relationships in all direct, digital and social channels. Mission-critical personalised communications Customer engagement Specialised content Transactional (billing, statements, cheques and inbound services) Regulatory communications Creating activation communications in Retail and FMCG channels that motivate consumers to experience and buy brands. Brand activation strategy Shopper marketing Marketing supply chain management Fulfilment Logistics Point of Sale (POS) procurement Read more on page 4 Read more on page 5 OUR CLIENTS Communisis plc Annual Report and Financial Statements 03

6 Strategic Report COMMUNISIS AT A GLANCE CONTINUED HOW OUR DIVISIONS OPERATE THE CUSTOMER EXPERIENCE DIVISION END CUSTOMER Our end to end communication lifecycle uses data rich and engaging content to ensure relevant and targeted interactions with our clients customers BATCH AND REAL-TIME CUSTOMER DATA RETRIEVAL Documents can be securely retrieved either by end customers or our clients CRM teams to enable decisioning, referencing or query resolution CONTENT GENERATION Data and artwork are integrated using our best in breed customer communication management products within our Connect platform. Information design services are deployed at this stage in the communication cycle ARCHIVE Composed documents are archived using the enterprise content management products within Connect and retained based upon data retention policies CHANNEL PREFERENCE Preference engines ensure we help our clients communicate with their customers across their preferred channel throughout the customer journey CHANNEL DELIVERY Based upon channel preference and customer journey, communications are delivered by relevant channel APP POST SMS WEBSITE 04 Communisis plc Annual Report and Financial Statements

7 THE BRAND DEPLOYMENT DIVISION Strategic Report DEMAND MANAGEMENT For a marketing execution project, Communisis manages the agency interface and prototyping to ensure the product is fit for purpose, as well as reviewing historic volumes and providing innovative solutions SOURCING Vendors are selected from our pan-european network of over 700 approved suppliers, ensuring quality assurance, performance and capacity management are controlled throughout EXECUTION End to end project management along the critical path to ensure simplified and seamless execution. We provide business insight, governance and online ordering capabilities with our point of sale toolkit FINALISATION Delivery planning, warehousing and logistics and assembly instructions for complex items, all delivered to our clients activation plan to retailers CASE STUDY HOW THIS WORKED FOR A GLOBAL FMCG BRAND Before Communisis, a client had a minimum of 23 touchpoints necessary to successfully deliver a project. By driving standardisation, providing consistency, control and visibility whilst maximising savings opportunities, we were able to reduce these touchpoints to seven whilst also enabling the client to realise the following further benefits: increased speed to markets for campaigns; encouraging innovation and value added benefits; reduced cost to serve through a more consolidated delivery of the services; access to innovation and capability from the supply chain; and greater savings as a result of larger spend leverage. 7 TOUCHPOINTS Communisis plc Annual Report and Financial Statements 05

8 Strategic Report COMMUNISIS AT A GLANCE CONTINUED CONNECTING BRANDS AND CUSTOMERS IN 20 COUNTRIES AND 22 LANGUAGES WHERE WE OPERATE THE GROUP CONTINUES TO EXPAND AND WIDEN ITS INTERNATIONAL FOOTPRINT. OUR CLOSENESS TO CLIENTS, OFTEN THROUGH HAVING ON-SITE TEAMS WITH COMMUNISIS STAFF SITTING ALONGSIDE CLIENTS MARKETING TEAMS, FACILITATES THE IDENTIFICATION AND DEVELOPMENT OF NEW OPPORTUNITIES WHICH BOTH GROWS REVENUE AND IMPROVES THE RANGE OF OFFERINGS WE HAVE TO OUR CLIENTS. Our clients take an increasingly global approach to marketing services and to meet this we continue to assess new opportunities both within EMEA and beyond. CASE STUDY HOTEL, COFFEE SHOP AND RESTAURANT CHAIN GETTING MARKET POSITIONING RIGHT Our team s new brand for this client helped the company to find a unique identity in the crowded UK high street restaurant scene. By building on the existing brand with contemporary, striking communications and a streamlined, focused menu, we were able to strengthen market position and increase footfall beyond expectation in the flagship restaurant. CONCEPT AND CAMPAIGN AWARDS WINNER 06 Communisis plc Annual Report and Financial Statements

9 CASE STUDY FMCG BRAND IN POLAND MULTI-BRAND EFFICIENCY For an international FMCG brand, finding efficiency and simplicity within their print production is not only helpful, but essential. By aligning a toolkit of the core commercial print across all brand and distribution channels, we were able to deliver a consistently qualitative commercial solution that shortened lead times and increased savings during the production of over 20 million items. 35% PROJECT COST SAVINGS, FROM INITIAL 10% Strategic Report CASE STUDY FMCG BRAND FRANCE UNDERSTANDING CONSUMER BEHAVIOUR Ensuring customers continue to buy from the same brand again and again remains a critical component of success for any consumerfocused business. For this client, we developed a loyalty magazine that contained personalised coupons to encourage new purchases. This incentivised customers to stay loyal to the brand, while also giving the company a highly useful buying habit measuring tool. CAMPAIGN TIME TO MARKET REDUCED BY 16% Communisis plc Annual Report and Financial Statements 07

10 Strategic Report CHAIRMAN S STATEMENT LAUNCH OF STRATEGY FOR NEXT PHASE OF GROWTH Communisis delivered a strong set of results in. It was especially pleasing to see further growth in adjusted diluted EPS, solid free cash flow and a significant reduction in net debt. The final dividend for the year is proposed at 1.77p which added to the interim dividend of 0.89p gives a total of 2.66p, a 10% increase on the previous year. FULL YEAR DIVIDEND PER SHARE 2.66p ( 2.42p) I joined the Communisis Board last March and was appointed to the chair at the Annual General Meeting (AGM) in May. These preliminary results are therefore my first as Chairman of your Company. The past twelve months have confirmed my initial views about the strength of the business. A track record of growth backed by strong cash generation has been established over several years. We perform mission critical work at scale for very substantial clients across the Financial Services and Fast-Moving Consumer Goods (FMCG) sectors. We are significantly invested in our people, systems and infrastructure to fulfil data-sensitive, regulation-mandated customer communications, at high volumes and to manage complex, time-critical multinational product programmes for some of the world s biggest brands. We are differentiated from our competitor/comparator set in many ways. Our long-term client retention levels are sector-leading. The foundation for further success is therefore in place. To build upon it we have now set ourselves one key priority which is to raise the underlying profitability of the business in a sustainable way. The Value Enhancement Programme (VEP) which we are launching, is a three-year plan to deliver enhanced returns to our shareholders by raising the demonstrable value we deliver to our clients. Under the VEP we will launch a series of digital and data-led client initiatives which will include providing complete format and channel flexibility for client communications; building out added value services in allied areas such as fraud protection and data security and developing data analytics driven insight programmes to give clients greater visibility of enhancement opportunities. We also continue our commitment to embrace process innovation to deliver cost efficiency without compromising effectiveness of output. The core aim of the VEP will be to evidence consistently that our clients will drive higher returns on their investment with us than they can either with alternative providers or by retaining in house the activity in which we specialise. Communisis will not be the lowest price option - we are not a commodity level provider - but we will partner with our clients to deliver the highest returns on their spend. The VEP is our practical response to three key strategic themes of our business: Digital First, Global Reach and Empowered Organisation. Digital First recognises that an increasing proportion of the customers of our clients now prefer to communicate online. This now established trend will have a notable effect on our transactional business over time. It is our intention to take a still more pro-active lead with Digital and put it at the forefront of our transactional business. We will do that by accelerating existing organic developments, working with a range of technology partners and where appropriate acquiring the necessary skills and experience to strengthen our core propositions. We believe the time is ripe to enrich customer dialogue through the meaningful application of Digital - it is about a lot more than saving postage costs. 08 Communisis plc Annual Report and Financial Statements

11 Strategic Report Digital transformation will have other positive impacts on Communisis. For example it will allow us to extend the application of data analytics as a service and capture opportunities for the digitisation of our services for marketing execution. Global Reach is the recognition that many of our clients are truly international businesses and expect our services to be available in an increasing number of territories. We already have 30% of our sales in overseas markets and a prudent approach in EMEA has seen our network expand through our main hubs in Paris, Madrid, Rome, Warsaw and Frankfurt and eastward as far as Istanbul and Dubai. We have announced that we will be opening an office in Hong Kong for the sourcing of premiums ; the gifts which accompany many purchases of luxury goods. This move will make us more responsive in this growth area and contribute to increased margins by taking more direct control of these supply chains. Heartened by the good progress Editions has made in New York in with financial services clients, we aim to significantly enhance our presence in the USA. The three main opportunity areas we have identified are: further growth for Editions in content marketing, mostly in financial services; scope to access marketing execution services under our existing master relationships with brand owners; and digital transactional communications. Empowered Organisation covers a range of initiatives designed to make Communisis progressively more efficient and valuable. From a client perspective it is about our becoming still more integrated into client workflows to give them greater visibility and understanding of the impact of their communication and marketing execution choices and surfacing opportunities to enhance their efficiency or effectiveness or both. From a Communisis commercial perspective, this involves driving fresh marketing and commercial initiatives to deliver the right pipeline of growth opportunities. Communisis will selectively target the business it is best equipped to deliver and where it can retain more of the value which it creates for its clients. The structure of contracts will adapt accordingly. From an organisational perspective we are fuelling this by devolving more direct P&L responsibility into the hands of our local site and country managers, empowering them to drive the profitability of their discrete business units entrepreneurially. Communisis remains committed to delivering enhanced returns to its shareholders. The announcement of our three-year VEP is a new expression of that commitment. Alongside investing capital in pursuit of that growth, we will continue to ensure that a strong dividend remains a key component of our total shareholder returns policy. BOARD COMPOSITION Having reviewed the Board structure to enact these future plans, we announced in December that Steve Rawlins was joining us as Chief Financial Officer (CFO). Steve has extensive experience of the digital media, business services and FMCG sectors in both the UK and overseas markets. Most recently Steve was CFO of EDC Communications, a private equity backed group of digital media agencies. Previously he held senior finance roles at Vendia UK Ltd, Uniq PLC, Caradon PLC and The Gillette Company. Non-executive Director Helen Keays is to step down from the Board and from her role as Chair of the Remuneration Committee on 6 June 2018, due to other commitments. We thank Helen for her significant contribution since Our attention now turns to finding her replacement and we will update investors in due course. DAVID GILBERTSON Chairman 8 March 2018 CASE STUDY FMCG BRAND COUNTERING RETAIL OVERLOAD Introducing customers to a wider range of products was a challenge that produced excellent results. Before they came to us, over 75% of the coffee brand s sales came from just two products, making the need for more emphasis on their wider portfolio stronger than ever. Our team devised a new campaign that involved segmenting each brand into a range of different coffee-drinking occasions. This has helped to transform this brand and remains hugely popular and successful among consumers today. NEW SPLIT OF SALES Communisis plc Annual Report and Financial Statements 09

12 Strategic Report BUSINESS MODEL WHY CLIENTS CHOOSE COMMUNISIS We quantify the value we create for our clients and are specific about what differentiates us from our competitors, be that our people, products, processes or performance. PEOPLE PRODUCT We recruit, retain and develop the very best talent in our industry. We attract great people and invest in them to deliver exceptional results. EXPERIENCE 50 change management professionals with 500 combined years of business transformation and transition experience. Successfully managed 31 TUPE transfers in total. Of these, six have been in the last five years and involved on-boarding 800 new employees. Favoured employer in our industry in the UK with more sector professionals than any competitor. CIPS (Chartered Institute of Purchasing and Supply) Advance standard - a leading level held by fewer than 20 organisations globally. QUALIFICATIONS 80% of our senior managers are degree or masters qualified and accredited by recognised professional bodies. DIVERSITY Presence in 20 countries, with 22 languages spoken across our teams and over 150 professionals based in our European network. Committed to Equality accredited business for five years. We operate at scale and to the highest standards. Our clients trust the products we deliver, the services we provide and the solutions we develop. END TO END CAPABILITY CUSTOMER EXPERIENCE Enterprise content management (including Inbound). Customer communication management. Professional services. Security communications. Creative and agency services. Film. BRAND DEPLOYMENT Creative services. Creative production. Brand and shopper strategy. Procurement. Campaign management. Warehousing, fulfilment & logistics. Installation and analytics. INVESTMENT Technology strategic partners: Hewlett Packard, Pitney Bowes, Noosh & Quadient (GMC). Capital investment running at a rate of between 5m and 6m each year, predominantly software/technology. eucn (unique cheque numbering) developed as a Communisis proprietary patented service to combat cheque fraud. 10 Communisis plc Annual Report and Financial Statements

13 Strategic Report PROCESS PERFORMANCE Process is the foundation of repeatable outputs and consistent performance; absolute necessities as far as our clients are concerned. So not only do we hold ourselves to account, we seek and maintain accreditation wherever relevant and value adding. MANAGING RISK Accredited to 11 different ISO or industry standards. Full disaster recovery/business continuity plans in place; we conducted 55 client specific end to end tests and trained 200 employees in the last year. Interoperable locations European network ensuring continuity of service. Strong risk management framework to ensure we support our clients to communicate within regulation. Corporate governance Communisis is a PLC, listed on the London Stock Exchange. TECHNICAL CAPABILITY State of the art resilience delivered through tier 3 and 4 data centres. End to end governance process supports seamless integration between our own IT and third party solutions. The performance of our business units is meticulously tracked and we are always looking for ways to improve them. That means investment in technology to make our business even better. SCALE Customer Experience: UK sites producing each day 4 million mail packs and 3.4 million encoded documents, mail sorting 1.2 million items and processing 95 thousand inbound cases. Brand Deployment: manage marketing execution for our clients through 700 fully approved suppliers. Leverage from European print spend. INTEGRITY Accuracy: 0.71 recorded non-conformances per million units despatched. Delivery: industry-leading 99.4% SLA performance. Tracking: every personalised communication is tracked through our business from composition to despatch. CLIENT RETENTION Five-year average contract term and >90% retention rate. TRANSITIONAL CAPABILITY Customer Experience: 52 large, 72 medium and 104 small projects managed over the last 12 months with total project budgets of 21m. Brand Deployment: 10 pan European contracts transferred into the business in the last five years and a further 20 into single markets, delivering savings of 48m for our clients. Communisis plc Annual Report and Financial Statements 11

14 Strategic Report CHIEF EXECUTIVE S STATEMENT STRONG TRADING IN MARKET TRENDS The UK financial services industry remains the primary market for our Customer Experience division. Our clients and prospects within this market continue to see lower headline growth due to saturation and are therefore primarily focused on retention of market share and enriching their customer relationships. The continued migration to digital channels, improving customer experience and emphasis on quality of customer communications are central to this and our solutions and services are well placed to fulfil client needs. Within the insurance market, organisations are more focused on gaining market share over retention and are proactively acquiring the capability to shift to channels of customer preference. Digital channels are therefore preferred and communications are typically complex and highly personalised. The utilities sector again is typified by lower headline growth but customer habits are changing and moving more digital to take personal control of consumption and respond to environmental concerns. Demand for specialist content marketing capability, such as that provided by our Editions Financial business, is strong in the UK and US. Experience during suggests that high quality content delivered by genuine sector specialists is being favoured by chief marketing officers to enable brands to speak with authority. Within the international FMCG market, the challenge for most brand owners in was the fluctuation of currency and how this has affected the repatriation of Euros or Pounds to Dollars (typically). This has caused some pressure on marketing budgets. In-store marketers are responding to the trend to cheaper, own brand alternatives and online shopping. There has been a drive towards standardisation to increase production leverage and efficiency and a desire for displays to be more permanent. There is still a focus on supply chain efficiencies and eliminating waste/ failed delivery with some market estimates at up to 20% of pre-filled free-standing display units not making it to their intended shop floor destination. Such challenges represent opportunity for our Brand Deployment division. 12 Communisis plc Annual Report and Financial Accounts Statements

15 Strategic Report With the increased sales in the craft drinks sector (whether that be beers, gins, etc.), major brand businesses have needed to respond to keep on-shelf presence in supermarkets. Brands are therefore offering more events or Gift with Purchase (GWP) to keep their in-store presence and increase sales. As a result, we have seen a marked increase in the requirement for fast turnaround co-packing of GWP for major shopping events (Christmas, Father s Day and other anniversaries). We expect to see this trend increase in The broader agency market dynamic is changing significantly at present, driven largely by the entrance of consultancy-based businesses into the sector. This has increased commoditisation of service and has led to a reduction of fees. That said, with the increased pushback on the lack of transparency online, agencies are being asked to deliver more demonstrable sales and can charge for that effectiveness. In addition, there are increased calls to design products for in-store that can be used efficiently as well as effectively to reduce costs and increase sales. There remain strong opportunities in brand awareness and product launches and this is where, for example, our agency Twelve has been successful. We still anticipate further consolidation within our sectors. As we focus increasingly on provision of digital products and services, our competitor set has shifted somewhat. This now includes technology-based competitors, as well as consultancy businesses. We continue to monitor the impact of Brexit negotiations on the economies in which we operate. There are not yet any clear political outcomes but given our activity in the wider supply chain for staple consumer goods and employment of foreign nationals, in-country, we continue to believe that we are relatively well protected from potential negative economic impacts Brexit may have. RISK/GDPR/REGULATION The Group has a formal approach to risk management. In considering the risk to the business over the past 18 months, the Group has reviewed and refined its approach to data protection in line with the changing global landscape and new legislation. The EU General Data Protection Regulation (GDPR) is of particular focus and is a regulation which updates rights and provides opportunities for individuals and companies in the 21st century. The primary objective of the GDPR is to give back control of personal data and to simplify the regulatory environment for international business. When it is implemented in May 2018, in the words of the Information Commissioner, GDPR will be a game changer for us all by: putting the spotlight on accountability; emphasising transparency; extending the scope of data protection; introducing fines for non-compliance; and realising the business benefits of this changing environment. CASE STUDY LEADING FMCG CLIENT INCREASING SALES AND WINNING AWARDS We worked with one brand to showcase their award-winning products to a wider audience. Our team helped position their range as the best in class, while supporting the client and retailers loss prevention directive. Production rollout achieved a 27% uplift in sales of some products and won awards at the POPAI and Shop! awards. A THREE-MONTH STORE TRIAL DEMONSTRATED A 42% SALES UPLIFT FOR FEATURED PRODUCTS VERSUS THE CONTROL STORE Communisis plc Annual Report and Financial Statements 13

16 Strategic Report CHIEF EXECUTIVE S STATEMENT CONTINUED RISK/GDPR/REGULATION CONTINUED Communisis activities as both a Data Controller and a Data Processor have required us to review our operations against the new regulations and put in place actions to address the risk of non-compliance. As part of our ongoing investment that supports the business, we have integrated Data Protection within the Group as part of our Information Security Management System. This investment, comprising 0.8m capital and 0.8m operational expenditure in 2018, includes: dedicated Data Protection Compliance Officers, who are experienced subject matter experts, bringing in skills and experience from both the public and private sectors; developing Records of Processing Activities models which are used to assess the processing Communisis undertakes as both a Data Controller and Data Processor and feed into an updated risk assessment procedure and Data Processing Impact Assessment; implementing enhancements in technology to support new regulations; and undertaking work, in compliance with the Information Commissioner s Office (ICO) guidance on contracts and liabilities, to assist clients in their compliance. DETAILED TRADING REVIEW PER DIVISION FOR CUSTOMER EXPERIENCE was a positive year for Customer Experience with a strong overall increase in profitability. The Direct Mail business performed well, showing significant improvement on prior year numbers. This was largely driven by increased insourcing of work and stringent cost control. The overall transactional business (outbound and inbound) improved profitability against prior year, driven by new contracts and increased volumes. Our technology business also outperformed. This was related to transition activity on-boarding a new client to our Connect TM digital platform for customer communications management. The Security Print business (predominantly cheque book production) was down on volume but demand for our new digital technology for fraud prevention has increased with a number of bank clients now using our system for eucn, a patented cheque fraud feature exclusive to Communisis. We refocused our general creative agency Psona onto Communisis core client bases in Financial Services and FMCG and restructured to integrate its ongoing and future client activity. BRAND DEPLOYMENT This division achieved proportionately less profit growth than revenue growth, mainly in our core Managed Services business, driven by country mix and investment in new markets. The Campaign Fulfilment business outperformed expectations as it brought various new contracts on-board and we expanded our services in the drinks sector. The Agencies finished ahead of prior year, mainly due to projects relating to the telecommunications sector within Twelve. TECHNOLOGY The continued importance of technology, in the delivery of services to our clients and supporting our operating model, provided focus to improve capability, control and visibility of services and systems in. To enable this, we made a number of significant industry hires in the year. We implemented a best practice approach to enterprise architecture enabling us to align people, process and technology with specific expertise from the financial services sector. Amongst other benefits, this approach allowed us to develop a scalable, multi-tenanted product for digital asset management and workflow during which now supports five clients, with capacity and capability for further on-boarding. This allows marketing teams access to creative content for action and approval. 14 Communisis plc Annual Report and Financial Accounts Statements

17 Strategic Report Formal service reviews with stakeholders are now embedded, creating dialogue which enables transformation plans aligned to business need and strategic priorities. This is supported by an internal customer satisfaction survey, providing quantitative understanding of the service we deliver and assisting us to shape our future planning. Through systematic selection and contracting with 3rd party vendors (the latter being increasingly pertinent as we continue to develop real time digital products), we have improved services received from our technology supply base, in addition to generating important savings in the year. We have also prioritised investment in technology solutions and services. This includes major software expenditure over two years with Noosh, a product which allows Communisis to support marketing services and print procurement in a more operationally efficient and expedient way, a significant step in the digitisation of our business processes in Brand Deployment. We also adopted Solarwinds in the year for service and incident management and products for internal and external collaboration. This extends to federation with clients to improve lines of communication and manage costs more effectively. PEOPLE Our progress with people related matters remains strong and supports our strategic agenda. We are delighted to have retained with an improved result, our Gold Level accreditation from the Committed to Equality organisation. In we also made significant strides with managing and developing our talent, boosted by a strong focus on personal performance management and leadership development programmes, with 32 candidates completing a leadership programme in the year. ANDY BLUNDELL Chief Executive 8 March 2018 CASE STUDY MAJOR UK HIGH STREET BANK ENHANCING CUSTOMERS BANKING EXPERIENCE Our work with this banking client has become the backbone of their communications operation. Their task for us was to decrease the operational costs of processing inbound communications. Our solution was to transfer 430 employees to Communisis with all non-core banking activity and collaborate with the bank to create an end to end solution to link inbound and outbound communications. The results were increased customer responsiveness, a more cost-effective system and the start of a decade long relationship between Communisis and the bank. OVER 3,000,000 INBOUND COMMUNICATIONS A MONTH Communisis plc Annual Report and Financial Statements 15

18 Strategic Report STRATEGY STRATEGIC PRIORITIES DIGITAL FIRST Core to our strategy is the need to adopt a Digital First approach to business, developing our professional services capability and ensuring we excel at systems integration and building communications. Digitisation is focused both in developing and enhancing delivery channels for our clients as well as our own internal business processes to provide operational efficiency. GLOBAL REACH Our international reach has increased year on year and this continues to form a core element of our growth strategy. Where this has been largely EMEA marketing activation activity, we are committed to growing both our Brand Deployment and Customer Experience divisions. New product development with greater emphasis on data analytics to support digital leadership and channel capability. Marketing insight and innovation to inform strategic decision making. Digitally enabled business processes delivering automation, simplification and efficiency as well as reducing risk. Increased use of technology to manage the interface between Communisis and our clients, raising visibility of activity and making us easier to do business with. ACHIEVEMENTS The Group is increasing investment in technology to deliver more digital services to clients and to make its own operations more operationally effective. Within the Customer Experience division, we have invested in a new processing facility for our Enterprise Content Management digitisation platform in Leeds which gives us further capacity and capability to grow our inbound service line. We are also moving to a single technology platform for the international supply chain management activity within the Brand Deployment division. We are making our services GDPR resilient on behalf of our clients and a significant proportion of our investment overall in future to be in technology and risk-related areas. Targeted insight into prospect markets and territories which support further expansion and profitable growth. Increased international representation in our middle and top management reflecting our increasing overseas revenues and presence. Increased use of technology to facilitate centralised sourcing and consistency throughout the supply chain interface. Leveraging established locations to drive other services to maximise investment. ACHIEVEMENTS Overseas revenue now represents 30% of total revenue. We now have 700 fully approved suppliers outside the UK providing a comprehensive partner network. Our content marketing agency, Editions, expanded operations to the US. This represents a new market for Communisis and the first non-uk activity for the Customer Experience division. 16 Communisis plc Annual Report and Financial Statements

19 EMPOWERED ORGANISATION We recognise the importance of high performing and motivated leaders across our business and are committed to ensure they have the structure and support needed to lead our business units to success. Strategic Report Increased ownership and accountability for delivery with enhanced support and access to specialised resource. Promoting locally driven business development to improve capacity utilisation and mix. Systematic annual cost efficiency reviews across our divisions to drive operating margin. ACHIEVEMENTS Invested additional resource in our commercial and marketing insight functions and adopted a methodology and process for defining prospects and vertical sectors which will deliver improved profitability. Developed a value creation programme to ensure our teams have the tools to sell Communisis services on the basis of value and differentiation. Salesforce.com now adopted as the central knowledge hub for all of our sales and performance marketing activities and we have a richer insight into our commercial and client relationships. CASE STUDY HEALTHCARE CLIENT UNDERSTANDING POS REQUIREMENTS The line of products offered by this client is vast. The team s solution to the significant challenge to achieve brand consistency and standardise the range was to focus on the retailers themselves. Through MI capture, we were able to better understand their requirements and catalogue tailored items delivered directly to stores. Through the introduction of Roamler Analytics, future POS production and use will now be informed more than ever before. REDUCED SET-UP TIME SAVING UP TO 3 PER UNIT AT FULFILMENT STAGE Communisis plc Annual Report and Financial Statements 17

20 Strategic Report RISK MANAGEMENT AND PRINCIPAL RISKS MANAGING RISK TO DELIVER STRATEGIC OBJECTIVES To successfully deliver against the Group s strategic initiatives, we must first understand the risks faced and plan to manage them to an acceptable level. OUR APPROACH The Board is accountable for ensuring the identification and appropriate management of potential risks faced by the Group. The internal audit function s responsibilities include overseeing the effectiveness of the internal control environment of the Group and its ongoing risk management programme. This process is designed to identify, evaluate and manage the principal risks faced by the business in line with the Group Risk Policy Statement. Risk management is the extent to which the Group responds to the opportunities faced, whilst at the same time understanding and seeking to control any threats that could prevent its achievement of business objectives and successful execution of our business strategy. The aim of the Group s risk management programme is therefore to improve the awareness of the consequences of risk-taking activities, reduce the frequency of damaging events occurring and minimise the severity of the consequences if they do occur. Part of this approach includes operation in line with or certification to a number of standards. This helps the business to work to legal, regulatory and contractual requirements using a set of clearly defined frameworks and management systems. Policy requires that business unit heads demonstrate that they conform to the requirements of the Communisis Group risk management programme. Assessments must be undertaken, risks identified, controls identified and action managed for all activities that are identified as being critical to Communisis. During the year, all business units are required to report their material risks on a monthly basis to the internal audit function enabling independent review and reporting to the Board and senior management teams. Impact assessments are carried out to ascertain the likelihood of occurrence of each risk and the potential impact on the Group. In addition, the Board also carries out a regular top down risk assessment of the most significant strategic risks that are linked to the achievement of the Group s strategic initiatives. VIABILITY STATEMENT The Group has prepared five-year forecasts of profitability and cash flow as part of the goodwill impairment testing and, with average contract lives of five years, the Group has good medium-term visibility of the business. Despite this, there will always be uncertain factors outside the control of Communisis and forecasting can never take into account unknown future economic, legal or regulatory changes which could impact the business and the markets in which it operates. In recognition of this, and consistent with the Value Enhancement Programme, the Group has produced a viability assessment based on the three-year period to December 2020, and can confirm that they have a reasonable expectation that the Group will continue to operate and meet its liabilities as they fall due for the next three years. In making this statement the Directors have considered forecasts for the next three years, which include the Group s key financial ratios and cash flows over the period, and formed an opinion over the resilience of the Group. This takes into account the current position, the principal risks facing the business in severe but plausible scenarios and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the three-year period. The Directors consider the period to December 2020 to be appropriate as this is in line with the period covered by the Group s financial and strategic planning. Clients have shown an increased willingness to enter into longer contractual terms resulting in improved visibility for the Group from a financial perspective. With more emphasis being placed internally on identifying and managing pervasive risk, the Directors are confident that the Group will operate in line with the three-year forecasts. Whilst the review has considered all the principal risks identified in the table below, three have been identified for enhanced stress testing where they are considered to have the most significant plausibility and impact. These are: safeguarding of data and cyber risk; response to technological change; and the loss of major clients. Testing in isolation was considered inappropriate, as ultimately the occurrence of a severe data incident or adverse impact from technological change could lead to loss of major clients (either through reputational damage or failure to respond to the client s progressive adoption of digital communication channels). From May 2018 the impact of a data incident may also result in fines from the Information Commissioner s Office, due to General Data Protection Regulation (GDPR). The three-year forecasts have therefore been stress tested by considering these data and technological risks and then overlaying the impact of the loss of the Group s top three customers. During the Group s banking facilities were renewed and are in place until August Availability of bank facilities is not expected to present any risk to the viability of the Group and has not therefore featured within the viability stress testing. Whilst the occurrence of these risks is plausible, the Group are confident that the mitigating actions detailed in the table overleaf are sufficient to minimise the impact. GOING CONCERN The Directors, after making enquiries, have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period not less than 12 months from the date of the Financial Statements. For this reason, they have adopted the going concern basis in preparing the Financial Statements. 18 Communisis plc Annual Report and Financial Statements

21 RISKS AND UNCERTAINTIES Strategic Report The principal risks and uncertainties facing the business are taken directly from the risk registers and are detailed below. The Group faces other risks which are subject to regular review and have been assessed as lower risk and are therefore not included here. Some risk factors remain beyond the direct control of the Group and the risk management programme. We can therefore, only provide reasonable but not absolute assurance that key risks are managed to an acceptable level. The Group continues to monitor the impact of the UK s decision to exit the EU but until we have more visibility of the eventual outcome it is difficult to fully evaluate the impact on the Group s activities. RISK AREA IMPACT MITIGATING ACTIONS AND MANAGEMENT The Group must be able to respond to market and technological change Clients and their customers progressive adoption of digital formats and channels may impact Group strategy and market demand for products and services. The impact is that the systems and equipment utilised by the Group could potentially be superceded earlier than anticipated by management. A disruptive technological change has not been anticipated as a result of a lack of investment in new products and services. We may not adequately identify and protect our IP. Continued investment in technology and new services maintains and enhances the Group s competitive position. Specific teams are embedded within the business to lead change and innovation. The Group is committed to procuring new types of technology in order to be able to provide the latest services to clients and therefore maintain its competitive position. Where appropriate we have protected IP through patents. CHANGE IN LEVEL OF RISK The level of risk is increasing The Group continues to pursue international expansion The Group now operates in 18 countries outside of the UK ( 17 countries). International exposure to geo-political volatility and social instability may put the Group operations at risk. Movements in foreign exchange rates can impact the Group s Sterling reported Financial Statements. The Group operates in a range of jurisdictions where non-compliance with local laws may expose the Company to fines or other restrictions. The Group has a work stream forum team that specifically deals with the management of operations that are carried out in non-uk locations. A country risk assessment process has been developed along with country management manuals. Foreign currency balances and cash flow forecasts are regularly reviewed to monitor exposure. Principal exposure is in Euro denominated territories. Advice is sought from expert legal and tax partners. The level of risk is increasing Deterioration in the economic environment may decrease profitability The impact is that macro-economic issues may quickly and detrimentally affect consumer expenditure, which could impact the trading performance of the Group s clients and reduce their discretionary spend resulting in lower sales and profitability. Market trends are monitored and factored into the Group s business planning, budgeting and management processes. This is especially pertinent with regard to Brexit. Volume erosion protection is included in contract terms where possible. The level of risk is stable Communisis plc Annual Report and Financial Statements 19

22 Strategic Report RISK MANAGEMENT AND PRINCIPAL RISKS CONTINUED RISK AREA IMPACT MITIGATING ACTIONS AND MANAGEMENT The Group continues to integrate acquisitions to meet its strategic objectives The Group s last acquisition was in January 2015 which is now integrated fully within the Group with appropriate cost base control. The ongoing risk is that in the longer term the acquisitions may not achieve the revenues anticipated within the business case on acquisition. The Group has a clear strategy for ensuring growth. This includes assessment of the alignment of the products and services supported by positive and robust integration. We have adopted a two-divisional structure with the benefit of reducing complexity and providing a clearer market proposition to our client base. CHANGE IN LEVEL OF RISK The level of risk is stable Clients rely upon proven resilient business operations Certain Group operations depend upon the uninterrupted delivery of products and services that rely on complex computer networks and systems. The impact is that the Group may face a significant business continuity incident that will materially affect its ability to deliver products or services to its clients, and associated financial penalties. A Business Continuity Management (BCM) system and BCM plans are in place. These are exercised and audited for core areas of the Group. The Group operates from multiple office, inbound and manufacturing facilities which helps to mitigate against natural disasters. Appropriate business interruption insurance is maintained. Key areas of the Group have been integrated in to ISO/IEC certification. The level of risk is stable Safeguarding of data and cyber risk The Group processes personal and sensitive data on behalf of clients as part of its core services. The impacts are that: a failure to maintain a secure and fully functional IT infrastructure could result in an inability to meet contractual service obligations; and New GDPR (General Data Protection Regulation) fines are to be implemented in 2018, of up to 4% of global revenue. Continued investment in IT infrastructure, security and monitoring, guards against the inappropriate use of client data and maintains and enhances the effectiveness of controls. Established information and security standards are subject to regular third-party audits. Core areas of the Group are subject to certification including ISO/IEC Alignment with changing legislation is assessed and actioned, this includes GDPR. The level of risk is increasing People, talent and skills; recruitment and retention; support Without learning, development resource and succession planning, there is a risk that the Group will be unable to develop, retain and motivate highly skilled employees that are necessary to support operations, expand and build client relationships. There is also a possible impact to employee morale and wellbeing from a failure by the Group to maintain a safe and compliant working environment. The Group actively monitors senior leadership to ensure motivation is maintained, that succession plans are in place and applied to relevant team members. A growing range of benefits and incentives are provided by the Group to its staff. The Group has policies and procedures in place for training and development. Business operational expansion and acquisitions also help to ensure that the Group has the right skills. The Group provides regular training on health and safety for all employees and monitors performance to ensure compliance with all relevant regulations and employment laws across all jurisdictions in which the Group operates. The level of risk is stable 20 Communisis plc Annual Report and Financial Statements

23 RISK AREA IMPACT MITIGATING ACTIONS AND MANAGEMENT Existing client concentration may mean that the loss of a major client could materially decrease sales A substantial percentage of the Group s revenues are derived from a relatively small number of clients and therefore the loss of one or more of these clients could have a material impact on the Group s sales. This could result in a material decrease in profitability whilst new contracts are sought and excess capacity reduced. In the year ended 31 December the top five clients of the Group accounted for approximately 48% of sales ( 56%). A strategic account management programme operates to preserve client relationships, monitor compliance with service level agreements and expand the services offered to key clients. Business development activities continue to promote the Group s services in a broad range of market sectors and into international markets, reducing the historical reliance on the financial services sector. Long-term client relationships and associated contractual commitments are developed. CHANGE IN LEVEL OF RISK The level of risk is stable Strategic Report Due to high operational gearing, a reduction in revenues could significantly impact profitability The impacts are that the Group will not: adapt sufficiently quickly to any technological change or downturn in demand, with a consequent loss of competitiveness and profitability; have adequate resources to invest in new technology and services; retain its major client portfolio, without replacement, or recover debts; and diversify sufficiently into other market sectors. The Group prepares regular financial forecasts to evaluate its funding and liquidity requirements for the foreseeable future. These forecasts are reviewed and approved by the Board. Based on these forecasts, appropriate funding and liquidity solutions are put in place to ensure that appropriate headroom is maintained. A range of financing facilities are utilised with a reasonable degree of headroom over projected funding requirements. The Group s lending arrangements have been renewed and are in place until August Client credit is closely monitored and controlled to minimise the amount of overdue debt. Credit insurance is obtained against larger non-financial services sector debts. Working capital and capital expenditure are actively managed to ensure that banking covenants are not breached. The level of risk is increasing A change in pension scheme assumptions could increase the pension deficit Communisis has continuing obligations under a defined benefit pension scheme that is now closed to new entrants. The IAS 19 accounting pension deficit is 38.2m as at 31 December. The impact is that any changes in assumptions, such as interest rates, equity returns or discount rates could require substantial future cash contributions to eliminate any resulting increase in the pension scheme deficit and therefore decrease the Group s ability to expand the business through continued investment or to pay dividends to shareholders. The Group works closely with the pension scheme trustees to adopt programmes that optimise returns on pension scheme assets, reduce the ultimate pension liabilities and minimise the level of additional cash contributions required to eliminate any deficit. The triennial valuation was completed in with a funding deficit of 29.8m. Following this, deficit repair payments have been set at a base of 2.55m in addition to the 1.15m annual payments under the Central Asset Reserve scheme. The next triennial valuation will be in The level of risk is stable Potential lease liabilities from past disposals could result in high cash costs to the Group The Group has contingent liabilities arising from lease commitment guarantees on past corporate disposals. The principal impact is that current leasehold occupants will become insolvent and that guarantees will be called, resulting in a material cash cost to the Group. The financial status of the leasehold occupants is monitored on a regular basis. Action will be taken to minimise the cost to the Group when default is anticipated. The level of risk has decreased Communisis plc Annual Report and Financial Statements 21

24 Strategic Report FINANCIAL REVIEW CONTINUED GROWTH SUMMARY The Group continues to grow in both revenues and profit generation across both divisions, resulting in an adjusted operating profit of 21.2m ( 19.5m) and adjusted diluted earnings per share of 6.37p ( 6.07p). Strong conversion of profits to cash generated a free cash flow of 12.5m ( 12.9m), leading to further net debt reduction by 6.1m to 24.3m ( 30.4m). The Group s adjusted operating margin increased to 5.6% ( 5.4%). TRADING SUMMARY was a further year of growth in revenues and profits within both divisions with strong free cash generation and continued reduction in net debt. Total revenue grew by 4% to 375.9m ( 361.9m), driven by expansion of international operations with overseas revenues now representing 30% of Group revenue ( 26%). Adjusted operating profits rose 9% to 21.2m ( 19.5m) from growth across both divisions. Customer Experience grew from the integration of new business wins and strong performance across both traditional revenue streams and newer digital outputs. Brand Deployment saw further development within its overseas network and an increased level of Campaign Fulfilment activity. Together, this delivered adjusted profit before tax of 17.2m ( 16.7m) and adjusted diluted earnings per share of 6.37p, up from 6.07p in, an increase of 5%. Free cash flow of 12.5m ( 12.9m) remained strong, despite increased tax payments and higher pension deficit repair payments, as a result of higher underlying earnings and lower capital expenditure. Net debt as a result reduced by 6.1m to 24.3m. The segmental reporting is aligned with the Group s strategic direction and the way in which activities are managed. Revenue and operating profit before exceptional items are reported in two divisions: Customer Experience and Brand Deployment. Central costs that support the full Group are reported separately. CUSTOMER EXPERIENCE Gross revenue for the division was 189.3m, increased from 185.0m in. This was due to the integration of new business wins and a strong year across both digital revenue streams and the traditional areas of direct mail and statements where volume erosion across transactional print channels continues but at lower levels than expected. Adjusted operating profit for Customer Experience at 22.4m was 2.5m higher than with very strong performances across the business. Significant improvements were seen in Direct Mail as a result of insourcing and strong cost control within the production environment, in Inbound due to increased volumes, and in our transactional business due to new business wins and the associated transition income relating to the integration into our transactional centres. A challenging year in Cheques, but mitigated through strong cost control with some initial take up of 22 Communisis plc Annual Report and Financial Statements

25 Strategic Report The table below is an extract from the Group s segmental Income Statement. # m m Revenue Customer Experience Brand Deployment Total Group revenue Adjusted profit from operations Customer Experience Brand Deployment Central Costs (11.8) (11.0) Corporate Costs (5.9) (5.6) Adjusted operating profit Amortisation of acquired intangibles (0.7) (0.8) Profit from operations before exceptional items Exceptional items (2.1) (4.3) Profit from operations Net finance costs including revaluation gains/(losses) (4.0) (2.8) Profit before tax Tax (2.6) (3.0) Profit after tax Earnings per share Basic (p) Adjusted diluted (p) Adjusted profit before tax ( m) Adjusted EBITDA ( m) Adjusted operating margin (on gross revenue) 5.6% 5.4% # Account management and service costs relating to Customer Experience clients, previously included within central costs, have now been recognised within the Customer Experience segment from. The comparatives have been adjusted to show this on a like for like basis. eucn, boding well for Editions Financial had another strong year and successfully established the New York office as planned, initially providing content marketing to our client, LinkedIn, and on-boarding further large financial services clients. The Agencies performed at similar levels to but underwent a significant restructuring during the year with the closure of the Glasgow operation and full restructure of the London based teams, entering 2018 leaner and more focused on core services and clients. BRAND DEPLOYMENT Gross revenue grew to 186.6m from 176.9m during the year, with Managed Services benefitting from strong sales growth across Germany, Poland, France, Spain, Italy and Dubai, which saw its first full year of operations. Adjusted operating profit showed some growth to 16.5m ( 16.2m). In Managed Services the margin did not increase proportionately in line with revenue as a result of country mix together with investment in new countries as we build out the international operations. The focus going forwards is on operating margin improvement through both operational efficiencies and continued investment in systems along with integration of new client wins. Campaign Fulfilment, performed by our Newcastle based operation, had a very successful year with growth in revenues and profits from a number of new contracts. The agencies Life and Twelve together had a strong year, with further growth and their most profitable year to date since acquisition. CENTRAL AND CORPORATE COSTS Central costs are 0.8m higher than in, driven by increased spend on technology and increased focus on marketing and development of the Communisis brand. In addition, pension costs in included within Corporate Costs did not benefit from 0.4m of one-off settlement gains experienced in. Communisis plc Annual Report and Financial Statements 23

26 Strategic Report FINANCIAL REVIEW CONTINUED EXCEPTIONAL ITEMS Total exceptional costs charged in the year were 2.1m, including 1.7m associated with restructuring across the agency and Managed Service businesses, restructuring of the Group marketing function and closure of the Bangalore and Glasgow offices. In addition there was a 0.2m non-cash write off relating to customer relationship assets, offset by a 0.3m fair value revaluation release of contingent consideration in respect of recent acquisitions. The Group also incurred a 0.5m write off in respect of unsupported assets which will not be recovered. NET FINANCE COSTS Finance costs were 1.2m higher than the prior year due to a swing on the impact of foreign currency translation of nontrading balances. had benefitted from a 0.9m gain whereas there was a 0.4m loss in. Both pension and bank finance charges were at a consistent level in both years. TAXATION The effective tax rate in the Income Statement was 18.4% ( 25.6%). During the year, the effective tax rate has benefitted from a number of credits which related to prior years. The balance has been adjusted through the current year Income Statement, as management consider that the adjustment is immaterial in the context of an understanding of the Group s financial performance for users of the financial statements. Excluding this adjustment the tax rate would have been 22.7% which is higher than the UK rate of corporation tax due to the proportion of profits generated in overseas jurisdictions with higher tax rates. CASH FLOW AND NET DEBT The table below summarises the cash flows for the year and the closing net debt position. m m Profit from operations before exceptional items Depreciation and other non-cash items Decrease in working capital (1.1) (0.5) Pension scheme contributions (4.0) (2.8) Interest and tax (5.2) (4.3) Net operating cash flow before exceptional items Exceptional items (2.7) (3.7) Net operating cash flow Net capital expenditure (5.0) (5.7) Free cash flow Investment in new contracts (0.7) (1.2) Acquisition of subsidiary undertakings (0.3) Repayment of promissory loan note relating to acquisition of subsidiary undertakings (9.3) Dividends paid (5.2) (4.8) Share issues net of directly attributable expenses 0.1 Debt arrangement fees (0.7) Purchase of shares (0.4) Revaluation (Increase)/decrease in net bank debt (3.1) 8.6 Opening net bank debt (19.7) (28.3) Closing net bank debt (22.8) (19.7) Unamortised borrowing costs Net bank debt (22.2) (19.5) Finance lease creditor (2.1) (1.6) Promissory loan notes (9.3) Net debt (24.3) (30.4) 24 Communisis plc Annual Report and Financial Statements

27 Generating strong free cash flow and continued debt reduction remains a priority for the Group and during, we are pleased to report a further 20% reduction in net debt of 6.1m to 24.3m. Free cash flow remained strong at 12.5m ( 12.9m) with increased pension deficit repair payments, higher tax payments and increased working capital being offset by higher underlying profitability, lower capital expenditure and lower exceptional items. Dividends paid to shareholders increased by 0.4m to 5.2m. Promissory loan notes of 9.3m in respect of the Life Marketing Consultancy acquisition in January 2015 were repaid during January from normal facilities. The overall movement in bank debt including this was a net cash outflow of 3.1m. Excluding this repayment the cash improvement during the year was 6.2m. The net bank debt at the end of the year was 22.8m ( 19.7m), with significant headroom within the Group s facilities of 70m. Average net bank debt during the year was 41.9m ( 32.7m), at a higher level than following the repayment of the promissory loan notes. During the year the banking facilities were renewed through to August As part of the facility, Communisis has to comply with a number of covenants, including maintaining a multiple of net bank debt to EBITDA and EBITA to net finance costs, both of which were in compliance with significant headroom. DIVIDENDS The Board has proposed a final dividend of 1.77p per share bringing the total dividend for the year to 2.66p per share, an increase of 10% over. PENSIONS The pension scheme accounting deficit at the year end decreased to 38.2m ( 55.5m). This reflects both an improvement in asset valuations and a reduction in liabilities. The reduction in liabilities incorporates changes in mortality assumptions following the 31 March triennial valuation. Discount rates in reduced to 2.5% from 2.7% with RPI/CPI rates remaining static. Cash contributions to the pension scheme are determined by reference to the triennial actuarial valuation. During the year the 31 March triennial valuation was completed with deficit repair payments being set for future years. The contributions paid in towards the accounting deficit were 2.9m plus rental payments of 1.1m through the Central Asset Reserve arrangement. The next triennial valuation will be in BALANCE SHEET AND NET ASSETS Net assets as at 31 December have increased by 20.9m since the prior year. This increase does however include the benefit of a 17.3m reduction in the pension scheme deficit. Excluding this, Group net assets increased by 3.6m during the year. CORPORATE SOCIAL RESPONSIBILITY The Group embraces corporate social responsibility and our policies make Communisis more resilient, more productive and more predictable in performance, whilst delivering economic and environmental benefits to society as a whole. Strategic Report STEVE RAWLINS Chief Financial Officer 8 March 2018 Communisis plc Annual Report and Financial Statements 25

28 Strategic Report CORPORATE SOCIAL RESPONSIBILITY REPORT SUSTAINABLE ACTIVITIES Communisis has continued to elevate the level of corporate social responsibility (CSR) internally by constantly reviewing and improving processes to track sustainable activities that the business has been involved in. We ensure that we support charitable organisations and continue to safeguard the future of our business through our focus on apprenticeships, internships and learning and development. OUR PEOPLE AND ORGANISATION We recruit, develop and retain top quality people who help us to grow the business and achieve our strategic aims. Details of how the Company attracts, develops and retains the best people and engages, develops and rewards its people, are set out below. ATTRACT, DEVELOP AND RETAIN THE BEST PEOPLE We communicate our strategic goals to all of our managers and empower them to develop both themselves and those for whom they are responsible through focused training to ensure they can best deliver those goals. In we grew our internal learning and development team. This team delivers a range of technical, leadership and developmental training to all our people, running a number of tailored leadership training programmes throughout the year. Some 120 of our most promising future leaders completed one of these programmes in. We also continued to grow our online resources, through the Communisis Academy. This is our learning and development hub which provides all of our employees with access to tools and materials to support their ongoing developmental needs. It is a cloud-based system, available 24/7 regardless of where our employees are based. In, we moved our annual review process to this platform, allowing a digital, flexible approach to managing objectives, performance and individuals development needs. Our apprenticeship programme continues to grow. This now encompasses roles in IT, business administration and digital marketing. Plans are in place to have apprentices over four sites: Liverpool, Edinburgh, Leeds and Andover. In, following the roll-out of the Apprenticeship Levy, we launched our programme of modern apprenticeships and now have over 60 colleagues across the Group completing qualifications ranging from Software Development to Business Administration and Improving Operational Performance to Leadership and Management. Succession plans have been reviewed during the year and are in place for all senior and business-critical roles. These succession plans allow us to focus on learning and development requirements, as well as driving our diversity agenda by identifying key talent and providing support with tailored development programmes. Recruiting the best talent is critical to our ongoing success. In, our partnership with Randstad Sourceright went live. This allows us to access the best recruitment tools and processes to support our line managers in finding the best people for their teams. In addition, this approach enhances our commitment to diversity and equality during the recruitment process by ensuring we follow best practice for ensuring fair and equitable recruitment processes. In we have made great strides in presenting ourselves as an employer of choice. We are working hard to bring a greater awareness of Communisis to the recruitment marketplace, and help us attract the best new talent. More work will follow in 2018 to enhance this further. RETAINING OUR PEOPLE THROUGH ENGAGEMENT AND REWARD At Communisis we understand that the success of our business strategy is critically dependent upon the involvement of all employees. We appreciate that employee engagement and wellbeing not only benefit our employees but also have a direct impact upon the performance of our business and we seek to achieve that engagement in a number of ways. During we: held information and consultation forums, focus groups and internal surveys to listen to our teams; acted upon that feedback at local and Company levels; used various high-quality digital channels to ensure timely and effective flows of information; and developed improved and engaging visual communications to support our digital channels. A healthy and safe working environment is central to everything we do. We are committed to providing our employees with a safe place to work combined with excellent occupational health services. In we further enhanced our flexible benefits offering by expanding the offering on our benefits platform available within the UK. We are also constantly reviewing our international benefits offerings which vary by country linked to local legislation and practice. We review remuneration regularly, benchmarking salaries where appropriate, and develop reward schemes which encourage and incentivise appropriately. Our people also receive regular wellbeing communications and have the opportunity to engage in various advice and training initiatives on Wellbeing Days. Our aim is to ensure that our people work within an environment which is conducive to good health and wellbeing and that our programmes and initiatives positively affect our peoples lives both inside and outside of work. 26 Communisis plc Annual Report and Financial Statements

29 DIVERSITY We have an ongoing commitment to equality and diversity and have retained accreditation to the Committed2Equality standard in. Following an annual audit, our accreditation has remained at Gold standard, with an improved assessment result. Communisis has focused on utilising appropriate recruitment processes and techniques to ensure we are able to reach all jobseekers. We are also committed to flexible working arrangements, and benefits provision, which assists staff with their work life balance. The Group has in place an Equal Opportunities Policy and Statement (details of which are set out below). The ongoing commitment above, together with the Group s Equal Opportunities Policy and Statement, comprises the Group s policy on diversity. EQUAL OPPORTUNITIES Our policy is to provide equal opportunities to all existing and potential employees. We know that our reputation is dependent upon fair and equitable treatment of all our employees and we forbid discrimination on the grounds of race, religion, gender, disability, sexual orientation, age, nationality or ethnic origin. Employment opportunities are equally available to all. Employment opportunities are available to disabled persons in accordance with their abilities and aptitudes on equal terms with other employees. If an employee becomes disabled during employment, we make every effort to enable them to continue in employment by making reasonable adjustments in the workplace and providing retraining for alternative work where necessary. MENTAL HEALTH AND WELLBEING In the business launched a significant initiative to support our people s mental health and wellbeing. The initiative started by participating in Mental Health Awareness Week in May, at the end of which we made three commitments: created a mental health and wellbeing group, to lead and drive initiatives to support our people; improved our internal support by training our HR team; and signed the Time to change employer pledge detailing our commitments (which included in 2018 creating mental health first aiders in the workplace). This programme of works shows our commitment to our people and that we take the issue of mental health seriously and are committed to breaking down the taboo and helping end mental health discrimination in all workplaces. GENDER We have a progressive policy towards gender equality. Whilst we have always taken the view that the most suitable candidate for any role should be the person who is appointed to that role, we recognise the benefits that diversity can bring to any organisation and have embraced that philosophy when making all appointments into the business. Our recruitment partnership, with market leader Randstad Sourceright, involves coaching, training and up-skilling our line managers to help them support our approach to both diversity and gender equality. We also partner with CEB (now Gartner) for a suite of SHL psychometric assessment tools which ensure we have an objective and fair approach to candidate selection. A breakdown by gender of the number of persons who were Directors, senior managers and employees of the Group as at 31 December is set out below. BREAKDOWN BY GENDER OF THE NUMBER OF PERSONS WHO WERE DIRECTORS, SENIOR MANAGERS AND EMPLOYEES H H H DIRECTORS 67% MALE (4) 33% FEMALE (2) SENIOR MANAGERS 1 55% MALE (22) 45% FEMALE (18) ALL EMPLOYEES 59% MALE (1,233) 41% FEMALE (873) 1 The category of senior managers comprises the Executive Board members and individuals who report directly into them. GENDER PAY Under the Equality Act 2010 (Gender Pay Gap Information) Regulations, Communisis is required to report various statistics and information linked to differences in pay by gender across the business. The publishing of our gap analysis is on track to meet the reporting deadline of 4 April Strategic Report Communisis plc Annual Report and Financial Statements 27

30 Strategic Report CORPORATE SOCIAL RESPONSIBILITY REPORT CONTINUED OUR PEOPLE AND ORGANISATION CONTINUED SUPPORTING OUR SUPPLIERS Our supply chain is key to the success of Communisis. We work hand in hand with our suppliers to understand our environmental impact and we plan to do more in 2018 to establish a reliable source of data within the supply chain through the strategic adoption of Ecovadis (a supply chain management platform) which will give us greater insights into the businesses that we work with. SUPPORTING OUR PEOPLE Our aim is to give our employees rewarding careers that make the best use of the talents they have and also to equip them for the future by providing the opportunity to develop new skills. Most importantly, we want all our employees to feel they work for a company that treats them with respect and has values they can feel proud of. Our aim is to be the employer of choice for the best people in our markets. SUPPORTING OUR COMMUNITIES We actively encourage all employees to be socially active and participate in volunteering activities in the local community. We support this by allowing a paid volunteer day per employee per year. Our Insight and MI team travelled to the heart of East London to St Luke s Community Centre, where they worked hard to help revamp some donated picnic benches and help out with some gardening. They then helped clear one of the local parks by removing the fallen leaves and turning the soil, planting fresh plants and flowers to blossom in time for spring and summer. COMMUNISIS CHARITY AND VOLUNTEERING Support for our nominated charities continued during, led by our Charity Committee, which is made up of colleagues from all around the Group. Proceeds from all fundraising events went to Children in Need, Alzheimer s Society and Macmillan Cancer Support. We will announce new nominated charity partners in During our fundraising and donations amounted to 56,723, which has been distributed amongst our nominated charities. A further 1,275 was raised for other local charities giving a grand total of 57,998. We continued to work with and support The Prince s Trust through, and will be doing so into Our Volunteer Charity Champions represent all the business regions and support fundraising events, engage with other employees, set an example and are key to the success of our endeavours. Below are some of the events we enjoyed in. YORKSHIRE THREE PEAKS On 7 July, 47 Communisis employees took on the Yorkshire Three Peaks. Individuals either walked the 24-mile long route with 5,200ft of ascent, or they supported those doing so. Everyone challenged themselves, whether that was to complete one peak, two peaks or all three. 483 bottles of water, 51 made-to-order sandwiches, 104 energy gels and a countless number of blisters later, everyone had completed the challenge coming in under the guideline of 12 hours. This event alone raised over 5, Communisis employees took on the Yorkshire Three Peaks in July 28 Communisis plc Annual Report and Financial Statements

31 BAKE SALES Communisis is not alone in its love of cake, and in we held numerous bake sales. Highlights included Alzheimer s Society Cupcake Day in June, and Macmillan Coffee Morning in September. All our sites got involved and raised thousands on behalf of these good causes in the process. SUSTAINABILITY Our work continued throughout with the sustainability forum, which is comprised of stakeholders from across the business who can offer insight and expertise in all areas of the business. The purpose of the forum is to share best practice, capture our achievements and help shape the future of sustainability within Communisis. We are committed to the development, implementation and maintenance of an action plan to target improvements in our environmental and sustainability performance, in addition to helping our clients with theirs and to monitoring our progress over time. HUMAN RIGHTS AND MODERN SLAVERY We take the issue of human rights seriously. The Modern Slavery Act 2015 has introduced changes in the UK law focusing on increasing transparency in supply chains. A copy of the Group s slavery and human trafficking statement can be found on the Company s website ( We are committed to ensuring there is transparency in our approach in tackling modern slavery in our supply chain. ANTI-BRIBERY POLICY The Group s anti-bribery policy sets out the ethical values required to ensure compliance with legal requirements. Anti bribery and corruption training is provided across the Group to all employees. The training is provided via our online training portal. Communisis values its reputation for ethical behaviour, financial integrity and reliability. It acknowledges that over and above the commission of any crime, any involvement in bribery will also reflect adversely on its reputation. Communisis aim is to limit its exposure to bribery and corruption by: setting out a policy on anti-bribery and corruption; training all employees so that they can recognise and avoid the use of bribery by themselves and others; providing employees with a suitable channel of communication and ensuring sensitive information is treated appropriately; rigorously investigating instances of alleged bribery and assisting the police and other appropriate authorities in any resultant prosecution; and taking firm and vigorous action against any individual involved in bribery or corruption. Strategic Report Communisis plc Annual Report and Financial Statements 29

32 Strategic Report CORPORATE SOCIAL RESPONSIBILITY REPORT CONTINUED HEALTH, SAFETY AND ENVIRONMENT HEALTH, SAFETY AND ENVIRONMENTAL POLICY Communisis operates a combined Health, Safety and Environmental Policy which strives to continuously improve our health, safety and environment (HSE) compliance by integrating HSE practices as core values into our business activities. This in turn significantly contributes to the commercial success of the business. The Board Director responsible for implementation of the Health, Safety and Environmental Policy is the Chief Executive. KEEPING OUR PEOPLE SAFE The main focus of our Health and Safety Programme is the prevention of injury and loss. We believe that all incidents are preventable and that our employees should be free to work in an environment that does not cause them injury or ill health. In, we were not subject to any regulatory enforcement resulting from any breaches of Health and Safety (H&S) legislation. All manufacturing locations maintained their safety management certifications to the externally verified standard of Occupational Health and Safety Assessment Standard 18001:2007 (OHSAS). All endeavours are made to maintain a legally compliant business that operates without placing our employees, customers and visitors at risk of injury. We have a mature system of compliance checking through audit that enables us to monitor and improve our systems. This activity is compounded by and reinforced by external verification audits that are undertaken by SGS, our nominated external verification provider, to the standard of OHSAS that we operate in our production sites. In we combined the Health and Safety Policy with our Environmental Policy to create one unified document. We continue to offer a cycle to work scheme and now have more colleagues than ever enjoying the benefits of a healthier lifestyle that this has brought to them. We continue to utilise our online training portal to provide our H&S training. This portal enables us to provide consistent training throughout the organisation. In addition we have utilised other forms of training including face-to-face training to raise line management awareness of HSE issues across our operational facilities. PERFORMANCE AGAINST HEALTH, SAFETY AND ENVIRONMENTAL POLICY OBJECTIVES Demonstrate proactive leadership and management for the prevention of incidents, ill-health and environmental pollution. We have continued to be proactive in our approach to safety and environmental management through the implementation of initiatives such as line management responsibility training, incident investigation awareness training and an increased focus on hazard observation and reporting. Other areas such as occupational health surveillance and mental health awareness have also been the focus of Group-wide initiatives. Demonstrate continuous improvements to our HSE management systems to reduce HSE risk and maintain legal compliance. All operational facilities have maintained their OHSAS and International Organisation for Standardisation (ISO) 14001:2004 management system, with two locations making the conversion to the new ISO 14001:2015 standard. To provide assurance that this effort is directed in the correct manner, we have a rolling programme of internal audit reviews covering legal and process compliance. Engage and consult with personnel to ensure their competency, awareness and ability to work safely and in an environmentally responsible manner through the provision of supervision, information, instruction and training. All operational facilities operate an employee forum where HSE issues are discussed and improvements are agreed. Many of the forums liaise directly with local unions, where representation is held, to ensure that good communication, information, instruction and training is provided to all areas of our operations. Our new online training portal has also enabled us to deploy training to a greater population of the workforce and provides consistency in the quality of the training. Manage performance by monitoring and taking corrective action and ensure efficiency of communication for a positive culture. We use a software-based system to manage various aspects of HSE documentation. This includes hazard observation records, risk assessment records, audit schedule and non conformance tracking. Monitor and manage our environmental impacts based on energy usage, waste management and supply chain practices. Each operational facility monitors its energy use to reduce energy wastage. High standards of waste segregation and recycling are present across the business. We have renewed our Forest Stewardship Council (FSC) and Programme for the Endorsement of Forest Certification (PEFC) for the next three years showing our dedication to sustainable sourcing of the materials we use. We operate a greenhouse gas management system which enables us to accurately record and report our emissions. This system ensures consistency and transparency in our activities and is written to support ISO We recognise that water scarcity and water pollution are a major global environmental challenge and we take all practicable steps to ensure that we manage our impact on these resources with the care that it requires. Water consumption and waste generation across our operations are monitored and managed to ensure our environmental impact is as low as possible. 30 Communisis plc Annual Report and Financial Statements

33 HEALTH AND SAFETY PERFORMANCE The reportable incident frequency rate (RIFR) has reduced slightly to 0.12 from This is due to improved return to work processes utilising our external healthcare provider and Employee Assistance Programme. The lost time incident frequency rate (LTIFR) (referred to previously as Lost Time Accident Frequency Rate (LTAFR)) has increased to 0.27 from 0.22*. As a result of this increase, the business has taken additional risk management measures to ensure that relevant learnings were widely communicated, risk assessment controls reviewed and additional training completed. * numbers have been restated to reflect more accurate data. Both frequency rates are calculated by taking the number of incidents multiplying by 100,000 (as the typical number of hours that a facility of 100 employees would work across 50 weeks per year) and dividing this by the total number of hours worked (based on permanent employees, temporary employees, agency employees and sub-contractor employees). RIFR AND LTIFR LTIFR 2014 RIFR 2015 In we experienced 11 Lost Time Incidents, five of which were reportable under the Reporting of Injuries Diseases and Dangerous Occurrences Regulations 2013 (RIDDORs). In there were 11 Lost Time Incidents and six RIDDORs respectively. Whilst the number of Lost Time Incidents is the same as, there is a marked improvement in relation to the number of days lost in respect of these incidents. With only 110 Lost Working Days being recorded in against 170* days in. * numbers have been restated to reflect more accurate data. INCIDENT BY TYPE There continues to be exceptional H&S performance from some of the operational sites throughout the Group. For example, the site at Newcastle experienced no injuries for the second consecutive year. Group performance also improved with a 68% increase in hazard observations being reported compared to. HSE OBSERVATIONS 2,500 2,000 1,500 1, ENVIRONMENTAL PERFORMANCE ENVIRONMENTAL LEGAL COMPLIANCE Communisis has maintained all its relevant environmental certifications and operational permits and has not been subject to any improvement, abatement or enforcement notices. We frequently evaluate our compliance against relevant environment legislation through a programme of auditing and review against current legislation. CARBON REDUCTION COMMITMENT (CRC) AND GREENHOUSE GAS (GHG) Full compliance was achieved with CRC Phase 2 during. This aspect of our compliance was done in conjunction with Carbon Credentials Energy Services Limited, our compliance partner, which we continue to partner with to provide us with technical advice and support. GHG REPORTING We continuously review and modify current reporting practices in order to fully meet compliance requirements. Aside from continuous improvement of monitoring and measurement of activity data, we ensure that there are internal controls in place in order to avoid the risk of any material discrepancy within this report. Strategic Report Near Miss First Aid Medical Aid Lost Time Incident (> 1 Day) RIDDOR (> 7 Days) Communisis plc Annual Report and Financial Statements 31

34 Strategic Report CORPORATE SOCIAL RESPONSIBILITY REPORT CONTINUED HEALTH, SAFETY AND ENVIRONMENT CONTINUED ENVIRONMENTAL PERFORMANCE CONTINUED CARBON INTENSITY We have updated our carbon intensity calculation for and moved away from the previous measure that referred to paper consumption. Going forward we will be reporting on two new measures that we believe give greater insight into the performance of the Group as a whole. We have elected to report: 1) tonnes of CO 2 e per square footage of our property portfolio; and 2) tonnes of CO 2 e from business travel against our average employee headcount during the year. TONNES OF CO2E PER SQ FT Year-on-year there has been a positive improvement in carbon intensity performance across our property portfolio that we own or lease. This can be attributed to energy efficiency projects that have been introduced. For instance, LED lighting and energy efficient compressors have been installed in various parts of our operations. TRAVEL (TONNES CO2E) PER HEADCOUNT Our carbon intensity for travel (as a ratio of average headcount) shows a small reduction during (0.560) compared to (0.572). This can be attributed to the continued focus on restricting travel and improving our internal communication technology. The rate has however increased from 2014 and 2015 levels (with an average of 0.456). This is due to an increased amount of international travel that occurred as our global presence has increased. The headcount calculation includes permanent employees, temporary employees, agency employees and subcontractor employees. For the purposes of reporting, any sites that were acquired or divested during a particular year will not have its square footage or energy included in the calculation. As part of our continuous improvement process and our obligation to report GHG emissions, we will continue to provide verification of the emissions statements and data made by the Company in accordance with ISO Our current status is maintained at the top scoring of reasonable assurance as verified by our external third-party partner. ENVIRONMENTAL PERFORMANCE MONITORING ECOVADIS Ecovadis is a supply chain management process that allows us to communicate our sustainability performance to our clients across a common platform. This provides us with an externally verified score based on our approach to the environment, labour practices and human rights, fair business practices, sustainable procurement and associated KPIs. In we maintained a silver rating which placed us in the top 30% of subscribers. CARBON DISCLOSURE PROJECT (CDP) Our climate change programme submission for was completed for both our Company performance and the way in which our supply chain is managed. We have maintained our A- score. Year Scope 1 1,603 1,571 1,630 1,816 Scope 2 9,122 8,514 7,486 6,138 Scope 3 1, Total gross carbon TCO 2e 11,737 10,869 10,067 8,884 The above table shows the audited and verified data by our external third party partner. Scope 1 emissions are those that occur from sources that the Company own and directly manage or control. These have increased due to an increase in our production activity. Scope 2 emissions are those that are generated from the purchased electricity that the Company consumed and have decreased because our operational facilities continue to be more energy efficient through the process improvements that were implemented during. Scope 3 emissions occur as a consequence of our activities, but occur from sources that are not owned nor controlled by us. These have reduced due to fewer European and domestic flights. 32 Communisis plc Annual Report and Financial Statements

35 Corporate Governance INTRODUCTION TO CORPORATE GOVERNANCE GOVERNANCE DEAR SHAREHOLDER To ensure continued focus on our long-term delivery, we have launched the next phase of our strategic planning, with financial targets to ensure continued shareholder returns and value. To this end we have initiated a Value Enhancement Programme (VEP) with three key strategic themes; Digital First, Global Reach and Empowered Organisation. CORPORATE GOVERNANCE This report serves to highlight that a strong governance framework is in place in order to support the Group s strategy. The report sets out our approach to the main governance principles and outlines how the Board ensures that high standards of corporate governance are maintained. Corporate Governance CODE COMPLIANCE As a Board we remain committed to maintaining high standards of corporate governance and we endorse the provisions set out in the UK Corporate Governance Code. During the year under review, we have assessed the level of compliance with the Code and the Board confirms that throughout the year the Company has continued to comply with all of the Code s provisions, insofar as they apply to a FTSE SmallCap company. FUTURE STRATEGIC DIRECTION The Board confirms its collective responsibility for the success of the Group by demonstrating its strong leadership in setting the Group s strategy and reviewing management performance. The Board is accountable to the Company s shareholders for good governance and this report describes how the principles of good governance set out in the Code are applied within Communisis. DAVID GILBERTSON Chairman 8 March 2018 Communisis plc Annual Report and Financial Statements 33

36 Corporate Governance BOARD OF DIRECTORS MEET THE BOARD A N R F F F DAVID GILBERTSON Chairman ANDY BLUNDELL Chief Executive STEVE RAWLINS Chief Financial Officer TERM OF OFFICE Chairman of the Board since May, having been appointed an Independent Non-executive Director in March. David is a member of the Audit, Remuneration and Nomination Committees and Chairman of the Nomination Committee. EXPERIENCE David has more than 30 years experience in specialist business and professional information provision, first as a journalist and editor and subsequently as leader of companies in public ownership, private equity and private hands. He has a significant corporate M&A track record and extensive experience of company governance at board level in both public and private domains, and of managing shareholder relations and communication. David was formerly CEO of Informa plc. CURRENT EXTERNAL DIRECTORSHIPS David is Senior Independent Director of Tarsus Group plc. He is Chairman of Old Street Labs Limited and Procurement Leaders Limited. KEY STRENGTHS Extensive board and general management experience. TERM OF OFFICE Chief Executive since October 2009 and member of the Board since August EXPERIENCE Andy joined Communisis in January 2008 as Managing Director of Print Sourcing and became Group Sales Director in November He was later appointed to the Board as Chief Executive Officer designate on 25 August 2009 and took on the role permanently in October Formerly, Andy was a Managing Director at Bemrose Booth Limited and a Managing Director at De La Rue plc. CURRENT EXTERNAL DIRECTORSHIPS Andy is a Non-executive Director of RM plc. KEY STRENGTHS Considerable executive management experience in relevant sectors. Sales and Marketing; Client focus. Wide knowledge of international markets. TERM OF OFFICE Chief Financial Officer and member of the Board since December. EXPERIENCE Steve joined Communisis in December and has extensive experience of the digital media, business services and FMCG sectors in both the UK and overseas markets. Most recently Steve was CFO of EDC Communications, a private equity backed group of digital media agencies. Previously he held senior finance roles at Vendia UK Ltd, Uniq PLC, Caradon PLC and The Gillette Company. CURRENT EXTERNAL DIRECTORSHIPS None. KEY STRENGTHS Extensive financial management experience. KEY FOR COMMITTEE MEMBERSHIP AT 8 MARCH 2018 A R Audit Committee Remuneration Committee N Nomination Committee F Administration and Finance Committee* Committee Chairman * Any two Directors (one of whom must be the Chairman, the Chief Executive or the Chief Financial Officer). Peter Hickson was Chairman of the Nomination Committee and a member of the Audit, Remuneration and Administration and Finance Committees until 11 May, when he stepped down as Chairman of the Board. 34 Communisis plc Annual Report and Financial Statements

37 A A A N N N R R R F F F Corporate Governance PETER HARRIS Senior Independent Non executive Director TERM OF OFFICE Independent Non-executive Director since July 2013 and Senior Independent Director since May Peter is also Chairman of the Audit Committee and a member of the Remuneration and Nomination Committees. EXPERIENCE Peter has over 30 years financial experience and also has extensive media experience, having spent the last 20 years in senior finance roles in the media sector. He was previously the Interim Finance Director at Centaur Media plc, Interim Chief Financial Officer of Bell Pottinger LLP, CFO of the Engine Group and CFO of 19 Entertainment. Prior to that, he was Group Finance Director of Capital Radio plc. Peter has considerable experience in UK and US listed companies, with international exposure. CURRENT EXTERNAL DIRECTORSHIPS Peter is Executive Director and Chief Financial Officer of Next Fifteen Communications Group plc. KEY STRENGTHS Extensive financial management experience (including recent financial experience). JANE GRIFFITHS Non-executive Director TERM OF OFFICE Independent Non-executive Director since May Jane is also a member of the Audit, Remuneration and Nomination Committees. EXPERIENCE Jane is a marketing professional with over 20 years international agency and brand owner experience for global brands across the luxury, financial services, IT, telecommunications, retail, travel, hospitality, charity, automotive and petrochemicals industry sectors. Jane is currently working as an international marketing consultant. Jane s previous roles include Marketing Director EMERI for Christie Manson & Woods Limited and Marketing Director EMEA for Citibank NA. She has also worked for a number of advertising agencies including Ogilvy/ Ogilvy One in London, New York and Korea, Arc Worldwide London (part of the Leo Burnett Group) and TBWA/GGT London, each with a seat on the senior management team and as a member of the Board. CURRENT EXTERNAL DIRECTORSHIPS None. KEY STRENGTHS Strong marketing and agency experience with global businesses. HELEN KEAYS Non-executive Director TERM OF OFFICE Independent Non-executive Director since August Helen is also Chair of the Remuneration Committee and a member of the Audit and Nomination Committees. EXPERIENCE Helen has over 20 years experience in travel, retail, consumer markets and telecoms, with the majority of her career spent at GE Capital and Vodafone, where she held various senior marketing roles. Previously Helen was a Nonexecutive Director of Majestic Wine plc, Mattioli Woods plc and SKN Holdings Limited. CURRENT EXTERNAL DIRECTORSHIPS Helen is a Non-executive Director of Domino s Pizza Group plc, Nichols Plc and is also a Life Trustee of the Shakespeare Birthplace Trust. KEY STRENGTHS Strong commercial experience in retail and consumer markets. Communisis plc Annual Report and Financial Statements 35

38 Corporate Governance CORPORATE GOVERNANCE REPORT INTERNAL GOVERNANCE STRUCTURE EXECUTIVE BOARD The Executive Board is the main operating board of Communisis plc and comprises the following people from across the Group: ANDY BLUNDELL Chief Executive STEVE RAWLINS Chief Financial Officer ANDREW NEAL Group Human Resources Director DAVID HERRIDGE Managing Director Customer Experience JON WELLINGS Managing Director Brand Deployment MARK LEWIS Group Shared Services Director This report, with the Directors Remuneration Report, describes how the Board applies the principles of the UK Corporate Governance Code issued by the Financial Reporting Council, which is publicly available at Publications/Corporate-Governance/UK-Corporate-Governance- Code-.pdf. UK CORPORATE GOVERNANCE CODE COMPLIANCE During the year under review, the Company has complied with the main provisions of the UK Corporate Governance Code (April ) (the Code). BOARD STRUCTURE The Board currently comprises the Chairman, two Executive Directors and three independent Non-executive Directors. David Gilbertson was appointed as an independent Non-Executive Director on 1 March and took over as Chairman at the close of the AGM on 11 May, when Peter Hickson stepped down from the Board. On 4 December Mark Stoner, Executive Director and Finance Director, stepped down from the Board. Steve Rawlins was appointed as an Executive Director and Chief Financial Officer on 4 December. We have announced today that Helen Keays will be leaving the business on 6 June The Nomination Committee will conduct an external search for a new Non-executive Director. The roles and responsibilities of the Chairman and Chief Executive are set out in separate documents outlining their respective roles. The Chairman s role fulfils a number of objectives including ethical leadership of the Board, ensuring the Board agenda focuses on strategy, value creation, performance and accountability, appropriate identification and supervision of significant risks, effective communication with shareholders and that the Board as a whole acts efficiently in delivering the agreed strategies. The Chief Executive is responsible for operational management of the Group, leading the development and implementation of strategy, setting and monitoring of budgets and other financial objectives, organisational structure and setting and delivery of objectives of direct reports, all for consideration by the Board. Consistent with their role as part of a unitary board, the Nonexecutive Directors constructively challenge and help develop Company proposals on strategy. They also test the integrity of financial information, ensure financial controls are appropriate and robust, determine appropriate levels of remuneration for Executive Directors and have a pivotal role in succession planning. Biographical details of the Board as at the date of this report can be found on pages 34 and 35. The Chairman does not have any other significant commitments in addition to those detailed in his biography. CONFLICTS OF INTEREST The Company s Articles of Association contain provisions permitting Directors to take up any position that conflicts, or may possibly conflict, with the interests of the Company provided those Directors have sought authorisation from the Board before doing so. All existing external appointments for each Director have been authorised by the Board and a register of interests is kept and reviewed on a regular basis. All Directors have been made aware of the need to consult the Company Secretary about any possible conflicts which may arise, so that prior consideration can be given by the Board to whether or not such conflict will be authorised. BOARD PROCEEDINGS The Board schedules eight or nine meetings each year, and also meets at other times as appropriate. During there were nine scheduled meetings and two ad hoc meetings (some of which were conducted by telephone). The table opposite shows the attendance of each Director at meetings of the Board and its standing Committees during the year. Details of membership of Committees are set out on pages 34 and Communisis plc Annual Report and Financial Statements

39 The Company has adopted a schedule of matters reserved for Board approval which is reviewed annually and includes: strategy; budget approval and monitoring of performance; acquisitions and disposals; approval of the Annual Report, interim, preliminary and other market updates on the Company s performance; approval of significant contracts; and As a result of consideration of the Directors input throughout the year and the Board evaluation process referred to below, the Board is satisfied that all the Directors continue to demonstrate the level of skills and commitment to be fully effective in their respective roles as members of the Board. NON-EXECUTIVE DIRECTOR INDEPENDENCE Having considered the criteria for independence within the Code, the Board is satisfied that David Gilbertson, Jane Griffiths, Peter Harris and Helen Keays remain independent. Corporate Governance approval of Group policies. The Company ensures that the Board is supplied with appropriate and timely information to enable it to discharge its duties. Directors may seek independent professional advice if necessary, at the expense of the Company. All Directors have access to the services of the Company Secretary. During the year under review the Chairman held meetings with the Non-executive Directors in the absence of the Executive Directors to discuss a range of issues including strategy, financial performance, progress towards targets, management performance and management succession. RE-ELECTION In accordance with the Code recommendation, all members of the Board will be submitting themselves for re-election at this year s AGM to be held on 10 May 2018, with the exception of Steve Rawlins, who will be standing for election, and Helen Keays who will be leaving the business on 6 June 2018 and therefore will not be offering herself for re-election at this year s AGM. INDUCTION AND DEVELOPMENT A formal and comprehensive induction process is in place for new Directors, which includes an information pack and personalised induction programme. This programme is tailored to the needs of each Director and agreed with him or her so that he or she can gain a better understanding of the Company. Steve Rawlins, further to his appointment on 4 December, is currently undergoing a formal and comprehensive induction including site tours and meetings with senior management at the Company s main operating sites. In order to ensure that Directors continue to further their understanding of the issues facing the Company, presentations are made to the Board on key topics throughout the year. This gives the Directors the opportunity to meet the management teams across the Group and improve their knowledge and understanding of the different areas of the Group. The Directors also receive regular briefings on upcoming developments and, if required, training is arranged to cover specific areas for which the Directors need to have a more in-depth knowledge. ATTENDANCE BY DIRECTORS AT MEETINGS OF THE BOARD AND COMMITTEES IN Administration Board Audit Remuneration Nomination and Finance (11 meetings) (3 meetings) (5 meetings) (3 meetings) (13 meetings) 1 David Gilbertson Andy Blundell Steve Rawlins Jane Griffiths Peter Harris Helen Keays Mark Stoner Peter Hickson Meetings of the Administration and Finance Committee are held on an ad hoc basis and require the attendance of two Directors, one of whom must be the Chairman, Chief Executive or Chief Financial Officer. 2 David Gilbertson was appointed a Non-executive Director on 1 March and Chairman with effect from 11 May. 3 Steve Rawlins was appointed an Executive Director and Chief Financial Officer on 4 December. 4 Mark Stoner stepped down as an Executive Director and Finance Director on 4 December. 5 Peter Hickson stepped down as Chairman of the Board on 11 May. Communisis plc Annual Report and Financial Statements 37

40 Corporate Governance CORPORATE GOVERNANCE REPORT CONTINUED BOARD EVALUATION A Board performance evaluation is conducted annually with the most recent being December. The evaluation process was based on a questionnaire devised for the purpose and circulated to the Directors. The performance of the Board as a whole and of each of its principal Committees was considered and included issues such as: the assessment and monitoring of the Group s strategy and risks; the mix of knowledge and skills on the Board; processes and procedures; oversight; ethics and compliance. The results were collated by the Company Secretary and reviewed by the Chairman, who reported significant themes to the Board for further consideration and discussion. The objectives for 2018 are: explore ways for the Non-executive Directors to gain a more detailed understanding of the challenges faced by different areas of the business in order to facilitate insightful contributions to strategy discussions; increase the proportion of Board time spent on strategic issues; and to undertake a full review of Board members skills and experience, to ensure that the appropriate skills and experience are in place to execute the strategy. The evaluation process for 2018 is planned for the fourth quarter of the year. BOARD COMMITTEES The Board has four Committees: Audit, Remuneration, Nomination and Administration and Finance, all of which have terms of reference which are reviewed annually and deal specifically with their authorities and duties. The terms of reference may be viewed on the Company s website. Only the Committee Chairman and Committee members are entitled to be present at the Audit, Remuneration and Nomination Committee meetings but others may attend by invitation. AUDIT COMMITTEE During the year, the Audit Committee comprised: Peter Harris (Chairman); David Gilbertson (from 1 March ); Jane Griffiths; and Helen Keays. Peter Hickson stepped down from the Board and the Audit Committee on 11 May. Peter Harris is assessed as having the required recent and relevant financial expertise required by the Committee. All appointments to the Committee are made by the Board, which considers the required balance of skills and expertise required for the Committee. The Committee meets as required but not less than three times a year. Three meetings were held during. It also meets in the absence of management for discussions with the external auditor and in the absence of the external auditor when undertaking its annual appraisal of the performance of the auditor. The Committee s primary function is to oversee and manage the appointment of and relationship with the Group s external auditor and to monitor and review the activities of the internal audit function to ensure appropriately robust and effective financial controls are in place and are adhered to. The Committee is provided with sufficient resources to undertake its duties and has access to the Company Secretary, who acts as secretary to the Committee, and all other employees. It may also take independent legal or professional advice at the expense of the Group when it believes it is necessary. The Audit Committee Report is set out on pages 42 and 43. NOMINATION COMMITTEE Details of the Nomination Committee are set out in the Nomination Committee Report on pages 40 and 41. REMUNERATION COMMITTEE Details of the Remuneration Committee are set out in the Directors Remuneration Report on pages 44 to 59. ADMINISTRATION AND FINANCE COMMITTEE The Committee comprises any two Directors, one of whom must be the Chairman, the Chief Executive or the Chief Financial Officer. It may appoint its own Chairman and it meets when necessary. It is empowered by the Board to: administer the Company s share schemes in accordance with the Board s policy (and any specific decisions of the Remuneration Committee that concern participation by Directors and/or senior employees); borrow money (by entering into new or replacement facilities) needed by the business, enter into finance leases and operate existing banking facilities (within the limit set by the Group s borrowing facilities immediately before taking action and subject to a transaction limit of 10m); and enter into guarantees or indemnities where they are a necessary incidental of the exercise of the powers above. 38 Communisis plc Annual Report and Financial Statements

41 INTERNAL CONTROL AND RISK MANAGEMENT The Board is responsible for maintaining a sound system of internal control in the Group and reviewing the effectiveness of financial, operational and compliance controls. This system is designed to provide assurance to the Group s objectives of reliable financial reporting, operational effectiveness and efficiency, compliance with laws, regulations and policies and the safeguarding of assets. The system aims to manage, rather than eliminate, the risk of failure to achieve business objectives. By its nature, it provides reasonable, but not absolute, assurance against material misstatement or loss. The Group has an independent internal audit function which has a direct line of communication to the Audit Committee Chairman. The principal role in fulfilling the internal audit function is to review the adequacy and effectiveness of the controls operating within the business by undertaking an agreed schedule of independent audits each year. The nature and scope of this annual audit programme is reviewed in advance by the Audit Committee each year and may be updated from time to time according to changing business circumstances and requirements. The findings of these audits are reported in accordance with the internal audit terms of reference and any necessary corrective actions are agreed and monitored. Summaries of these reports are presented to, and discussed with, the Audit Committee along with details of progress against action plans as appropriate. The Board has overall accountability for ensuring that risks are effectively managed across the Group. In addition, the internal audit function within the Group also has responsibilities for the risk management programme. A summary of this process is provided as part of the Viability Statement on page 18. Following the Company s preliminary and interim results announcements, presentations are made to analysts and major shareholders to update them on the progress the Company has made towards its strategic objectives and invite them to ask questions. Full details on results presentations, RNS releases and trading updates are available on the Company s website. In Andy Blundell utilised internet video channels via the Proactive Investor website to extend links to investors. The Chairman and Senior Independent Director are also available to speak with major shareholders and brief the Board to ensure that they are aware of the views of shareholders. Additionally the retail market has been kept in focus with direct communication and through intermediaries (private client brokers). Information in relation to those who have a significant direct or indirect holding in the Company are set out in the Directors Report on page 62. GENDER DIVERSITY Details of the proportions of male and female employees on the Board, in senior management positions and in the organisation as a whole, are provided in the Corporate Social Responsibility Report on page 27. STRUCTURE OF COMPANY S CAPITAL Details of the structure of the Company s capital are set out in the Directors Report on pages 60 to 63. Approved by the Board on 8 March 2018 and signed on its behalf by: Corporate Governance RELATIONS WITH SHAREHOLDERS An important role of the Board is to represent and promote the interests of its shareholders as well as being accountable to them for the performance and activities of the Company. The Board believes it is very important to engage with its shareholders and its main channel of communication to institutional investors is through the Chief Executive and Chief Financial Officer via investor roadshows, broker organised conferences, face-toface meetings and the AGM. The Company is a member of the Quoted Companies Alliance (QCA), which enhances access to leading small and mid-cap investors and helps the Company better understand its key criteria in making investment decisions. Sarah Caddy Company Secretary 8 March 2018 Communisis plc Annual Report and Financial Statements 39

42 Corporate Governance NOMINATION COMMITTEE REPORT NOMINATION COMMITTEE ANNUAL STATEMENT BY THE CHAIRMAN OF THE NOMINATION COMMITTEE The Nomination Committee evaluates and keeps under review the composition of the Board and its Committees to maintain the appropriate balance of skills, knowledge, experience and independence to ensure their continued effectiveness. Appropriate succession plans for the Non-executive Directors, Executive Directors and senior management are also kept under review. The Committee has continued to perform its duties in respect of its terms of reference, a copy of which is available on the Company s website. The Committee meets as required, but has at least two scheduled meetings throughout the year. Three meetings were held throughout and attendance records of the meetings held during the year can be found on page 37. COMPOSITION The composition of the Nomination Committee during the year was: David Gilbertson (Chairman) (Committee member from 1 March, Chairman from 11 May ); Jane Griffiths; Peter Harris; and Helen Keays. Peter Hickson stepped down from the Board and Chairman of the Nomination Committee on 11 May. Committee appointments are made by the Board. The Committee is provided with sufficient resources to undertake its duties and has access to the Company Secretary, who acts as secretary to the Committee, and all other employees. It may also take independent legal or professional advice at the expense of the Group when it believes it is necessary. ROLES AND RESPONSIBILITIES The main roles and responsibilities of the Committee are to: review the composition of the Board and make recommendations to the Board of any changes needed; consider, at the request of the Board or the Chairman, the making of any appointment or re-appointment, to the Board; evaluate the skills, knowledge and experience of the Board and, taking these into account, prepare a description of the role and capabilities required for a particular appointment; and identify and nominate, for Board approval, candidates to fill any Board vacancies. 40 Communisis plc Annual Report and Financial Statements

43 KEY ACTIONS TAKEN DURING As part of its role to review the composition of the Board, during the Nomination Committee recommended the appointment of a new Non-executive Director who would also replace Peter Hickson as Chairman of the Board and Chairman of the Nomination Committee at the close of the AGM. The Nomination Committee evaluated the balance of skills, experience, independence and knowledge of the Board before preparing a detailed candidate specification, which defined the criteria for the new appointee, in particular, looking for a candidate with the relevant skills to take on the roles of Chairman of the Board and Chairman of the Nomination Committee. The specification was agreed by the Nomination Committee. Peter Hickson stepped down from the Board as Non-executive Chairman with effect from 11 May. I was appointed as a Non-executive Director on 1 March and as Non-executive Chairman with effect from 11 May and will offer myself for re-election at the May 2018 AGM. In accordance with the requirements of the specification, an independent external search agency (Warren Partners) was engaged to assist with the search for suitable candidates. Warren Partners has no other connection with the Company. A short-list of potential candidates was produced and these were interviewed by the Senior Independent Director, Chairman of the Nomination Committee and Group Human Resources Director. The final candidates were then interviewed by the other Nonexecutive Directors. Following those interviews, the final candidate was selected and then met by the Executive Directors. I was selected as Non-executive Director for my extensive knowledge and experience in relevant industry sectors and suitability to take over as Chairman of the Board and Chairman of the Nomination Committee when Peter Hickson stepped down at the AGM on 11 May. Peter Hickson was not involved in the final decision on the appointment of his upcoming successor. The process described above was also followed in respect of the appointment of Steve Rawlins as an Executive Director and Chief Financial Officer with effect from 4 December. In connection with Steve Rawlins appointment, the Committee used the services of Spencer Stuart (which has no other connection with the Company). Mark Stoner stepped down as an Executive Director and Finance Director with effect from 4 December. It has been announced today that Helen Keays will be leaving the business on 6 June The Board would like to thank Helen for her commitment and contribution over the years and to wish her every success for the future. The Committee will conduct an external search for a new Non-executive Director. Following the appointment of a new Director, the Chairman, in conjunction with the Company Secretary and the Group Human Resources Director, has responsibility for ensuring that a full, formal and tailored induction to the Company is provided. Such induction includes one-to-one meetings with key management, an overview of the Group s structure, strategy and operations, and site visits. The Committee also carefully reviews and makes recommendations concerning the re-appointment of any Non-executive Director at the conclusion of their specified term of office. The Committee considered the positions of Peter Harris, Jane Griffiths, and myself. It was the Committee s view that it would be in the best interests of the Company s shareholders, subject to careful and rigorous review, for each of the Non executive Directors to offer themselves for re-election at the 2018 AGM. In the Committee s view, each of the Directors bring considerable management experience and an independent perspective to the Board s discussions and are considered to be independent of management and free from relationship or circumstance that could affect, or appear to affect, the exercise of their independent judgement, therefore providing continued valuable support. Helen Keays will be leaving the business on 6 June 2018 and therefore will not be offering herself for re-election at this year s AGM. DIVERSITY The Board recognises the recommendations and benefits to the Group of diversity in the workforce and in the composition of the Board itself. Whilst the Company will always make appointments based on the best candidate for the role, it does take into consideration the recommendations within the Davies Report and seeks to follow the Code. In female Directors accounted for 33.3% of the Board composition. More details on diversity and gender across the Group can be found on page 27. The Committee will also consider the Parker Review findings on ethnic and cultural diversity when making future appointments to the Board. David Gilbertson Chairman of the Nomination Committee 8 March 2018 Corporate Governance Communisis plc Annual Report and Financial Statements 41

44 Corporate Governance AUDIT COMMITTEE REPORT AUDIT COMMITTEE ANNUAL STATEMENT BY THE CHAIRMAN OF THE AUDIT COMMITTEE The Committee has continued to perform its duties in respect of its terms of reference, a copy of which is available on the Company s website. Three meetings were held during the year, two of which were scheduled to coincide with the Board s review and approval of the Group s interim statement and of its preliminary results announcement based on the Annual Report and Financial Statements. Attendance records of the meetings held during the year can be found on page 37. ROLE AND RESPONSIBILITIES Broadly, the key activities and responsibilities of the Committee have been to review and challenge, where necessary: the effectiveness of the Group s internal controls, audit function and risk management programme; the financial reporting process, including the adoption of critical accounting policies and practices; the independence and effectiveness of the external auditor; the Group s procedures and arrangements for handling any allegations from whistleblowers; and to report to the Board any action required if a material cause for concern, or scope for improvement, is discovered. COMPOSITION The Committee is composed entirely of Non-executive Directors. The composition of the Audit Committee during the year was: Peter Harris (Chairman); Jane Griffiths; Helen Keays; and David Gilbertson (Committee member from 1 March ). Peter Hickson stepped down from the Board as a Committee member of the Audit Committee on 11 May. The relevant experience of each member is described on pages 34 and 35. INTERNAL AUDIT AND CONTROL The Group s system of operational and internal financial control is subject to regular internal and external audits including those conducted on behalf of clients under contractual arrangements. There were 419 separate audits completed during. This activity covered areas of compliance including information security, quality, health and safety, environmental matters and business continuity arrangements in addition to financial reporting and internal controls. The internal and external audit plans are set and approved in the context of a developing assurance reporting process and are flexed to deal with any changes with respect to the risk profile of the Group. The Group s internal audit function reports independently and directly to the Audit Committee Chairman and maintains regular communication outside of the scheduled Committee meetings. 42 Communisis plc Annual Report and Financial Statements

45 RISK MANAGEMENT The Group has an established risk management programme, details of which are provided in the Strategic Report and Corporate Governance sections. The risk focus has been on the changes in data protection legislation, data control assurance and cyber security. The Committee also kept a keen eye upon health, safety and environment which involved reviewing internal controls and challenging how risks are appropriately managed. The impact of the exit from the European Union was also considered in the context of the Group s strategic risks. SIGNIFICANT MATTERS RELATED TO THE FINANCIAL STATEMENTS The Committee assesses whether suitable accounting policies have been adopted, and appropriate estimates and judgements have been made, based upon a review of accounting papers which have been prepared by management providing details of significant financial reporting issues, together with reports from the external auditor prepared in contemplation of the interim and full-year results. Any issues arising are discussed with the external auditor together with any other matters which the auditor wishes to bring to the Committee s attention. In, such issues included revenue recognition, goodwill impairment and internal controls. Of the matters considered during the year, the most significant were revenue recognition and goodwill valuation: the Committee continued to monitor the established Group policies for revenue recognition to ensure that they remained appropriate, robust and were consistently applied; and recoverability of goodwill is reviewed on an ongoing basis and an assessment of whether any impairment of goodwill is required is performed at least annually. The principal judgements relate to the assumptions underlying the calculation of the value in use of the segmental businesses, primarily whether the long-term plans are achievable, the reasonableness of the overall macro-economic factors that underlie the valuation process and the suitability of the discount rate used to determine the present value of future cash flows. The Committee assessed this issue by considering management prepared papers and by reviewing reports from the external auditor, both of which describe the supporting methodology, the rationale and support for the key assumptions in the context of market comparators and the associated sensitivities. The Committee s conclusion was that a goodwill impairment was not required. The key areas of focus during 2018 include the General Data Protection Regulation which is effective from May 2018, and the implementation of new International Financial Reporting Standards (IFRS) in respect of lease accounting (IFRS 16) and revenue from contracts with customers (IFRS 15). As part of the Financial Reporting Council s (FRC) thematic review into pension disclosures, the Company was notified that the pension disclosures in its Annual Report and Accounts would be reviewed. The FRC noted one matter in relation to pension disclosures where they believed that users of the accounts would benefit from improvements to existing disclosures. As a result, we have taken the opportunity to improve our disclosures in relation to our pension funding investment strategy in our Annual Report and Financial Statements. The FRC s review covered only the specific disclosures relating to the thematic review of pensions disclosures, and was not intended to provide any assurance that the report and accounts were correct in all material respects. EXTERNAL AUDIT The Committee has responsibility for making a recommendation on the appointment, re-appointment and removal of the external auditor. The external auditor s appointment is reviewed periodically and the lead audit partner is rotated at least once every five years. Ernst & Young LLP has been the Group s external auditor since September 2002, when the last audit tender took place. A new audit partner was rotated onto the audit during the year as the previous partner had completed five annual audits. The Committee is aware of the EU mandated requirement for auditor rotation and will monitor any legal or regulatory developments. The Committee reviews reports from Ernst & Young LLP as part of the annual audit process. These cover the scope, approach and results of the external audit and include the procedures adopted for safeguarding the firm s independence and objectivity. The quality and content of these reports, together with the performance and behaviour of the audit teams during the exercise of their duties, inform the Committee s assessment of audit effectiveness. The external auditor meets privately with the Committee after each meeting without any member of the executive management team being present. The Committee has an established policy for determining the non-audit services that the external auditor can provide and the procedures required for pre-approval of any such engagement. This allows the Committee to satisfy itself that auditor objectivity and independence are safeguarded. The split between audit and non-audit fees for the year ended 31 December and the nature of the non-audit services provided appear in Note 5.5 to the Consolidated Financial Statements. Non-audit fees totalled 20,000 in respect of other assurance and advisory services provided during. Given the type of non-audit services provided and at 9% of the external audit fee of 235,000, they are not considered by the Committee to be of a nature or at a level that compromises the objectivity and independence of the external auditor. Upon the recommendation of the Committee, Ernst & Young LLP will be proposed for re-appointment as auditor by shareholders at the AGM on 10 May Peter Harris Chairman of the Audit Committee 8 March 2018 Communisis plc Annual Report and Financial Statements 43 Corporate Governance

46 Corporate Governance DIRECTORS REMUNERATION REPORT REMUNERATION COMMITTEE ANNUAL STATEMENT FROM THE CHAIR OF THE REMUNERATION COMMITTEE DEAR SHAREHOLDER I am pleased to present the Directors Remuneration Report for the year ended 31 December on behalf of the Board. This Remuneration Report is split into two sections: this letter introducing the Directors Remuneration Report; and the Annual Report on Remuneration. Our Directors Remuneration Policy, which was approved by our shareholders at the AGM, is set out for reference in the Appendix to this report. REMUNERATION IN was a year of continued progress for Communisis despite challenging trading conditions in a number of our markets. As a consequence of this performance and the related growth in profits, the Committee was pleased to approve the payment of annual bonuses for, albeit at broadly threshold levels for our Executive Directors (Andy Blundell only) for (30% of base salary). However, we do expect to approve the vesting of part of the 2015 Long Term Incentive Plan (LTIP) award. The EPS condition for this award (80% weighting) has been met. A total of % of this part vested; the share price condition (20% weighting) will be measured after the performance period for this part ends on 15 April The Committee also undertook the following actions in : base salaries were reviewed for Executive Directors as part of the normal, annual review of Company-wide salaries. In line with the levels of increases made to all staff, the Chief Executive s salary was increased by 1% from 1 July ; there was no pay increase awarded to the Finance Director in the year; further LTIP awards were made to Executive Directors on 10 March ; the treatment of remuneration items for the Finance Director who stepped down from our Board on 4 December (Mark Stoner) were determined (as more fully described on page 49 of this report); and the remuneration for Steve Rawlins who joined us on 4 December as an Executive Director and Chief Financial Officer was approved. Details of Steve s remuneration arrangements for 2018 are set out in this report. REMUNERATION POLICY IN 2018 We were very pleased to receive over 94% support when we renewed our Directors Remuneration Policy at our AGM. For 2018, we have had to consider as a Committee whether our policy remains appropriate for Communisis and capable of supporting our revised strategic vision as more fully explained in the Chairman s Statement at the beginning of this Annual Report. Having undertaken a review, we concluded that our current policy as approved at the AGM remains appropriate. We are thus not seeking to amend our policy at the 2018 AGM. We have, however, decided to make certain changes in the way in which we will implement our policy in These modifications are permitted within our current policy and so we do not propose to seek a further policy approval at the 2018 AGM. 44 Communisis plc Annual Report and Financial Statements

47 In summary, the changes which we are making are as follows: whilst the same performance measures from (Adjusted EBIT (50%), free cash flow (25%) and personal objectives (25%)) will apply to the 2018 annual bonus, in 2018 the percentage of maximum bonus payable for on-target performance will be increased from 50% of maximum to 65% of maximum; and within our LTIP, we are again seeking to make annual awards subject to an equally weighted (50:50) mix of three-year EPS growth and three-year absolute TSR growth targets. For both measures the growth rates required for vesting are between 5% CAGR (25% vesting of that part) and 10% CAGR (100% vesting of that part). For s awards the equivalent ranges were a 5% to 15% CAGR for three-year EPS and a 7.5% to 17.5% CAGR for TSR with 15% of the award vesting at the threshold level for both measures. The changes which we have made were not matters undertaken lightly by the Committee, but we are under an obligation to act in the interests of our shareholders and in this regard we considered it important that our incentive plans align with our revised strategy and support its delivery. The performance targets which we have set for the LTIP are aligned to the growth aspirations set out in the Chairman s Statement. Accordingly, the target ranges are, we believe, appropriately stretching in light of our revised strategy and, if achieved, will deliver strong performance for our shareholders in the prevailing business climate in our industry. Additionally we would ask our shareholders to note that: for absolute TSR we are starting the measurement point for the 2018 to 2020 three-year cycle from a significantly higher base point than in (Communisis TSR in financial year increased by 55.3%); we strongly believe in our incentive plans being self-funding, and hence the heavy emphasis on profits-based measures within our plans (adjusted EBIT, EPS) against which the costs of all bonuses and share plans are charged; and we set appropriately stretching targets for our annual bonus: our five-year average bonus outcome for the Chief Executive is 34.4% of maximum bonus levels; and to ensure affordability, even if our free cash flow and personal objectives measures for annual bonus are attained at levels higher than the equivalent performance on our adjusted EBIT measure, the amount of bonus payable will be capped by the level of attainment on the adjusted EBIT metric. SHAREHOLDER APPROVAL At the AGM on 10 May 2018, shareholders will be invited to approve the Directors Remuneration Report as set out on pages 44 to 52. We are not seeking further approval from shareholders for our policy (as set out for information in the Appendix to the Directors Remuneration Report) at the 2018 AGM. Our shareholders support for the resolution on the Directors Remuneration Report which will be proposed at the 2018 AGM is important for us as a Board and I would recommend all shareholders to vote for this resolution. Yours sincerely Helen Keays Chair of the Remuneration Committee 8 March 2018 INTRODUCTION This report is presented in two parts. The first part constitutes the Annual Report on Remuneration. This outlines how the Committee implemented the Directors Remuneration Policy for the financial year ended 31 December. This report, together with the Annual Statement from the Chair of the Remuneration Committee, will be put to shareholders for approval at the AGM to be held on 10 May Shareholder approval is on an advisory basis only. The second part is an Appendix containing the Directors Remuneration Policy, as approved by the Company s shareholders at the Company s AGM on 11 May, which is reproduced here for information. For completeness, the scenario charts in the Directors Remuneration Policy have been updated to reflect Steve Rawlins remuneration arrangements for The Company has complied with the principles and provisions relating to Directors remuneration in the UK Corporate Governance Code, and these reports have been prepared in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the Regulations). Where information disclosed has been subject to audit by the Company s auditor, Ernst & Young LLP, this is highlighted. Corporate Governance Communisis plc Annual Report and Financial Statements 45

48 Corporate Governance DIRECTORS REMUNERATION REPORT CONTINUED ANNUAL REPORT ON REMUNERATION PROPOSED IMPLEMENTATION OF REMUNERATION POLICY IN 2018 (UNAUDITED INFORMATION) Element of Remuneration Policy Detail of implementation of Policy for 2018 Base salary Andy Blundell 364,212 Steve Rawlins 250,000 A further review will occur on 1 July Pension No changes to the overall value of the pension arrangements for Executive Directors are anticipated for From 1 July 2013 the pension entitlement for each Executive Director has been set at 12% of base salary. Benefits There are no proposed changes to the benefits offered to Executive Directors in The benefits to be received by Executive Directors in 2018 will include life assurance, private medical cover, car or car allowance provision and fuel card. Annual performance bonus The maximum annual performance bonus for 2018 will remain at 100% of base salary. The proposed performance measures (and their respective weightings) for the 2018 annual bonus are as follows: Adjusted EBIT 50% Free cash flow 25% Personal objectives 25% The actual performance targets for 2018 are not disclosed prospectively as these are considered to be commercially sensitive by the Board. The Committee s intention is for the performance targets for each performance measure to be disclosed retrospectively in next year s Directors Remuneration Report, which is consistent with the fact the performance targets for the annual performance bonus are disclosed retrospectively in this report on page 48. As described in the Annual Statement from the Chair of the Remuneration Committee, reflecting the level of stretch within the targets set for the 2018 annual bonus, the percentage of maximum bonus payable for on-target performance in 2018 will be 65% of base salary. Long-term incentives There will be an LTIP grant made in 2018 to the Executive Directors over shares worth 150% of salary. The performance conditions for this award will be as follows: 50% of the award will be subject to a performance condition requiring absolute growth in adjusted diluted EPS; 50% of the award will be subject to a performance condition requiring absolute growth in TSR; for both metrics, the vesting range is detailed below; both metrics will be measured over three financial years to 31 December 2020; EPS will be measured on the basis of adjusted diluted EPS; and TSR growth will be measured using a three-month averaging period to determine the starting and ending TSR levels. Threshold Upper CAGR range 5% 6% 7.5% 10% Vesting % 25% 43% 70% 100% All-employee share plans Chairman and Non- Executive Directors fees Continued opportunity to participate in the tax-advantaged Sharesave Scheme on the same basis as all other UK employees. David Gilbertson s fee as Chairman is currently 135,000 per annum. The Non-executive Director base fees for 2018 are currently 50,000. Peter Harris and Helen Keays each receive an additional 5,000 fee as Chair of the Audit Committee and Remuneration Committee respectively. Peter Harris also receives 5,000 for his role as the Senior Independent Director. 46 Communisis plc Annual Report and Financial Statements

49 ROLE AND MEMBERSHIP OF THE REMUNERATION COMMITTEE The Committee s principal responsibilities are: recommending to the Board the remuneration strategy and framework for the Executive Directors and senior managers; determining, within that framework, the individual remuneration arrangements for the Executive Directors and senior managers; and overseeing any major changes in employee benefit structures throughout the Group and reviewing remuneration trends across the Group. The Committee has formal terms of reference which can be viewed on the Company s website. During, the Committee comprised: Helen Keays (Chair); Peter Hickson (stepped down 11 May ); Corporate Governance David Gilbertson (appointed Non-executive Director 1 March ; appointed Company Chairman 11 May ); Jane Griffiths; and Peter Harris. The Committee met on five occasions and attendances are given in the table on page 37. The Chief Executive is invited to attend meetings of the Committee, except when his own remuneration is being discussed. ADVISERS TO THE COMMITTEE FIT Remuneration Consultants LLP (FIT), signatories to the Remuneration Consultants Group s Code of Conduct, were appointed by the Committee following consideration of FIT s experience in this sector. FIT provides advice to the Committee on all matters relating to remuneration, including best practice. FIT provided no other services to the Group and accordingly the Committee was satisfied that the advice provided by FIT was objective and independent. FIT s fees in respect of were 34, (excluding VAT). FIT s fees were charged on the basis of the firm s standard terms of business for advice provided. At the Committee s request, administrative advice and support were provided by the Company Secretary, the Company s Human Resources Director and the Company s Tax Manager. VOTING At the Company s AGM held on 11 May, shareholders approved the Directors Remuneration Report for the year ended 31 December and approved the Directors Remuneration Policy. Below is the result in respect of these resolutions, which required a simple majority of the votes to be cast in favour in order for the resolution to be passed: Votes for % Votes against % Remuneration Report 108,911, % 42, % Remuneration Policy 102,536, % 6,406, % 93,149 votes and 104,492 votes were withheld from the Remuneration Report and Remuneration Policy resolutions respectively. IMPLEMENTATION REPORT FOR SINGLE TOTAL FIGURE OF REMUNERATION IN FOR THE EXECUTIVE DIRECTORS (AUDITED INFORMATION) Salary Benefits 1 Annual performance bonus 2 LTIP and Sharesave 3,4 Pension 5 Total Andy Blundell Mark Stoner Steve Rawlins Benefits comprise life assurance, private medical cover, car or car allowance provision and fuel card. 2 Details of the performance measures and targets applicable to the annual bonus for are set out below. 3 LTIP vesting in is summarised below. The value shown in the table above for LTIPs in represents vesting of the EPS element of the 2015 LTIP award (which is measured to 31 December ). The share price element of the 2015 award is not recognised in the table above but will be recognised in the 2018 report to the extent that this element vests on the measurement date of 14 April The table assumes that % of the total award vests. This is multiplied by the three-month average share price to 31 December ( p per share). Communisis plc Annual Report and Financial Statements 47

50 Corporate Governance DIRECTORS REMUNERATION REPORT CONTINUED IMPLEMENTATION REPORT FOR CONTINUED SINGLE TOTAL FIGURE OF REMUNERATION IN FOR THE EXECUTIVE DIRECTORS (AUDITED INFORMATION) CONTINUED 4 The figures in the LTIP column shown above for (representing the vesting of part of the 2014 LTIP awards) have been restated from the report. The values in the above table now reflect the value of the Company s shares on the date(s) of vesting (49p per share on 11 June ; 46.5p per share on 2 August for half of Mark Stoner s vesting shares) multiplied by the number of shares vesting, whereas the equivalent figure within the published single figure table was an estimate which reflected the average share price between 1 October and 31 December ( p per share). 5 Pension contributions are in line with the pension entitlements summary on page Mark Stoner ceased to be a Director on 4 December. More details can be found on page Steve Rawlins was appointed a Director on 4 December. 8 The aggregate remuneration of all Directors under salary, fees, benefits, cash contributions in lieu of pensions and annual bonus was 1,114,000 ( 1,447,000) ( figures included remuneration details for Nigel Howes and Dave Rushton, who are no longer remunerated). 9 Dave Rushton stepped down from the Board on 31 January and ceased to be an employee on 30 June. He was paid salary, benefits and pension entitlement until 30 June only in accordance with his contractual notice period. As noted above, he was paid an additional 8,622 in with regard to settlement of claims in relation to statutory rights. He did not receive an annual bonus for. Dave Rushton exercised his outstanding LTIP options on 13 September (14,453 shares at 39.08p). 10 Nigel Howes stepped down from the Board on 31 January and ceased to be an employee on 31 January. He was paid salary, benefits and supplement in lieu of pension until 31 January only in accordance with his contractual notice period. He was paid an additional 5,700 in January with regard to settlement of claims in relation to statutory rights. He did not receive an annual bonus for. Nigel Howes exercised his outstanding LTIP options on 19 March (222,049 shares at 54.25p). ANNUAL PERFORMANCE BONUS As Mark Stoner stood down from the Board on 4 December, it was determined that he would not receive an annual performance bonus for. The performance measures for the annual performance bonus were as follows: adjusted EBIT (50% weighting of total bonus); free cash flow (25% weighting of total bonus); and personal objectives (25% weighting of total bonus). Level: Threshold Maximum Total value of award available: 30% of weighting 100% of weighting Weighting: Metric: 50% of salary Adjusted EBIT ( m) % of salary Free cash flow ( m) % of salary Personal objectives Against these measures, 21.2m was achieved for adjusted EBIT and 12.5m was achieved for free cash flow. On the basis of the Committee s judgement and considering performance against the performance measures described above, the annual bonus for Andy Blundell was 109,000 ( 89,000), an outcome of 30% of salary. Andy Blundell accepted the bonus in line with other members of the Executive Board. VESTING OF LTIP AWARDS IN 2018 The 2015 LTIP award was based as to 20% of the award on a share price growth performance condition and as to 80% of the award on an EPS performance condition. See page 51 for a summary of the performance conditions. The share price growth performance condition requires the attainment of share price growth thresholds (65.513p to 90p) on the third anniversary of the award date (being 14 April 2018). Accordingly, the single figure table includes an estimated level of vesting for these awards based on the three-month average share price to 31 December ( p; estimated vesting nil). The EPS performance condition of CAGR 7.5% to 15% has been achieved as to % vesting. In the single total figure table % of the total 2015 LTIP award is represented as vesting. PENSION ENTITLEMENTS SUMMARY Andy Blundell remains a member of the defined contribution section of the Communisis Pension Plan. He receives a contribution of 10,000 per annum to the Communisis Pension Plan. His overall pension entitlement is 12% of base salary. The balance above 10,000 is paid as a salary supplement. No Director participated in a defined benefit scheme in the year. Steve Rawlins will receive all pension entitlements as a cash supplement. 48 Communisis plc Annual Report and Financial Statements

51 PAYMENTS TO DIRECTORS LEAVING THE GROUP As was announced on 4 December, Mark Stoner stepped down from his role as Finance Director on that day. In accordance with the terms of his service agreement and the Directors Remuneration Policy, Mark will receive the following treatments: payment of his base salary and benefits for 12 months in line with his contractual notice period; no annual bonus for ; the 2015 and LTIP awards made to Mark Stoner will be retained. These awards may vest at the originally specified vesting dates, subject to the performance conditions for the awards being achieved and subject to time pro-rating where applicable; and it was agreed after the year end that the LTIP award to Mark Stoner would lapse. COMPARATIVE TOTAL SHAREHOLDER RETURN The graph below shows the Company s total shareholder return performance compared with the FTSE All Share Index. The graph provides a basis for comparison with a relevant equity index, of which Communisis is a constituent, and the Committee believes that no other published index provides a better comparison. In accordance with the regulations the graph shows this performance over a nine-year period. Corporate Governance TOTAL SHAREHOLDER RETURN SINCE 31 DECEMBER 2008 TSR value of a 100 unit investment made on 31 December Dec Dec Dec Dec Dec Dec Dec 2014 Communisis plc 31 Dec Dec FTSE All-Share 31 Dec TABLE OF HISTORICAL DATA (CEO) The Regulations also require a table setting out the remuneration of the Chief Executive (CEO) over the same period as the above chart and this data is presented below. Single figure Annual variable element Long-term incentive of total award rates against vesting rates against Year CEO remuneration () maximum opportunity (%) maximum opportunity (%) Andy Blundell Andy Blundell Andy Blundell Andy Blundell Andy Blundell Andy Blundell Andy Blundell Andy Blundell Andy Blundell/Steve Vaughan Communisis plc Annual Report and Financial Statements 49

52 Corporate Governance DIRECTORS REMUNERATION REPORT CONTINUED IMPLEMENTATION REPORT FOR CONTINUED RELATIVE IMPORTANCE OF SPEND ON PAY Profit distributed by Overall expenditure Year way of dividend () on pay () 5,058 98,619 5,564 94,381 % change 10.00% (4.30)% NOTES 1 Profit distributed by way of dividend has been taken as the dividend paid in respect of the relevant financial year. For this is the interim dividend paid ( 1,860,000) and the proposed final dividend of 3,704,000. No share buy-backs were made in either year. 2 Overall expenditure on pay has been taken as the total employee costs (wages and salaries, social security costs and pension costs) as set out in Note 5.3 Employee Benefits Expense in the Notes to the Consolidated Financial Statements. The reduction in the percentage of spend on pay primarily reflects the lower number of employees in the Group in. CEO S RELATIVE PAY In accordance with the regulations, we present in the table below the percentage change in the prescribed pay elements (salary, taxable benefits and annual bonus outcome) of the Chief Executive and the average percentage change for UK-based staff between financial year and financial year. YEAR-ON-YEAR PERCENTAGE CHANGE Salary (%) Taxable benefits (%) Annual bonus (%) CEO 1.00 (0.80) UK-based staff DIRECTORS INTERESTS (AUDITED INFORMATION) The interests (all being beneficial) of the Directors in the Company s securities are set out below: Director At 31 December 2 At 31 December Ordinary shares Shares subject to option Ordinary shares Shares subject to option David Gilbertson 193,000 Peter Hickson 2 1,360,778 1,360,778 Andy Blundell 1 405,200 2,733, ,843 1,977,778 Steve Rawlins Jane Griffiths Peter Harris Helen Keays Mark Stoner 2 179,152 1,754, ,910 1,230, ,000 of these shares are held by Andy Blundell s wife. 2 The holdings for Peter Hickson and Mark Stoner are shown as at the dates on which they stepped down from the Board, being 11 May and 4 December respectively. NOTES The Directors and their families had no interest in the shares of any other company within the Group. There have been no changes in the interests of those continuing Directors between the year end and 7 March Communisis plc Annual Report and Financial Statements

53 SHARE OPTIONS (AUDITED INFORMATION) The number of, and prices at which, options under the Long Term Incentive Plan 2007 and Sharesave Scheme have been granted to Directors are set out below. Except for Sharesave options, all options are subject to the performance conditions described below and on page 46. Options Options held at held at Earliest Latest 1 January Options Options Options 31 December Option exercise exercise granted lapsed exercised price (p) date date Long Term Incentive Plan Andy Blundell 300, ,171 85,829 Nil , ,000 Nil ,062,778 1,062,778 Nil ,055,533 1,055,533 Nil Mark Stoner 100,000 71,391 28,609 Nil ,000 71,391 28,609 Nil , ,000 Nil , ,009 Nil , ,786 Nil Sharesave Scheme Mark Stoner 27,540 27, Corporate Governance NOTES 1 The range of market price of shares in Communisis plc during the year ended 31 December was 39p to 66p. The closing price on 31 December was 65p. 2 None of the Directors paid for the award of options. 3 Options granted in the year represent awards with a face value of 150% of base salary ( 543,600) for Andy Blundell and 150% of base salary ( 372,750) for Mark Stoner. This has been calculated using the mid-market price of the preceding day before the date of grant, being 51.5p for the options granted on 10 March. 4 Threshold level of vesting for the LTIP awards granted in the year is 15% of the total number of awards granted. Sharesave options are not subject to performance conditions. 5 The performance conditions attached to the LTIP awards granted during the year are set out below. 6 The Directors exercised the options indicated in the table above on 7 September, when the market price of the Company s shares was 57p. Additionally, former Director Nigel Howes exercised 222,049 options at 54.25p. 7 The aggregate gains of Directors from share options exercised in was 81,537 ( 161,858). 8 The 723,786 LTIP shares granted to Mark Stoner in lapsed on 2 January SUMMARY OF PERFORMANCE CONDITIONS FOR UNVESTED LTIP AWARDS Year of award Performance condition Performance condition EPS growth (50% weighting) Measured over three financial years, beginning with year of award 5% CAGR to 15% CAGR (see below) Absolute TSR (50% weighting) Measured over three years from date of award 7.5% CAGR (15% of this part) to 17.5% CAGR (100% of this part); straight-line vesting between these thresholds EPS growth (100% weighting) N/A Measured over three financial years, beginning with year of award 5% CAGR to 15% CAGR (see below) 2015 EPS growth (80% weighting) Measured over three financial years, beginning with year of award 7.5% CAGR (25% of this part) to 15% (100% of this part) CAGR; straight-line vesting between these thresholds Absolute share price performance (20% weighting) Measured at three years from date of award p (25% of this part) to 90p (100% of this part) Underpin (applicable to all LTIP awards) No LTIP shares will vest unless the Committee is satisfied as to the Company s underlying financial performance over the three-year LTIP vesting period Communisis plc Annual Report and Financial Statements 51

54 Corporate Governance DIRECTORS REMUNERATION REPORT CONTINUED IMPLEMENTATION REPORT FOR CONTINUED SUMMARY OF PERFORMANCE CONDITIONS FOR UNVESTED LTIP AWARDS CONTINUED NOTES 1 EPS is adjusted basic earnings per share (i.e. earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles and the tax effect of these items). Vesting is based on EPS for the final year of the three-year performance period. 2 Both absolute TSR and share price are measured on the basis of three-month averaging periods. 3 The vesting schedule for EPS growth for the and LTIP awards is as follows: EPS growth (compound annual growth) % of award subject to EPS performance condition vesting Less than 5% p.a. Nil 5% p.a. 15% 6% p.a. 20% 7.5% p.a. 25% 10% p.a. 75% 15% p.a. or more 100% Between each defined threshold Straight-line vesting PROVISION OF SHARES FOR SHARE PLANS DILUTION The current estimated dilution from subsisting awards, including executive and all-employee share awards, and assuming, which is most unlikely, that all subsisting options vest in full, is approximately 4.36% of the shares in issue at the date of this report. The Company has an Employee Benefit Trust which as at 7 March 2018 holds 441,220 shares which may be used to satisfy options granted under the Executive Share Option Scheme and the LTIP and the above estimate of potential dilution is presented on the basis of assuming that the Employee Benefit Trust will satisfy certain outstanding awards. Awards are currently managed to confine commitments within an overall dilution limit for all-employee share plans of no more than 10% of share capital in any 10-year period and a limit of 5% of share capital in any 10-year period for the Company s discretionary share plans. Following approval of the LTIP by shareholders at the AGM, the 5% limit in respect of the Company s discretionary share plans will no longer apply to new LTIP awards. CHAIRMAN AND NON-EXECUTIVE DIRECTOR FEES Salary/fees Other benefits Total Total Chairman David Gilbertson N/A Non-executive Directors Jane Griffiths Peter Harris Helen Keays EXTERNAL DIRECTORSHIPS Andy Blundell was appointed a Non-executive Director of RM plc on 25 May. He received a fee of 21, in, which he retained. This report was reviewed and approved by the Board on 8 March 2018 and signed on its behalf by order of the Board. Sarah Caddy Company Secretary 8 March Communisis plc Annual Report and Financial Statements

55 APPENDIX TO DIRECTORS REMUNERATION REPORT DIRECTORS REMUNERATION POLICY REMUNERATION POLICY Remuneration for Executive Directors comprises the following elements: FIXED PAY VARIABLE PAY Base salary + Pension + Benefits + Annual performance bonus + Long-term incentives = TOTAL REMUNERATION Corporate Governance Element and purpose Policy Operation and opportunity Performance measures Base salary This is the core element of pay that reflects the individual s role and position within the Group and reflects capability and contribution. Pension To provide market-competitive levels of retirement benefits. Benefits To aid retention and remain competitive within the marketplace. Base salaries are reviewed periodically against companies of similar size and complexity, and any salary increases are applied in line with the outcome of the relevant review with effect from 1 July in a financial year. Base salaries are paid monthly in cash. Provide a competitive employer sponsored pension plan. Pension contributions are paid in relation to membership of the defined contribution section of the Communisis Pension Plan, as a salary supplement in lieu of pension contributions, or as a Company contribution to personal pension arrangements. Benefits comprise private medical cover, car or car allowance provision and fuel card. The Committee reserves the ability to introduce new benefits where it concludes that it is in the interests of Communisis to do so, having regard to the particular circumstances and to market practice, provided that the maximum aggregate value of all benefits in a year will not exceed the maximum amount stated in this table. Any salary increases in the policy period will be made following consideration of business performance and, as a cap, no increase will take an Executive Director s salary above the median salary for Chief Executives in the FTSE SmallCap plus 10%, determined using data available to the Committee at that time. Pension contributions are set at a maximum level of 12% of base salary per annum. In any year the values of benefits for Executive Directors may vary in line with the cost of providing insurance and other benefits without the Committee taking action. A limit on the maximum cash value of all benefits has been set at 40,000 per annum for each Executive Director. Actual levels of benefits will be disclosed each year in the single figure table. N/A N/A N/A Communisis plc Annual Report and Financial Statements 53

56 Corporate Governance DIRECTORS REMUNERATION REPORT CONTINUED APPENDIX TO DIRECTORS REMUNERATION REPORT DIRECTORS REMUNERATION POLICY CONTINUED REMUNERATION POLICY CONTINUED Element and purpose Policy Operation and opportunity Performance measures Annual performance bonus To motivate employees and incentivise delivery of annual performance targets. Long-term incentives The Company operates the Communisis Long Term Incentive Plan (LTIP) to motivate and incentivise delivery of sustained performance over the long term. Share ownership guidelines To encourage share ownership by the Executive Directors and ensure interests are aligned. Bonus levels and the appropriateness of measures are reviewed annually at the commencement of each financial year to ensure they continue to support our strategy. Once set, performance measures and targets will generally remain unchanged for the year, except to reflect events such as corporate acquisitions or other major transactions where the Committee considers it to be necessary, in its opinion, to make appropriate adjustments. Awards can be made on an annual basis with a vesting period of at least three years. The Company also has scope to operate a tax-advantaged Executive Share Option Scheme. Although there is no plan to make awards to Executive Directors under this plan at present, the Company reserves the right to do so subject to the 30,000 limit on HMRC approved options available under this plan. Any such awards would be taken into account in making any awards under the LTIP in the same year. Executive Directors are expected to retain 50% of all shares (net of tax) which vest under the LTIP (or any other discretionary long-term incentive arrangement introduced in the future) until such time as they hold a specified value of shares. Only beneficially owned shares and vested share awards (discounted for anticipated tax liabilities) may be counted for the purposes of the guidelines. Share awards do not count prior to vesting. The Remuneration Committee will review Executive Director shareholdings annually in the context of this policy. The Committee will not set a maximum annual bonus level in excess of 100% of base salary for the duration of this policy. Awards are paid in cash. No bonus is paid at the threshold level of performance, with amounts accruing from that point. The maximum value of LTIP awards which may be granted in any financial year is equivalent to 150% of base salary. The threshold level of vesting for LTIP awards will not exceed 25% of the total award. 100% of base salary for all Executive Directors. The performance measures applied may be financial or non-financial, and can be corporate, divisional or individual measures set for any year in such proportions as the Committee considers appropriate. However, the weighting of financial performance measures will not be reduced below 60% of total annual bonus potential in any year for the duration of this policy. The Committee will consider overall Group and financial performance before any element of bonus is paid, and accordingly may moderate the bonus outturn either upwards (without exceeding the 100% of base salary cap) or downwards. Performance measures applied to LTIP awards are reviewed from time to time to ensure they remain appropriate and aligned with shareholders interests. The Committee may set such performance conditions on LTIP awards as it considers appropriate (whether financial or non-financial and whether corporate, divisional or individual). However, performance conditions will always measure performance over a period of at least three financial years (commencing with the financial year in which the award is made). N/A 54 Communisis plc Annual Report and Financial Statements

57 Element and purpose Policy Operation and opportunity Performance measures All-employee share plans To encourage share ownership by employees, thereby allowing them to share in the long-term success of the Group and align their interests with those of the shareholders. The Company operates a Sharesave plan for UK employees. This is an all-employee tax-advantaged share plan and follows the usual form for such plans. Executive Directors are able to participate in all-employee share plans on the same terms as other Group employees. The exercise price of the options is usually equal to the market price of the shares at the date of invitation to participate less a maximum discount of 20%. The maximum amount that can be invested in the scheme will not exceed the statutory limit from time to time (currently 500 per month). The options vest on the third or fifth anniversary of the commencement of the savings period (depending upon the length of the savings period). Consistent with normal practice, such awards are not subject to performance conditions. Corporate Governance REMUNERATION POLICY CHAIRMAN AND NON-EXECUTIVE DIRECTORS The table below summarises the remuneration elements for the Chairman and Non-Executive Directors. Element and purpose Policy Operation and opportunity Performance measures Chairman and Non-executive Fees are paid monthly in cash. N/A Director fees. The fees paid to the Chairman and the fees of the other Non-executive Directors aim to be competitive with other fully listed companies of equivalent size and complexity. The fees payable to Non-executive Directors are determined by the Board. The Chairman s fee is determined by the Committee. Non-executive Directors will not participate in share incentive arrangements. The aggregate fees (and any benefits) of the Chairman and Non-executive Directors will not exceed the limit from time to time prescribed within the Company s Articles of Association for such fees (currently 500,000 p.a. in aggregate). Any increases actually made will be appropriately disclosed. NOTES TO THE REMUNERATION POLICY TABLE 1. Differences between the Policy on Remuneration for Directors from the Policy on Remuneration of other employees Where Communisis pay policy for Directors differs to its pay policies for groups of employees, this reflects the appropriate market rate position for the relevant roles. However, elements of consistency of treatment are promoted through a single Group-wide annual bonus arrangement (although quantum and the mix of performance metrics vary according to seniority) and Group-wide share plans. 2. Stating maximum amounts for the remuneration policy The DRR Regulations and related investor guidance encourages companies to disclose a cap within which each element of remuneration policy will operate. Where maximum amounts for elements of remuneration have been set within the Directors Remuneration Policy, these will operate simply as caps and are not indicative of any aspiration. 3. Malus and clawback Malus (being the forfeiture of unvested awards) and clawback (being the ability of the Company to claim repayment of paid amounts as a debt) provisions apply to the annual bonus and LTIP. These provisions may be applied where the Remuneration Committee considers it appropriate to do so following: any material re-statement of the Company s or a Group member s financial results for any period; individual gross misconduct; or any other circumstances that have a sufficiently significant impact on the reputation of the Company or any Group member. 4. Travel and hospitality While the Remuneration Committee does not consider it to form part of benefits in the normal usage of that term, it has been advised that corporate hospitality (whether paid for by Communisis or another) and certain instances of business travel (including any related tax liabilities settled by the Company) for the Directors (and exceptionally their family members) may technically come within the applicable rules and so the Remuneration Committee expressly reserves the right to authorise such activities within its agreed policies. Communisis plc Annual Report and Financial Statements 55

58 Corporate Governance DIRECTORS REMUNERATION REPORT CONTINUED APPENDIX TO DIRECTORS REMUNERATION REPORT DIRECTORS REMUNERATION POLICY CONTINUED REMUNERATION POLICY CONTINUED NOTES TO THE REMUNERATION POLICY TABLE CONTINUED 5. Payments under previous policies For the avoidance of doubt, in approving this Directors Remuneration Policy, authority is given to the Remuneration Committee to honour any commitments entered into with former or current Directors under previous policies (including the payment of pensions and the vesting of past share awards). 6. Discretions reserved in operating incentive plans The Remuneration Committee will operate the annual performance bonus and LTIP according to their respective rules and the above Remuneration Policy table. The Remuneration Committee retains certain discretions, consistent with market practice, in relation to the operation and administration of these plans including: the determination of performance measures and targets and resultant vesting and pay-out levels; the ability to adjust performance measures and targets to reflect events (including corporate actions) and/or to ensure the performance measures and targets operate as originally intended; (as described in the Termination Policy section below) determination of the treatment of individuals who leave employment, based on the rules of the incentive plans, and the treatment of the incentive plans on exceptional events, such as a change of control of the Company; and the ability to make adjustments to existing awards made under the incentive plans in certain circumstances (e.g. rights issues, corporate restructurings or special dividends). APPROACH TO RECRUITMENT REMUNERATION The Company s recruitment remuneration policy aims to give the Committee sufficient flexibility to secure the appointment and promotion of high-calibre executives to strengthen the management team and secure the skill sets to deliver our strategic aims. The following represents principles to be applied by the Committee on recruitment of Executive Directors: The starting point for the Committee will be to look to the policy for Executive Directors as set out in the policy table and structure a package in accordance with that policy. Consistent with the DRR Regulations, the caps contained within the general policy for fixed pay will not apply to a recruit although the Committee would not envisage exceeding those caps in practice. For a new appointment, base salary may be increased over time following progress and development in the role rather than being set directly at the level of a previous incumbent or at market level. For an internal appointment, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment, as appropriate. For external and internal appointments, the Committee may agree that the Company will make a contribution towards legal fees in connection with agreeing employment terms. The annual performance bonus plan and LTIP will operate as outlined in the general policy in relation to any newly appointed Executive Director, including the maximum award levels. All awards for external appointments to compensate for awards forfeited on leaving a previous employer ( buy-outs ), whether made under the annual performance bonus, LTIP or otherwise (including under UKLA Listing Rule 9.4.2), will be capped at the commercial value of the amount forfeited and will take account of the nature, time horizons and performance requirements of those awards. In particular, the Committee s starting point will be to ensure that any awards being forfeited which remain subject to outstanding performance requirements (other than where substantially complete) will be replaced with buy-out awards subject to similar requirements, and any awards with service requirements are also bought out with similar terms. However, exceptionally the Committee may relax those obligations in respect of buy-outs where it considers it to be in the interests of shareholders and those factors are, in the view of the Committee, equally reflected in some other way, for example through a discount to the face value of the awards forfeited. For the avoidance of doubt, such buy-out awards are not subject to a formal cap. A new Chairman or Non-executive Director would be recruited on the terms explained above in respect of the main policy for such Directors. 56 Communisis plc Annual Report and Financial Statements

59 SERVICE CONTRACTS EXECUTIVE DIRECTORS The Committee s policy is that each Executive Director s service agreement should be of indefinite duration, subject to termination at normal retirement age, and should otherwise be terminable by the Company on no more than 12 months notice and by the Director on six months notice. The service agreements of all Executive Directors comply with that policy. None of the service agreements include provision for compensation payments on early termination. Whether any such compensation would be payable and the amount of any compensation would be determined according to the law of contract as it applies to the particular circumstances of an individual case. Contracts do not contain change of control provisions. The Committee reserves flexibility to alter these principles if necessary to secure the recruitment of an appropriate candidate but would expect a return to these principles within a reasonable timeframe. The date of each Executive Director s appointment is: Contract date Andy Blundell 2 November 2009 Steve Rawlins 4 December Corporate Governance NON-EXECUTIVE DIRECTORS Each Non-executive Director is engaged for an initial period of three years. They are then invited to serve for a further three-year period, after which they are appointed annually. These engagements can be terminated by either party on three months notice. The Non-executive Directors cannot participate in the Company s share option schemes, are not entitled to any pension benefit and are not entitled to any payment in compensation for early termination of their appointment. The date of original appointment of each Non-executive Director and the effective date of their latest appointment is: Date of original appointment Latest appointment date David Gilbertson 1 March 1 March Jane Griffiths 17 May May 2015 Peter Harris 1 July May Helen Keays 1 August May TERMINATION POLICY SUMMARY It is appropriate for the Committee to consider treatments on a termination having regard to all of the relevant facts and circumstances available at that time. This policy applies both to any negotiations linked to notice periods on a termination and any treatments that the Committee may choose to apply under the discretions available to it under the terms of the annual performance bonus and LTIP plans. The potential treatments on termination under these plans are summarised below. Incentives If a leaver is deemed to be a good leaver ; i.e. leaving through voluntary redundancy, serious ill health or death or otherwise at the discretion of the Committee. Annual Performance Bonus Committee has discretion to award a pro-rated bonus. Long Term Incentive Plan (LTIP)* Leaver will receive a pro-rated award subject to the application of the performance conditions. Vesting levels may be varied by the Committee if considered appropriate. Vesting will not be brought forward to the time of cessation of employment unless the Committee considers this appropriate. If a leaver is deemed to be a bad leaver ; i.e. leaving for disciplinary reasons or to join a competitor. No awards made. All awards will normally lapse. Other exceptional cases; e.g. change in control. Pro-rated bonus. Leaver will receive a pro-rated award subject to the application of the performance conditions at the date of the event, subject to standard Committee discretions to increase vesting taking into account relevant factors. * Similar treatments would apply to any awards made under the Executive Share Option Scheme in future. Communisis plc Annual Report and Financial Statements 57

60 Corporate Governance DIRECTORS REMUNERATION REPORT CONTINUED APPENDIX TO DIRECTORS REMUNERATION REPORT DIRECTORS REMUNERATION POLICY CONTINUED TERMINATION POLICY SUMMARY CONTINUED The Company has power to enter into settlement agreements with executives and to pay compensation to settle potential legal claims. In addition, and consistent with market practice, in the event of termination of an Executive Director, the Company may pay a contribution towards the individual s legal fees and fees for outplacement services as part of a negotiated settlement. Any such fees would be disclosed as part of the detail of termination arrangements. For the avoidance of doubt, the policy does not include an explicit cap on the cost of termination payments. In the event of cessation of a Non-executive Director s appointment they would be entitled to a three-months notice period. EXTERNAL APPOINTMENTS Andy Blundell is a Non-executive Director of RM plc. No other Executive Director is a director of any company apart from subsidiaries of Communisis. Were any Executive Directors to take up such an external non-executive appointment, they would be permitted to retain any fees earned from that appointment. INDICATIVE TOTAL REMUNERATION LEVELS Communisis total remuneration opportunity 1,400 1,356 1,200 40% 1, % 29% 27% % 41% % 27% % 54% 33% 100% 53% 32% 0 Minimum In line with expectation Maximum Minimum In line with expectation Maximum Andy Blundell Steve Rawlins Long term incentives (incl. Sharesave) Annual performnce bonus Total fixed pay The above chart aims to show how the remuneration policy set out above for Executive Directors is applied using the following assumptions: Minimum Consists of base salary, benefits and pension. Base salary is the current base salary. Benefits for Andy Blundell are the benefits paid in as set out in the single figure table, with Steve Rawlins benefits at expected 2018 levels for illustration. Pension entitlements measured as 12% of base salary receivable either as a contribution or in cash. Base salary Benefits Pension Total fixed Andy Blundell Steve Rawlins In line with expectation Maximum Based on what the Director would receive if performance was in line with expectation (excluding share price appreciation and dividends): annual performance bonus: consists of the on-target bonus (65% of base salary); and LTI: consists of the threshold level of vesting (25%). Assumed that the typical annual award is at 150% of base salary each year. Based on the maximum remuneration receivable (excluding share price appreciation and dividends): annual performance bonus: consists of the maximum bonus (100% of base salary); and LTI: assumes maximum vesting of awards (150% of total award). 58 Communisis plc Annual Report and Financial Statements

61 STATEMENT OF CONSIDERATION OF EMPLOYMENT CONDITIONS ELSEWHERE IN THE GROUP Pay and employment conditions in the Group are taken into account when setting Executive Directors remuneration. The Committee receives regular updates from the Human Resources Director on overall pay and conditions in the Group, including (but not limited to) changes in base pay and any staff bonus pools in operation. There is also oversight of the all-employee Sharesave Scheme which Executive Directors and all other Group employees can participate in on the same terms and conditions. The Company did not consult with employees in drawing up this Directors Remuneration Report. STATEMENT OF CONSIDERATION OF SHAREHOLDER VIEWS Each year, the Committee takes into account the approval levels of remuneration-related matters at our AGM in determining that the current Directors Remuneration Policy remains appropriate for the Company. The Committee also seeks to have a productive dialogue with investors on developments in the remuneration aspects of corporate governance generally, and any changes to the Company s executive pay arrangements in particular. Corporate Governance Communisis plc Annual Report and Financial Statements 59

62 Corporate Governance DIRECTORS REPORT Communisis plc (the Company) is a company incorporated in England and Wales and is listed on the London Stock Exchange. Its registered office address is Communisis House, Manston Lane, Leeds LS15 8AH, and its registered number is The Directors present their Annual Report, Financial Statements and Independent Auditor s Report for the year ended 31 December. With the exception of details of Directors interests which are set out on page 50 of the Directors Remuneration Report, the information to be included in the Annual Report and Financial Statements under LR9.8.4C of the UK Financial Conduct Authority s Listing Rules is set out in this Directors Report. STRATEGIC REPORT Section 414C of the Companies Act 2006 (the Act) requires us to present a fair review of the business during the year ended 31 December and a description of the principal risks and uncertainties facing the Company. The review must be a balanced and comprehensive analysis of both the development and performance of the Company s business during the financial year, and the position of the Company s business at the end of the year, consistent with the size and complexity of the business. It also requires us to provide details of expected future developments in the Group and an indication of the Group s overseas branches. The Strategic Report can be found on pages 1 to 32. RESULTS AND DIVIDENDS The results for the year are shown on page 74. An interim dividend of 0.89p per ordinary share was paid on 13 October. The Directors now propose a final dividend of 1.77p per ordinary share to be paid on 18 May 2018 to shareholders on the register at close of business on 20 April This makes total dividends for the year of 2.66p per share ( 2.42p). DIRECTORS AND GOVERNANCE The names and biographical details of the Directors who hold office at the date of this report are set out on pages 34 and 35. The Directors who served during the year are shown below: DAVID GILBERTSON (appointed Non-executive Director 1 March ; appointed Chairman 11 May ) Chairman ANDY BLUNDELL Chief Executive STEVE RAWLINS (appointed 4 December ) Chief Financial Officer JANE GRIFFITHS Non-executive Director PETER HARRIS Non-executive Director HELEN KEAYS Non-executive Director PETER HICKSON (stepped down on 11 May ) Chairman MARK STONER (stepped down on 4 December ) Finance Director Additional information relating to the remuneration and share interests of each Director is given in the Directors Remuneration Report on pages 44 to 59. No Director had, during or at the end of the year, any material interest in any contract of significance in relation to the Group s business. Details of the Directors service contracts are set out in the Directors Remuneration Report on page 57. In accordance with the UK Corporate Governance Code, all Directors will offer themselves for re-election at the AGM on 10 May 2018 in line with best market practice (with the exception of Helen Keays who will be leaving the business on 6 June 2018 and therefore will not be offering herself for re-election at this year s AGM). The corporate governance statement required by Disclosure and Transparency Rule (DTR) is contained within the Corporate Governance Report on pages 36 to 39 as permitted by DTR Communisis plc Annual Report and Financial Statements

63 RESEARCH AND DEVELOPMENT Expenditure on research and development in the year was nil ( nil). In respect of internal development activities, in, we continued active development across Connect TM, our multichannel communication platform. A key challenge for clients in marketing wishing to adopt any type of workflow system is the definition of their own processes. To simplify this, within Mantl TM (the marketing workflow components of Connect TM ) we have developed new standard processes for many types of workflow such as Direct Marketing and Product Literature. The initial release of these features helped us reduce on-boarding for the first client down to eight weeks where previously it was between three and six months. For retail customers ensuring their point of sale material is displayed correctly is a major challenge. Our current compliance tool enables retail stores to photograph their displays and central marketing can then approve, or provide instructions to correct the displays. We have been researching image analysis and recognition to do this automatically. Proof of concept work suggests that walls with up to three posters on may be recognisable but beyond that the resolution of the posters becomes too small. There is a trade-off between how quickly multiple items can be confirmed as correct and verifying each item, particularly when the change between versions may be low. Like all organisations we are moving away from developing applications to building multi-tenanted platforms and in we updated Connect TM to enable multiple clients to run on a single infrastructure stack. Over time this will enable us to deliver more integrated support with the ability to centrally monitor the production, delivery and receipt of communications. We launched two new products within the Connect TM range, firstly Personalised Video is now a channel option for marketing and transactional customers. Personalised Video, as the name suggests, enables an to be sent to customers containing a link to a video with content tailored to them. We have also developed DocBox as a solution to long-term storage of terms and conditions in a digital form. Many of our clients are required by the regulator to provide documentation in a so called Durable Medium, one that cannot be tampered with and will be available to the customer for the relevant regulatory period. DocBox provides a unique encrypted URL for each document, plus underlying storage that enables clients to prove that each customer is being served the correct terms and conditions for the product they have and also that the document has not been changed since it was posted. DocBox saved our initial client over 1m in postage costs for terms and conditions mailings. Finally, we have been upgrading our management information tools, which removes Adobe Flash as this technology presents issues for many of our clients and the new interface is pure HTML5. Connect TM now has over 30 products to enable clients to create, send and receive multi-channel communications. SHARE CAPITAL Note 19 to the Consolidated Financial Statements contains details of the changes in issued share capital of the Company during the year. FINANCIAL RISK MANAGEMENT Disclosures required under paragraph 6 in Schedule 7 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 have been provided in Note 26 to the Consolidated Financial Statements. PURCHASE OF OWN SHARES The Directors authority to make purchases of the Company s shares on its behalf is given by resolution of the shareholders and renewed annually at the Company s AGM. No share buy-backs were undertaken by the Company during. In March and November the Communisis plc Employee Benefit Trust acquired 320,000 and 800,000 shares respectively for total consideration of 441,691. SHARE OPTION SCHEMES Further options were granted during the year under the Group s share option schemes. Details of the options outstanding at year end are given in Note 13 to the Consolidated Financial Statements. CORPORATE SOCIAL RESPONSIBILITY The Group s approach to corporate social responsibility is detailed within its report set out on pages 26 to 32. POLITICAL DONATIONS No political expenditure was incurred during the year, nor were any contributions made for political purposes. EMPLOYMENT POLICY Communisis is committed to the principle of equal employment opportunity for all employees and to providing employees with a work environment free of discrimination and harassment. Employment decisions at Communisis are based on candidates abilities to match the business needs, job requirements and individual qualifications for roles. We are committed to treating all candidates in a fair and objective manner, regardless of their age, race, colour, nationality, ethnic origin, creed, disability, sexual orientation, sex, gender identity, marital or civil partnership status, parental status, religion, belief or non-belief, social or economic class, employment status, or any other criteria that cannot be shown to be properly justifiable. Corporate Governance Communisis plc Annual Report and Financial Statements 61

64 Corporate Governance DIRECTORS REPORT CONTINUED EMPLOYMENT POLICY CONTINUED Opportunities are available to disabled employees for training, career development and promotion on the same basis as all other employees. Where existing employees become disabled, it is the Group s policy to provide continuing employment wherever practicable in the same or an alternative position and to provide appropriate assistance, equipment and facilities for them to carry out the role. Further details of the way in which we engage with our employees on matters which affect them and encourage their involvement and participation in the performance of the Group are given on page 10 and on pages 26 to 29. QUALIFYING THIRD-PARTY INDEMNITY PROVISION Article 172 of the Company s Articles of Association provides that, subject to the provisions of the enactments concerning companies (which limit the scope of indemnities in favour of Directors), every Director and officer, and the auditor of the Company, is to be indemnified out of the assets of the Company against all costs, charges, expenses, losses and liabilities which he or she may sustain or incur in or about the execution of his or her office or in relation thereto. This is a qualifying third-party indemnity provision within the meaning of Section 236 of the Act. The Company also takes out insurance covering claims against the Directors or officers of the Company and any subsidiary. This insurance provides coverage in respect of some of the Company s liabilities under Article 172. FUTURE DEVELOPMENTS Future developments are described in the Strategic Report on pages 1 to 32. GOING CONCERN AND VIABILITY The Directors Going Concern and Viability Statements are set out in the Strategic Report on page 18. The Directors have assessed the longer-term prospects of the Group in accordance with provision C.2.2 of the Code. This is included in the Strategic Report on page 18. AGM Notice of the AGM to be held on 10 May 2018 is contained in a separate document sent, or made available electronically, to shareholders with this report and is available on the Company s website. DISCLOSURE OF INFORMATION TO THE AUDITOR In accordance with Section 418(2) of the Act, the Directors confirm that, so far as each is aware, there is no relevant audit information of which the auditor is unaware. Each Director has taken all steps that he or she ought to have taken as a Director to make himself or herself aware of, and to establish that the auditor is aware of, any relevant audit information. ADDITIONAL INFORMATION FOR SHAREHOLDERS The following is additional information required for shareholders as a result of the implementation of the Takeover Directive into UK law. At 31 December, the Company s issued share capital comprised: % of total issued Number share capital Ordinary shares of 25p each 209,619,144 52,404, Each share carries one vote with the result that the total voting rights at the same date were 209,619,144. The Company is not aware of any agreements between shareholders that may result in restrictions in the transfer of shares or voting rights. The Company s issued share capital as at 8 March 2018 was 209,701,138. Every holder of ordinary shares present in person or by proxy at the AGM of the Company will be entitled to vote. A poll will be taken on each of the resolutions in the Notice of Meeting and every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. MAJOR INTERESTS IN SHARES The Company was notified under DTR 5 of the following major holdings of voting rights associated with its shares as at the year end and changes made as at 7 March 2018: Voting rights as at % of total issued Voting rights as at % of total issued Shareholder 31 December share capital 7 March 2018 share capital Richard Griffiths and controlled undertakings 48,500, ,500, Henderson Group plc 20,916, ,916, CRUX Asset Management Limited 12,000, ,000, Majedie Asset Management Limited 10,651, ,651, Communisis plc Annual Report and Financial Statements

65 The Notice of Meeting specifies deadlines for exercising voting rights either in person or by proxy in relation to resolutions to be passed at that meeting. All votes, including proxy votes, will be counted and made available as soon as practicable after the AGM and published on the Company s website. There are no restrictions on the transfer of ordinary shares in the Company other than: the registration of share transfers may be suspended at such times and for such periods (not exceeding 30 days in any year) as the Directors may determine; certain restrictions may, from time to time, be imposed by laws and regulations (for example, insider trading laws and market requirements relating to close periods); and the restrictions imposed by the Listing Rules of the Financial Conduct Authority, whereby certain employees of the Company require the approval of the Company to deal in the Company s securities. A special resolution at a general meeting of the shareholders is required to amend the Company s Articles of Association. Directors are re-appointed by ordinary resolution at a general meeting of the shareholders. The Articles provide that the Board can appoint a Director but anyone so appointed must be elected by an ordinary resolution at the next AGM. At each AGM, one-third of the Directors previously elected at an AGM must retire by rotation. Each retiring Director who wishes to continue to serve must be re-elected at the meeting. In line with best practice, the Board conducts annual re-elections for all Directors and will follow this policy at the 2018 AGM. DIRECTORS AUTHORITIES The Directors are authorised under the terms of Section 551 of the Act to issue ordinary shares up to a maximum aggregate nominal value of 17,448,000 and under the terms of Section 560 of the Act authorised to issue ordinary shares in connection with a rights issue up to a maximum aggregate nominal value of 34,896,001 (such amount to be reduced by any allotments made under the first part of this paragraph). Pursuant to Section 570 of the Act, the Directors are also authorised to allot shares for cash, without first offering them to existing shareholders, up to a limit of 5% of the Company s issued ordinary share capital. This authority also gives the Directors the power to allot shares for cash in connection with a rights issue. Both these authorities will expire at the AGM on 10 May 2018, and the Directors will seek to have them renewed at that meeting. SIGNIFICANT INTERESTS Directors interests in the share capital of the Company as at 8 March 2018 and 31 December are shown in the table on page 50. Significant interests in voting rights notified under DTR 5 are shown on page 62. CONTRACTS WITH SHAREHOLDERS There are no contracts of significance or any other contracts between the Company and a controlling shareholder within the meaning of Listing Rule 9.8.4R. SIGNIFICANT SHARE SCHEMES The Communisis Employee Benefit Trust holds 0.21% as at 8 March 2018 ( 0.39%) of the issued share capital of the Company in trust for the benefit of employees of the Group and their dependents. The voting rights of these shares are exercisable by the Trustees. GREENHOUSE GAS EMISSIONS All disclosures concerning the Group s greenhouse gas emissions (as required to be disclosed under the Companies Act 2006 (Strategic Report and Directors Report) Regulations 2013) are contained in the Corporate Social Responsibility Report forming part of the Strategic Report on pages 26 to 32. CHANGE OF CONTROL The Company is party to a number of contracts that could be terminated by the other party in the event of a change of control of the Company. The Company is also party to a number of banking agreements that, upon a change of control of the Company, are terminable by the banks upon provision of written notice. There are no agreements between the Company and its Directors or employees providing for additional compensation for loss of office or employment (whether through resignation, redundancy or otherwise) where such loss of office or employment occurs because of a takeover bid. AUDITOR The Directors will place a resolution before the AGM to reappoint Ernst & Young LLP as auditor for the ensuing year. Approved by the Board on 8 March 2018 and signed on its behalf by: Sarah Caddy Company Secretary 8 March 2018 Corporate Governance Communisis plc Annual Report and Financial Statements 63

66 Corporate Governance STATEMENT OF DIRECTORS RESPONSIBILITIES GROUP FINANCIAL STATEMENTS PREPARED UNDER IFRS The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Financial Statements for each financial year. Under that law, the Directors have prepared the Group Financial Statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). Under company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing these Financial Statements, the Directors are required to: select suitable accounting policies and apply them consistently; make judgements and estimates that are reasonable and prudent; state whether IFRS as adopted by the EU has been followed, subject to any material departures disclosed and explained in the Group Financial Statements; and prepare the Financial Statements on a going concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping adequate accounting records, which show and explain the Group s transactions and disclose with reasonable accuracy, at any time, the financial position of the Group and enable them to ensure that the Financial Statements comply with the Companies Act 2006 and Article 4 of the International Accounting Standards (IAS) Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for preparing the Directors Report, the Strategic Report, the Directors Remuneration Report and the Corporate Governance Report in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules. PARENT COMPANY FINANCIAL STATEMENTS PREPARED UNDER UK GAAP The Directors are responsible for preparing the parent company Financial Statements in accordance with applicable United Kingdom law and regulations. Company law requires the Directors to prepare Financial Statements for each financial year. Under that law, the Directors have elected to prepare the Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit and loss of the Company for that period. In preparing these Financial Statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and prepare the Financial Statements on a going concern basis unless they consider that to be inappropriate. The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company s transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and enable them to ensure that the Financial Statements comply with the Companies Act 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. 64 Communisis plc Annual Report and Financial Statements

67 DIRECTORS RESPONSIBILITY STATEMENTS PURSUANT TO DTR 4 Each of us, for himself or herself and on behalf of each other Director who held office on 31 December, confirms that, to the best of his or her knowledge: the Consolidated Financial Statements, prepared in accordance with IFRS as issued by the IASB and IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole; and the Strategic Report and the Directors Report include a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties it faces. In accordance with Section 418 of the Companies Act 2006, each Director in office at the date of this report confirms that: so far as the Director is aware, there is no relevant audit information of which the Company s auditor is unaware; and he or she has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant audit information and to establish that the Company s auditor is aware of that information. In addition, the Directors as at the date of this report consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company s performance, business model and strategy. By order of the Board: Corporate Governance Andy Blundell Chief Executive 8 March 2018 Steve Rawlins Chief Financial Officer 8 March 2018 Communisis plc Annual Report and Financial Statements 65

68 Financial Statements INDEPENDENT AUDITOR S REPORT TO THE MEMBERS OF COMMUNISIS PLC FOR THE YEAR ENDED 31 DECEMBER OPINION In our opinion: Communisis plc s Group financial statements and parent company financial statements (the financial statements ) give a true and fair view of the state of the Group s and of the parent company s affairs as at 31 December and of the Group s profit for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements of Communisis plc which comprise: Group Parent company Consolidated Balance Sheet as at 31 December Company Balance Sheet as at 31 December Consolidated Income Statement for the year then ended Company Statement of Changes in Equity for the year then ended Consolidated Statement of Comprehensive Income for the year then ended Related notes 1 to 22 to the financial statements including a summary of significant accounting policies Consolidated Statement of Changes in Equity for the year then ended Consolidated Cash Flow Statement for the year then ended Related notes 1 to 32 to the financial statements, including a summary of significant accounting policies The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. USE OF OUR REPORT This report is made solely to the company s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 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. CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: the disclosures in the annual report set out on pages 18 to 21 that describe the principal risks and explain how they are being managed or mitigated; the directors confirmation set out on page 18 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; the directors statement set out on page 18 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; whether the directors statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or the directors explanation set out on page 18 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. 66 Communisis plc Annual Report and Financial Statements

69 OVERVIEW OF OUR AUDIT APPROACH Key audit matters Revenue recognition Carrying value of goodwill Audit scope We performed an audit of the complete financial information of 5 components and audit procedures on specific balances for the remaining 17 components. The components where we performed full or specific audit procedures accounted for >99.5% of profit before tax adjusted for exceptional items, >99.5% of Revenue and 99% of Total assets. Materiality Overall Group materiality of 0.8m which represents 5% of profit before tax adjusted for exceptional items.* * Exceptional items are defined in note 5.4 to the Annual Report and Financial Statements KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Risk Revenue recognition Refer to the Audit Committee Report (pages 42 and 43); and Notes 2 and 4 of the Group financial statements The Group has reported revenues of 375.9m ( 361.9m). We identified 4 specific risks of fraud and error in respect of improper revenue recognition given the nature of the Group s products and services as follows: Inappropriate cut-off of revenue; Inappropriate accounting for complex contractual arrangements; Our response to the risk At each full and specific scope audit location with significant revenue streams: We performed walkthroughs of each significant class of revenue transactions and assessed the design effectiveness of key controls. For revenue recognised close to the period end, we vouched all transactions above our testing threshold to documentation supporting recognition of revenue. For revenue accrued but unbilled at the period end, we vouched all transactions above our testing threshold to documentation supporting recognition of revenue on a stage of completion basis. Key observations communicated to the Audit Committee Based on the procedures performed, we did not identify any evidence of material misstatement in the revenue recognised in the year or revenue deferred at 31 December. Financial Statements Inappropriate accrual or deferral of income; Management bias or override of controls. There is no change in the risk profile in the current year. We have performed audit procedures over a sample of complex contractual arrangements and assessed whether the revenue recognition policies adopted were appropriate and consistently applied. We performed other substantive, transactional testing and analytical procedures to assess the recognition of revenue throughout the year. Where practicable, at 9 components we performed testing over full populations of transactions using data analysis. For revenue recorded through journal entries outside of normal business processes, we performed testing on a sample basis to establish whether a service had been provided or a sale had occurred in the financial year to support the revenue recognised We also considered the adequacy of the Group s disclosure of accounting policies for revenue recognition in notes 2 and 4 to the financial statements respectively. At each full and specific scope audit location with significant revenue streams (12 components) we performed audit procedures which covered >99.5% of the Group s revenue. All procedures were performed by the primary team Communisis plc Annual Report and Financial Statements 67

70 Financial Statements INDEPENDENT AUDITOR S REPORT TO THE MEMBERS OF COMMUNISIS PLC CONTINUED FOR THE YEAR ENDED 31 DECEMBER KEY AUDIT MATTERS CONTINUED Risk Carrying value of goodwill Refer to the Audit Committee Report (pages 42 and 43); and Notes 2 and 12 of the Group financial statements We focused on this area due the size of the goodwill balance ( 164m) ( 164m) and because the directors assessment of value in use of the Group s Cash Generating Units ( CGUs ) involves assumptions about the future performance of the business and the discount rates applied to future cash flow forecasts. We consider there to be a fraud risk due to the significance of the carrying value of goodwill; the inherent judgements involved; and recent trading challenges in some jurisdictions where the Group operates making the estimate susceptible to override by management. There is no change in the risk profile in the current year. Our response to the risk We challenged management s assumptions used in its impairment models for assessing the recoverability of the carrying value of goodwill. We focused on the appropriateness of CGU identification, the method applied to estimate recoverable values, discount rates, and forecast cash flows. Specifically: We assessed the design effectiveness of internal financial controls over management s budgeting process and their assessment and measurement of impairment. We have confirmed that the CGUs identified are the lowest level at which management monitors goodwill. We tested the method applied in the value in use calculation as compared to the requirements of IAS 36, Impairment of Assets, and the mathematical accuracy and integrity of management s model. We obtained an understanding of, and assessed the basis for, key underlying assumptions for the 2018 budget. We have confirmed that the cash flow forecasts used in the valuation are consistent with information approved by the Board and have reviewed the historical accuracy of management s forecasts. We challenged management on its cash flow forecasts and the implied growth rates for 2018 and beyond by considering evidence available to support these assumptions and their consistency with findings from other areas of our audit. The discount rates and long term growth rates applied within the model were assessed in conjunction with EY valuation specialists, including comparison to economic and industry forecasts where appropriate. For both CGUs, we performed sensitivity analyses by stress testing key assumptions in the model with downside scenarios to understand the parameters that, should they arise, could lead to a different conclusion in respect of the carrying value of goodwill. We considered the appropriateness of the related disclosures provided in note 12 in the Group financial statements. The entire goodwill balance was subject to full scope audit procedures. Key observations communicated to the Audit Committee Based on the results of our work, we agree with management s conclusion that no impairment of goodwill is required in the current year. We agree with management s assessment of the reasonably possible changes in key assumptions that would result in an impairment in any Cash Generating Unit and the disclosure given in note 12 to the financial statements. In the prior year, our auditor s report included a key audit matter in relation to Accounting for a change in segments. As the reportable segments have not changed in this has not been included this year. 68 Communisis plc Annual Report and Financial Statements

71 AN OVERVIEW OF THE SCOPE OF OUR AUDIT TAILORING THE SCOPE Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and effectiveness of Group-wide controls, changes in the business environment and other factors such as recent Internal audit results when assessing the level of work to be performed at each entity. In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, of the 22 reporting components of the Group, we selected 12 components covering entities within Europe which represent the principal business units within the Group. Of the 12 components selected, we performed an audit of the complete financial information of 5 components ( full scope components ) which were selected based on their size or risk characteristics. For the remaining 7 components ( specific scope components ), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. The reporting components where we performed audit procedures accounted for 100% ( 100%) of the Group s Profit before tax adjusted for exceptional items, 100% ( 100%) of the Group s Revenue and 100% ( 100%) of the Group s Total assets. For the current year, the full scope components contributed 95% ( 96%) of the Group s Profit before tax adjusted for exceptional items, 94% ( 94%) of the Group s Revenue and 94% ( 94%) of the Group s Total assets. The specific scope components contributed 4% ( 4%) of the Group s Profit before tax adjusted for exceptional items, 5% ( 6%) of the Group s Revenue and 5% ( 5%) of the Group s Total assets. The audit scope of these components may not have included testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group. Of the remaining 10 components that together represent 1% of the Group s Profit before tax adjusted for exceptional items, none are individually greater than 1% of the Group s Profit before tax adjusted for exceptional items. For these components, we performed other procedures, including analytical review, testing of consolidation journals and intercompany eliminations to respond to any potential risks of material misstatement to the Group financial statements. The charts below illustrate the coverage obtained from the work performed by the audit team. Financial Statements Revenue 94% 5% 1% PBT 95% 4% 1% Total assets 94% 5% 1% 0% 20% 40% 60% 80% 100% Full Specific Review CHANGES FROM THE PRIOR YEAR There have been no changes to the scope compared to the prior year. INVOLVEMENT WITH COMPONENT TEAMS In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us as the primary audit team. All audit work performed for the purposes of the audit of the Group Financial Statements was undertaken by the primary audit team. Communisis plc Annual Report and Financial Statements 69

72 Financial Statements INDEPENDENT AUDITOR S REPORT TO THE MEMBERS OF COMMUNISIS PLC CONTINUED FOR THE YEAR ENDED 31 DECEMBER OUR APPLICATION OF MATERIALITY We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. MATERIALITY The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Group to be 800,000 ( 780,000), which is 5% ( 5%) of the Group s adjusted profit before tax. We believe that adjusted profit before tax provides us with a consistent year on year basis for determining materiality and is the most relevant performance measure to the stakeholders of the entity. Non-recurring items are set out in Note 5.4 of the Group s financial statements. We determined materiality for the Parent Company to be 1.7 million ( 1.5 million), which is 2% ( 2%) of net assets. This is higher than Group materiality of 800,000, however for the purpose of the Group audit, we performed our work using allocated performance materiality of 120,000. STARTING BASIS Profit before tax 14.4m ADJUSTMENTS Adjustment for non recurring items Exceptional items of 2.1m MATERIALITY Profit before tax adjusted for exceptional items of 16.5m Materiality of 800,000 (5% of materiality basis) During the course of our audit, we reassessed initial materiality and the only change in the final materiality from our original assessment at planning was to reflect the actual reported performance of the Group in the year. PERFORMANCE MATERIALITY The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group s overall control environment, our judgement was that performance materiality was 50% ( 75%) of our planning materiality, namely 400,000 ( 580,000). We have set performance materiality at this percentage to ensure that uncorrected and undetected misstatements in all accounts do not exceed our materiality level. We have set performance materiality at this percentage due to our past experience of the audit that indicate a higher risk of misstatements, both corrected and uncorrected. Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to full and specific scope components was 80,000 to 240,000 ( 117,000 to 350,000). REPORTING THRESHOLD An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of 40,000 ( 39,000), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. 70 Communisis plc Annual Report and Financial Statements

73 OTHER INFORMATION The other information comprises the information included in the annual report set out on pages 1 to 65, other than the financial statements and our auditor s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: Fair, balanced and understandable set out on page 65 the statement given by the Directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or Audit committee report set out on page 42 the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or Directors statement of compliance with the UK Corporate Governance Code set out on page 36 the parts of the directors statement required under the Listing Rules relating to the company s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Financial Statements OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, the part of the directors remuneration report to be audited has been properly prepared in accordance with the Companies Act In our opinion, based on the work undertaken in the course of the audit: the information given in the strategic report and the directors report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the strategic report and the directors report have been prepared in accordance with applicable legal requirements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or the parent company financial statements and the part of the Directors Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of directors remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Communisis plc Annual Report and Financial Statements 71

74 Financial Statements INDEPENDENT AUDITOR S REPORT TO THE MEMBERS OF COMMUNISIS PLC CONTINUED FOR THE YEAR ENDED 31 DECEMBER RESPONSIBILITIES OF DIRECTORS As explained more fully in the directors responsibilities statement set out on pages 64 and 65, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group and parent company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so. AUDITOR S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD The objectives of our audit, in respect to fraud, are: to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Our approach was as follows: We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant frameworks which are directly relevant to specific assertions in the financial statements are those that relate to the reporting framework (IFRS, FRS 101, the Companies Act 2006 and UK Corporate Governance Code) and the relevant tax compliance regulations in the jurisdictions in which the Group operates. We understood how Communisis plc is complying with those frameworks by making enquiries of management, Internal Audit, those responsible for legal and compliance procedures and the Company Secretary. We corroborated our enquiries through our review of board minutes and papers provided to the Audit Committee. We assessed the susceptibility of the Group s financial statements to material misstatement, including how fraud might occur, by meeting with management from various parts of the business to understand where it considered there was a susceptibility to fraud. We also considered performance targets and their propensity to influence efforts made by management to manage earnings. We considered the programmes and controls that the Group has established to address risks identified, or that otherwise prevent, deter and detect fraud; and how senior management monitors those programmes and controls. Where the risk was considered to be higher, we performed audit procedures to address each identified fraud risk. These procedures included testing manual journals and were designed to provide reasonable assurance that the financial statements were free from fraud and error. Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations identified in the paragraphs above. Our procedures involved journal entry testing, with a focus on manual consolidation journals, and journals indicating large or unusual transactions based on our understanding of the business; enquiries of Legal Counsel, Group management, Internal Audit, subsidiary Management at all full and specific scope components; and focused testing, as referred to in the key audit matters section above. In addition, we completed procedures to conclude on the compliance of the disclosures in the Annual Report and Accounts with the requirements of the relevant accounting standards, UK legislation and the UK Corporate Governance Code. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council s website at This description forms part of our auditor s report. 72 Communisis plc Annual Report and Financial Statements

75 OTHER MATTERS WE ARE REQUIRED TO ADDRESS We were appointed by the company on 11 October 2002 to audit the financial statements for the year ending 31 December 2002 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 16 years, covering the years ending 2002 to. The non-audit services prohibited by the FRC s Ethical Standard were not provided to the Group or the parent company and we remain independent of the Group and the parent company in conducting the audit. The audit opinion is consistent with the additional report to the audit committee. Mark Morritt (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor Leeds 8 March 2018 NOTES: 1. The maintenance and integrity of the Communisis plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Financial Statements Communisis plc Annual Report and Financial Statements 73

76 Financial Statements CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER Note Before amortisation of acquired intangibles and exceptional items Amortisation of acquired intangibles and exceptional items (Note 5.4) Total Before amortisation of acquired intangibles and exceptional items Amortisation of acquired intangibles and exceptional items (Note 5.4) Revenue 4 375, , , ,932 Changes in inventories of finished goods and work in progress (291) (291) Raw materials and consumables used (197,551) (197,551) (191,210) (191,210) Employee benefits expense 5.3 (91,597) (1,570) (93,167) (95,094) (3,525) (98,619) Other operating expenses (56,914) (482) (57,396) (45,921) (742) (46,663) Depreciation and amortisation expense (8,663) (733) (9,396) (9,945) (809) (10,754) Profit from operations 21,162 (2,785) 18,377 19,471 (5,076) 14,395 Finance revenue Finance costs 5.1 (3,943) (3,943) (3,765) (3,765) Profit before taxation 17,220 (2,785) 14,435 16,669 (5,076) 11,593 Income tax expense 6 (3,249) 586 (2,663) (3,956) 990 (2,966) Profit for the year attributable to equity holders of the parent 13,971 (2,199) 11,772 12,713 (4,086) 8,627 Earnings per share 8 On profit for the year attributable to equity holders and from continuing operations basic 6.40p 5.64p 6.08p 4.12p diluted 6.37p 5.61p 6.07p 4.12p Dividend per share paid during the year 2.50p 2.29p proposed 1.77p 1.61p Total Dividends paid and proposed during the year were 5.2m and 3.7m respectively ( 4.8m and 3.4m respectively). The accompanying notes are an integral part of these Consolidated Financial Statements. All income and expenses relate to continuing operations. 74 Communisis plc Annual Report and Financial Statements

77 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER Note Profit for the year 11,772 8,627 Other comprehensive income/(loss) to be reclassified to profit or loss in subsequent years: Exchange differences on translation of foreign operations ,129 Gain/(loss) on cash flow hedges taken directly to equity 134 (29) Income tax thereon 6 (23) 3 Items not to be reclassified to profit or loss in subsequent years: Adjustments in respect of prior years due to change in tax rate (411) Actuarial gains/(losses) on defined benefit pension plans 14 14,805 (15,972) Income tax thereon 6 (2,517) 2,715 Other comprehensive income/(loss) for the year, net of tax 13,638 (12,565) Total comprehensive income/(loss) for the year, net of tax 25,410 (3,938) Attributable to: Equity holders of the parent 25,410 (3,938) The accompanying notes are an integral part of these Consolidated Financial Statements. Financial Statements Communisis plc Annual Report and Financial Statements 75

78 Financial Statements CONSOLIDATED BALANCE SHEET 31 DECEMBER Assets Non-current assets Property, plant and equipment 10 19,296 21,638 Intangible assets , ,903 Trade and other receivables 16 1, Deferred tax assets 6 4,636 6, , ,768 Current assets Inventories 15 7,756 6,968 Trade and other receivables 16 77,375 66,203 Cash and cash equivalents 18 30,182 38, , ,465 Total assets 327, ,233 Equity and liabilities Equity attributable to the equity holders of the parent Equity share capital 19 52,405 52,344 Share premium Merger reserve ESOP reserve 19 (163) (297) Cumulative translation adjustment Retained earnings 85,558 65,322 Total equity 139, ,215 Non-current liabilities Interest-bearing loans and borrowings 20 53,604 58,751 Trade and other payables ,511 Provisions Financial liabilities Retirement benefit obligations 14 38,217 55,479 92, ,011 Current liabilities Interest-bearing loans and borrowings Trade and other payables 22 92,993 90,968 Income tax payable 1,414 2,210 Provisions Financial liabilities ,385 94,007 Total liabilities 188, ,018 Total equity and liabilities 327, ,233 The Consolidated Financial Statements on pages 74 to 115 were approved by the Board on 8 March 2018 and signed on its behalf by: Note Andy Blundell Steve Rawlins Directors The accompanying notes are an integral part of these Consolidated Financial Statements. 76 Communisis plc Annual Report and Financial Statements

79 CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER Cash flows from operating activities Cash generated from operations 30 22,624 22,909 Interest paid (1,800) (2,065) Interest received 1 18 Income tax paid (3,419) (2,250) Net cash flows from operating activities 17,406 18,612 Cash flows from investing activities Acquisition of subsidiary undertakings (net of cash acquired) (252) Purchase of property, plant and equipment (1,559) (3,225) Purchase of intangible assets (4,364) (3,808) Proceeds from the sale of property, plant and equipment Net cash flows from investing activities (5,640) (7,167) Cash flows from financing activities Share issues net of directly attributable expenses Purchase of shares (442) New borrowings under old loan facility 5,000 5,000 Repayment of borrowings under old loan facility (63,000) (8,000) New loan facility 63,000 Repayment of borrowings under new loan facility (10,000) Repayment of promissory loan note in respect of acquisition of subsidiary undertakings 7 (9,300) Debt arrangement fees (657) Dividends paid 9 (5,222) (4,773) Net cash flows from financing activities (20,043) (8,166) Net (decrease)/increase in cash and cash equivalents (8,277) 3,279 Cash and cash equivalents at 1 January 38,294 32,719 Exchange rate effects 165 2,296 Cash and cash equivalents at 31 December 18 30,182 38,294 Note Financial Statements The accompanying notes are an integral part of these Consolidated Financial Statements. Communisis plc Annual Report and Financial Statements 77

80 Financial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER Issued capital Share premium Capital reduction shares Merger reserve ESOP reserve Capital redemption reserve Cumulative translation adjustment Retained earnings At 1 January 52,302 5,986 15,600 (10) 1,375 (802) 52, ,814 Profit for the year 8,627 8,627 Other comprehensive loss 1,129 (13,694) (12,565) Total comprehensive loss 1,129 (5,067) (3,938) Employee share option schemes value of services provided Shares issued exercise of options (3) 49 Shares issued from ESOP 155 (155) Purchase of own shares (442) (442) Issue of capital reduction shares 15,081 (15,081) Capital reduction (5,996) (15,081) (1,375) 22,452 Dividends paid (4,773) (4,773) At 31 December 52, (297) , ,215 Profit for the year 11,772 11,772 Other comprehensive income ,223 13,638 Total comprehensive income ,995 25,410 Employee share option schemes value of services provided Shares issued exercise of options Shares issued from ESOP 134 (134) Dividends paid (5,222) (5,222) At 31 December 52, (163) , ,136 Total equity The accompanying notes are an integral part of these Consolidated Financial Statements. 78 Communisis plc Annual Report and Financial Statements

81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 1. AUTHORISATION OF FINANCIAL STATEMENTS The Consolidated Financial Statements of Communisis plc (the Group ) for the year ended 31 December were authorised for issue in accordance with a resolution of the Directors on 8 March Communisis plc is a public limited company incorporated and domiciled in England and Wales whose shares are traded on the London Stock Exchange. The registered office is located at Communisis House, Manston Lane, Leeds LS15 8AH. The nature of the Group s operations and its principal activities are set out in the Chief Executive s Statement on pages 12 to ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION The Consolidated Financial Statements of Communisis plc are for the year ended 31 December. They have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The Consolidated Financial Statements are presented in Sterling and all values are rounded to the nearest thousand British pounds () except where otherwise indicated. New standards and interpretations There are no IFRS or IFRIC (IFRS Interpretations Committee of the IASB) interpretations effective for the first time this financial year that have had a material impact on the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. 2.2 BASIS OF CONSOLIDATION The Consolidated Financial Statements comprise the Financial Statements of Communisis plc and its subsidiaries as at 31 December each year. The results of subsidiaries prepared for the same reporting year as the parent company are included in these Consolidated Financial Statements, using consistent accounting policies. All intra-group balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a change of control of a subsidiary, the Consolidated Financial Statements include the results for the part of the reporting year during which Communisis plc has control. 2.3 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES The key judgements and assumptions concerning the future and other key sources of estimation uncertainty at the Balance Sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Judgements Exceptionals The Group presents separately, on the face of the Income Statement, material items of income and expense which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year. An element of management judgement is required in identifying these exceptional items. Additional information is included in Note 5.4. Development costs Expenditure on a development project, such as computer software, which is reliably measurable, is capitalised when the technical feasibility and commercial viability of the project is demonstrated. The Group must intend to, and have available the resources to, complete the project and be satisfied that the intangible asset arising from the development project will generate probable future economic benefits. An element of management judgement is required when distinguishing between the research and development phases of a project. Additional information is included in Note 5.3. Estimates Impairment of goodwill The Group determines whether goodwill is impaired on at least an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December was 164m ( 164m). Additional information is included in Note 12. Financial Statements Communisis plc Annual Report and Financial Statements 79

82 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2. ACCOUNTING POLICIES CONTINUED 2.3 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES CONTINUED Pensions The actuarial valuation involves making assumptions about mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Discount rates are based on interest rates of AA rated corporate bonds that have terms of maturity approximating to the terms of the relevant pension liability. Additional information is included in Note 14. Revenue recognition Revenue from the delivery of client projects is recognised by reference to the stage of completion. This is more commonly seen within the agency businesses. Stage of completion is estimated using an appropriate measure according to the nature of the contract such as costs incurred relative to total anticipated costs. Where the financial outcome of a project cannot be reliably measured, revenue is only recognised to the extent that the expenses recognised are recoverable. 2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Foreign currency transactions Transactions in foreign currencies are recorded in the functional currency at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the Balance Sheet date and exchange differences arising are recognised in the Income Statement. The functional currencies of the overseas subsidiaries include the Euro, the Indian Rupee, the Swedish Krona, the Swiss Franc, the Turkish Lira, the Polish Zloty, the Romanian Leu, the United Arab Emirates Dirham and the United States Dollar. The assets and liabilities of these overseas subsidiaries are translated into Sterling at the rate of exchange ruling at the Balance Sheet date and their Income Statements are translated at the weighted average exchange rates for the year where this is a reasonable approximation to actual translation rates. The exchange differences arising on the retranslation are taken directly to a separate component of equity described as the cumulative translation adjustment. On disposal of a foreign entity, the cumulative amount recognised in equity relating to that particular foreign operation is recognised in the Income Statement. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and accumulated impairment in value. Land is not depreciated. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Freehold property 25 to 50 years Long leasehold property 25 to 50 years Short leasehold property 5 to 20 years Plant, equipment and motor vehicles 3 to 20 years The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists, and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. The recoverable amount of property, plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Useful economic lives, depreciation methods and residual values are reviewed annually. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognised in the Income Statement. Business combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value. Acquisition costs incurred are expensed and included in exceptional items. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. Assets acquired and liabilities assumed in transactions separate to the business combinations, such as the settlement of pre-existing relationships or post-acquisition remuneration arrangements, are accounted for separately from the business combination in accordance with their nature and applicable IFRSs. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or a liability will be recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. If the contingent consideration is classed as equity, it is not remeasured until it is finally settled within equity. 80 Communisis plc Annual Report and Financial Statements

83 2. ACCOUNTING POLICIES CONTINUED 2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Goodwill Goodwill on acquisitions is initially measured at cost, being the excess of the cost of the business combination over the acquirer s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. Goodwill is allocated to the related cash-generating units monitored by management for the purpose of impairment testing. Where goodwill has been allocated to a cash-generating unit (or group of cash-generating units) and an operation within that unit (or group of units) is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operations disposed of and the portion of the cash-generating unit (or group of units) retained. Intangible assets Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets created within the business are not capitalised (unless the specific conditions in IAS 38 are met) and expenditure is charged to the Income Statement in the year in which the expenditure is incurred. (a) Acquired from a business combination Intangible assets arising from a business combination are capitalised at fair value at the date of acquisition, where they can be measured reliably. Following initial recognition, the cost model is applied to the class of intangible assets. Amortisation charged on assets is recognised in amortisation expense in the Income Statement over the expected life of the asset. Intangible assets currently recognised are being amortised over a period of between five and ten years. (b) Customer relationships Amounts paid to secure customer contracts are capitalised and amortised over the length of the contract. An impairment review is carried out when events or changes in circumstances indicate that the carrying value may not be recoverable. (c) Research and development costs Research costs are expensed as incurred. Expenditure on a development project, such as computer software, which is reliably measurable, is capitalised when the technical feasibility and commercial viability of the project is demonstrated. The Group must intend to, and have available the resources to, complete the project and be satisfied that the intangible asset arising from the development project will generate probable future economic benefits. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure carried forward is amortised over the period of expected future sales from the related project, from the date the asset is available for use. The carrying value of development costs is reviewed when there is an indicator of impairment. In addition it is reviewed annually when the asset is not yet in use. (d) Computer software costs Acquired computer software and licences are capitalised. These costs are amortised over their estimated useful lives (three to eight years). Costs associated with maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will generate probable economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the costs of software development employees. These costs are amortised over their estimated useful lives (three to eight years). Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. Inventories Inventories are stated at the lower of cost and net realisable value. Raw materials are stated at purchase cost on a first-in, first-out basis. For finished goods and work in progress, costs include directly attributable material and labour costs and certain overhead costs that contribute in bringing the inventories to their present location and condition. Selling expenses and other administrative overhead expenses are excluded. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Provision is made for items of stock that are damaged, obsolete or slow moving. Financial Statements Communisis plc Annual Report and Financial Statements 81

84 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2. ACCOUNTING POLICIES CONTINUED 2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Trade and other receivables Trade and other receivables are recognised and carried at original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made. Bad debts are written off when identified. Impairment of assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the higher of an asset or cash-generating unit s fair value less costs to sell and its value in use. Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case impairment is determined at the cash-generating unit level. The carrying amounts of the cash-generating units to which goodwill is allocated and intangible assets not yet available for use are reviewed annually or more frequently when there is an indication of impairment. Value in use is determined by the estimated future pre-tax cash flows, discounted to their present values using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset. Cash and cash equivalents Cash and cash equivalents in the Consolidated Balance Sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents are as defined above, net of outstanding bank overdrafts. Trade and other payables Trade and other payables are recognised and carried at original invoice amount. Financial instruments Financial assets and financial liabilities are recognised in the Consolidated Balance Sheet when the Group becomes a party to the contractual provisions of the instrument. Financial liabilities The Group s financial liabilities include borrowings and trade and other payables, which are all classified as other financial liabilities. Other financial liabilities are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group s obligations are discharged, cancelled, or they expire. Derivative financial instruments and hedge accounting Initial recognition and subsequent measurement The Group uses derivative financial instruments such as forward currency contracts and interest rate swaps to hedge its foreign currency and interest rate risks respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives during the year that do not qualify for hedge accounting and the ineffective portion of an effective hedge are taken directly to the Income Statement. The fair value of forward currency contracts is the difference between the forward exchange rate and the contract rate. The forward exchange rate is referenced to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swaps is the difference between the fixed rate and the one-month LIBOR rate implied at the Balance Sheet date, calculated monthly, and discounted to present value. For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging exposure to variability in cash flows, which is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, or when hedging the foreign currency risk in an unrecognised firm commitment. 82 Communisis plc Annual Report and Financial Statements

85 2. ACCOUNTING POLICIES CONTINUED 2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Derivative financial instruments and hedge accounting continued Initial recognition and subsequent measurement continued For those derivatives designated as hedges and for which hedge accounting is desired, the hedging relationship is formally designated and documented at its inception. This documentation identifies the risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how effectiveness will be measured throughout its duration. Such hedges are expected to be highly effective in offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income, while any ineffective portion is recognised immediately in the Income Statement. Amounts taken to equity are transferred to the Income Statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken to other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to the Income Statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in other comprehensive income until the forecast transaction or firm commitment occurs. The Group sometimes uses forward exchange contracts as hedges of its exposure to foreign currency risk in forecasted transactions and firm commitments. During and the Group did not utilise any hedging instruments other than in respect of interest rates as detailed in Note 23. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made, but there is some uncertainty about the timing or the amount of the future expenditure required in settlement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Pensions and similar obligations Group companies operate defined contribution and defined benefit pension plans. Payments to the defined contribution pension plans are charged as an expense to the Income Statement as incurred when the related employee service is rendered. The Group has no further legal or constructive payment obligations once the contributions have been made. For the defined benefit pension plan, the cost of administering the pension scheme is recognised in employee benefits expense in the Income Statement. The Group determines the net interest income/expense on the net defined benefit assets/liabilities for the year by applying the discount rates used to measure the defined benefit obligations at the beginning of the year to the net defined benefit assets/liabilities at the beginning of the year, taking into account any changes in the net defined benefit assets/liabilities during the year as a result of contributions and benefit payments. The liability recognised in the Balance Sheet in respect of the defined benefit pension plan is the present value of the defined benefit obligation at the Balance Sheet date less the fair value of the plan assets. The defined benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of AA rated corporate bonds that have terms of maturity approximating to the terms of the relevant pension liability. AA rated corporate bonds are used as the most suitable proxy for calculating the discount rate. All actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and the fair value of plan assets are recognised in the Consolidated Statement of Comprehensive Income. When a settlement or a curtailment occurs, the obligation and the related plan assets are remeasured using current actuarial assumptions and the resultant gain or loss is recognised in the Income Statement during the period in which the settlement or curtailment occurs. A settlement is the elimination of all obligations for benefits already accrued and a curtailment is the reduction of future obligations as a result of a material reduction in the scheme membership or a reduction in future entitlement. Financial Statements Communisis plc Annual Report and Financial Statements 83

86 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2. ACCOUNTING POLICIES CONTINUED 2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Share-based payment transactions Certain Directors and management are eligible to participate in share-based payment schemes, all of which are equity-settled. The cost of equity-settled transactions with employees is measured by reference to their fair value at the date at which they are granted. The fair value is determined by an external valuer using an appropriate model. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of Communisis plc ( market conditions ). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ( the vesting date ). The cumulative expense recognised for equity-settled transactions at each reporting date reflects the extent to which the vesting period has expired and the Group s best estimate of the number of equity instruments that will ultimately vest. No expense is recognised for awards that do not ultimately vest, except for awards where vesting or non-vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance or service conditions are satisfied. The Group has an employee share ownership plan (ESOP) for the granting of non-transferable options. Shares in the Group held by the ESOP are accounted for in the same way as treasury shares and presented in the Balance Sheet as a deduction from equity described as the ESOP reserve. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the Income Statement for the award is expensed immediately. This includes any awards where non-vesting conditions within the control of the Group or the employee are not met. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the Income Statement. Where an equity-settled award is forfeited, the total cost recognised in the Income Statement to date for the award is reversed. ESOP reserve Communisis plc shares held by the Group are classified in shareholders equity as the ESOP reserve and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to retained earnings. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of equity shares. Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. The determination considers whether fulfilment of the arrangement is dependent on the use of a specific asset or assets, or the arrangement conveys a right to use the assets. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability on a straight-line basis. Finance charges are recognised in the Income Statement. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Operating lease payments are recognised as an expense in the Income Statement on a straight-line basis over the lease term or in accordance with utilisation of the leased asset when the contract is based on usage. Revenue Revenue in the year represents the turnover, net of discounts, derived from services provided to clients and sales of goods. Revenue is recognised at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Provision of services The provision of print sourcing services includes the sourcing and supply of printed and other marketing material (included within Brand Deployment revenue). Revenue from such services is recognised when the significant risks and rewards of ownership of the material have passed to the client and the amount of revenue can be measured reliably; this is usually on despatch by the supplier. Revenue from creative, data and analysis services (included within Customer Experience revenue) is recognised when the service has been provided and client acknowledgement of stage completion has been received. Revenue from campaign management services (included within Brand Deployment revenue) is recognised when the service has been provided, on a time basis which is either a monthly or annual charge, or on a management fee basis. 84 Communisis plc Annual Report and Financial Statements

87 2. ACCOUNTING POLICIES CONTINUED 2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Revenue continued Provision of services continued Revenue from delivery of client projects is recognised by reference to the stage of completion. Stage of completion is estimated using an appropriate measure according to the nature of the contract such as costs incurred relative to total anticipated costs or other measures such as contract milestone completion. Where the project outcome cannot be measured reliably, revenue is recognised only to the extent of the expenses recognised that are recoverable. Revenue from postal sortation services (included within Customer Experience revenue) is recognised on despatch of the post to the postal carrier. Revenue from software licences is recognised over the period of the licence. Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the amount of revenue can be measured reliably; this is usually on despatch by the Group. Interest Finance revenue is recognised as the interest accrues using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount. Income from suppliers The Group receives rebates from certain suppliers for transactions that, based on the terms of the relevant contracts and local law, are either remitted to clients or retained by the Group. If amounts are passed on to clients they are recorded as liabilities until settled or, if retained by the Group, are recorded as a reduction to cost of sales as earned. These rebates are not complex in nature and there is no management judgement in calculating these. The rebates are typically calculated based on a fixed percentage of purchase value. Financial Statements Exceptional items The Group presents separately, on the face of the Income Statement, those material items of income and expense which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year. This facilitates comparison with prior periods and to better assess trends in financial performance. Income tax Current tax Current tax assets and liabilities for the current year are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the Balance Sheet date. Deferred tax Deferred income tax is provided, using the liability method, on all temporary differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are not recognised if the temporary differences arise from the initial recognition of goodwill, or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised. In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Balance Sheet date. Income tax relating to items recognised in other comprehensive income or directly in equity is also recognised in other comprehensive income or directly in equity. Communisis plc Annual Report and Financial Statements 85

88 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2. ACCOUNTING POLICIES CONTINUED 2.4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Sales tax Revenues, expenses and assets are recognised net of the amount of sales tax except: where the sales tax incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables which are stated with the amount of sales tax included. The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Balance Sheet. Dividend distribution The final dividend distribution to the Company s shareholders is recognised as a liability in the Group s Financial Statements in the year in which the dividend is approved by the Company s shareholders. Interim dividends are recognised in the year in which they are paid. 2.5 ADOPTION OF NEW AND REVISED STANDARDS The IASB and IFRIC have issued a number of standards and interpretations with an effective date after 1 January With the exception of the new revenue standard IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018 replacing IAS 18 Revenue) and the new leases standard IFRS 16 Leases (effective 1 January 2019 replacing IAS 17 Leases), the Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group s Financial Statements. IFRS 15 Revenue from Contracts with Customers The standard replaces IAS 18 Revenue, IAS 11 Construction Contracts and related interpretations. It provides a single comprehensive model to use in accounting for revenue and costs from contracts with customers and includes extensive disclosure requirements. The core principle is that an entity recognises revenue at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for transferring the goods or services to a customer. The principles in IFRS 15 are applied using the five-step model. The Group will adopt IFRS 15 using the full retrospective application method and consequently apply the new standard to each reporting period presented i.e., in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. As a practical expedient under IFRS 15 the Group will apply the five step approach to portfolios of contracts with similar characteristics as it is not expected that the Financial Statements would materially differ had the standard been applied to the individual contracts within the portfolio. In addition the following practical expedients will also be taken: contracts which are completed at the beginning of the earliest period presented will not be restated; contracts that are started and completed in the same annual reporting period will have no impact and therefore will not be restated; where contracts are completed but had variable consideration, an entity will use the transaction price at the date the contract was completed rather than estimates of the variable consideration in comparative periods; contract modifications which occurred before the beginning of the earliest period presented will be reflected in aggregate; and for all periods presented before the date of initial application, we will not disclose the amount of the transaction price allocated to the remaining performance obligations or an explanation of when we expect to recognise that amount as revenue. The Group is in the process of finalising the impact on the results. At this stage, the following areas of change have been identified: certain revenue streams within the Customer Experience segment should be treated on an Agent basis under IFRS 15 whereas under IAS 18 these are accounted for on a Principal basis. As Agent, the Group will recognise revenue net (i.e. the remaining amount of consideration after deduction of third party s fees) when or as the performance obligation is satisfied. An adjustment to both revenue and costs is therefore required when restating the comparatives in accordance with IFRS 15. This will not affect profit however margins will be improved due to the lower revenue figures; and the profile of transition revenue, relating to the integration of new contracts into Communisis, is likely to change under IFRS 15. The extent of this change will vary between contracts dependent on the specifics of each individual transition project. IFRS 16 Leases The standard replaces IAS 17 Leases and related interpretations. It introduces a single lessee accounting model, referred to as the right-of-use model, which will apply to most leases. The standard therefore primarily changes operating lease accounting for lessees. All lease arrangements will give rise to the recognition of a right-of-use asset and a lease liability. Lease costs will be recognised in the form of deprecation of the right-of-use asset and interest on the lease liability. Lessee accounting under IFRS 16 is therefore similar to accounting for finance leases under existing IAS 17. Lessor accounting under IFRS 16 is similar to existing IAS 17 accounting and is not expected to have a material impact for the Group. 86 Communisis plc Annual Report and Financial Statements

89 2. ACCOUNTING POLICIES CONTINUED 2.5 ADOPTION OF NEW AND REVISED STANDARDS CONTINUED IFRS 16 Leases continued The Group is currently assessing and quantifying the impact of the accounting changes that will arise under IFRS 16; however, the following changes to lessee accounting will have a material impact on the Consolidated Income Statement, Consolidated Balance Sheet and Consolidated Cash Flow Statement after the Group s adoption on 1 January 2019: right-of-use assets will be recognised for most assets that are leased by the Group under operating leases; currently no lease assets are recognised on the Consolidated Balance Sheet. The biggest asset category impacted for the Group will be Land and Buildings; liabilities will be recorded for future lease payments of existing operating leases in the Consolidated Balance Sheet for the reasonable certain period of the lease. Liabilities are not currently recorded for operating leases; future operating lease commitments are however disclosed. The lease liability recognised on transition will not equal the lease commitments reported on 31 December, but may not be dissimilar. This increase in debt will have an impact on gearing ratios; lease expenses will be for depreciation of the right-of-use assets and interest on lease liabilities. Interest will typically be higher in the early stages of a lease and reduce over the term as with current finance lease accounting under existing IAS 17. The effect of this change will increase EBITDA. Currently operating lease expenses are recognised on a straight-line basis over the lease term; and operating lease cash flows are currently included within operating activities in the Consolidated Cash Flow Statement; under IFRS 16 these will be recorded as cash flows from financing activities. IFRS 9 Financial Instruments The standard is effective from 1 January 2018 and replaces IAS 39 Financial Instruments. It brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. During the Group performed an impact assessment of the three aspects of IFRS 9 which are summarised below: Classification and measurement Loans and trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortised cost measurement under IFRS 9. This is the same treatment as under IAS 39, therefore, reclassification is not required. Impairment IFRS 9 requires the Group to record expected credit losses on all of its loans and trade receivables, either on a twelve-month or lifetime basis. The Group will apply the simplified approach detailed in IFRS 9 and record lifetime expected losses on its trade receivables. The Group, however, expects no material increase in the bad debt provision as a result of this change. Hedge accounting The Group determined that existing hedge relationships are still deemed effective hedging relationships and hence will continue to qualify for hedge accounting under IFRS 9. As IFRS 9 does not change the general principles of how an entity accounts for effective hedges, applying the hedging requirements of IFRS 9 will not have a material impact on the Group s Financial Statements after adoption. The assessment is based on currently available information and may be subject to change arising from further reasonable and supportable information being made available to the Group in 2018 when the standard is adopted. Overall, the Group expects no material impact on its Financial Statements. Financial Statements 3. SEGMENTAL INFORMATION BUSINESS SEGMENTS The Group s activities are now predominantly focused in two main areas which are: Customer Experience; and Brand Deployment. During the year there have been two changes to cost allocations within the segments as follows: Pass Through revenue, representing pre-agreed or contracted revenues that include an element regarding print, postal and other marketing material which are passed on to clients at cost as part of a wider service, is now reported directly within the Customer Experience and Brand Deployment segments. This change has been made to allow the full underlying segmental split of gross revenue to be better understood. Account management and service costs relating to Customer Experience clients, previously included within Central Costs, have now been recognised within the Customer Experience segment. Pension scheme costs are included in the Corporate Costs segment. Communisis plc Annual Report and Financial Statements 87

90 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 3. SEGMENTAL INFORMATION CONTINUED BUSINESS SEGMENTS CONTINUED The Communisis Board, being the Chief Operating Decision Maker, considers the performance of Customer Experience and Brand Deployment in assessing the performance of the Group and making decisions about the allocation of resources. Segmental disclosures have therefore been presented on this basis. Segment performance is evaluated based on profit from operations and is measured consistently with profit from operations in the Income Statement. However, Corporate Costs and Central Costs are managed on a Group basis and are not allocated to operating segments. Transfer pricing between business segments is set on an arm s length basis in a manner similar to transactions with third parties. The revenue and operating profit figures reviewed by the Chief Operating Decision Maker exclude sales between business segments and, as such, sales between business segments are excluded from the figures in the segmental results tables below. The segment results for the year ended 31 December are as follows: Customer Experience Brand Deployment Central Costs Corporate Costs Revenue 189, , ,865 Profit from operations before amortisation of acquired intangibles and exceptional items 22,373 16,497 (11,759) (5,949) 21,162 Amortisation of acquired intangibles (570) (163) (733) Profit from operations before exceptional items 21,803 16,334 (11,759) (5,949) 20,429 Exceptional items (1,315) (734) (289) 286 (2,052) Profit from operations 20,488 15,600 (12,048) (5,663) 18,377 Net finance costs (3,942) Profit before tax 14,435 Income tax expense (2,663) Profit for the year 11,772 Other segmental information: Depreciation 3, ,759 Amortisation 4, ,637 Revenue includes sales to two clients which each individually represent more than 10% of the Group s total revenue. Sales to client 1 were 68.8m including transactions with the Brand Deployment business segment, and to client 2 were 43.1m including transactions with the Customer Experience business segment. The re-segment results for the year ended 31 December are as follows: Customer Experience Brand Deployment Central Costs Corporate Costs Revenue 185, , ,932 Profit from operations before amortisation of acquired intangibles and exceptional items 19,915 16,216 (11,080) (5,580) 19,471 Amortisation of acquired intangibles (599) (210) (809) Profit from operations before exceptional items 19,316 16,006 (11,080) (5,580) 18,662 Exceptional items (3,128) (495) (29) (615) (4,267) Profit from operations 16,188 15,511 (11,109) (6,195) 14,395 Net finance costs (2,802) Profit before tax 11,593 Income tax expense (2,966) Profit for the year 8,627 Other segmental information: Depreciation 3, ,348 Amortisation 4,714 1, ,406 Revenue includes sales to two clients which each individually represent more than 10% of the Group s total revenue. Sales to client 1 were 88.7m including transactions with the Brand Deployment business segment, and to client 2 were 48.7m including transactions with the Customer Experience business segment. Total Total 88 Communisis plc Annual Report and Financial Statements

91 3. SEGMENTAL INFORMATION CONTINUED GEOGRAPHICAL INFORMATION Revenues from external clients United Kingdom 262, ,153 Other countries 113,392 95, , ,932 Non-current assets United Kingdom 205, ,444 Other countries , ,541 Non-current assets for this purpose consist of property, plant and equipment and intangible assets. 4. REVENUE Revenue disclosed in the Income Statement is analysed as follows: Sales revenue Sale of goods 160, ,733 Provision of services 214, , , ,932 Finance revenue Interest income on financial assets carried at amortised cost 1 18 Gain on foreign currency liabilities Financial Statements No revenue was derived from exchanges of goods and services ( nil). 5. OTHER EXPENSES 5.1 TOTAL FINANCE COSTS Interest expense for borrowings at amortised cost 2,030 2,289 Loss on foreign currency liabilities 425 Retirement benefit related cost (Note 14) 1,488 1,476 3,943 3, NET FINANCE COSTS Interest on financial assets measured at amortised cost 1 18 Interest on financial liabilities measured at amortised cost (2,030) (2,289) Net interest on financial assets and financial liabilities not at fair value through Income Statement (2,029) (2,271) (Loss)/gain on foreign currency liabilities (425) 945 Retirement benefit related cost (1,488) (1,476) (3,942) (2,802) Communisis plc Annual Report and Financial Statements 89

92 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 5. OTHER EXPENSES CONTINUED 5.3 EMPLOYEE BENEFITS EXPENSE Wages and salaries 78,355 82,150 Social security costs 8,471 8,155 Pension costs 4,046 4,409 Share-based payments (equity-settled) Redundancy costs 1,698 3,400 93,167 98,619 In addition to the above 93,167,000, a further 1,214,000 of employee costs have been capitalised during the year as part of various development projects around the Group. These costs have been capitalised as software and are included in Note 11. The total employee benefits expense for the year ended 31 December is therefore 94,381,000. Of the 1,698,000 redundancy costs, 1,570,000 has been included in exceptional items in Note Communisis plc Annual Report and Financial Statements Number The average monthly number of employees during the year was made up as follows: Customer Experience 1,471 1,514 Brand Deployment Central Costs Corporate Costs ,081 2,164 Compensation of key management personnel Short-term employee benefits 2,394 2,531 Post-employment benefits Compensation for loss of office 112 (139) Share-based payments (equity-settled) Total compensation paid to key management personnel 3,018 2,825 Key management personnel consist of statutory Directors of the Company along with non-statutory Directors who sit on the Executive Board. In the year ended 31 December an adjustment of 139,000 was made in respect of actual compensation for loss of office charged and provided for in Details of individual statutory Director s remuneration, with pension entitlements and interests, for the Directors of the Company only, are provided within the Directors Remuneration Report on pages 44 to 59. Details of the Group s pension commitments are provided in Note 14 to these Financial Statements. Details of the Directors interests in employee share incentive plans are provided within the Directors Remuneration Report on pages 44 to AMORTISATION OF ACQUIRED INTANGIBLES AND EXCEPTIONAL ITEMS Profit from operations is arrived at after charging the following items: Exceptional restructuring costs 1,737 4,260 Customer relationship asset write off Contingent consideration write off (361) (452) Write off of unsupported assets 506 Capital restructure costs 109 Trade name impairment 232 Exceptional items 2,052 4,267 Non-exceptional amortisation of acquired intangibles ,785 5,076 During the Group incurred 1,737,000 in respect of organisational restructuring to reduce the cost base, deliver efficiency improvements and outsource non-core activities. The restructuring costs included 1,570,000 relating to staff restructuring and 167,000 in respect of the site closures at the Bangalore office and Bothwell Street, Glasgow, and associated legal costs. Of the 1,737,000, 140,000 is unpaid at 31 December. Number

93 5. OTHER EXPENSES CONTINUED 5.4 AMORTISATION OF ACQUIRED INTANGIBLES AND EXCEPTIONAL ITEMS CONTINUED The 170,000 customer relationship asset write off relates to customer relationships valued as part of acquisition accounting in recent years. It is indicative of the current nature of client turnover in agency businesses where revenues are project based and not usually underpinned by long-term contracts. The 361,000 reduction in contingent consideration relates to fair value revisions of the contingent consideration in respect of the acquisitions of Life Marketing Consultancy Limited (Life) and Psona Films Limited, being 300,000 and 61,000 respectively. The 452,000 reduction in contingent consideration in the year ended 31 December relates to fair value revisions of the contingent consideration in respect of the acquisitions of Life and The Meaningful Marketing Group Limited, being 200,000 and 252,000 respectively. The Group also incurred a charge of 506,000 in respect of the write off of unsupported assets which will not be recovered. The trade name impairment of 232,000 in the year ended 31 December is in relation to Life. The trade name was assigned a value of 512,000 at acquisition on 5 January Trading with this business has been lower than expected resulting in the trade name impairment. The 109,000 capital restructure costs in the year ended 31 December relate to non-recurring professional fees in relation to the capital reduction exercise undertaken during that year to create additional distributable reserves. 5.5 AUDITOR S REMUNERATION The remuneration of the auditor is analysed as follows: Audit of the Group Financial Statements Other fees to the auditor local statutory audits for subsidiaries other assurance services 10 9 other advisory services Financial Statements 5.6 OPERATING LEASE PAYMENTS Minimum lease payments 11,487 11,364 Sub-lease receipts (1,135) (1,098) 10,352 10, INCOME TAX The major components of income tax expense for the years ended 31 December and are: Tax charged in the Consolidated Income Statement Current income tax UK corporation tax 2,738 2,736 Adjustments in respect of prior years (555) 197 Overseas tax on profits for the year 1, Total current income tax charge 3,439 3,720 Deferred income tax Origination and reversal of temporary differences (740) (636) Adjustments in respect of prior years (36) (105) Adjustments in respect of prior years due to change in tax rate (13) Total deferred tax credit (776) (754) Tax charge in the Consolidated Income Statement 2,663 2,966 Tax relating to items charged or credited to other comprehensive income Deferred income tax Actuarial gains/(losses) on pension scheme current year credit 2,517 (2,715) Adjustment in respect of prior years due to change in tax rate (824) 411 Tax on financial liabilities 23 (3) Tax charge/(credit) in the Consolidated Statement of Comprehensive Income 1,716 (2,307) Communisis plc Annual Report and Financial Statements 91

94 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 6. INCOME TAX CONTINUED Current tax adjustments, in respect of prior years, relate to the release of provisions created in respect of prior years tax submissions, agreed in the current year. RECONCILIATION OF THE TOTAL TAX CHARGE The tax expense in the Income Statement for the year is lower ( higher) than the average standard rate of corporation tax in the UK of 19.25% ( 20%). The differences are reconciled below: Profit before income tax 14,435 11,593 At UK statutory income tax rate of 19.25% ( 20%) 2,779 2,319 Expenses not deductible for tax purposes Non-taxable income (138) (97) Effect of different tax rates of subsidiaries operating in other jurisdictions Unrecognised tax losses in overseas territories 7 60 Share-based payments (92) 110 Change in deferred tax in respect of rolled over capital gains (23) (26) Adjustments in respect of prior years (591) 92 Adjustment in respect of prior years due to change in tax rate (13) Tax charge in the Consolidated Income Statement 2,663 2,966 The Group has unrecognised losses amounting to 380,000 ( 200,000), which arose outside of the UK and which are available indefinitely for offsetting against future taxable profits of the companies in which the losses arose. No deferred tax asset has been recognised in respect of these losses as they may not be used to offset taxable profits elsewhere in the Group and there is no evidence of recoverability in the near future. If the Group were able to recognise all unrecognised deferred tax assets, the profit would have been increased by 96,000. DEFERRED TAX Deferred tax included in the Consolidated Balance Sheet is as follows: Accelerated capital allowances (777) (925) Other short-term timing differences Losses available for offset against future taxable income Capital gains rolled over into replacement assets (413) (436) Share-based payments Pensions 5,221 7,331 Financial liabilities Customer relationship intangible assets (196) (351) Deferred tax asset 4,636 6,406 The realisation of the above current year deferred tax asset is dependent upon the anticipated continuing profitability of the Group. The deferred tax asset is recognised as the Directors foresee future profits adequate to assume recovery. The deferred tax credit included in the Consolidated Income Statement is as follows: Accelerated capital allowances (141) (149) Other short-term timing differences 116 (19) Losses available for offset against future taxable income Held-over capital gains (153) Capital gains rolled over into replacement assets (23) (31) Share-based payments (207) 9 Pensions (393) (337) Customer relationship intangible assets (155) (240) Deferred tax credit (776) (754) The provision for deferred tax at 31 December has been made at rates between 17% and 19% depending upon the anticipated time of reversal. This reflects the legislation included in the Finance Act reducing the rate of corporation tax to 17% from April Communisis plc Annual Report and Financial Statements

95 7. ACQUISITION OF BUSINESS In the year ended 31 December there have been movements in contingent consideration in relation to Psona Films Limited and Life as outlined below: PSONA FILMS LIMITED On 25 April 2014, the Group acquired the entire issued share capital of Jacaranda Productions Limited. On 30 June 2014 the Company s name was changed to Psona Films Limited. As part of the purchase agreement a contingent consideration was agreed. An amount equal to 10% of annual gross profits of the company was payable to the sellers at the end of each of the three earn-out periods, being the years ended 30 April 2015, and. The total contingent consideration would in no circumstance exceed the value of 500,000. As at the date of acquisition, the fair value of the contingent consideration was estimated at 200,000, determined using a discounted cash flow method. As at 31 December, a total of 139,000 had been paid out under this arrangement for the earn-out periods ending 30 April 2015 and 30 April. However, as the conditions of the contingent consideration arrangement were not met in the final earn-out period, the remaining balance at 30 April was written off to the Income Statement. A reconciliation of the fair value of the contingent consideration liability is provided below: At 1 January 61 Fair value revision (61) At 31 December The results of this business are included within the Customer Experience segment. LIFE MARKETING CONSULTANCY LIMITED On 5 January 2015, the Group acquired the entire share capital of Life. Financial Statements As part of the purchase agreement a contingent consideration was agreed, the mechanism for which was subsequently revised in 2015 to maintain incentivisation for the management of Life. As at 31 December, the fair value of all contingent consideration was revised to 300,000. The final contingent consideration liability will be quantified and settled in An assessment of the likely contingent consideration payable was performed by looking at the relative likelihood of a range of outcomes of over or under achieving against the current forecasts over the earn-out period. As at 31 December, using this methodology, the fair value of the contingent consideration was revised to nil. A reconciliation of the fair value of the contingent consideration liability is provided below: At 1 January 300 Fair value revision (300) At 31 December The results of this business are included within the Brand Deployment segment. The Group has used Level 3 hierarchy valuation techniques to determine the fair value of the contingent consideration. The fair value hierarchy is described in Note 23. In January the Group repaid the 9,300,000 two-year promissory loan note which was used to finance part of the initial consideration for the acquisition of Life Marketing Consultancy Limited. 8. EARNINGS PER SHARE Number 000 Weighted average number of ordinary shares (excluding treasury shares) for basic earnings per share 208, ,211 Effect of dilution: Share options 1, Weighted average number of ordinary shares (excluding treasury shares) adjusted for the effect of dilution 209, , ,220 ( 806,319) shares were held in trust at 31 December. Share options in issue total 2,470,608 ( 4,395,426) options. Number 000 Communisis plc Annual Report and Financial Statements 93

96 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 8. EARNINGS PER SHARE CONTINUED Basic and diluted earnings per share is calculated as follows: Profit attributable to equity holders of the parent 11,772 8,627 Earnings per share Basic 5.64p 4.12p Diluted 5.61p 4.12p ADJUSTED EARNINGS PER SHARE Adjusted earnings per share are derived from net profit from continuing operations before exceptional items, amortisation of acquired intangibles and certain tax items in respect of prior years, attributable to equity holders of the parent is derived as follows: Profit after taxation from continuing operations 11,772 8,627 Exceptional items (Note 5.4) 2,052 4,267 Taxation on exceptional items (461) (819) Amortisation of acquired intangibles (Note 5.4) Taxation on amortisation of acquired intangibles (125) (171) Taxation adjustments in respect of prior years (609) Profit after taxation from continuing operations excluding exceptional items and amortisation of acquired intangibles 13,362 12,713 Adjusted earnings per share: Basic 6.40p 6.08p Diluted 6.37p 6.07p The basis of measurement of adjusted earnings per share is to reflect more accurately the measure of earnings per share used by the market. Adjusted earnings per share uses the same weighted average number of ordinary shares as reported above. 9. DIVIDENDS PAID AND PROPOSED Declared and paid during the year Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 December 2015 of 1.47p per share 3,077 Interim dividend for the year ended 31 December of 0.81p per share 1,696 Final dividend for the year ended 31 December of 1.61p per share 3,362 Interim dividend for the year ended 31 December of 0.89p per share 1,860 5,222 4,773 Proposed for approval at AGM (not recognised as a liability as at 31 December) Final equity dividend on ordinary shares of 1.77p ( 1.61p) per share (based on issued share capital at the date of approval of the Financial Statements) 3,704 3, Communisis plc Annual Report and Financial Statements

97 10. PROPERTY, PLANT AND EQUIPMENT Freehold property Long leasehold property Short leasehold property Plant, equipment and motor vehicles Cost At 1 January 8, ,895 61,873 73,161 Additions ,932 3,360 Disposals (3,218) (3,218) Exchange adjustment At 31 December 8, ,300 61,626 73,342 Additions ,610 1,704 Disposals (796) (5,696) (6,492) At 31 December 7, ,373 57,540 68,554 Depreciation At 1 January 3, ,185 50,078 Depreciation charge for the year ,857 4,348 Impairment Disposals (3,077) (3,077) Exchange adjustment At 31 December 4, ,320 51,704 Depreciation charge for the year ,335 3,759 Disposals (950) (5,252) (6,202) Exchange adjustment (3) (3) At 31 December 3, ,227 44,400 49,258 Net book value at 31 December 4,010 2,146 13,140 19,296 Net book value at 31 December 4,031 2,301 15,306 21,638 Net book value at 31 December ,288 2,107 16,688 23,083 Total Financial Statements The carrying value of plant and equipment held under finance leases and hire purchase contracts at 31 December was 2,883,999 ( 2,059,000). With the exception of finance leases and hire purchase contracts above, there is no security or any restriction on title. Included within plant, equipment and motor vehicles are assets currently in development of 151,000 ( 1,500,000). Depreciation is expected to commence in There are a number of assets included within property, plant and equipment that have been fully amortised but are still in use by the Group. The total cost and accumulated depreciation of these assets at 31 December is 39,091,000 ( 44,532,000). Communisis plc Annual Report and Financial Statements 95

98 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 11. INTANGIBLE ASSETS Goodwill Software assets Customer relationship assets Cost At 1 January 240,198 25,811 31, , ,230 Additions 2, ,292 Disposals (761) (761) At 31 December 240,198 27,256 31, , ,761 Additions 4,028 4,028 Disposals (446) (454) (900) At 31 December 240,198 30,838 31, , ,889 Amortisation and impairment At 1 January 76,177 14,030 16, ,863 Amortisation during the year 3,281 2, ,406 Impairment (Note 5.4) Disposals (761) (761) At 31 December 76,177 16,550 19, ,858 Amortisation during the year 2,626 2, ,637 Impairment (Note 5.4) Disposals (446) (454) (900) At 31 December 76,177 18,730 21, ,765 Net book value at 31 December 164,021 12,108 9, ,124 Net book value at 31 December 164,021 10,706 12, ,903 Net book value at 31 December ,021 11,781 15, ,367 Software assets are amortised evenly over their useful economic lives of between three and eight years. Included in software assets is 2,666,000 ( 336,000) currently in development. Amortisation is expected to commence in As at 31 December the forecast revenue for some of the customer relationships within recent acquisitions had declined from initial expectations resulting in an indication of impairment. The relevant customer relationship assets have therefore been reduced accordingly and 170,000 ( 118,000) has been recorded in exceptional items (Note 5.4). Included within licences are amounts spent for the development of software which the Group has the exclusive right to sell within the UK. There are a number of assets included within software that have been fully amortised but are still in use by the Group. The total cost and accumulated amortisation of these assets at 31 December is 7,803,000 ( 8,954,000). 12. IMPAIRMENT OF GOODWILL Goodwill acquired through business combinations is allocated for impairment testing purposes to two cash-generating units (CGUs), which are reportable segments, as follows: Customer Experience; and Brand Deployment. These represent the lowest level within the Group at which goodwill is monitored for internal management purposes. The carrying amount of goodwill allocated to cash-generating units is as follows: Customer Experience 86,691 86,691 Brand Deployment 77,330 77, , ,021 The Group conducts annual impairment tests on the carrying value of goodwill using value in use calculations. The key assumptions included in the value in use calculations are revenue growth, product and services mix and profit margins, the long-term growth rates and the discount rate applied. Trade names Licences Total 96 Communisis plc Annual Report and Financial Statements

99 12. IMPAIRMENT OF GOODWILL CONTINUED The Group prepares cash flow forecasts for these CGUs based on the most recent annual budgets approved by the Board. These are based upon detailed budgets for the coming year and internal forecasts of future growth over a five-year period and cash flows beyond the five-year period are extrapolated using external forecasts of expected growth rates. Further information on the assumptions used within the major CGUs is detailed below. KEY ASSUMPTIONS USED IN VALUE IN USE CALCULATIONS The calculation of value in use for all CGUs is most sensitive to the following assumptions: revenue growth rates; product and services mix and profit margins; and growth rates used to extrapolate cash flows beyond the budget period. In addition, the calculation of value in use is sensitive to movements in the discount rate. Revenue growth included in the approved financial budgets The revenue forecast in the Customer Experience cash flow projections, based on financial budgets, is a decline of 4% in 2018 followed by growth of between 3% and 5% in years two to five. The revenue forecast in the Brand Deployment cash flow projections, based on financial budgets, is a decline of 2% in 2018 followed by growth of between 7% and 8% in years two to five. Product and services mix and profit margins Brand Deployment is expected to have an increased share of Group revenues relative to Customer Experience over the five-year forecast period. The Group profit margin, based on gross revenue, is projected to increase from 5.6% in to 7.5% by the end of the detailed forecast period. Financial Statements Profit growth rate used to extrapolate cash flows beyond the budget period The profit growth rate used to extrapolate cash flow projections beyond the budget period for all CGUs is considered to be a representative rate for the markets to which these segments are dedicated and in line with long-term economic growth forecasts. Profit growth rates have been assessed individually for each CGU. Profit growth rates of 1.9% have been used for Customer Experience and 2.4% for Brand Deployment. Discount rates The pre-tax discount rate applied to the Customer Experience cash flow projections is 11.4% and to Brand Deployment cash flow projections is 11.7%. This is the Group s weighted average cost of capital adjusted to a pre-tax rate and adjusted to reflect management s view of the market assessment of specific risks associated with each separate CGU. Goodwill at 31 December Customer Experience 86,691 Brand Deployment 77,330 Revenue growth rates years 2-5 % 4%, 3%, 3%, 5% respectively 8%, 7%, 7%, 7% respectively Profit margin years 2-5 (based on gross revenue) % Terminal growth rates % Pre-tax discount rate % 11%, 12%, 13%, 14% respectively %, 11%, 11%, 11% respectively Goodwill at 31 December Customer Experience 86,691 Brand Deployment 77,330 Revenue growth rates years 2-5 % 5%, 5%, 5%, 6% respectively 6%, 7%, 4%, 4% respectively Profit margin years 2-5 (based on gross revenue) % Terminal growth rates % Pre-tax discount rate % 12%, 12%, 13%, 13% respectively %, 10%, 11%, 11% respectively Goodwill was allocated to each individual CGU using a relative value approach during the re-segmentation which was completed in. The growth rates used in years two to five are below the growth rates expected by management for the business. In no impairment charges have been made ( nil). The headroom at 31 December was 33m ( 35m) in the Customer Experience segment and 96m ( 87m) in the Brand Deployment segment. Communisis plc Annual Report and Financial Statements 97

100 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 12. IMPAIRMENT OF GOODWILL CONTINUED SENSITIVITY TO CHANGES IN ASSUMPTIONS There are reasonably possible changes in key assumptions within the Customer Experience segment which could erode the headroom. The sensitivity to each of these reasonably possible changes is detailed below. In each sensitivity assessment, all other items assumptions, other than the assumption being sensitised, remained equal: short-term revenue growth rates in years two to five would need to reduce from between 3% and 5% to between -1% and 1% to remove all headroom on the Customer Experience impairment test; the pre-tax discount rate would need to increase (in absolute terms) by 2.5% to remove all headroom within the Customer Experience impairment test; on average, long-term profit growth rates would need to be reduced (in absolute terms) by 2.5% to remove all headroom in the Customer Experience segment; and profit margin would need to drop by 1.8% in years two to five, which equates to a 14.3% drop in overall segmental profits, to remove all headroom in the Customer Experience segment. There are no reasonably possible changes in key assumptions within the Brand Deployment segment which could erode the headroom to the point at which an impairment is necessary. 13. SHARE-BASED PAYMENTS THE COMMUNISIS LONG TERM INCENTIVE PLAN 2007 Certain Directors and managers are eligible to participate in this plan at the discretion of the Remuneration Committee. The exercise price in respect of options granted under the scheme is nil. There are no cash settlement alternatives. The share price measure, in respect of the 2015 grant of options, is calculated by reference to the average share price in the final three months of the three-year performance period in comparison with the average share price in the three months immediately preceding grant ( Base Share Price ). The Total Shareholder Return (TSR) measure, in respect of the grant of options, is measured by reference to the change in the Net Return Index of the Group over the three-year period commencing on the date of grant. The earnings per share performance will be measured on the basis of adjusted basic earnings per share (being earnings per share from continuing operations before exceptional items and amortisation of acquired intangible assets and the tax effect of these items). For attainment between certain annual growth rate thresholds, vesting will occur on a straight-line pro rata basis. The Remuneration Committee will only sanction vesting of the awards granted if they are satisfied as to the Group s underlying financial performance in the performance period. Year of grant Vesting condition and period 2015 A maximum of 20% of the options will vest on the attainment of certain share price thresholds and the remaining 80% will vest on the attainment of growth in earnings per share over the financial years Vesting will be calculated by comparing earnings per share at the end of financial year to the earnings per share at 31 December 2014 and calculating the compound annual growth rate. All options will vest on the attainment of growth in earnings per share over the financial years 18. Vesting will be calculated by comparing earnings per share at the end of financial year 2018 to the earnings per share at 31 December 2015 and calculating the compound annual growth rate. A maximum of 50% of the options will vest on the attainment of growth in TSR over three years from the date of grant and calculating the compound annual growth rate in this measure. The remaining 50% will vest on the attainment of growth in earnings per share over the financial years 19. Vesting will be calculated by comparing earnings per share at the end of financial year 2019 to the earnings per share at 31 December and calculating the compound annual growth rate. The fair value of options granted under the Long Term Incentive Plan 2007 in the year to 31 December was estimated on the date of grant using a binomial simulation option pricing model, taking into account the terms and conditions upon which the options were granted. The following were used in the option pricing model: Share price at the date of grant 52.50p 47.00p Estimated annualised dividend yield 4.6% 4.7% Risk-free interest rate 0.2% 0.5% Expected volatility used in the modelling under the Black-Scholes valuation model 39.0% 38.7% Weighted average fair value of the share options granted 33.38p 41.00p The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns which may occur. The expected volatility reflects historical volatility adjusted for future trends, which may also not necessarily be the actual outcome. Both the historical and expected volatilities reflect the volatility of the share prices of Communisis plc and comparator companies. 98 Communisis plc Annual Report and Financial Statements

101 13. SHARE-BASED PAYMENTS CONTINUED THE COMMUNISIS LONG TERM INCENTIVE PLAN 2007 CONTINUED The following table illustrates the number movements in the Long Term Incentive Plan options during the year. The Long Term Incentive Plan options are nil cost options so the weighted average exercise prices (WAEP) is nil in all cases. Number of shares Number of shares Outstanding at 1 January 5,906,359 6,048,291 Granted during the year 3,497,764 3,191,359 Forfeited during the year (603,735) (1,115,547) Expired during the year (507,681) (1,870,885) Exercised during the year 1 (365,096) (346,859) Outstanding at 31 December 7,927,611 5,906,359 1 The weighted average share price at the date of exercise for the options exercised in the year ended 31 December was 55p ( 45p). The weighted average remaining contractual life for the share options outstanding under the Long Term Incentive Plan as at 31 December is 1.52 years ( 1.75 years). The weighted average fair value of all options granted under the Long Term Incentive Plan during the year was 33p ( 41p). Number of shares Number of shares Equity-settled awards granted to Directors of Communisis plc 1,055,533 1,062,778 Equity-settled awards granted to former Directors of Communisis plc 723, ,009 Equity-settled awards granted to other employees 1,718,445 1,545,572 Total equity-settled awards granted during the year 3,497,764 3,191,359 Financial Statements THE EXECUTIVE SHARE OPTION SCHEME 2010 Certain Directors and managers are eligible to participate in this scheme at the discretion of the Remuneration Committee. The exercise price of the options granted under this scheme is equal to the market value of the shares on the date of grant. No options were granted under this scheme in the year ended 31 December or in the year ended 31 December. THE SHARESAVE SCHEME All UK employees (including Executive Directors) are eligible to participate in the Communisis Sharesave Scheme. The exercise price of the options is usually equal to the market price of the shares at the date of invitation to participate less a maximum discount of 20%. The options vest on the third anniversary of the commencement of the savings period. Any options which have not been exercised within six months of the vesting date lapse. No options were granted under the Sharesave Scheme in. The weighted average fair value of the options granted was estimated at the date of grant using the Black-Scholes option pricing model. The following were used in the option pricing model and assumed that option holders will exercise their option at expiry: Share price at the date of grant 44.00p Estimated annualised dividend yield 5.0% Risk-free interest rate 0.6% Expected volatility used in the modelling under the Black-Scholes valuation model 38.9% Exercise price for options exercisable three years after the date of grant 45.75p The volatility has been determined by reference to Communisis plc s and comparator companies historical volatility over a three-year period, adjusted for expected future trends, to reflect the share price of Communisis plc in the future. The dilutive effect of outstanding options is reflected as additional share dilution in the computation of earnings per share. The following table illustrates the number and WAEP of, and movements in, share options during the year. Number of shares WAEP Number of shares Outstanding at the beginning of the year 4,395, p 2,640, p Granted during the year 3,123, p Forfeited during the year (191,777) 45.75p (1,171,653) 27.73p Exercised during the year 1 (243,134) 56.04p (155,659) 31.68p Expired during the year (1,489,907) 56.07p (42,044) 31.68p Outstanding at the end of the year 2,470, p 4,395, p Exercisable at the end of the year 86, p 1 The weighted average share price at the date of exercise for the options exercised in the year ended 31 December was 62p ( 43p). WAEP Communisis plc Annual Report and Financial Statements 99

102 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 13. SHARE-BASED PAYMENTS CONTINUED THE SHARESAVE SCHEME CONTINUED The weighted average remaining contractual life for the share options outstanding under the Sharesave Scheme as at 31 December is 1.95 years ( 1.63 years). The weighted average fair value of all Sharesave options granted during the year was nil ( 7.80p). The range of exercise prices for options outstanding under all schemes at the end of the year was nil 57.5p ( nil 57.5p). The number of share options for which the exercise price is nil totals 7,927,611 ( 5,906,359). 14. RETIREMENT BENEFIT PLANS The Group operates the Communisis Pension Plan which comprises a defined contribution and defined benefit section. DEFINED CONTRIBUTION SECTION The Group operates a UK defined contribution arrangement within all UK trading Group companies. The assets of the arrangements are held separately from those of the Group. Group companies are required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Group with respect to the retirement benefit scheme is to make the specified contributions. The total cost charged to income of 3,007,000 ( 3,105,000) represents contributions payable to these arrangements by the Group at specified rates. At 31 December, 478,000 of contributions due in respect of the current reporting period had not yet been paid over to the arrangements ( all paid over). This liability was paid on 4 January The Group expects to contribute 3,000,000 to the defined contribution pension arrangements in DEFINED BENEFIT SECTION The section is closed to all members with no employees accruing further benefits under the plan. The following tables summarise the components of net benefit expense recognised in the Consolidated Income Statement and the amounts taken to the Consolidated Statement of Comprehensive Income: Recognised in profit from operations Administration costs (826) (857) Gains on settlements 352 Recognised in arriving at profit from operations (826) (505) Interest expense (5,524) (6,466) Interest income 4,036 4,990 Net interest on defined benefit liability (1,488) (1,476) Net benefit expense (2,314) (1,981) Taken to the Consolidated Statement of Comprehensive Income Actual return on scheme assets (excluding interest income) 9,659 18,990 Actuarial losses arising from changes in financial assumptions (6,555) (34,962) Actuarial gains arising from changes in demographic assumptions 2,676 Experience gains arising on liabilities 9,025 Actuarial gains/(losses) recognised in the Consolidated Statement of Comprehensive Income 14,805 (15,972) Benefit (liability)/asset The following table summarises the funded status and amounts recognised in the Consolidated Balance Sheet for the defined benefit pension plan. Defined benefit obligation (200,957) (208,357) Value of plan assets 162, ,878 Net pension deficit (38,217) (55,479) The defined benefit obligation comprises 200,957,000 ( 208,357,000) arising from a partly funded plan. 100 Communisis plc Annual Report and Financial Statements

103 14. RETIREMENT BENEFIT PLANS CONTINUED DEFINED BENEFIT SECTION CONTINUED Benefit (liability)/asset continued Changes in the fair value of the funded status of the defined benefit plan are as follows: Opening net pension deficit (55,479) (41,145) Contributions by employer 4,771 3,619 Gains on settlements 352 Net interest expense (1,488) (1,476) Administration costs (826) (857) Actuarial gains/(losses) 14,805 (15,972) Closing net pension deficit (38,217) (55,479) Present value of the defined benefit obligation Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation 208, ,486 Interest expense 5,524 6,466 Benefits paid (7,778) (8,069) Actuarial losses arising from changes in financial assumptions 6,555 34,962 Actuarial gains arising from changes in demographic assumptions (2,676) Experience gain arising on liabilities (9,025) Creditor extinguished on settlements (2,488) Closing defined benefit obligation 200, ,357 Financial Statements Value of plan assets Changes in the value of plan assets are as follows: Opening plan assets 152, ,341 Interest income 4,036 4,990 Administration costs (826) (857) Contributions by employer 4,771 3,619 Benefits paid (7,778) (8,069) Actual return on scheme assets (excluding interest income) 9,659 18,990 Assets distributed on settlements (2,136) Closing plan assets 162, ,878 The values of major categories of plan assets and the relative percentage of the total plan assets are as follows: Asset category Assets with a quoted market price in an active market: Diversified growth funds 74, , Liability driven investments 27, , Synthetic equities/liability driven investments 24, Diversified alternatives 15,313 9 Property income fund 14, ,410 9 Emerging market equities 14,018 9 Others Direct lending 2,688 2 Insured liabilities 2, ,500 2 Cash 2, , , , None of the above represent equities or bonds issued by the Group, or properties owned by the Group. % % Communisis plc Annual Report and Financial Statements 101

104 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 14. RETIREMENT BENEFIT PLANS CONTINUED DEFINED BENEFIT SECTION CONTINUED Value of plan assets continued Communisis Trustee (2011) Company Limited (the Trustee ) has been appointed by Communisis to administer and manage the Communisis Pension Plan on behalf of the members in accordance with the terms of the Trust Deed and Rules of the Plan and relevant legislation. There are currently four Trustee Directors, two of whom are company nominated (one of whom is the Independent Chairman) and two of whom are member-nominated. One of the member-nominated Trustees is a current pensioner of the Communisis Pension Plan and the other an active contributing member. Member-nominated Trustee Directors are usually appointed for a three-year term but are then eligible for re-appointment subject to a vote of the membership. The overall management of the investment of the assets of the Communisis Pension Plan is the responsibility of the Plan Trustees. However, the day-to-day execution of the investment and associated transactions is delegated to the Plan s appointed Investment Managers. The Trustees agreed investment strategy is based on analysis of the liability profile of the Plan and the risk and returns expected from the various asset classes held over the longer term. The primary objective of the Trustees is to operate a strategy which provides long-term growth and security for all beneficiaries. The risk that the investments may not be sufficient to cover the Plan liabilities is one which is monitored by the Trustees and their advisers as well as by the Company. The funding position and the divergence of invested assets is under regular review. During, the Plan Trustees reviewed and implemented a new investment strategy for the Defined Benefit Section of the Communisis Pension Plan. The new investment strategy was agreed with the Company and is designed to achieve similar long term investment returns to the previous investment strategy but importantly it aims to do this by taking less investment risk. This has been achieved by improving asset diversification and hedging a greater proportion of the interest and inflation risk inherent in the Plan s liabilities. The key new funds introduced were: Synthetic equity/liability driven investments a pooled fund that uses derivatives in order to track global equity market returns and simultaneously provide exposure to changes in real interest rates. This fund helps increase the Plan s hedging of the inflation risk inherent in its liabilities; Diversified alternatives a pooled fund that invests across a range of mostly private market assets such as private equity, specialist property investments, infrastructure and private debt. The diversified nature of these asset classes and their less frequent pricing means that investment returns tend to be smoother than comparable public market investments; and Direct lending this fund invests in senior loans of mostly mid-market European companies and the fund is expected to produce materially better returns than an investment in publicly quoted corporate debt. The Communisis Pension Plan invests in liability driven investments (LDIs) to both reduce investment risk and to better manage the liabilities of the Plan. The objective of LDIs are to have sufficient assets to meet both current and future liabilities as they fall due rather than simply having assets which deliver a positive investment return. LDIs are executed using approaches ranging from increasing the duration of the gilt portfolio to the use of more sophisticated strategies using financial instruments such as swaps. LDIs are designed primarily to hedge interest and inflation risk with an element of active equity exposure in order to seek higher returns. We believe that LDIs are a key risk management tool given the impact that the fluctuations in liabilities can have on the Plan s funding levels and deficits. The Group expects to pay 5,000,000 to the defined benefit pension scheme in 2018, of which 1,150,000 relates to annual rent and 1,000,000 to administration costs. In February 2012 the Group and the Trustees agreed to a Central Asset Reserve arrangement involving the securitisation of a rental stream on one of the Group s freehold properties to help address the pension fund deficit. In connection with the arrangement certain freehold property was transferred to a limited partnership established by the Group. The partnership is controlled by, and its results are consolidated by, the Group. The fair value of the assets transferred was 9,750,000 and on the same date the Plan used the contribution to acquire an interest in the partnership for its fair value of 9,750,000. The Plan s partnership interest entitles it to a distribution of 1,150,000 each year from the income of the partnership over 15 years. The Plan s interest in the partnership does not qualify as a Plan asset for the Group. In addition to the rental payments referred to above, in order to remove the deficit, a further recovery plan (subject to reassessment following future triennial valuations) has been agreed. The latest triennial actuarial valuation for the pension scheme was performed at 31 March. The recovery plan following completion of the triennial actuarial valuation comprises eight annual contributions, payable by 5 October each year from up to and including It was agreed that deficit repair contributions to the scheme will be 2,550,000, increasing in line with dividend increases, or 3% if higher. We believe this is a balanced outcome for the Group and pension scheme Trustees, and provides certainty over cash payments for the next three years. The Board continues to work with the Trustees to seek opportunities to reduce the deficit and liability exposure, and accelerate progress to the goal of self-sufficiency for the defined benefit pension scheme. 102 Communisis plc Annual Report and Financial Statements

105 14. RETIREMENT BENEFIT PLANS CONTINUED DEFINED BENEFIT SECTION CONTINUED Assumptions Independent qualified actuaries have updated the accounting deficit valuation to take account of the requirements of IAS 19 Employee Benefits in order to assess the liabilities of the scheme at 31 December. The principal weighted average assumptions used to determine benefit obligations for the Group s Plan are shown below: Discount rate Inflation assumption Retail Price Index Inflation assumption Consumer Price Index Mortality rates Mortality rates have assumed the base table of 110% of S2PA to be consistent with the approach adopted at the actuarial valuation dated 31 March ( base table of 110% of S1PA). Assumed life expectancy for a member aged 65 is as follows: % % Current pensioners: Male Female Future pensioners: Male Female Years Years Financial Statements Sensitivity analysis Sensitivity analysis has been performed to determine the impact on the defined benefit obligation as a result of reasonable changes in the key assumptions occurring at the end of the reporting period. A change of 0.1 percentage points in the discount rate would have the following effects: Discount rate Effect on profit from operations Effect on defined benefit obligation Increase Decrease (56) 45 (3,400) 3,400 A change of 0.1 percentage points in the Consumer Price Index would have the following effect: Increase Decrease Inflation Effect on profit from operations 56 (55) Effect on defined benefit obligation 2,300 (2,200) An increase of one year in life expectancy would have the following effect: Increase Effect on profit from operations 169 Effect on defined benefit obligation 6,500 The Plan is exposed to inflation and interest rate risk and changes in the life expectancy of pensioners. The Plan s exposure to equity market risk is mitigated by a diverse portfolio of investments. The weighted average duration of the defined benefit obligation at 31 December is approximately 17 years ( 17 years). 15. INVENTORIES Raw materials 4,467 3,952 Work in progress 1,958 2,339 Finished goods 1, ,756 6,968 All inventories are held at the lower of cost and net realisable value. Communisis plc Annual Report and Financial Statements 103

106 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 16. TRADE AND OTHER RECEIVABLES Trade receivables 49,951 44,505 Prepayments, accrued income and other receivables 29,390 22,519 79,341 67,024 Current 77,375 66,203 Non-current 1, ,341 67,024 Trade receivables are non-interest bearing and generally on days credit terms with an average of 50 days. The carrying value of trade receivables is considered a reasonable approximation of fair value. All of the Group s trade and other receivables have been reviewed for indicators of impairment. The doubtful debt provision has moved as follows: At 1 January 1, Provisions made during the year 166 1,104 Released during the year (1,104) (6) At 31 December 466 1,404 In determining the recoverability of a trade receivable, the Group considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The Group trades only with recognised, creditworthy third parties. The top 10 clients make up 56% of the receivables balance ( 44%). Generally, clients who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group s exposure to bad debts is not significant. The Group has in place trade credit insurance arrangements which cover 38% of the Group s revenue up to a maximum aggregate claim in any one year of 4,500,000. The concentration of credit risk is therefore limited to the carrying value of trade receivables not covered by the credit insurance. The Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts, in respect of the portion not covered by the credit insurance, and an excess of 40,000 in respect of the portion covered by the credit insurance. Certain trade receivables were found to be impaired and a provision of 466,000 ( 1,404,000) is carried at the year end. Trade receivables are shown net of this doubtful debt provision. In addition, some of the unimpaired trade receivables are past due as at the reporting date. The age of financial assets past due but not impaired is as follows: Overdue by less than 30 days 3,960 1, days overdue 1, days overdue days 2, ,046 2,584 Management have considered the unimpaired receivables past due and do not consider there is any change in credit risk that requires any additional provisions. 104 Communisis plc Annual Report and Financial Statements

107 17. FINANCIAL ASSETS AND LIABILITIES 17.1 FINANCIAL ASSETS BY CATEGORY The IAS 39 categories of financial assets included in the Consolidated Balance Sheet and the headings in which they are included are as follows: Non-current assets Trade and other receivables loans and receivables 1, Cash and cash equivalents 1, Current assets Trade and other receivables loans and receivables 69,367 58,317 Cash and cash equivalents 30,182 38,294 99,549 96, FINANCIAL LIABILITIES BY CATEGORY The IAS 39 categories of financial liabilities included in the Consolidated Balance Sheet and the headings in which they are included are as follows: Non-current liabilities Interest-bearing loans and borrowings financial liabilities measured at amortised cost 53,000 58,000 Unamortised loan arrangement fees (596) (176) Trade and other payables financial liabilities measured at amortised cost Financial liabilities 228 Hire purchase commitments 1, Provisions ,888 59,673 Current liabilities Trade and other payables financial liabilities measured at amortised cost 81,921 87,603 Financial liabilities 94 Hire purchase commitments Provisions ,899 88,432 Financial Statements 17.3 CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES The IAS 39 categories of financial liability included in the Consolidated Balance Sheet and the headings in which they are included are as follows: 1 January Cash flows Amortisation of loan arrangement fee 31 December Non-current interest-bearing loans and borrowings 57,824 (5,657) ,404 1 January Cash flows Amortisation of loan arrangement fee 31 December Non-current interest-bearing loans and borrowings 60,648 (3,000) ,824 Communisis plc Annual Report and Financial Statements 105

108 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 18. CASH AND CASH EQUIVALENTS Cash at bank and in hand 30,182 38,294 Cash at bank earns interest at floating rates based on daily bank deposit rates. The carrying amount of these assets approximates to their fair value. 19. EQUITY SHARE CAPITAL AND RESERVES Number of shares Number of shares Allotted and fully paid Ordinary shares of 25p each 209,619,144 52, ,376,010 52,344 At the year end the Group had one class of ordinary shares which carry no right to fixed income. The Group has two share option schemes under which options to subscribe for the Company s shares have been granted to employees (Note 13). SHARE PREMIUM RESERVE This represents the share premium attaching to those shares issued upon the exercise of certain share options. At 31 December the share premium reserve was 75,000 ( nil). At 1 January 5,986 Exercise of share options 10 Capital reduction (5,996) At 31 December Exercise of share options 75 At 31 December 75 MERGER RESERVE This represents the share premium attaching to those shares issued upon the acquisition of subsidiaries. At 31 December the merger reserve on consolidation was 519,000 ( 519,000). At 1 January 15,600 Capital reduction (15,081) At 31 December and 519 ESOP RESERVE The ESOP reserve is used to record the investment in Communisis plc shares held by the employee share ownership plan (ESOP). The ESOP is for the benefit of all employees and can be used in conjunction with any of the Group s share schemes. The ESOP reserve holds 441,220 shares at 31 December ( 806,319) with an average cost of 36.86p ( 36.83p) and the market value of these shares is 284,589 ( 349,781). At 1 January (10) Shares issued from ESOP 155 Purchase of own shares (442) At 31 December (297) Shares issued from ESOP 134 At 31 December (163) CAPITAL REDEMPTION RESERVE The capital redemption reserve is used to record the effect of share capital buy-backs made by the Company where the nominal value of share capital acquired is transferred to this reserve. At 31 December the capital redemption reserve was nil ( nil). At 1 January 1,375 Capital reduction (1,375) At 31 December and 106 Communisis plc Annual Report and Financial Statements

109 19. EQUITY SHARE CAPITAL AND RESERVES CONTINUED CUMULATIVE TRANSLATION ADJUSTMENT The cumulative translation adjustment reserve is used to record exchange differences arising from the translation of the Financial Statements of foreign subsidiaries. At 1 January (802) Translation movements 1,129 At 31 December 327 Translation movements 415 At 31 December INTEREST-BEARING LOANS AND BORROWINGS Current Hire purchase contracts May Non-current Hire purchase contracts May , ,000,000 bank loan ( 65,000,000) August ,404 57,824 53,604 58,751 HIRE PURCHASE See Note 25 for full details. Maturity Financial Statements BANK OVERDRAFTS The bank overdrafts are principally denominated in Sterling and bear interest at rates set by reference to the UK base rate. The overdrafts are secured by cross guarantee arrangements with the relevant banks. At 31 December and 31 December bank overdraft facilities of 5,000,000 were available but not utilised. 65,000,000 BANK LOAN In August the 65,000,000 bank loan facility was renewed. This loan is secured by a cross guarantee arrangement and is repayable in August Interest is charged at LIBOR plus a rate of between 1.5% and 2.25% depending on the ratio of net debt to EBITDA in the preceding performance period. The Group is subject to a number of covenants in relation to its borrowing, which, if breached, would result in its loans becoming immediately repayable. These covenants specify certain maximum limits in terms of net debt as a multiple of EBITDA and interest payable as a multiple of EBITA. At the year end, and throughout the year, the Group was not in breach of any bank covenants. At 31 December the Group had available 12,000,000 ( 7,000,000) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. With the exception of hire purchase agreements, early repayment is possible under the terms of all the borrowing facilities listed above at no cost by giving more than five days notice. 21. PROVISIONS Onerous leases Dilapidation provisions At 1 January Arising during the year Utilised (179) (106) (285) Released during the year (115) (30) (145) At 31 December Current Non-current At 31 December Current Non-current At 31 December Total Communisis plc Annual Report and Financial Statements 107

110 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 21. PROVISIONS CONTINUED ONEROUS LEASES The onerous lease provisions related to the estimated costs for the rental obligations in respect of the exits from Bangalore and Bothwell Street, Glasgow. The provisions reflected the estimated net cost to the Group over the remainder of the lease period. At 31 December both provisions had been settled in full. DILAPIDATION PROVISIONS The dilapidation provisions represent the estimated costs required to reinstate premises to a state as required under the lease. At 31 December the provision existed for premises in Edinburgh which expire in TRADE AND OTHER PAYABLES Trade payables 63,426 58,188 Other payables 2,234 2,727 Taxation and social security 6,347 3,980 Accruals and deferred income 21,936 27,584 Interest payable 1 93,944 92,479 Current 92,993 90,968 Non-current 951 1,511 93,944 92,479 Trade and other payables are non-interest bearing and generally on day credit terms. The carrying values are considered to be a reasonable approximation of fair value. 23. FINANCIAL LIABILITIES Current liabilities Interest rate swaps 94 Non-current liabilities Interest rate swaps INTEREST RATE SWAPS At 31 December the Group has two arrangements each of a notional amount of 10,000,000 with maturity dates being in The Group pays fixed rates of interest of 3.16% and 1.77% respectively on each arrangement and on both the Group receives a variable rate equal to LIBOR + 1.5% on the notional amount. FAIR VALUE HIERARCHY The Group used the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. As at 31 December the Group held the following financial instruments measured at fair value: Financial liabilities at fair value through profit or loss Interest rate swaps During the year there were no transfers between Level 1 and Level 2 fair value measurements and no transfers into or out of Level 3 fair value measurements. As disclosed within Note 27, the fair value of loans has been calculated using Level 2 valuation techniques and the fair value of contingent consideration has been calculated using Level 3 valuation techniques as outlined in Note 7. Level 1 Level 2 Level Communisis plc Annual Report and Financial Statements

111 24. OBLIGATIONS UNDER OPERATING LEASES OPERATING LEASE COMMITMENTS GROUP AS LESSEE Motor vehicles and machinery leases The Group has entered into commercial leases on motor vehicles and items of machinery. These leases have a remaining life of between one and six years. Future minimum rentals payable under non-cancellable operating leases as at 31 December are as follows: No later than one year 5,708 6,115 After one year but no more than five years 6,007 8,518 After five years ,737 14,726 Land and building leases The Group has entered into commercial land and building leases. These leases have a remaining life of between one and ten years. Future minimum rentals payable under non-cancellable operating leases as at 31 December are as follows: No later than one year 3,876 3,955 After one year but no more than five years 13,593 14,114 After five years 7,556 8,879 25,025 26,948 Financial Statements OPERATING LEASE COMMITMENTS GROUP AS LESSOR Surplus land and building leases The Group has entered into commercial land and building leases consisting of the Group s surplus office and manufacturing buildings. These properties have been sublet and the leases have a remaining life of six years. Future minimum rentals receivable under non-cancellable operating leases as at 31 December are as follows: No later than one year 1,135 1,135 After one year but no more than five years 4,542 4,542 After five years 551 1,686 6,228 7, HIRE PURCHASE COMMITMENTS The Group has entered into hire purchase contracts for various items of plant and machinery with a purchase option at the end of the lease term for a nominal fee. Future minimum lease payments under finance leases and hire purchase contracts together with the present value of the net minimum lease payments are as follows: Minimum payments Present value of payments (Note 20) Minimum payments Present value of payments (Note 20) Within one year After one year but no more than five years 1,266 1, Total minimum lease payments 2,217 2,084 1,622 1,541 Less amounts representing finance charges (133) (81) Present value of minimum lease payments 2,084 2,084 1,541 1,541 Communisis plc Annual Report and Financial Statements 109

112 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group s principal financial instruments comprise bank loans and overdrafts (Note 20), cash and short-term deposits (Note 18) and interest rate swaps (Note 23). The main purpose of these financial instruments is to raise finance for the Group s operations and to manage interest rate risk. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. It is, and has been throughout the year under review, the Group s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group s financial instruments are cash flow interest rate risk, foreign currency risk, liquidity risk and credit risk. CASH FLOW INTEREST RATE RISK The Group s exposure to the risk of changes in market interest rates relates primarily to the Group s medium-term debt obligations with a floating interest rate. All borrowings are held on floating rate terms and so the Group is exposed to interest rate movements on these borrowings. The Group s policy is to monitor interest rate exposure on this floating rate debt and maintain interest rate swaps through separate financial instruments where appropriate. At the end of the Group has two arrangements each with a notional amount of 10,000,000, covering 88% of the year end bank debt ( 100%). Within bank debt the Group includes all interest-bearing bank loans and borrowings, less cash and cash equivalents. At 31 December, if interest rates had been 100 basis points higher for the full financial year, with all other variables held constant, this would have resulted in a reduction of pre-tax profits of 330,000 and a post-tax reduction in equity of 266,000; if interest rates had been lower by 25 basis points throughout the financial year the pre-tax profits would have been 83,000 higher and the post-tax impact on equity would have been an increase of 67,000. FOREIGN CURRENCY RISK The Group operates principally in the UK with approximately 30% ( 26%) of sales denominated in currencies other than Sterling and, of this figure, 26% ( 24%) of sales arising from companies operating with functional currencies other than Sterling. The majority of foreign currency transactions are naturally hedged from buying and selling within the same currency. Where this is not the case, and Communisis is entering into a significant foreign currency transaction with no natural hedge in place, the Group enters into forward foreign exchange contracts to control these risks. There were no foreign currency contracts outstanding at the year end ( none). LIQUIDITY RISK The Group regularly monitors its risk to a shortage of funds, taking account of the maturity profile of its financial assets and liabilities and the projected cash flows from operations. The Group s objective is to maintain a balance between continuity of funding and flexibility through a mix of medium-term funding of committed floating rate facilities supplemented by uncommitted bank overdraft facilities. In the Group refinanced its borrowings which are repayable in August At 31 December none of the Group s mediumterm debt matures in less than 12 months ( nil), none matures between one and two years from the Balance Sheet date ( 100%) and 100% matures between two to five years from the Balance Sheet date ( nil). The Directors consider this funding structure to be adequate for the Group s current requirements. The maturity profile of the Group s financial liabilities at 31 December is shown in Note 27. CREDIT RISK The Group trades only with recognised, creditworthy third parties. Generally, customers who wish to trade on credit terms are subject to credit verification procedures. During the year the Group has entered into trade credit insurance arrangements which cover 38% of the Group s turnover up to a maximum aggregate claim in any one year of 4,500,000. The concentration of credit risk is therefore limited to the carrying value of trade receivables not covered by the credit insurance as disclosed in Note 16. The Group s exposure to credit risk arises from the default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. As at the Balance Sheet date there are no significant concentrations of credit risk within the Group. The credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, is managed by Group treasury in accordance with Group policy. Investments of surplus funds are only made with established banks approved by the Board. The Group s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. 110 Communisis plc Annual Report and Financial Statements

113 26. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES CONTINUED CAPITAL MANAGEMENT The primary objective of the Group s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support the business and maximise shareholder value. The Group monitors capital using a gearing ratio, being bank debt divided by equity plus bank debt. The policy is to maintain the gearing ratio below 50%. Within bank debt the Group includes all interest-bearing bank loans and borrowings, less cash and cash equivalents. Interest-bearing bank loans and borrowings 53,000 58,000 Less cash and cash equivalents (30,182) (38,294) Bank debt 22,818 19,706 Equity 139, ,215 Capital and bank debt 161, ,921 Gearing ratio 14.09% 14.29% For the purposes of capital management, the Group considers undiscounted interest-bearing loans and borrowings as the appropriate measure for the purposes of determining bank debt. 27. FINANCIAL INSTRUMENTS The following table sets out the maturity of the Group s financial liabilities, based on contractual undiscounted payments. At 31 December Within 1 year 1 2 years Trade and other payables 81, ,163 65,000,000 bank loan 1,060 1,060 1,060 1,060 53,618 57,858 Interest rate swaps Provisions Hire purchase ,217 84,026 1,878 1,345 1,387 53, , years 3 4 years 4 5 years More than 5 years Total Financial Statements At 31 December Within 1 year 1 2 years Trade and other payables 90, ,479 65,000,000 bank loan 1,317 58,329 59,646 Interest rate swaps Provisions Hire purchase ,622 93,303 59, ,232 Carrying value is considered to approximate fair value for all of the Group s financial instruments other than bank loans, which have a carrying value of 52,404,000 ( 57,824,000) and a fair value of 57,262,000 ( 59,470,000). The fair value of loans has been calculated using Level 2 valuation techniques reflecting the borrowing rate at the end of the reporting period and any unamortised arrangement fees relating to those borrowings. The known non-performance risk at 31 December was assessed to be insignificant. 28. CAPITAL COMMITMENTS As at 31 December the Group had not entered into any contractual commitments for the acquisition of property, plant and equipment ( 494,000) or intangible assets ( nil). 2 3 years 3 4 years 4 5 years More than 5 years Total Communisis plc Annual Report and Financial Statements 111

114 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 29. CONTINGENT LIABILITIES The Group has contingent liabilities where it has provided rental guarantees to landlords in respect of certain leasehold properties occupied by companies that were formerly subsidiaries in the Group, but have subsequently been sold. The principal risk is that current leasehold occupants will become insolvent and that guarantees will be called, resulting in a material cash cost to the Group. To the extent that they have not already been called, these guarantees represent contingent liabilities of the Group. Other than those leases for which the liability is considered to be remote, the Group has guaranteed rentals on a lease with a remaining term of six years, with an annual rental of 1,135,000. In addition, there are four further rental guarantees totalling 80,000 with remaining lease terms of between two and six years. No provision for these guarantees has been made in the Financial Statements because, at the Balance Sheet date, the Directors believe that it is not probable that they will be called. 30. CASH GENERATED FROM OPERATIONS Continuing operations Profit before tax 14,435 11,593 Adjustments for: Amortisation of intangible assets arising on business acquisitions Depreciation and other amortisation 8,663 9,945 Exceptional items 2,052 4,267 Loss on sale of property, plant and equipment 7 25 Share-based payment charge Net finance costs 3,942 2,802 Additional contribution to the defined benefit pension plan (3,988) (2,836) Cash cost of exceptional items (2,704) (3,700) Changes in working capital: (Increase)/decrease in inventories (761) 904 Increase in trade and other receivables (15,546) (9,912) Increase in trade and other payables 15,194 8,507 Cash generated from operations 22,624 22, RELATED PARTY TRANSACTIONS During the year the Directors were remunerated for services provided to the Group. This is disclosed in the Directors Remuneration Report on pages 44 to 59. The Directors are included within key management personnel, for whom details of compensation are disclosed in Note 5.3. There were no other related party transactions in the year. 32. INVESTMENTS The Consolidated Financial Statements include the Financial Statements of Communisis plc, the ultimate parent undertaking, and all subsidiary undertakings. The Group s subsidiary operations are listed in the following table. The registered offices for each subsidiary are referenced in the table and listed on page 115. Name Country of incorporation Registered office % equity interest % equity interest Immediate parent Absolute Data Solutions Limited (i) England and Wales Communisis Data Intelligence Limited Art Master of Chelsea Limited (i) England and Wales Wakefield Holdings Limited B2E Consulting Limited (i) England and Wales Communisis Data Intelligence Limited Bangquote Limited (i) England and Wales Dataform (Northern) Limited Canada 2 Limited (i) England and Wales Communisis Dataform Limited Chorley Direct Mail Limited (i) England and Wales Waddingtons House Limited Communisis 2012 Limited England and Wales Communisis plc Communisis BBF Limited (i) England and Wales Robot No.6 Limited Communisis Broadprint Limited (i) England and Wales Robot No.7 Limited Communisis Capital Partner Limited England and Wales Communisis UK Limited Communisis Chorleys Limited (i) England and Wales Waddingtons House Limited Communisis-CRM Limited (i) England and Wales Waddingtons House Limited Communisis Data Intelligence Limited England and Wales Communisis UK Limited 112 Communisis plc Annual Report and Financial Statements

115 32. INVESTMENTS CONTINUED Name Country of incorporation Registered office % equity interest % equity interest Immediate parent Communisis Dataform Limited (i)(ii) England and Wales Communisis plc Communisis Dataform South West Limited (i) England and Wales Communisis Dataform Limited Communisis Digital Limited (iii) England and Wales Communisis UK Limited Communisis Europe Limited England and Wales Communisis plc Communisis Group Strategic England and Wales Communisis UK Limited Partnerships Limited (i) Communisis International Limited England and Wales Communisis plc Communisis One Limited (i)(iii) England and Wales Communisis Chorleys Limited Communisis Security Products Limited (i) England and Wales Robot No.7 Limited Communisis Trustee Company Limited (i) England and Wales Waddington Limited Communisis Trustee (2011) Company England and Wales Communisis plc Limited Communisis UK Limited England and Wales Communisis plc Dataform (Digital) Limited (i) England and Wales Communisis Dataform Limited Dataform (Midlands) Limited (i) England and Wales Communisis Dataform Limited Dataform (Northern) Limited (i) England and Wales Communisis Dataform Limited E.K. Lickfold Limited (i)(iv) England and Wales Waddingtons House Limited Geronimo Marketing & Communications Limited (i) England and Wales The Meaningful Marketing Group Limited House of Dubreq Limited (i) England and Wales Waddington Limited Imagio Limited (i) England and Wales Wakefield Holdings Limited Intuistic Limited (i) England and Wales Communisis Data Intelligence Limited Jacaranda Productions Limited (i) England and Wales Robot No.6 Limited Jaypak Limited (i) England and Wales Waddington Limited John Mansfield Timber Limited (i) England and Wales Communisis plc John Waddington Properties (i) England and Wales Imagio Limited Johnsen & Jorgensen Plastic Limited (i) England and Wales Waddington Limited Ken Stokes Limited (i) England and Wales Robot No.6 Limited Kieon Limited (i) England and Wales Waddington Limited Laser Image Limited (i) England and Wales Robot No.6 Limited Life Marketing Consultancy Limited (v) England and Wales Communisis plc McCorquodale Colour Display Limited (i) England and Wales Robot No.7 Limited Mono-Web Limited (i) England and Wales Waddington Limited NEWJMTCO Limited (i)(vi) England and Wales Communisis plc PFB Advertising Limited (i)(vii) England and Wales Communisis One Limited Print Directive Limited (i) England and Wales Communisis Dataform Limited Psona Limited England and Wales Psona Group Limited Psona Films Limited England and Wales Psona Group Limited Psona Glasgow Limited England and Wales Psona Group Limited Psona Group Limited England and Wales Communisis plc Psona 12 Limited England and Wales Psona Group Limited Public Creative Limited (i) England and Wales Psona Limited Robot No.6 Limited (i) England and Wales Communisis plc Robot No.7 Limited (i) England and Wales Robot No.6 Limited Standard Check Book Company Limited (i) England and Wales Robot No.7 Limited Subbuteo Sports Games Limited (i) England and Wales Waddington Limited Supervision Entertainment Limited (i) England and Wales Waddington Limited The Communications Agency One Limited (i) England and Wales Waddington Limited The Garden Marketing Limited (i) England and Wales Communisis 2012 Limited The Meaningful Marketing Group Limited (iii) England and Wales Psona Group Limited Waddington Limited (viii) England and Wales Communisis plc Waddingtons Business Forms Limited (i) England and Wales Waddington Limited Waddingtons Games Limited (i) England and Wales Waddington Limited Financial Statements Communisis plc Annual Report and Financial Statements 113

116 Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 32. INVESTMENTS CONTINUED Name Country of incorporation Registered office % equity interest % equity interest Immediate parent Waddingtons Playing Card Company Limited (i) England and Wales Waddington Limited Waddingtons Security Print Limited (i) England and Wales Communisis plc Waddingtons Videomaster Limited (i) England and Wales Waddington Limited Wakefield Holdings Limited (i) England and Wales Communisis UK Limited Yomego Limited (i) England and Wales Robot No.7 Limited Communisis Belgie NV Belgium Communisis Europe Limited Communisis Deutschland GmbH Germany Communisis Europe Limited Communisis Digital Private Limited India Communisis Digital Limited Communisis France S.a.r.l. France Communisis Europe Limited Communisis Hellas Marketing Services EPE Greece Communisis Europe Limited Communisis Inc. USA Communisis International Limited Communisis Ireland Limited Ireland Communisis UK Limited Communisis Italia Srl Italy Communisis Europe Limited Communisis Marketing Services LLC United Arab Emirates Communisis International Limited Communisis Nederland B.V. The Netherlands Communisis Europe Limited Communisis NI Limited (i) Northern Ireland Robot No.7 Limited Communisis Pension Funding Limited Partnership (i) Scotland Communisis Capital Partner Limited/ GDE Limited/Communisis Trustee (2011) Company Limited GDE Limited (i) Scotland Communisis UK Limited M.Y.E Limited (i) Scotland Waddingtons House Limited Waddingtons House Limited (i) (ix) Scotland Waddington Limited Communisis Poland Sp. z o.o Poland Communisis International Limited Communisis Portugal LDA Portugal Communisis Europe Limited Communisis Romania S.R.L Romania Communisis Europe Limited Communisis Spain S.L. Spain Communisis Europe Limited Communisis Suisse Sàrl Switzerland Communisis Europe Limited Communisis Sverige AB Sweden Communisis Europe Limited Communisis Turkey Ofis Hizmetleri Turkey Communisis Europe Limited Pazarlama Ticaret Limited Sirketi Editions Publishing Limited Scotland Communisis UK Limited Editions Financial Inc. USA Communisis Inc. Communisis Marketing Services Limited Russian Federation Communisis International Limited Liability Company Communisis Marketing Services d.o.o. Beograd Serbia Communisis International Limited 114 Communisis plc Annual Report and Financial Statements

117 32. INVESTMENTS CONTINUED Reference (from table above) Registered office 1 Communisis House, Manston Lane, Leeds LS15 8AH 2 Pegasus Park, De Kleetlaan 12A, 1831 Diegem, Belgium 3 Am Kronberger Hang 8, 65824, Schwalbach am Taunus, Germany 4 #41, Patalamma Temple Street, Near South End Circle, Basavanagudi, Bangalore, Karnataka, India Rue Boissiere, Paris, France 6 Patroklou 1 & Paradissou, Athens, , Greece Orange Street, Wilmington, Delaware 19801, USA 8 Suite 3, One Earlsfort Centre, Earlsfort Terrace, Dublin, Ireland 9 Via Montenapoleone n.29, Milan, Italy 10 Standard Chartered Tower, Level 5, Emmar Square, DownTown Burj Khalifa, Dubai, United Arab Emirates 11 Monfor Offices 4th floor, Sir Winston Churchilllaan 299, 2288 DC Rijswijk, The Netherlands 12 Marlborough House, 30 Victoria Street, Belfast, Northern Ireland BT1 3GG 13 1 Rutland Court, Edinburgh, Scotland EH3 8EY 14 ul. Mila 2, , Warszawa, Poland 15 Av. do Brasil, 15-1, , Lisbon, Portugal 16 Bulevardul Dimitrie Pompei nr. 5 7, Cladirea Hermes Business, Etaj 2, Biroul, 205, Sector 2, Bucuresti, , Romania 17 Calle Gurtubay 4, 3 derecha, Madrid, Spain chemin du Faubourg-de-Cruseilles, Carouge, 1227, Geneva, Switzerland 19 Berga Backe 2, Box 68, Danderyd, Sweden 20 Kucukbakkalkoy Mahallesi, Vedat Gunyol Caddesi, Defne Sokak No: 1 Flora Residence Kat: 18 Daire: , Atas, ehir / Istanbul, 34750, Turkey Lothian Road, Edinburgh, Midlothian, Scotland EH3 9WJ Eighth Avenue, New York, NY 10011, USA , 3 Smolenskaya Square, Moscow, Russian Federation 24 Spanskih boraca 52/10, Novi Beograd, Belgrade, Serbia Financial Statements Notes: (i) Dormant company. (ii) Ownership held in ordinary shares, ordinary-a shares, preference-a shares and preference-b shares. (iii) Ownership held in ordinary-a shares and ordinary-b shares. (iv) Ownership held in ordinary shares and deferred shares. (v) Ownership held in ordinary-a shares, ordinary-b shares and ordinary-c shares. (vi) Ownership held in ordinary shares, ordinary-a shares, ordinary-b shares, ordinary-c shares and preference shares. (vii) Ownership held in ordinary shares and 4% non-cumulative preference shares. (viii) Ownership held in ordinary shares, 6% preference shares and 8% preference shares. (ix) Ownership held in ordinary shares and ordinary-a shares. Communisis plc Annual Report and Financial Statements 115

118 Financial Statements COMPANY BALANCE SHEET 31 DECEMBER Assets Non-current assets Property, plant and equipment Intangible assets Trade and other receivables 9 3 Investments 8 228, ,565 Deferred tax assets 5 1,031 1, , ,316 Current assets Trade and other receivables 9 2,631 5,391 Income tax receivable 1, Cash and cash equivalents ,477 5,715 Total assets 234, ,031 Equity and liabilities Equity share capital 15 52,405 52,344 Share premium ESOP reserve 16 (163) (297) Retained earnings 17 32,835 26,824 Total equity 85,152 78,871 Non-current liabilities Interest-bearing loans and borrowings 11 52,404 57,824 Trade and other payables Financial liabilities Loans due to group undertakings 62,857 70,787 Retirement benefit obligations 18 4,384 6, , ,959 Current liabilities Interest-bearing loans and borrowings 11 25,167 6,651 Trade and other payables 12 4,238 14,423 Financial liabilities Provisions ,499 21,201 Total liabilities 149, ,160 Total equity and liabilities 234, ,031 The Company has taken advantage of the exemption provided by Section 408 of the Companies Act 2006 not to publish its individual Income Statement. The profit for the year attributable to the members of the Company was 9,148,000 ( 658,000 loss). The Financial Statements on pages 116 to 128 were approved by the Board on 8 March 2018 and signed on its behalf by: Note Andy Blundell Steve Rawlins Directors The accompanying notes are an integral part of these Financial Statements. 116 Communisis plc Annual Report and Financial Statements

119 COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER Issued capital Share premium Capital reduction shares Merger reserve ESOP reserve Capital redemption reserve Retained earnings At 1 January 52,302 5,986 15,081 (10) 1,375 11,239 85,973 Loss for the year (658) (658) Other comprehensive loss (1,783) (1,783) Total comprehensive loss (2,441) (2,441) Employee share option schemes value of services provided Shares issued exercise of options (3) 49 Shares issued from ESOP 155 (155) Purchase of own shares (442) (442) Issue of capital reduction shares 15,081 (15,081) Capital reduction (5,996) (15,081) (1,375) 22,452 Dividends paid (4,773) (4,773) At 31 December 52,344 (297) 26,824 78,871 Profit for the year 9,148 9,148 Other comprehensive income 1,622 1,622 Total comprehensive income 10,770 10,770 Employee share option schemes value of services provided Shares issued exercise of options Shares issued from ESOP 134 (134) Dividends paid (5,222) (5,222) At 31 December 52, (163) 32,835 85,152 Total equity Financial Statements The accompanying notes are an integral part of these Financial Statements. Communisis plc Annual Report and Financial Statements 117

120 Financial Statements NOTES TO THE COMPANY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 1. AUTHORISATION OF FINANCIAL STATEMENTS AND STATEMENT OF COMPLIANCE WITH FRS 101 The Financial Statements of Communisis plc (the Company ) for the year ended 31 December were authorised for issue on 8 March 2018 and the Balance Sheet was signed on the Board s behalf by Andy Blundell and Steve Rawlins. Communisis plc is incorporated and domiciled in England and Wales. The Company Financial Statements are prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101) and in accordance with applicable United Kingdom law and accounting standards. The Company s Financial Statements are presented in Sterling and all values are rounded to the nearest thousand British pounds () except where otherwise indicated. The results of Communisis plc are included in the Consolidated Financial Statements of Communisis plc which are available from Communisis House, Manston Lane, Leeds LS15 8AH. The principal accounting policies adopted by the Company are set out in Note ACCOUNTING POLICIES 2.1 BASIS OF PREPARATION The accounting policies which follow set out those policies which apply in preparing the Financial Statements for the year ended 31 December. The Company has taken advantage of the following disclosure exemptions under FRS 101: (a) the requirements of paragraphs 45(b) and of IFRS 2 Share-based Payment, because the share-based payment arrangement concerns its own equity instruments and its separate Financial Statements are presented alongside the Consolidated Financial Statements of the Group and the disclosures are included in the Consolidated Financial Statements of the Group in which the entity is consolidated; (b) the requirements of IFRS 7 Financial Instruments: Disclosures, as the disclosures are included in the Consolidated Financial Statements of the Group in which the entity is consolidated; (c) the requirements of paragraphs of IFRS 13 Fair Value Measurement as the disclosures are included in the Consolidated Financial Statements of the Group in which the entity is consolidated; (d) the requirement in paragraph 38 of IAS 1 Presentation of Financial Statements to present comparative information in respect of: (i) paragraph 79(a)(iv) of IAS 1; (ii) (iii) paragraph 73(e) of IAS 16 Property, Plant and Equipment; and paragraph 118(e) of IAS 38 Intangible Assets; (e) the requirements of paragraphs 10(d), 10(f), 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D, 111 and 134 to 136 of IAS 1 Presentation of Financial Statements; (f) the requirements of IAS 7 Statement of Cash Flows; (g) the requirements of paragraphs 30 and 31 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors; (h) the requirements of paragraph 17 of IAS 24 Related Party Disclosures; (i) the requirements in IAS 24 Related Party Disclosures to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member; and (j) the requirements of paragraphs 130(f)(ii), 130(f)(iii), 134(d) 134(f) and 135(c) 135(e) of IAS 36 Impairment of Assets as the disclosures are included in the Consolidated Financial Statements of the Group in which the entity is consolidated. The Company has taken advantage of the exemption provided by Section 408 of the Companies Act 2006 not to publish its individual Income Statement and related notes. The Company has net current liabilities of 25,022,000 as at 31 December ( net current liabilities of 15,486,000). The Company s objectives, policies and processes for managing its liquidity risk, as well as potential exposure to cash flow interest rate risk, are described in Note 26 in the Consolidated Financial Statements. Through the Group, the Company has considerable financial resources and, as a consequence, the Directors believe that the Company is well placed to manage its business risks successfully. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Financial Statements. 118 Communisis plc Annual Report and Financial Statements

121 2. ACCOUNTING POLICIES CONTINUED 2.2 SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the Balance Sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Pensions The actuarial valuation involves making assumptions about discount rates, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Additional information is included in Note SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Intangible assets Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets created within the business are not capitalised (unless specific conditions are met) and expenditure is charged to the Income Statement in the year in which the expenditure is incurred. Acquired computer software and licences are capitalised. These costs are amortised over their estimated useful lives (three to eight years). Costs associated with maintaining computer software programs are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Company, and that will generate probable economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the costs of software development employees. These costs are amortised over their estimated useful lives (three to eight years). Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. Property, plant and equipment Property, plant and equipment in the Financial Statements of the Company are stated at cost, less aggregate depreciation and any provision for impairment. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Plant and equipment 3 to 10 years The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists, and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount. The recoverable amount of property, plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Useful economic lives, depreciation methods and residual values are reviewed annually. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognised in the Income Statement. Investments Investments are shown at cost less provision for impairment. The cost of an investment is measured as the aggregate of the consideration transferred, measured at acquisition date fair value. Any contingent consideration will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or a liability will be recognised in accordance with IAS 39 either in profit and loss or in other comprehensive income. If the contingent consideration is classed as equity, it is not remeasured until it is finally settled within equity. Investments are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that its carrying value may be impaired. Investments are allocated to the related cash-generating units monitored by management for the purpose of impairment testing. Trade and other receivables Trade and other receivables, which generally have day credit terms, are recognised and carried at original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made. Bad debts are written off when identified. Cash and cash equivalents Cash and cash equivalents in the Balance Sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. Financial Statements Communisis plc Annual Report and Financial Statements 119

122 Financial Statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2. ACCOUNTING POLICIES CONTINUED 2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Trade and other payables Trade and other payables, which generally have day credit terms, are recognised and carried at original invoice amount. Income tax Current tax, being UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the Balance Sheet date. Deferred income tax is provided, using the liability method, on all temporary differences at the Balance Sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are not recognised if the temporary differences arise from the initial recognition of goodwill, or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred income tax assets are recognised for all deductible temporary differences carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised. In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the Balance Sheet date. Income tax relating to items recognised in other comprehensive income or directly in equity is also recognised in other comprehensive income or directly in equity. Foreign currencies The Company s functional currency and presentation currency is Sterling. Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the Balance Sheet date. All differences are taken to the Income Statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Pension costs The Company operates defined contribution and defined benefit pension plans. Payments to defined contribution pension plans are charged as an expense to the Income Statement as incurred when the related employee service is rendered. The Company has no further legal or constructive payment obligations once the contributions have been made. The defined benefit pension plan is a Group scheme, as detailed in the Group accounting policies note in the Group Consolidated Financial Statements on page 83. In accordance with the Company policy in respect of the defined benefit pension scheme, a proportion equating to 12.3% of all movements on the defined benefit scheme is recognised within the Company accounts. This proportion is based on the number of members employed by the Company at the time that the scheme was closed to future accrual. The proportionate split is applied to all costs, settlements and actuarial gains and losses as detailed below. The costs of administering the defined benefit pension scheme are recognised in employee benefits expense in the Income Statement. When a settlement (eliminating all obligations for benefits already accrued) or a curtailment (reducing future obligations as a result of a material reduction in the scheme membership or a reduction in future entitlement) occurs, the obligation and the related plan assets are remeasured using current actuarial assumptions and the resultant gain or loss is recognised in the Income Statement during the period in which the settlement or curtailment occurs. All actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and the fair value of plan assets are recognised immediately in the Statement of Comprehensive Income. 120 Communisis plc Annual Report and Financial Statements

123 2. ACCOUNTING POLICIES CONTINUED 2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date: whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to the use of assets. Operating lease payments are recognised as an expense in the Income Statement on a straight-line basis over the lease term or in accordance with utilisation of the leased asset if more appropriate. Employee share ownership plan Communisis plc shares held by the Company are classified in shareholders equity as the ESOP reserve and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken to retained earnings. No gain or loss is recognised in the Income Statement on the purchase, sale, issue or cancellation of equity shares. Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the Income Statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the Balance Sheet date. Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made, but there is some uncertainty about the timing or amount of the future expenditure required in settlement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Share-based payment transactions Certain Directors and management are eligible to participate in share-based payment schemes, all of which are equity-settled, in return for services provided to Communisis plc. The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. The fair value is determined by an external valuer using an appropriate model. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of Communisis plc ( market conditions ). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ( the vesting date ). The cumulative expense recognised for equity-settled transactions at each reporting date reflects the extent to which the vesting period has expired and the Company s best estimate of the number of equity instruments that will ultimately vest. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance or service conditions are satisfied. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any cost not yet recognised in the Income Statement for the award is expensed immediately. This includes any award where non-vesting conditions within the control of the Company or the employee are not met. Any compensation paid up to the fair value of the award at the cancellation or settlement date is deducted from equity, with any excess over fair value being treated as an expense in the Income Statement. Where an equity-settled award is forfeited, the total cost recognised in the Income Statement to date for the award is reversed. Derivative financial instruments and hedge accounting Initial recognition and subsequent measurement The Company uses derivative financial instruments such as forward currency contracts and interest rate swaps to hedge its foreign currency and interest rate risks respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives during the year that do not qualify for hedge accounting and the ineffective portion of an effective hedge are taken directly to the Income Statement. The fair value of interest rate swaps is the difference between the fixed rate and the one-month LIBOR rate implied at the Balance Sheet date, calculated monthly, and discounted to present value. Communisis plc Annual Report and Financial Statements 121 Financial Statements

124 Financial Statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2. ACCOUNTING POLICIES CONTINUED 2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Derivative financial instruments and hedge accounting continued Initial recognition and subsequent measurement continued For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging exposure to variability in cash flows, which is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction, or when hedging the foreign currency risk in an unrecognised firm commitment. For those derivatives designated as hedges and for which hedge accounting is desired, the hedging relationship is formally designated and documented at its inception. This documentation identifies the risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how effectiveness will be measured throughout its duration. Such hedges are expected to be highly effective in offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in the Income Statement. Amounts taken to equity are transferred to the Income Statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non-financial asset or non-financial liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to the Income Statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction or firm commitment occurs. 3. OPERATING COSTS AND INCOME AUDITOR S REMUNERATION The auditor s remuneration charge relating to the year was 21,000 ( 20,500). The Company is exempt from disclosing remuneration for non-audit services as the Group accounts are required to include the information required by Regulation 4(1)(b) of the Companies Regulations 2005 in respect of the Group. EMPLOYEE BENEFITS EXPENSE Wages and salaries 2,731 2,210 Social security costs Pension costs Share-based payments (equity-settled) Redundancy costs 181 3,625 3,038 Number The average number of persons employed by the Company during the year was: United Kingdom DIRECTORS REMUNERATION Details of individual Directors remuneration, pension entitlements and interests of the Directors in Communisis plc are provided within the Directors Remuneration Report on pages 44 to DIVIDENDS PAID AND PROPOSED Declared and paid during the year Amounts recognised as distributions to equity holders in the year: Final dividend for the year ended 31 December 2015 of 1.47p per share 3,077 Interim dividend for the year ended 31 December of 0.81p per share 1,696 Final dividend for the year ended 31 December of 1.61p per share 3,362 Interim dividend for the year ended 31 December of 0.89p per share 1,860 5,222 4,773 Proposed for approval at AGM (not recognised as a liability as at 31 December) Final equity dividend on ordinary shares of 1.77p ( 1.61p) per share (based on issued share capital at the date of approval of the Financial Statements) 3,704 3,358 Number 122 Communisis plc Annual Report and Financial Statements

125 5. DEFERRED TAX Deferred tax included in the Balance Sheet is as follows: Depreciation in excess of capital allowances Temporary differences Share-based payments Pension 745 1,106 Financial liabilities Deferred tax asset 1,031 1,424 The provision for deferred tax at 31 December has been made at rates between 17% and 19% depending upon the anticipated time of reversal. This reflects the legislation included in the Finance Act reducing the rate of corporation tax to 17% from April PROPERTY, PLANT AND EQUIPMENT Plant and equipment Cost At 1 January 1,495 Additions Disposals (1,251) At 31 December 244 Depreciation At 1 January 1,322 Charge for year 29 Disposals (1,251) At 31 December 100 Net book value at 31 December 144 Net book value at 31 December 173 Financial Statements 7. INTANGIBLE ASSETS Computer software Cost At 1 January 340 Additions 53 Disposals (118) At 31 December 275 Amortisation At 1 January 186 Charge for year 89 Disposals (118) At 31 December 157 Net book value at 31 December 118 Net book value at 31 December 154 Communisis plc Annual Report and Financial Statements 123

126 Financial Statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 8. INVESTMENTS Shares Provisions Subsidiaries At 1 January 404,821 (176,256) 228,565 Fair value adjustment December 405,021 (176,256) 228,765 Details of the Company s investments are outlined in Note 32 in the Consolidated Financial Statements. 9. TRADE AND OTHER RECEIVABLES Trade receivables Amounts owed by subsidiary companies 769 3,478 Other receivables Prepayments and accrued income VAT receivable ,634 5,391 Current 2,631 5,391 Non-current 3 2,634 5,391 Total 10. CASH AND CASH EQUIVALENTS Cash at bank and in hand INTEREST-BEARING LOANS AND BORROWINGS Current Bank overdrafts On demand 25,167 6,651 25,167 6,651 Non-current 65,000,000 bank loan ( 65,000,000) August ,404 57,824 77,571 64,475 BANK OVERDRAFTS The bank overdrafts are principally denominated in Sterling and bear interest at rates set by reference to the UK base rate. The overdrafts are secured by cross guarantee arrangements with the relevant banks. 65,000,000 BANK LOAN This loan is secured by a cross guarantee arrangement and is repayable in August Interest is charged at LIBOR plus a rate of between 1.5% and 2.25% depending on the ratio of net debt to EBITDA in the preceding performance period. The Company is subject to a number of covenants in relation to its borrowing, which, if breached, would result in its loans becoming immediately repayable. These covenants specify certain maximum limits in terms of net debt as a multiple of EBITDA and interest payable as a multiple of EBITA. At the year end and throughout the year the Company was not in breach of any bank covenants. At 31 December the Company had available 12,000,000 ( 7,000,000) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. Early repayment is possible under the terms of all the borrowing facilities listed above at no cost by giving more than five days notice. Maturity 124 Communisis plc Annual Report and Financial Statements

127 12. TRADE AND OTHER PAYABLES Trade and other payables 521 2,190 Amounts due to subsidiary companies Other payables Taxation and social security 2,067 1,957 Accruals and deferred income 1,423 10,738 4,480 15,036 Current 4,238 14,423 Non-current ,480 15, FINANCIAL LIABILITIES Current liabilities Interest rate swaps 94 Non-current liabilities Interest rate swaps INTEREST RATE SWAPS At 31 December the Company has two arrangements each of a notional amount of 10,000,000 with maturity dates being in The Company pays fixed rates of interest of 3.16% and 1.77% respectively on each arrangement and on both the Company receives a variable rate equal to LIBOR + 1.5% on the notional amount. Financial Statements 14. PROVISIONS Dilapidation provisions At 1 January Utilised (106) (106) Released during the year (21) (21) At 31 December DILAPIDATION PROVISIONS The dilapidation provisions represent the estimated costs required to reinstate the Chiswell Street, London, premises to a state as required under the lease. The costs were incurred in. 15. CALLED UP SHARE CAPITAL Number of shares Total Number of shares Allotted and fully paid Ordinary shares of 25p each 209,619,144 52, ,376,010 52,344 The Company has one class of ordinary shares which carries no right to fixed income. The Company has two share option schemes under which options to subscribe for the Company s shares have been granted to employees (Note 19). During the year the Company issued 243,134 ordinary shares with a nominal value of 60,784 in respect of Sharesave options for consideration of 136,226. The difference of 75,442 between the consideration received and the nominal value has been taken to the share premium reserve. Communisis plc Annual Report and Financial Statements 125

128 Financial Statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 16. RESERVES SHARE PREMIUM This represents the share premium attaching to those shares issued upon the exercise of certain share options. At 31 December the share premium reserve was 75,000 ( nil). At 1 January 5,986 Exercise of share options 10 Capital reduction (5,996) At 31 December Exercise of share options 75 At 31 December 75 MERGER RESERVE This represents the share premium attaching to those shares issued upon the acquisition of subsidiaries. At 31 December the merger reserve was nil ( nil). At 1 January 15,081 Capital reduction (15,081) At 31 December and ESOP RESERVE The ESOP reserve is used to record the investment in Communisis plc shares held by the employee share ownership plan (ESOP). The ESOP is for the benefit of all employees and can be used in conjunction with any of the Group s share schemes. The ESOP reserve holds 441,220 shares at 31 December ( 806,319) with an average cost of 36.86p ( 36.83p) and the market value of these shares is 284,589 ( 349,781). At 1 January (10) Shares issued from ESOP 155 Purchase of own shares (442) At 31 December (297) Shares issued from ESOP 134 At 31 December (163) CAPITAL REDEMPTION RESERVE The capital redemption reserve is used to record the effect of share capital buy-backs made by the Company where the nominal value of share capital acquired is transferred to this reserve. At 31 December the capital redemption reserve was nil ( nil). At 1 January 1,375 Capital reduction (1,375) At 31 December and 17. RETAINED EARNINGS At 1 January 26,824 11,239 Profit/(loss) for the financial year 9,148 (658) Ordinary dividends paid (5,222) (4,773) Adjustment in respect of prior years due to change in tax rate (47) Net gain/(loss) on cash flow hedges taken directly to equity 111 (26) Actuarial gains/(losses) on defined benefit pension plans 1,821 (1,965) Income tax (charge)/credit on items taken directly to Other Comprehensive Income (310) 255 Employee share option schemes value of services provided Shares options exercised (3) Shares issued from ESOP (134) (155) Capital reduction 22,452 At 31 December 32,835 26, Communisis plc Annual Report and Financial Statements

129 18. RETIREMENT BENEFIT PLANS The Company operates the Communisis Pension Plan which comprise a defined contribution and defined benefit section. DEFINED CONTRIBUTION SECTION The Company operates UK defined contribution arrangements. The assets of the arrangements are held separately from those of the Company. The Company is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the Company with respect to the retirement benefit scheme is to make the specified contributions. The total cost charged to income of 106,000 ( 165,000) represents contributions payable to these arrangements by the Company at specified rates. At 31 December, 16,000 of contributions due in respect of the current reporting period had not yet been paid over to the arrangements ( all paid over). This liability was paid on 4 January The Company expects to contribute 0.1m ( 0.1m) to the defined contribution pension arrangements in DEFINED BENEFIT SECTION These Financial Statements include a proportion of the Group pension deficit and charge which has been allocated to the Company based on the number of members employed by the Company at the time the scheme was closed to future accrual. Defined benefit obligation (23,969) (24,879) Fair value of plan assets 19,585 18,372 Net pension deficit (4,384) (6,507) Detailed disclosure can be found in Note 14 to the Consolidated Financial Statements on pages 100 to 103. Financial Statements 19. SHARE-BASED PAYMENTS The Company operates two schemes, details of which can be found in Note 13 to the Consolidated Financial Statements on pages 98 to 100. The following table illustrates the number and movements in the Long Term Incentive Plan options during the year. The Long Term Incentive Plan options are nil cost options so the weighted average exercise prices (WAEP) are nil in all cases. Number Exercised during the year 1 365, ,859 Outstanding at the end of the year 7,927,611 5,906,359 Number 1 The weighted average share price at the date of exercise for the options exercised in the year ended 31 December was 55p ( 45p). The weighted average remaining contractual life for the share options outstanding under the Long Term Incentive Plan as at 31 December is 1.52 years ( 1.75 years). The following table illustrates the number and weighted average exercise prices (WAEP) of, and movements in, Sharesave Scheme options during the year. Number Exercised during the year 1 243, p 155, p Outstanding at the end of the year 2,470, p 4,395, p 1 The weighted average share price at the date of exercise for the options exercised in the year ended 31 December was 62p ( 43p). The weighted average remaining contractual life for the share options outstanding under the Sharesave Scheme as at 31 December is 1.95 years ( 1.63 years). WAEP Number The range of exercise prices for options outstanding under all schemes at the end of the year was nil 57.5p ( nil 57.5p). The number of share options for which the exercise price is nil total 7,927,611 ( 5,906,359). WAEP Communisis plc Annual Report and Financial Statements 127

130 Financial Statements NOTES TO THE COMPANY FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 20. OTHER FINANCIAL COMMITMENTS At 31 December the Company had annual commitments under non-cancellable operating leases for assets as set out below: Land and buildings Operating leases which expire: within one year in two to five years Other Operating leases which expire: within one year in two to five years CONTINGENT LIABILITIES The Company has contingent liabilities where it has provided rental guarantees to landlords in respect of certain leasehold properties occupied by companies that were formerly subsidiaries in the Group, but have subsequently been sold. The principal risk is that current leasehold occupants will become insolvent and that guarantees will be called, resulting in a material cash cost to the Group. To the extent that they have not already been called, these guarantees represent contingent liabilities of the Company. Other than those leases for which the liability is considered to be remote, the Company has guaranteed rentals on a lease with a remaining term of six years, with an annual rental of 1,135,000. In addition, there are four further rental guarantees totalling 80,000 with remaining lease terms of between two and six years. No provision for these guarantees has been made in the Financial Statements because, at the Balance Sheet date, the Directors believe that it is not probable that they will be called. 22. RELATED PARTY TRANSACTIONS The Company has taken advantage of the exemption under paragraph 8(k) of FRS 101 not to disclose related party transactions with its wholly owned subsidiaries. Remuneration of key management personnel is disclosed in the Directors Remuneration Report on pages 44 to Communisis plc Annual Report and Financial Statements

131 SHAREHOLDER INFORMATION 2018 FINANCIAL CALENDAR 8 March 2018 Preliminary results announcement 19 April 2018 Ex-dividend date for the final dividend 20 April 2018 Record date to be eligible for the final dividend 10 May 2018 Annual General Meeting 18 May 2018 Final dividend payment date 2 August 2018 Interim results announcement 13 September 2018 Ex-dividend date for the interim dividend 14 September 2018 Record date to be eligible for the interim dividend 12 October 2018 Interim dividend payment date ANNUAL GENERAL MEETING (AGM) 2018 This year s AGM will be held at the offices of Eversheds Sutherland LLP, 1 Wood Street, London EC2V 7WS, on Thursday 10 May The meeting will start at 12 noon and registration will be available from am. HOW TO GET IN TOUCH REGISTERED OFFICE Communisis plc Communisis House Manston Lane Leeds LS15 8AH Tel: +44 (0) Registered in England and Wales Number COMPANY SECRETARY Sarah Caddy HEAD OFFICE Communisis plc 10 Little Portland Street London W1W 7JG Tel: +44 (0) ADVISERS AUDITOR Ernst & Young LLP 1 Bridgewater Place Water Lane Leeds LS11 5QR STOCKBROKERS Liberum Capital Limited Ropemaker Place 25 Ropemaker Street London EC2Y 9LY CORPORATE LAWYERS Eversheds Sutherland LLP Clarion Solicitors LLP Pinsent Masons LLP Ward Hadaway LLP PRINCIPAL BANKERS HSBC Bank plc Lloyds Banking Group plc Santander UK plc Barclays Bank PLC REGISTRAR AND SHAREHOLDING ENQUIRIES Administrative enquiries about the holding of Communisis shares, such as change of address, change of ownership and dividend payments, should be directed to our registrar, Link Asset Services: BY PHONE Please call and calls will be charged at 12p per minute plus your phone company s access charge. If you are outside the United Kingdom, please call and calls will be charged at the applicable international rate. Lines are open between and Monday to Friday excluding public holidays in England and Wales. BY shareholderenquiries@linkgroup.co.uk ONLINE You can use the Share Portal at To register for this service, you will require your investor code which can be located on a recent dividend confirmation or on your share certificate. For all other enquiries, please contact Link Asset Services by post at the following address: Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU DIVIDENDS We encourage shareholders to have dividends paid directly into their bank account to ensure efficient payment and cleared funds on the payment date. If you have a UK bank account you can sign up for this service on the Share Portal by clicking on your dividend options and following the on-screen instructions or by contacting Link Asset Services on the number above. ELECTRONIC COMMUNICATIONS Shareholders can register to receive shareholder information electronically. Registering for electronic communications is very straightforward. Just visit You will require your investor code which can be located on a recent dividend confirmation or on your share certificate. BOILER ROOM SCAMS Unfortunately, we are aware that in the past some of our shareholders were targeted by fraudsters who made offers to buy their shares at prices substantially in excess of the market price. General information on boiler room scams, and how to report a suspected scam, is available from the FCA s website at Shareholder Information Communisis plc Annual Report and Accounts 129

132 FIND OUT MORE ONLINE AT COMMUNISIS.COM Communisis plc 10 Little Portland Street London W1W 7JG