Annual Report and Accounts Annual Report and Accounts Building the foundation for sustainable and profitable growth.

Transcription

1 Annual Report and Accounts Annual Report and Accounts Building the foundation for sustainable and profitable growth Scapa Group plc

2 Contents Overview Introduction 01 Chairman s Statement 04 Highlights 06 Business review 08 Governance Board of Directors 20 Leadership Team 21 Report of the Directors 22 Directors Remuneration Report 25 Corporate Governance 30 Financial Statements Statement of Directors Responsibilities 35 Independent Auditors Report 36 Consolidated Income Statement 37 Consolidated Statement of Comprehensive Income 37 Consolidated Balance Sheet 38 Consolidated Statement of Changes in Equity 39 Consolidated Cash Flow Statement 40 Group Accounting Policies 41 Notes on the Accounts 48 Five Year Summaries 71 Parent Company Financial Statements 72 Independent Auditors Report 73 Company Balance Sheet 74 Statement of Total Recognised Gains and Losses 74 Statement of Accounting Policies 75 Notes on the Accounts 76 Financial highlights Revenue Operating profit Revenue grew 8.8% year-on-year while repositioning the portfolio to align with market and profit strategy Operating profit increased to 8.0m from a loss of 1.5m Profit before tax increased to 6.1m from a loss of 5.2m Net cash of 18.8m* improved from 11.4m in 192.3m +8.8% 8.0m + 9.5m Operational highlights New leadership team appointed to deliver new strategy Medical grew 29% driven by increased demand and new programmes Industrial increased 6% attributable to energy and construction sectors Investment in additional capacity and R&D capability in Asia to underpin the focus on electronics Growth across all geographic regions Net cash balance * 18.8m +65% Earnings per share p 2.4p +4.3p Profit before tax 6.1m m * Including 6.3m cash which is restricted until December

3 Introduction Who we are Scapa is a worldwide leading manufacturer of bonding solutions and adhesive components for applications in the medical, electronics, industrial and transportation markets. What we do We help medical, industrial, electronics and transportation customers create better products by providing adhesive solutions and components. We design our offering around the requirements of global OEMs, distributors and consumers. Overview Business Review Our transition towards application-specific opportunities leveraging our global footprint and technologies is driving our portfolio towards value-added solutions from commodity products. Our aim is to accelerate the transition while continuing to deliver our financial expectations and value to shareholders. Governance Financial Statements Scapa Group plc Annual Report and Accounts 1

4 Introduction More than tape Scapa is a market leading developer and manufacturer of bonding materials and solutions. Our products are used extensively in a wide range of markets around the world. The applications range from plasters for minor cuts to optically clear adhesives in the latest smart phone. Our focus is to work with our customers to develop application-specific solutions for complex applications, which are continuously evolving. Industrial Industrial is the largest segment of our business and represents a wide range of markets and applications. Reflecting the overall market, construction is the biggest portion of Industrial. We have a broad range of products that cover virtually every requirement needed in buildings. Our products are also used in many energyrelated applications such as solar panels, oil and gas pipelines, and power and fibre cables. The increasing requirements for both traditional and alternative energy are driving the need and advancement of new bonding technology. The wide range of applications for our products enables us to identify attractive emerging segments and position ourselves to benefit from increasing demand. Scapa s unrivalled product range and application knowledge, combined with our global footprint, ensure that customers in any market will consider us as their source for bonding materials and solutions. We sell our products through our own sales force as well as through our channel partners and distributors worldwide. 2 Scapa Group plc Annual Report and Accounts

5 Overview Medical In receiving medical aids, whether it is a small plaster or life-saving surgery, the patient s experience is initially defined by the sensation of the skin. As many medical applications and solutions are applied to the skin through adhesion, a bonding solution that is skin-friendly is a critical consideration in the medical products. We work with global leaders in the medical industry to develop the next generation of skin-friendly products always with the patient s comfort in mind. Our products are used in a broad range of medical applications including medical devices, wound care and consumer products. The products include wound dressings, foams, films, drapes, ECG, pulse oximetry and MRI applications. Business Review Governance Electronics The requirements and needs of bonding solutions for the Electronics sector are increasingly demanding, driven by the innovation cycles of the market and global requirements of customers. As electronic products are becoming thinner and lighter, our products are replacing conventional fixings such as screws and connectors. Furthermore, our products are used as more than tape. We are working with our customers to incorporate other functionalities into our products to address other needs such as heat dispersion and electro magnetic interference (EMI). Scapa s range of acrylic foam films and PU foam tapes ensures a lightweight and thin adhesive solution. Our range of thermal film pads, heat sinks and EMI tapes also incorporates functionality beyond tape. Financial Statements Transportation The use of electronic components for the safety and comfort of passengers in cars, airplanes and trains is increasing. To help these electronic components communicate with each other, Scapa provides bonding solutions to wire harness manufacturers, meeting the highest OEM specifications, as well as logistic and support requirements of this industry, leveraging Scapa s global footprint. Global production platforms need global supply. With Scapa s global manufacturing footprint we offer supply and local support to transportation customers. Function integration and focus on valueadding design systems help transportation customers to meet their customer and legislation demands. Scapa Group plc Annual Report and Accounts 3

6 Chairman s Statement We are building the foundation for sustainable and profitable growth. James Wallace, Chairman 4 Scapa Group plc Annual Report and Accounts

7 In the fiscal year, Scapa Group took significant steps towards sustainable and profitable growth, achieving results ahead of earlier expectations. Whilst we recognise that we are at the beginning of the journey, we are very pleased with our progress this year. We have reorganised the business around the four strategic markets of Medical, Industrial, Electronics and Transportation and strengthened the management team to deliver our expectations. We have focused our efforts on improving the quality of our business portfolio toward higher value, application-specific products rather than high volume commodities. We have improved our operational execution and efficiency to deliver and exceed our customers expectations. We have made investments, both in capital and people, to lay the foundations for our future and vision. Financial highlights Revenue increased 8.8% to 192.3m and operating profit significantly increased to 8.0m (: 1.5m loss) with no exceptional items charged during the year (: 3.1m). The operating margin improved progressively throughout the year. The strong focus on working capital improved our net cash balance to 18.8m (: 11.4m) even after incurring a cash outflow of 6.1m relating to legacy issues. No dividend is proposed for the year. The future recommendation of dividends will stay under review as the Group continues to make progress towards sustainable profitability and cash generation. /11 and 0.5m of performance-related top-ups, owing to the Group s strong cash performance in this financial year. Going forward the Group is developing a road map to pursue all liability and administration cost-reduction initiatives that are in the interests of both pension scheme members and the Company. During the previous financial year the Group undertook an actuarial and legal review of the outcome of all current and future potential asbestos-related claims against the Group. That review has been revalidated in respect of the current financial year. We remain confident that there will be no impact of these historic product liability claims on the Group s profitability and there is adequate provision in the accounts for the continuing costs of defending against any claims. Board We welcomed Paul Edwards as the new Finance Director during the year. Having been appointed since the last AGM, Paul will be proposed for election at the next AGM in July. Richard Perry and Mike Buzzacott, the Non-Executive Directors who retire by rotation, will also be proposed for re-election at the AGM. We believe that good governance adds value and reduces risk to the business and as such we continually develop and improve our governance structures. This year, as in previous years, the Board has carried out a rigorous exercise of self-assessment to ensure that its performance meets the needs of both the Company and corporate Whilst we recognise that we are at the beginning of the journey, we are very pleased with our progress this year. Overview Business Review Governance Business performance Medical performance was strong, growing sales by 29%. The reorganisation around the market enabled us to properly allocate the resources and focus to maximise our position at our customers who are global leaders. Given our current market share at these customers and our long-standing relationships, we believe that our potential is significant. Industrial grew 6% after concentrating on improved product mix. The focus on a higher quality portfolio resulted in a rationalisation of our product range and pricing strategy. As a consequence, we closed our Carlstadt facility in the USA and implemented a series of price adjustments to pass on the increases in input costs. The energy-related accounts, which we identified as strategic segments within Industrial, contributed to the increase in growth. Electronics/Asia increased 3.2% as we re-profiled the portfolio from cash-consumptive trading business to locally manufactured products for the electronics market. During the year, we made significant investment to address the electronics market. We invested in new production capacity, opened a new R&D laboratory close to our strategic customers and built a team with significant experience in the sector. The focus this year has been to ensure that the investments are properly deployed and enable us to fully engage in this fast-growing and dynamic market. Transportation grew 2.7% benefiting from improved second half performance. The recovery of the automotive industry during the year has continued into the current financial year. Legacy issues The deficit on the Group defined benefit retirement plans now stands at 35.0m (: 38.6m), its lowest point in nine years. The Group deficit post tax is 25.6m (: 27.7m). The reduction in the deficit was the result of asset increases of 3.7m and a marginal increase in liabilities of 0.1m. The change in assumption in the UK to CPI from RPI to calculate deferred member pensions helped reduce the pension liabilities by around 3.2m. We are now entering year two of our three-year contributions agreement with the UK pension trustees. During /12 our UK and overseas contributions will be approximately 5.1m (: 4.4m) including 0.5m of PPF catch-up payments from governance best practice. The exercise demonstrated that the current mix of talents and experience of the Board as a whole are appropriate to carry the Group into the next challenging phase of its development. People During the year we have assembled a team of experienced and capable executives to implement our strategy and the Board is confident that the new Leadership Team will deliver the short-term expectations as well as establish a platform of entrepreneurialism and accountability to drive sustainable and profitable growth. The quality of our people continues to be our core strength and I am delighted that we have further enhanced our capabilities in so many parts of the business and that cultural change is being embraced. On behalf of the Board, I would like to thank all our employees around the world for their commitment, hard work and continuing support over the last year. Outlook Our focus for the coming year will continue to be profits and cash generation to further cement the foundation for the future. Much work will be done to generate greater return from our asset base through improved operational efficiencies and supply chain management. We will continue to prioritise profitable growth in strategic sectors over commodity volume business. We will also continue to invest in Medical and Electronics where we are confident of our strategy and competitive position. Within the Industrial market we are identifying and focusing on attractive segments with high potential that provide improved returns on our investment. The strategic management of our business portfolio will enable us to better respond to the many uncertainties in the current macro environment, particularly rising input costs. As we build on the progress made last year, we are in a strong position to take advantage of market opportunities and we are confident that we will continue to improve and make further progress in the new financial year. J A S Wallace Chairman Scapa Group plc Annual Report and Accounts 5 Financial Statements

8 Highlights Focused on attractive markets where we have a competitive position. Revenue by market Medical Industrial 33.8m 17.6% 126.3m 65.7% Electronics Transportation Total 12.9m 6.7% 19.3m 10% 192.3m Markets Medical Medical is a fully integrated, worldwide supplier of customised medical adhesive solutions, component materials and converted products for the medical device, wound care, hospital, transdermal and consumer industries. Financial highlights Revenue 33.8m +29% % of Total Revenue 18% 3-year trading history / /10 /11 Industrial Industrial represents a wide range of markets and applications, including construction, foam fabrication, military, printing & graphics and our energy markets of solar, cable and pipeline. Our range covers a larger portfolio of product types than virtually any other manufacturer in our markets. Electronics Electronics has strong partnerships across the world with top tier electronics OEMs, including consumer electronics, telecommunications devices and equipment manufacturers. Our products are application-specific and incorporate functionalities beyond tape and bonding. Transportation Transportation is a world leader in the design and manufacture of speciality adhesive films and tapes for automotive production. We are engaged with the OEMs and their supply chain partners. Revenue 126.3m +6% % of Total Revenue 65% Revenue 12.9m +3.2% % of Total Revenue 7% Revenue 19.3m +2.7% % of Total Revenue 10% / /10 / / /10 / / /10 /11 6 Scapa Group plc Annual Report and Accounts

9 Revenue by region Europe North America Asia 106.7m 55.5% 72.7m 37.8% 12.9m 6.7% Global presence Overview Operating profit by region Europe North America Asia 3.3m 5.3m 0.4m Business Review Region locations Europe North Asia America France Canada China Germany USA Hong Kong Italy Korea Switzerland India UK Malaysia Governance Regional highlights Financial highlights 3-year trading history Europe Revenue of 106.7m (: 101.1m) growth of 5.5% following market restocking and improving macro Operating profit significantly increased to 3.3m (: 0.3m) as we have improved profits and margins through strong control of costs Improved operational performance through centralisation and closure of Barcelona warehouse Revenue 106.7m +5.5% Operating profit 3.3m +1000% / /10 /11 Financial Statements North America Revenue of 72.7m (: 63.1m) growth of 15.2% as we continue to expand our service offering to our customers Operating profit significantly increased to 5.3m (: 1.3m) improving operating margin to 7.5% Revenue 72.7m +15.2% Operating profit 5.3m +308% / /10 /11 Asia Investing 1.2m in new line and research and development laboratory to effectively service demanding high growth Electronics industry Stepping away from low margin commodity products to more applicationspecific product portfolio Appointed a strong team to deliver the strategy Revenue 12.9m +3.2% Operating profit 0.4m -43% / /10 /11 Scapa Group plc Annual Report and Accounts 7

10 Business Review In the past year we have delivered against the core objectives. Heejae Chae, Group Chief Executive 8 Scapa Group plc Annual Report and Accounts

11 Our focus remains on further improving our margin and cash. We will continue to drive the business towards higher value-added products in growth markets and geographies. Our strategic objectives Our strategy remains to align ourselves with the requirements of our global customers and focus on high growth and high margin markets. The key markets are: Medical Industrial Electronics Transportation We will continue to work closely with our global partners in our target markets to develop bonding materials and solutions. Our extensive technical knowledge and global footprint will enable us to increase our market share with existing customers, many of whom are market leaders. In the past year we have delivered against the following core objectives: Focused on increasing cash through efficient utilisation of working capital Increasing margins through targeted price increases, operational efficiency and control of costs Significantly increased the strength and depth of the operational management team across the Group These core objectives remain key to the success of Scapa. Cash generation and improved margins through the transition from manufacturing commodity-based products to developing and producing more application-specific tapes, films and foams will continue to be the focus of Scapa building a sustainable foundation from which we can grow further. Results A summary of the financial results is set out in the table below: Revenue Operating profit/(loss) 8.0 (1.5) Net finance costs (1.9) (3.7) Profit/(loss) on ordinary activities before tax 6.1 (5.2) Basic earnings/(loss) per share(p) 2.4 (1.9) Revenue for the year was 192.3m (: 176.7m) generating operating profit of 8.0m (: 1.5m operating loss) with trading improving throughout the financial year. There was no material movement in revenue for the effects of exchange rates year-on-year. The first half of the financial year accounted for 51% of revenue. Conversely the split for operating profit was 45% for the first half and 55% for the second half, reflecting the move away from low margin volume business to more application-specific higher margin product. While the objective has been to concentrate on margins and cash generation, the Group has seen strong year-on-year growth in revenue across all markets, specifically Medical with growth of 29%. The exception is Asia where the strategy has been to delist commodity-based lower margin products while investing in research and development capability and a new production line to increase capacity and develop and drive the Electronics business forward in the coming years. During the financial year the Group has seen cost pressures in most raw materials but has protected and built margins not only through the change in mix but also through the implementation of price increases across all product sectors and markets. Overview Business Review Governance Financial Statements Scapa Group plc Annual Report and Accounts 9

12 Business Review Medical Revenue 33.8m +29% Overview Medical is a fully integrated, worldwide supplier of customised medical adhesive solutions, component materials and converted products for the medical device, wound care, hospital, transdermal and consumer industries. Highlights Growth from existing customers expanding our market share Focus on value-added solutions beyond coating Recognised as Silver Level Supplier for Johnson & Johnson Consumer Division Signed joint development agreement with Dow Corning on silicon-based adhesive solutions Market Overview Our Global Medical Business Unit serves the Medical Device, Advanced Wound Care (AWC), Consumer, Ostomy and Transdermal markets. Throughout the year these markets continued to outperform underlying GDP. The AWC market continues to grow through aging populations, higher prevalence of obesity and diabetes and products which are used in the treatment of complex and hard to heal wounds, including chronic wounds such as diabetic wounds, pressure ulcers, trauma wounds and large burns. Pulse oximetry, diabetic blood glucose monitoring (BGM) and overthe-counter transdermal delivery segments of the medical device market continue to provide strong levels of growth. Strategy Scapa Medical s Skin-Friendly Solutions strategy aligns the needs of the patient/clinician to Scapa s core technology and service capabilities and the benefits of our silicon and polyurethane capabilities are validated by our strategic alliances with Dow Corning. With customer support we have upgraded our operational capability and our Medical team is now recognised as offering Turnkey/full service to our customers through integrated design, material, converting and packaging solutions. Performance Medical continued to perform strongly in the second half of the year with full year revenue of 33.8m (: 26.2m), a growth of 29%. The continued momentum increased Medical s percentage of total revenue to 17.6% (: 14.8%). The growth continues in both advanced wound care and devices and is primarily from existing accounts where we are focusing and further developing our relationships. In Europe we are continuing to engage with our customers and expand our coverage and services in wound care and silicon-based products. North America continues to perform well and in addition to maintaining strong relationships with our leading customers we continue to develop mid-tier accounts where we are seeing larger orders placed. Meeting the growing needs of the medical sector The market for medical pressure sensitive products has been growing exponentially, driven by innovations in the expanding global medical market. Scapa s solutions are used in markets such as advanced wound care, medical devices, drug delivery, consumer healthcare, ostomy and surgical. Every solution is developed with end user comfort in mind. Scapa aims to be a development partner to our global customers, helping to pioneer solutions for the future medical environment. 10 Scapa Group plc Annual Report and Accounts

13 Industrial Revenue 126.3m +6% Overview Industrial represents a wide range of markets and applications, including construction, foam fabrication, military, printing & graphics and our energy markets of solar, cable and pipeline. Our range covers a larger portfolio of product types than virtually any other manufacturer in our markets. Market Overview The Global Industrial Business Unit encompasses a variety of different markets including Printing & Graphics, Construction, and Industrial Assembly. The overall growth in the year was driven primarily through accessing these markets through our extensive distribution network as well as reaching market-focused Original Equipment Manufacturers (OEMs) with specialty products. The positive strength of the economy reinforced the strong position in the highlighted markets, driving further product demand. Specifically in the energy sector, the solar, pipeline and cable industries each performed well given the investment in infrastructure in all three of the market sectors. Strategy The distribution network within the Global Industrial Business is a key focus. In Scapa Industrial we are actively expanding our existing product portfolio to meet a variety of different market needs served by our channel partners, further aiding them in their promotion of Scapa products in our primary market segments. Additionally, working in conjunction with OEMs, Scapa Industrial is actively leveraging our diverse manufacturing capabilities to develop an array of customer-specified product solutions. Performance Industrial remains the largest proportion of Group revenue with 65.7% (: 67.5%) of total sales. It services a wide number of diversified industries and sub-industries as traditional assembly methods and applications requirements are changing, increasing the use of tapes and bonding solutions. Revenue increased 6% to 126.3m (: 119.2m) with strong demand and performances from emerging technologies within the energy, cable and pipeline sectors. Highlights Driven by strong performance in North America Construction performed well, aided by general economic recovery and restocking Maximise our margin through better product portfolio management which will lower our cost and simplify our operational complexity Focus on energy sector yielding dividend, particularly solar Leverage the potential of the new energy sector The drive to develop sustainable, renewable energy sources has led to increased demand for specialised tapes. Within the photovoltaic industry, adhesive technology is seen as the cleanest, easiest and most flexible solution for most application processes. Scapa has developed highly specialised adhesive foams, tapes and films for various applications within this market which include junction box mounting, edge sealing and cell positioning tapes, as well as cable management and adhesives used for internal bonding or frame mounting. Our close association with key market players and testing bodies informs us of the latest market trends and keeps us at the forefront of this ever-evolving market. Overview Business Review Governance Financial Statements Scapa Group plc Annual Report and Accounts 11

14 Business Review Electronics Revenue 12.9m +3.2% Overview Electronics has strong partnerships across the world with top tier electronics OEMs, including consumer electronics, telecommunications devices and equipment manufacturers. Our products are application-specific and incorporate functionalities beyond tape and bonding. Highlights Invested in additional capacity and R&D Centre in Korea to further enhance our production and product development capability Shifting to application-specific products manufactured locally which will slow the growth during the transition Developing solid product pipeline in display and smartphone applications Market Overview Consumer electronics, IT & computing, network & telecommunications are all part of the large global electronics market. This market is a highly dynamic and fast-changing environment, where innovation is the basis of competition. With relentless consumer demand and material innovation, new products are continuously being introduced. Scapa has strong partnerships across the world with top tier electronics OEMs and component suppliers in the consumer electronics, telecommunications devices and equipment manufacturer industries. Strategy Scapa works closely with leading global partners in its target markets, developing specialised adhesive tape bonding solutions for OEMs, distributors and consumers. Scapa has a true global footprint, with production sites in Asia, Europe and North America. Our worldwide service and supply chain capabilities place us in an excellent position to partner with global customers. With R&D focused on electronics applications and product development in adjacent locations to global Tier 1 OEMs, Scapa has significant ability to provide technical guidance to these OEMs on future applications, with timely technical and product support. Performance Year-on-year growth in Electronics/Asia has been flat as we continue to pursue the strategy of stepping away from producing and selling low margin commodity industrial products in favour of applicationspecific solutions for the electronics industry. Revenue was 12.9m (: 12.5m) contributing 6.7% of the total sales (: 7.1%). This year we completed the investment of 1.2m in a new research and development facility as well as increased production capacity as we position ourselves for growth in a market which is dynamic and fast-changing, where innovation and customer service will enable us to develop sustainable margins and growth. At the heart of today s electronics Sales of ultra slim mobile devices such as smartphones and tablet computers are skyrocketing. Space-saving adhesive solutions allow the electronics manufacturers to stand out with modern sleek design. Scapa has developed a special product portfolio for the ultra slim world which includes foams, films and tapes for thermal management, EMI shielding and various bonding applications. Our strong partnerships across the world with top tier electronics OEMs allow us to develop state of the art solutions to maximise their freedom of design. 12 Scapa Group plc Annual Report and Accounts

15 Transportation Revenue 19.3m +2.7% Overview Transportation is a world leader in the design and manufacture of speciality adhesive films and tapes for automotive production. We are engaged with the OEMs and their supply chain partners. Market Overview Transportation segments had to recover more than most industrial markets from the economic downturn of In segments grew again and, more significantly, established healthy platforms for and beyond. From aerospace and automotive to shipbuilding, the Scapa Transportation team delivers technical solutions for applications including electrical wire harness, noise and vibration, assembly and trim. Market product ranges utilise technically innovative materials and high performance adhesive systems to ensure full compliance to the stringent OEM specifications that drive this business and its key global customer requirements. Strategy Our Global Transportation Business Unit continues to offer a wide range of solutions to meet the growing demands of the markets that it serves. We have established differential management of our OEM and Tier 1 customers in Europe, NA and Asia and co-ordination of customers globally where appropriate and beneficial. As a large percentage of our business is within the wire harness segment we have maintained a proactive approach to total product life cycle management, resulting in a change in the mix and profitability of our offering. We continue to leverage our global reach within the design systems segments with growth from our materials, coating and converted parts offerings. Performance Transportation delivered revenue growth of 2.7% to 19.3m (: 18.8m) and remains 10% of the overall Group revenue. We continue to sell to OEMs and their supply chain partners and produce technically innovative products to satisfy the stringent specifications of a demanding market. Highlights Demand has recovered throughout the year Focus on margin and cost to serve Expand beyond wire harness products Increase market share from current global customers Automotive technology Every year millions of vehicles are produced worldwide, with each new model requiring individual tape solutions. Scapa s converting and die cutting capabilities offer customised solutions aimed at improving the manufacturing process whilst reducing waste material. Adhesive tapes offer many benefits during vehicle assembly, providing instant bonds that will maintain their strength throughout the vehicle s lifetime. Scapa s aim is to develop adhesive solutions with transportation OEMs, utilising our converting capabilities and global footprint. Overview Business Review Governance Financial Statements Scapa Group plc Annual Report and Accounts 13

16 Business Review Building a solid financial platform for growth. Europe revenue North America revenue Asia revenue / /10 / / /10 / / /10 / m +5.5% 72.7m +15.2% 12.9m +3.2% Europe The trading performance in Europe improved with revenue growth to 106.7m compared to 101.1m in, an increase of 5.5%. With only 10% of Group sales derived from the UK, the driver for growth was from the other main economies in Europe, specifically France and Germany as demand was driven by a mix of restocking and improving macro conditions in the Industrial and Transportation markets. Medical contributed strongly as we continue to improve and expand our relationships with our Medical customers in advanced wound care as they seek to improve their competitive position. Operating profit was significantly ahead of the prior year at 3.3m (: 0.3m). As a consequence operating margins also improved to 3.1% (: 0.3%). In line with the rest of the business, Europe has incurred both energy-related and raw material cost pressure which was felt throughout the financial year particularly in rubber, cotton and specific resins. In the second half of the year we implemented a number of strategic price increases which contributed towards a much improved second half performance well ahead of the first, delivering 2.5m which was an operating margin of 4.6%, above the Group average of 4.2%. The cost control initiatives and a plant closure have been completed and culminated in the closing of our warehouse in Barcelona. There has been a high level of attention to maintaining the benefits in the financial year and, coupled with improved efficiency and pricing, this has produced a solid improvement in the performance. North America Revenue in North America has increased year-on-year by 15.2% with strong performances across all segments. Medical contributed strongly with demand remaining steady throughout the year as we continue to win an increased market share from our current customers such as Johnson & Johnson and Covidien. Industrial also performed well with a strong contribution from emerging technologies and energy sectors. The growth is pleasing given the closure of our Carlstadt facility in New Jersey USA. Although loss-making in the prior financial year, the closure has removed capacity and impacted volume and therefore revenue in this financial year. Operating profit for the region increased substantially to 5.3m (: 1.3m) accelerating margins to 7.3% for the year (: 2.1%). 14 Scapa Group plc Annual Report and Accounts

17 Strong growth driven by key markets where we have a competitive advantage. Asia This year has seen a change in strategy in our Asian operations. We are moving away from commodity low margin products and concentrating on more engineered application-specific technologies. To support this strategy in the year we completed the investment of 1.2m in a new production line and state of the art research and development facility in Anyang, South Korea, which is within a twenty mile radius of our strategic customers Samsung and LG. This ensures we can provide the close customer support and product development in line with the lifecycle of the development of our customers products. As a consequence the second half of the year saw a revenue reduction of 0.9m on the first half which led to a modest increase in the level of turnover to 12.9m in compared to 12.5m in. This year has seen the Group invest in the Asia cost base to both improve our research and development capability and sales capacity throughout the region to help drive future growth in the Electronics market. As a result the operating profit was 0.4m compared to 0.7m in, reducing the margin to 3.1% (: 5.6%). Corporate Head office costs increased by 0.3m to 1.0m (: 0.7m) due to recruitment of a number of newly created senior positions within the Head Office. While cost control and value for money are fundamental building blocks in the Group s make up, we are investing in the cost base to ensure the future development of the Group is supported and controlled. The introduction of a Group HR Director and global HR function alongside the investment in a Group business development team are two examples. Exceptional items There are no exceptional items (: 3.1m charge). Finance costs Net finance costs decreased by 1.8m due to a decrease in the pension financing charge of 1.7m. The IAS 19 finance charge fell due to the increase in asset values in the previous year and reduction in the interest discount rate to 5.6% compared to 5.7% at March. Although cash levels improved during the year, low interest rates have restricted returns. Taxation The Group tax charge of 2.6m (: 2.4m credit) includes 2.1m charge (: 1.4m credit) on operating activities and 0.5m charge owing to a change in the UK tax rate (: Nil). The operating activities charge is made up of 1.1m of deferred tax and 1.0m of current tax. The announcement during the year of the future UK corporation tax rate reduction from 28% to 26% had a deferred tax impact of 1.2m (: Nil), of which 0.5m has been charged through the profit and loss account with the residue following the pensions movement through reserves. The effective rate of tax for the Group, excluding the impact of the future rate change in the UK, is 34.4%. This is higher than the UK standard rate of 28% owing mainly to the Group operating in territories which have a higher statutory tax rate than the UK. Despite the high effective rate, the Group s net cash tax payment in the year was minimal, due to the utilisation of tax losses and a tax repayment in the year of 0.3m. Cash flow The Group ended the year with net cash of 18.8m (: 11.4m), an increase of 7.4m. This includes 6.3m (: 6.6m) of restricted cash; the restriction ends December. This is a creditable result given that it is after 4.4m (: 5.8m) of defined benefit pension payments, exeptional cash flows of 1.7m (: 5.7m) and 2.2m repayment of debt (: 0.2m). Effective management of working capital led to no outflow on cash despite the strong growth in sales (: 4.0m inflow), supported by a reduced capital expenditure programme of 1.6m (: 2.2m). Overview Business Review Governance Financial Statements Scapa Group plc Annual Report and Accounts 15

18 Business Review Continued focus on margin improvement and a strong balance sheet. Pensions The IAS 19 pension deficit has decreased by 3.6m to 35.0m (: 38.6m). The three UK defined benefit schemes, which are closed to new members and to future accrual, represent the largest portion of the deficit and that balance now stands at 28.8m (: 32.9m). The net movement in the UK deficits was the result of increases in asset values of 3.0m and a reduction in total liabilities of 1.1m, the latter being mainly the impact of the change in assumption from RPI to CPI. Last year the Company concluded the negotiations with the Trustees of all three UK defined benefit pension schemes with respect to contributions for three years of which two years remain. Affordability and a strong sponsoring employer were the key shared objectives and as a result annual recurring contributions for the three years from 1 April were reduced by 0.5m per annum. During the three-year period this annual shortfall can be made good if cash flow targets are outperformed with any benefit being shared between the Company (67%) and the pension funds (33%), with the funds share limited to the cumulative shortfall. At the end of the three-year period contributions revert to their original level and any remaining cumulative deferred contributions are made good. The net impact of the agreement has resulted in future UK cash pension costs of up to 3.5m per annum for the next two years. Total pension costs including UK and overseas schemes, plus PPF levy and administration expenses, will be 5.1m for /12. As noted above, the Group continues to recognise the deferred tax asset of 9.4m in respect of future pension deficit reduction payments which gain tax relief at the time of payment (as opposed to accrual). The pension deficit, net of deferred tax, is therefore 25.6m which includes a provision for future administration and PPF levy costs of around 6.5m. Asbestos litigation During the previous financial year the Group undertook an actuarial and legal review of the outcome of all current and future potential claims against Scapa. That review has been revalidated in respect of the current financial year. In parallel, a similar review of the Group s product liability insurance has been carried out. As a result, the Group last year recognised a liability and an equal and opposite insurance asset of 20.3m. The position has been revalidated as referred to above, the only movements being foreign exchange and the unwind of the discount, giving a closing balance of 19.9m. In addition, provisions of 5.7m (: 7.5m) remain to pay the Group s share of any future litigation costs. We continue to hold the view that Scapa s products have not been the cause of any alleged personal injury and we therefore continue to adopt the same robust stance with respect to all of the remaining personal injury claims in the USA arising from businesses sold in During the year 4,967 more plaintiff claims were dismissed and the total now stands at 8,116, a reduction of almost 26,000 since the peak of around 34,000 in Shareholder funds Shareholder funds have increased 3.3m to 68.6m (: 65.3m). Contribution from income was 2.9m (: 3.0m), being profit after tax of 3.5m with net pension gains of 0.9m (: 6.1m), offset by unfavourable currency impact on overseas asset values of 0.8m (: 0.3m) and tax charges of 0.7m (: Nil). In addition, movements in equity relating to share issues and share options have added 0.4m. Performance summary The Group s performance this financial year is pleasing with growth across all business units and in all regions. Group profits have significantly improved on the prior year and the Balance Sheet continues to strengthen. Strong operational and financial management continues to improve working capital which has contributed to the balance of 18.8m cash on the Balance Sheet. All legacy issues are well understood and controlled and the Group is on a sound footing for sustainable performance. 16 Scapa Group plc Annual Report and Accounts

19 Principal risks Risk Revenue Trade counterparty Raw material pricing and availability The Registration, Evaluation and Authorisation of Chemicals (REACH) legislation Defined benefit pension schemes Rising life expectancy Investment risk Treasury Funding requirements Currency The Group s trade and assets are broadly equally exposed to Sterling, US Dollars and Euros with the balance made up of Canadian Dollars, Swiss Francs and various smaller currencies Interest rates Counterparty credit Counterparty credit risk arises from the investment of surplus cash and the use of financial instruments Legal proceedings Personal injury claims arising from alleged exposure to asbestos-containing products Other potential litigation Mitigation Diverse range of customers European top 15 customers represent 27% of sales North America top 15 customers represent 35% of sales Credit limits are set based on Group policy Limits monitored regularly and customers put on stop as necessary Overdue debts improved to 7% (: 10%) Value of overdues decreased by 1.2m Introduction of global supply chain function Monitoring worldwide sources for critical raw materials to reduce costs whilst maintaining quality Dual sourcing of material reduces risk and maintains competitive pressure in the supply chain Dedicated project team to ensure compliance No significant issues for Scapa Closure of schemes to future accrual in the UK Assets held in high quality institutions Active de-risking investment strategy for assets Policies approved by Group Board Corporate team coordinates activities Corporate Treasury is not a profit centre Very limited use of derivatives Committed facility of 4.0m in UK Uncommitted short-term and overdraft facilities of up to 6.8m overseas Longer-term funding via finance leases ( 0.7m) Expect to remain in a net cash position next year Range of exposures provides natural hedge Matching currencies of costs to revenues Local borrowings serviced by local cash flows No speculative currency risk exposures Currently net debt free Weighted towards floating rate Deposits typically invested for three to six months Defined minimum credit rating for banks Limit exposure to each bank Expert legal advisory teams for defence and insurance coverage Monitoring adequacy of insurance Product liability insurance many times higher than potential liabilities Policy of defending all asbestos product liability claims Specialist advisers in each field supporting in-house General Counsel Overview Business Review Governance Financial Statements Principal risks to the business are reviewed on a regular basis by senior management and the Group Board. Remedial action plans are developed as and when appropriate. Our internal audit function regularly reviews risk and issue-tracking systems. Overall we continue to consider that the policies and monitoring systems which are in place and which have been reviewed regularly throughout the year remain sufficient to effectively manage the risks associated with our business. Scapa Group plc Annual Report and Accounts 17

20 Business Review We continue to implement Lean manufacturing techniques. Protecting the environment Scapa Group plc continues to recognise the importance of managing the consumption of the world s natural resources as well as providing a safe and healthy working environment for its employees, and also the neighbourhoods in which we operate. Clearly, however, the successful growth of our business will lead to the consumption of more resources, on an absolute basis. We therefore attempt to significantly reduce, or where possible eliminate, the amount of resource consumed for each unit of production. The Group routinely undertakes audits of our Environmental, Health and Safety programmes utilising both internal and external third parties where appropriate. Air emissions Scapa actively seeks to minimise the discharge of VOCs, particulates and odour into the atmosphere. Solvent-based adhesive coating processes are used in many locations throughout Scapa. Evaporated solvents are captured and effectively destroyed using modern thermal oxidizers or condensed using solvent recovery systems. All sites using thermal oxidizers undergo strict third-party testing to ensure that all legislative requirements are met or exceeded. Solvent consumption Whilst Scapa utilises solvent-based adhesives in all regions, much work continues to be carried out to reduce the quantity of process solvent for environmental and cost reasons. Work continues by our Research and Development teams to develop adhesive solutions and processes to completely eliminate the use of solvents for specific applications. Within our Medical and Industrial businesses, we offer a wide range of solventless adhesive tape solutions and continue to investigate new and innovative adhesive solutions. We continue to identify opportunities where focused capital investment can help reduce solvent consumption. Oil consumption There continues to be no significant direct use of oil within Scapa operations and where it is used it is predominantly for equipment lubrication. Lubrication oils are tested for maximum duration of use and disposed of through licensed disposal agents meeting all local and regional environmental standards. Gas and electricity consumption Gas and electricity remain significant inputs to Scapa processes in all regions. Constant reduction of energy usage is a key component of the Scapa environmental programme. We continue to work to implement energy management systems at our various global sites to help reduce overall consumption. Manufacturing waste The Group continues to drive its implementation of Lean manufacturing techniques across its sites. As this initiative extends and focuses upon the elimination of non-value-added activities, it will lead to reductions in manufacturing waste and our overall environmental footprint. Examples of improvement activities are: We continue to target the overall reduction in manufacturing waste sent to landfill at all sites In Valence (France) we have further optimised our coating and slitting processes to reduce edge waste which we can then extend to other processes Across our North American sites the SAP System has been extended with real-time shop-floor data capture systems to provide timely data to drive significant reductions in waste In Windsor (USA) we have approved capital investment to upgrade the control systems on the adhesive coating lines For the twelfth consecutive year the Inglewood, CA site received a WRAP Award (Waste Reduction Awards Program) from the California Integrated Waste Management Board 18 Scapa Group plc Annual Report and Accounts

21 We continually strive to improve safety across our processes. REACH During a number of additional substances were added to the list of substances of very high concern (SVHCs) though none of these affect Scapa s product portfolio. Some of the existing SVHCs are in Scapa s product portfolio and two of these will be placed into annex XIV which means they will be banned from commercialisation unless authorisation is granted. In effect these two substances will be banned from Accordingly Scapa has notified existing customers regarding SVHCs and we have a programme of work to remove these materials from finished products which has already resulted in some reformulations. Accordingly we see no significant risk arising from current REACH legislation. Improving safety culture Scapa considers its safety performance as a top priority. Our ultimate aim is, and must only be, to achieve a result where none of our employees comes to any harm whilst engaged in Scapa Group business. The Group realises that this is an extremely challenging goal that can only be achieved through constant vigilance and continuous improvement in the working environment and business processes, but above all through the attitude and behaviour of every single member of staff. Scapa and its employees agree that the delivery of a safe working environment and safe systems of work is a shared responsibility. The Board believes that it is the tone at the top that is a key driver of the Group s safety culture. The Board is committed to reinforcing and improving health and safety activities within all sites to ensure the constant safety and wellbeing of our employees. Standards of performance are set and monitored by the Board and safety KPIs form a key part of the Group s review process. The Leadership Team is responsible for providing guidance, focusing on best practices and overseeing auditing of our manufacturing sites and processes. Health and Safety Review of performance The Board safety targets for the year /11 were increased to a minimum 20% annual improvement in all KPIs. This priority is strongly reinforced by the Board who remain directly involved in monitoring performance on a regular basis. Key focus areas include: Machine guarding Risk Assessment Review Material movement, handling and storage Proper and improved use of Personal Protective Equipment Employee training Auditing of Health and Safety policies and practices In addition our key safety opportunities process identified more than 3,000 opportunities for potential improvement in our facilities during the year. All sites within the Group report Key Performance results monthly and are audited at least twice a year against a standard audit template to ensure a consistently high level of compliance and continuous improvement. Every serious incident or accident continues to be reviewed by the Group Operations Director, local site leadership teams and, in the most serious cases, the Board. During the year a new Group Health & Safety Leadership position was created to lead further improvements. /12 Health and Safety goals The ultimate goal for all Scapa sites will always be zero accidents and zero lost days. Anything less would send the message that some level of injury is acceptable. We aim to make continued annual improvements to our performance and for the next financial year the Board has again targeted a 20% annual improvement in all safety KPIs. Constant vigilance and reinforcement of key messages is required from all our staff. Underpinning this goal of improving the safety culture, bonus payments are made to Senior Managers and Directors which are, in part, dependent upon achievement of key health and safety goals. Overview Business Review Governance Financial Statements Scapa Group plc Annual Report and Accounts 19

22 Governance Board of Directors H R Chae Group Chief Executive P Edwards Group Finance Director J A S Wallace Chairman Heejae Chae joined the Board as Executive Director in September 2009 and subsequently became Group Chief Executive in November Prior to joining Scapa, Heejae was Group Chief Executive of Volex Group plc. He was previously the Group General Manager, Radio Frequency Worldwide, for Amphenol Corporation. He spent the early part of his career in finance at The Blackstone Group and Credit Suisse First Boston before moving into industry. Paul Edwards joined the Board in September as Group Finance Director. Prior to joining Scapa he was Group Finance Director of NCC Group plc. Paul is a Chartered Management Accountant and MBA and spent the earlier part of his career in manufacturing, logistics and services sectors. James Wallace joined the Board in August 2007 and became Chairman in October He is currently also Chairman of the Nominations Committee. An accountant by qualification, he spent the majority of his very successful executive career at Pifco Holdings PLC until James has held various Non-Executive Director positions and was Chairman of Bodycote plc from January 2002 until April Currently James is a Non-Executive Director of Manchester Airport Group plc and Cryptologic Ltd. R J Perry Non-Executive Director M C Buzzacott Non-Executive Director M R Stirzaker Company Secretary and General Counsel Richard Perry was appointed to the Scapa Board in June 2005 and is Chairman of the Audit Committee. Richard is currently Group Finance Director of Fenner plc to which position he was appointed in He was formerly a senior audit partner with Price Waterhouse. Mike Buzzacott joined the Board in March 2008 and is currently Chairman of the Remuneration Committee. Mike has extensive experience of the global chemicals industry where he spent 14 years in operational roles in BP Chemicals, before retiring as Group Vice President Petrochemicals in Mike is currently Non-Executive Director at Genus PLC and Croda International Plc. Mark Stirzaker is a UK qualified solicitor and joined Scapa in January 2006 with responsibility for its company secretarial and legal affairs worldwide. He has extensive experience of commercial legal matters in the manufacturing industry, having previously been Head of Legal at British Vita PLC for over 20 years. 20 Scapa Group plc Annual Report and Accounts

23 Leadership Team L-R: Gene Kim, Tracy Sheedy, Heejae Chae, Ian Marchant, Mark Stirzaker, Paul Edwards, Ralf Seufert G Kim Managing Director Asia T Sheedy Group HR Director I R Marchant Group Operations Director Overview Business Review Governance Financial Statements Gene Kim joined Scapa as Managing Director Asia in February. Prior to Scapa, Gene was Director of Strategic Projects at Cisco Systems. His prior experience also includes Samsung Electronics, Mercer Management Consulting and Arthur D Little. Tracy Sheedy joined Scapa in September as Group HR Director. Before joining the Company, Tracy was Head of Organisation and Capability Development with BAE Systems. Prior to this role Tracy held senior HR roles with ConvaTec, Georgia Pacific and Monsanto. Ian Marchant joined the Company in February as Group Operations Director. Prior to joining Scapa, Ian held a number of senior management positions with two international manufacturing businesses, Avon Rubber plc and General Electric Inc. R Seufert Group Commercial Director Ralf Seufert joined Scapa as Group Commercial Director in October. Before joining Scapa he was VP Sales & Marketing and member of the Board at Quadrant Plastic Composites AG in Switzerland. He has previously worked for GE Advanced Materials in senior management positions for global application development and sales. Scapa Group plc Annual Report and Accounts 21