Section 1 - Basis of preparation

1.1       Cautionary statement

The Chairman's Statement and Chief Executive's Statement commentary contained in this Annual Results Announcement, including the principal risks and uncertainties (note 7.4), have been prepared by the Directors in good faith based on the information available to them up to the time of their approval of this report solely for the Company's shareholders as a body, so as to assist them in assessing the Group's strategies and the potential for those strategies to succeed and accordingly should not be relied on by any other party or for any other purpose and the Company hereby disclaims any liability to any such other party or for reliance on such information for any such other purpose.

 

This Annual Results Announcement has been prepared in respect of the Group as a whole and accordingly matters identified as being significant or material are so identified in the context of Barratt Developments PLC and its subsidiary undertakings in the consolidation taken as a whole.

1.2       Basis of preparation

Whilst the financial information included in this Annual Results Announcement has been prepared in accordance with IFRS as issued by the IASB, IFRIC interpretations and SIC interpretations as adopted and endorsed by the EU, this announcement does not itself contain sufficient information to comply with IFRS. Full Financial Statements that comply with IFRS are included in the 2018 Annual Report and Accounts which will be circulated to shareholders in September 2018 and made available at www.barrattdevelopments.co.uk at that point.

 

The accounting policies adopted are consistent with those followed in the preparation of the Group's 2018 Annual Report and Accounts which have not changed from those adopted in the Group's 2017 Annual Report and Accounts except as disclosed in note 1.4.

 

This Annual Results Announcement has been prepared under the historical cost convention as modified by the revaluation of available for sale financial assets, derivative financial instruments and share-based payments.

 

Critical accounting judgements and key sources of estimation uncertainty

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the Directors' best knowledge of the amounts, actual results may ultimately differ from those estimates. The Directors have made no individual critical accounting judgements that have a significant impact upon the Financial Statements, apart from those involving estimations.

 

The most significant estimates made by the Directors in these condensed consolidated financial statements are set out within the relevant notes.

1.3       Going concern

In determining the appropriate basis of preparation of the condensed consolidated financial statements, the Directors are required to consider whether the Group can continue in operational existence for the foreseeable future.

 

The Group's business activities, together with factors which the Directors consider are likely to affect its future development, financial performance and financial position are set out in the Chief Executive's statement. The material financial and operational risks and uncertainties that may have an impact upon the Group's performance and their mitigation are outlined in note 7.4 and financial risks including liquidity risk, market risk, credit risk and capital risk are outlined in note 5.4 to these condensed consolidated financial statements.

 

The financial performance of the Group is dependent upon the wider economic environment in which the Group operates. As explained in the Risk management section in note 7.4, factors that particularly affect the performance of the Group include changes in the macroeconomic environment including buyer confidence, availability of mortgage finance for the Group's customers and interest rates. In forming their conclusion, the Directors have considered all currently available information about the potential future outcomes of events and changes in conditions that are reasonably possible at the time of making this statement. In doing this they have concluded that no material uncertainties exist.

 

At 30 June 2018 the Group had total committed bank facilities and private placement notes of £900.0m. The final maturity dates of these facilities range from December 2022 to August 2027, with the £700.0m revolving credit facility maturing in December 2022 and the sterling US private placement notes maturing in August 2027. The committed facilities and private placement notes provide appropriate headroom above our current forecast debt requirements.

 

Accordingly, after making enquiries and having considered forecasts and appropriate sensitivities, the Directors have formed a judgement, at the time of approving the condensed consolidated financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, being at least 12 months from the date of these condensed consolidated financial statements. For this reason, they continue to adopt the going concern basis in the preparation of these condensed consolidated financial statements.

1.4       Adoption of new and revised standards

During the year ended 30 June 2018, the Group has adopted the following new and revised standards:

·      Amendments to IAS 7 (Statement of Cash Flows) resulting in enhanced disclosures of changes in financial liabilities in note 5.1.

·      Amendments to IFRS 12 (Disclosure of Interests in Other Entities) included in the Annual Improvements to IFRS Standards 2014-2016 Cycle which has had no impact on the Financial Statements.

·      Amendments to IAS12: Recognition of Deferred Tax Assets for Unrealised Losses which has had no impact on the Financial Statements.

 

Section 2 - Results for the year and utilisation of profits

 

Estimation of future income and costs to complete - In order to determine the profit that the Group is able to recognise on its developments in a specific period, the Group has to allocate site-wide development costs between units built in the current year and in future years. It also has to estimate costs to complete on such developments and make estimates relating to future sales price margins on those developments and units. In making these assessments there is a degree of inherent uncertainty. The Group has developed internal controls to assess and review carrying values and the appropriateness of estimates made.

 

Management have performed a sensitivity analysis to assess the impact of a change in estimated costs for developments on which sales were recognised in the year. A 1% increase in estimated costs recognised in the year would reduce the Group's gross margin by 60bps.

 

2.1       Segmental analysis

The Group consists of two separate segments for management reporting and control purposes, being housebuilding and commercial developments. The segments are considered appropriate for reporting under IFRS 8 'Operating Segments' since these segments are regularly reviewed internally by the Board without further significant categorisation. The Group presents its primary segment information on the basis of these operating segments. As the Group operates in a single geographic market, Great Britain, no secondary segmentation is provided.

	House- building	Commercial developments	2018 Total	House- building	Commercial developments	2017 Total
	Units	Units	Units	Units	Units	Units
Residential completions *	16,680	-	16,680	16,645	-	16,645
Consolidated Income Statement	£m	£m	£m	£m	£m	£m
Revenue	4,827.0	47.8	4,874.8	4,589.1	61.1	4,650.2
Cost of sales	(3,821.6)	(37.3)	(3,858.9)	(3,661.9)	(47.5)	(3,709.4)
Cost associated with legacy properties **	(4.0)	(3.0)	(7.0)	-	(8.8)	(8.8)
Gross profit	1,001.4	7.5	1,008.9	927.2	4.8	932.0
Administrative expenses	(143.8)	(2.5)	(146.3)	(129.4)	(3.4)	(132.8)
Profit from operations	857.6	5.0	862.6	797.8	1.4	799.2
Share of post-tax profit/(loss) from joint ventures and associates	18.5	(0.5)	18.0	26.5	(0.9)	25.6
Profit from operations including post-tax profit/(loss) from joint ventures and associates	876.1	4.5	880.6	824.3	0.5	824.8
Finance income			3.5			2.9
Finance costs			(48.6)			(62.6)
Profit before tax			835.5			765.1
Tax			(164.0)			(149.1)
Profit for the year from continuing operations			671.5			616.0

* Residential completions exclude joint venture completions of 899 (2017: 750) in which the Group has an interest.

** During the year an amount of £7.0m (2017: £8.8m) was provided in respect of costs associated with legacy properties. These costs have been separately disclosed in the Income Statement. In determining the sum provided it was necessary to estimate the cash flows associated with the assets, and to discount a proportion of these at an appropriate rate. The discount rate was determined at 3.8% (2017: 2.3%) with reference to the Group's forecast average cost of long-term debt.

 

Balance Sheet	House- building £m	Commercial developments £m	2018 Total £m	House- building £m	Commercial developments £m	2017 Total £m
Segment assets	5,959.9	16.9	5,976.8	5,821.4	27.6	5,849.0
Elimination of intercompany balances			(30.2)			(21.3)
			5,946.6			5,827.7
Cash and cash equivalents			982.4			784.4
Consolidated total assets			6,929.0			6,612.1
Segment liabilities	(1,995.8)	(63.5)	(2,059.3)	(2,081.9)	(76.3)	(2,158.2)
Elimination of intercompany balances			30.2			21.3
			(2,029.1)			(2,136.9)
Loans and borrowings			(191.1)			(73.9)
Deferred tax liabilities			(25.3)			(8.0)
Current tax liabilities			(85.8)			(71.1)
Consolidated total liabilities			(2,331.3)			(2,289.9)

 

Other information	House- building £m	Commercial developments £m	2018 Total £m	House- building £m	Commercial developments £m	2017 Total £m
Capital additions	7.5	-	7.5	4.0	-	4.0
Depreciation	5.4	-	5.4	4.1	-	4.1

2.2       Earnings per share

Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders of the Parent Company of £671.7m (2017: £615.8m) by the weighted average number of ordinary shares in issue during the year, excluding those held by the Employee Benefit Trust that do not attract dividend equivalents which are treated as cancelled, which was 1,010.7m (2017: 1,004.3m) shares.

Diluted earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders of the Parent Company of £671.7m (2017: £615.8m) by the weighted average number of ordinary shares in issue adjusted to assume conversion of all potentially dilutive share options from the start of the year, giving a figure of 1,020.0m (2017: 1,014.7m) shares.

The earnings per share from continuing operations were as follows:

	2018 pence	2017 pence
Basic earnings per share	66.5	61.3
Diluted earnings per share	65.9	60.7

2.3       Dividends

	2018 £m	2017 £m
Amounts recognised as distributions to equity shareholders in the year:
Final dividend for the year ended 30 June 2017 of 17.1p (2016: 12.3p) per share	172.9	123.6
Special dividend for the year ended 30 June 2017 of 17.3p (2016: 12.4p) per share	175.0	124.7
Interim dividend for the year ended 30 June 2018 of 8.6p (2017: 7.3p) per share	87.0	73.4
Total dividends distributed to equity shareholders in the year	434.9	321.7

 

	2018 £m	2017 £m
Proposed final dividend for the year ended 30 June 2018 of 17.9p (2017: 17.1p) per share	181.1	172.2
Proposed special dividend for the year ended 30 June 2018 of 17.3p (2017: 17.3p) per share	175.0	175.0

The proposed final dividend and the special dividend are subject to approval by shareholders at the Annual General Meeting. The cost has been calculated based on the issued share capital at 30 June 2018 and has not been included as a liability at 30 June 2018.

2.4       Tax

All profits of the Group are subject to UK corporation tax.

The current year tax charge has been provided for, by the Group, at a standard effective rate of 19.0% (2017: 19.75%) and the closing deferred tax assets and liabilities have been provided in these condensed consolidated financial statements at a rate of between 17.0% and 19.0% (2017: between 17.0% and 19.0%) of the temporary differences giving rise to these assets and liabilities, dependent upon when they are expected to reverse.

2.4.1     Tax recognised in the Income Statement

The tax expense represents the sum of the tax currently payable and deferred tax.

 

Analysis of the tax charge for the year

	2018 £m	2017 £m
Current tax:
UK corporation tax for the year	161.0	152.8
Adjustment in respect of previous years	(6.5)	0.5
	154.5	153.3
Deferred tax:
Origination and reversal of temporary differences	(1.4)	(3.1)
Adjustment in respect of previous years	10.9	(0.4)
Impact of reduction in corporation tax rate	-	(0.7)
	9.5	(4.2)
Tax charge for the year	164.0	149.1

 

Factors affecting the tax charge for the year

The tax rate assessed for the year is higher (2017: lower) than the standard effective rate of corporation tax in the UK of 19.0% (2017: 19.75%). The differences are explained below:

	2018 £m	2017 £m
Profit before tax	835.5	765.1
Profit before tax multiplied by the standard rate of corporation tax of 19.0% (2017: 19.75%)	158.7	151.1
Effects of:
Other items including non-deductible expenses	3.3	1.0
Additional tax relief for land remediation costs	(2.1)	(1.8)
Adjustment in respect of previous years	4.4	0.1
Adjustment for post-tax profits of certain joint ventures included in Group profit before tax	(0.3)	(0.6)
Impact of change in tax rate on deferred tax asset	-	(0.7)
Tax charge for the year	164.0	149.1

2.4.2     Tax recognised in equity

In addition to the amount charged to the Consolidated Income Statement, a net current and deferred tax charge of £5.1m (2017: £2.0m credit) was recognised directly in equity.

 

Section 3 - Working capital

3.1      Inventories

	Group
	2018 £m	2017 £m
Land held for development	2,963.4	2,895.6
Construction work in progress	1,463.1	1,509.1
Part-exchange properties and other inventories	90.2	70.7
	4,516.7	4,475.4

3.1.1     Nature and carrying value of inventories

The Group's principal activities are housebuilding and commercial development. The majority of the development activity is not contracted prior to the development commencing. Accordingly, the Group has in its Balance Sheet at 30 June 2018 current assets that are not covered by a forward sale. The Group's internal controls are designed to identify any developments where the balance sheet value of land and work in progress is more than the projected lower of cost or net realisable value.

 

During the year the Group has conducted six-monthly reviews of the net realisable value of specific sites identified as at high risk of impairment, based upon a number of criteria including low site profit margins and sites with no forecast completions. Where the estimated net realisable value of a site was less than its current carrying value within the Balance Sheet, the Group has impaired the land and work in progress value.

 

During the year, due to performance variations, changes in assumptions and changes to viability on individual sites, there were gross impairment charges of £13.2m (2017: £16.8m) and gross impairment reversals of £9.9m (2017: £3.3m), resulting in a net impairment charge of £3.3m (2017: £13.5m) included within profit from operations.

 

The key estimates in these reviews are those used to estimate the realisable value of a site, which is determined by forecast sales rates, expected sales prices and estimated costs to complete.

 

The Directors consider all inventories to be essentially current in nature, although the Group's operational cycle is such that a proportion of inventories will not be realised within 12 months. It is not possible to determine with accuracy when specific inventory will be realised as this will be subject to a number of variables such as consumer demand and planning permission delays.

3.1.2     Expensed inventories

The value of inventories expensed in the year ended 30 June 2018 and included in cost of sales was £3,619.7m (2017: £3,509.6m).

 

Section 4 - Business combinations and other investing activities

4.1       Business combinations

4.1.1     Non-controlling interests

	Group
Movement in non-controlling interest share of net assets recognised in the Consolidated Balance Sheet	2018 £m	2017 £m
At 1 July	9.1	8.9
Distribution of profits to non-controlling partner	(1.4)	-
Share of (loss)/profit for the year recognised in the Consolidated Income Statement	(0.2)	0.2
At 30 June	7.5	9.1

4.2       Goodwill

	Group £m
Cost
At 1 July 2016, 30 June 2017 and 30 June 2018	816.7
Accumulated impairment losses
At 1 July 2016, 30 June 2017 and 30 June 2018	24.5
Carrying amount
At 30 June 2017 and 30 June 2018	792.2

The Group's goodwill has a carrying value of £792.2m relating to the housebuilding segment. The goodwill relating to the commercial developments segment, with a cost of £24.5m, was fully impaired in the year ended 30 June 2008.

 

4.2.1     Impairment of goodwill and intangible assets

The Group conducts an annual impairment review of goodwill and intangibles together for the housebuilding segment.

Impairment of goodwill and brands - The impairment review for the goodwill of the housebuilding business and the Group's indefinite life brand, David Wilson Homes, requires an estimation of the value-in-use of the housebuilding segment. The value-in-use calculation requires an estimate of the future cash flows expected from the housebuilding business, including the anticipated growth rate of revenue and costs, and requires the determination of a suitable discount rate to calculate the present value of the cash flows. The discount rate used is based on the target capital structure, current market assessments of the time value of money and risks appropriate to the Group's housebuilding business. Changes in these may impact upon the Group's discount rate in future periods. The sensitivity of the valuation of goodwill and brands to changes in expectations and discount rates is set out in this note.

An impairment review was performed at 30 June 2018 and compared the value-in-use of the housebuilding segment with the carrying value of its tangible and intangible assets and allocated goodwill.

The value-in-use was determined by discounting the expected future cash flows of the housebuilding segment. The first two years of cash flows were determined using the Group's approved detailed site-by-site business plan. The cash flows for the third to the fifth years were determined using Group level internal forecasted cash flows based upon expected volumes, selling prices and margins, taking into account available land purchases and work in progress levels. The cash flows for year six onwards were extrapolated in perpetuity using an estimated growth rate of 2.5%, which was based upon the historical long term growth rate of the UK economy.

The key assumptions for the value-in-use calculations were:

·      Discount rate: this is a pre-tax rate reflecting current market assessments of the time value of money and risks appropriate to the Group's housebuilding business. Accordingly, the rate of 14.5% (2017: 14.5%) is considered by the Directors to be the appropriate pre-tax risk adjusted discount rate, being the Group's estimated long term pre-tax weighted average cost of capital.

·      Expected changes in selling prices for completed houses and the related impact upon operating margin: these are determined on a site-by-site basis for the first two years dependent upon local market conditions and product type. For years three to five, these have been estimated at a Group level based upon past experience and expectations of future changes in the market, taking into account external market forecasts.

·      Sales volumes: these are determined on a site-by-site basis for the first two years dependent upon local market conditions, land availability and planning permissions. For years three to five, these have been estimated at a Group level based upon past experience and expectations of future changes in the market, taking into account external market forecasts.

·      Expected changes in site costs to complete: these are determined on a site-by-site basis for the first two years dependent upon the expected costs of completing all aspects of each individual development. For years three to five, these have been estimated at a Group level based upon past experience and expectations of future changes in the market, taking into account external market forecasts.

The result of the value-in-use exercise concluded that the recoverable value of goodwill and intangible assets exceeded its carrying value by £1,731.4m (2017: £1,720.8m) and there has been no impairment.

Management have performed a sensitivity analysis in assessing recoverable amounts of goodwill, based on changes in key assumptions considered to be possible. These have included a change in the pre-tax discount rate of 1% and changes in the long term growth rate of 1%.

The sensitivity analysis shows no impairment would arise in isolation under each scenario.

 

 

 

Section 5 - Capital structure and financing

5.1       Net cash

Net cash is defined as cash and cash equivalents, bank overdrafts, interest bearing borrowings and foreign exchange swaps.

 

Net cash at 30 June is shown below:

Group
	Notes	2018 £m	2017 £m
Cash and cash equivalents	5.1.1	982.4	784.4
Drawn debt
Borrowings
Government loans		-	(21.4)
Sterling US private placement notes		(200.0)	-
US Dollar private placement notes		-	(61.6)
Prepaid fees		8.9	9.1
Total borrowings being total drawn debt		(191.1)	(73.9)
Derivative financial instruments
Foreign exchange swaps	5.3	-	13.2
Net cash		791.3	723.7
Total borrowings at 30 June are analysed as:
Non-current borrowings		(191.1)	(1.4)
Current borrowings		-	(72.5)
Total borrowings being drawn debt		(191.1)	(73.9)

Movement in net cash, including a reconciliation of liabilities arising from financing activities, is analysed as follows:

	Group
	2018 £m	2017 £m
Net increase in cash and cash equivalents	198.0	26.4
Repayment/(drawdown) of borrowings including issue of sterling US private placement notes:
Loan repayments	21.4	105.6
Repayment of US Dollar private placement notes	48.4	-
Issue of sterling US private placement notes	(200.0)	-
Other movements in borrowings:
Movement in prepaid fees	(0.2)	(0.3)
Foreign exchange loss on US Dollar private placement notes	(0.8)	(1.7)
Foreign exchange gain on swaps	0.8	1.7
Movement in net cash in the year	67.6	131.7
Opening net cash	723.7	592.0
Closing net cash	791.3	723.7

 

5.1.1     Cash and cash equivalents

Cash and cash equivalents are held at floating interest rates linked to the UK bank rate, LIBOR and money market rates as applicable. Cash and cash equivalents comprise cash held by the Group and short term bank deposits with an original maturity of three months or less from inception and are subject to an insignificant risk of changes in value.

 

 

 

 

5.1.2     Borrowings and facilities

All debt facilities at 30 June 2018 are unsecured.

 

The principal features of the Group's debt facilities at 30 June 2018 and 30 June 2017 were as follows:

 

		Amount drawn
	Facility	30 June 2018	30 June 2017	Maturity
Committed facilities
Revolving credit facility (RCF)	£700.0m	-	-	29 December 2022
Fixed rate sterling US private placement notes	£200.0m	£200.0m	-	22 August 2027
Government loans*	-	-	£16.8m	Repaid in full on 3 April 2018
Local government loan agreements	-	-	£4.6m including £0.2m interest	Repaid in full on 31 March 2018
Fixed rate US Dollar private placement notes	-	-	$80.0m	Repaid in full on 23 August 2017

*Government loans comprised cash received for specific sites under the Government's 'Get Britain Building' scheme, which were repaid during the year as described in the table above.

 

The Group also uses various bank overdrafts and uncommitted borrowing facilities that are subject to floating interest rates linked to the UK bank rate, LIBOR and money market rates as applicable.

 

Weighted average interest rates are disclosed in note 5.2.

 

5.2        Net finance costs

Recognised in the Consolidated Income Statement:

	Notes	2018 £m	2017 £m
Finance income
Finance income on short term bank deposits		(1.1)	(0.7)
Finance income related to employee benefits	6.1	(0.6)	(0.4)
Other interest receivable		(1.8)	(1.8)
		(3.5)	(2.9)
Finance costs
Interest on loans and borrowings		9.8	12.0
Imputed interest on deferred term payables		34.3	32.5
Amounts reclassified to the Income Statement in respect of hedged cash flows		(0.8)	10.2
Foreign exchange losses on US Dollar debt		0.8	1.7
Amortisation of facility fees		2.1	3.3
Other interest payable		2.4	2.9
		48.6	62.6
Net finance costs		45.1	59.7

 

Recognised in equity:

	2018 £m	2017 £m
Amounts deferred in respect of effective cash flow hedges	(0.8)	(1.9)
Total fair value movement on cash flow swaps included in equity	(0.8)	(1.9)
Amounts reclassified to the Income Statement in respect of hedged cash flows	0.8	(10.2)
Total fair value movement on cash flow swaps transferred from equity	0.8	(10.2)

 

 

 

The weighted average interest rates, excluding fees, paid in the year were as follows:

		Group
	2018  %	2017  %
Bank loans excluding swap interest	-	1.7
Net swap payment	-	5.4
Government loans	1.7	1.9
Term loans	-	4.4
Private placement notes	3.0	8.2

5.3       Derivative financial instruments - swaps

At 30 June 2018 the Group had no derivative financial instruments. In previous years the Group entered into derivative financial instruments in the form of interest rate swaps and cross currency swaps to manage the interest rate and foreign exchange rate risk arising from the Group's operations and sources of finance. The use of financial derivatives is governed by the Group's policies approved by the Board of Directors as detailed in note 5.4 to the condensed consolidated financial statements. The Group does not enter into any derivatives for speculative purposes.

The Group includes foreign exchange swaps within net debt. These swaps were entered into to hedge the foreign exchange exposure upon the Group's US Dollar denominated private placement notes. The Group's foreign exchange swaps had both an interest rate and an exchange rate element and only the exchange rate element on the notional amount of the swap is included within the net cash note.

The Group's derivative financial instruments at 30 June are shown below:

	Group
Designated as cash flow hedges:	2018 £m	2017 £m
Foreign exchange swap - exchange rate element	-	13.2
Foreign exchange swap - interest rate element	-	-
Current asset	-	13.2
Interest rate swaps - current liability	-	(5.8)
Net derivative financial instruments	-	7.4

5.3.1     Interest rate swaps

The Group entered into derivative transactions in the form of swap arrangements to swap floating rate debt into fixed rate sterling debt in accordance with the Group Treasury policy outlined in note 5.4, to manage the cash flow risks related to interest rates arising from the Group's sources of finance.

On 22 August 2017 the Group, utilising the break clause, cancelled the £25.0m 2022 interest rate swap at fair value.

After taking into account swap arrangements, the fixed interest rates applicable to the debt were as follows:

2018			2017
£m	Fixed rate payable %	Maturity	£m	Fixed rate payable %	Maturity
-	-	-	25.0	5.64	2022*

*Included a break clause allowing the Group or counterparty to cancel the swap on 22 August 2017 at fair value.

During the previous year the Group concluded that future floating rate borrowing was no longer expected to be highly probable and as a result, the Group discontinued prospectively hedge accounting for the interest rate swap. The loss previously recognised on the interest rate swap of £5.8m was reclassified from equity to the Income Statement during the year ended 30 June 2017. This is included in the Statement of Consolidated Income within the £10.2m reclassified to the Income Statement in that year. In addition, during the year ended 30 June 2017 hedging ineffectiveness of £0.7m was credited to the Consolidated Income Statement.

5.3.2     Foreign exchange swaps

The Group entered into derivative transactions in the form of swap arrangements to manage the cash flow risks related to foreign exchange which arose from the Group's sources of finance denominated in US Dollars.

On 23 August 2017 the Group repaid its US $80.0m US private placement notes in full and at 30 June 2018, the Group had no outstanding foreign currency debt (2017: US $80.0m). The swap arrangements entered into to swap all of this debt into fixed rate sterling debt, in accordance with the Group Treasury policy outlined in note 5.4, matured on 23 August 2017.

After taking into account swap arrangements, the fixed interest rates applicable to the debt were as follows:

2018			2017
US$m	Fixed rate payable %	Maturity	US$m	Fixed rate payable %	Maturity
-	-	-	80.0	8.14	2017

 

There was no ineffectiveness to be taken through the Consolidated Income Statement during the year or the prior year.

5.4       Financial risk management

The Group's approach to risk management and the principal operational risks of the business are detailed in note 7.4. The Group's derivative financial instruments are detailed in note 5.3.

 

The Group's operations and financing arrangements expose it to a variety of financial risks of which the most material are: credit risk, liquidity risk, interest rates and the availability of funding at reasonable margins. There is a regular, detailed system for the reporting and forecasting of cash flows from the operations to Group management to ensure that liquidity risks are promptly identified and appropriate mitigating actions are taken by the Treasury department. These forecasts are further stress-tested at a Group level on a regular basis to ensure that adequate headroom within facilities and banking covenants is maintained. In addition, the Group has in place a risk management programme that seeks to limit the adverse effects of the other risks on its financial performance, in particular by using financial instruments, including debt and derivatives, to hedge interest rates and currency rates. The Group does not use derivative financial instruments for speculative purposes.

 

The Board approves treasury policies and certain day-to-day treasury activities which have been delegated to a centralised Treasury Operating Committee, which in turn regularly reports to the Board. The Treasury department implements guidelines that are established by the Board and the Treasury Operating Committee.

5.4.1     Liquidity risk

Liquidity risk is the risk that the Group will be unable to meet its liabilities as they fall due. The Group actively maintains a mixture of long term and medium term committed facilities that are designed to ensure that the Group has sufficient available funds for operations. The Group's borrowings are typically cyclical throughout the financial year and peak in April and May; and October and November of each year, due to seasonal trends in income. Accordingly, the Group maintains sufficient facility headroom to cover these requirements. On a normal operating basis, the Group has a policy of maintaining a minimum headroom of £150.0m. The Group identifies and takes appropriate actions based upon its regular, detailed system for the reporting and forecasting of cash flows from its operations. The Group's drawn debt, excluding fees, represented 22.2% (2017: 11.3%) of available committed facilities at 30 June 2018. In addition, the Group had £982.4m (2017: £784.4m) of cash and cash equivalents.

 

The Group was in compliance with its financial covenants at 30 June 2018. At the date of approval of the condensed consolidated financial statements, the Group's internal forecasts indicate that it will remain in compliance with these covenants for the foreseeable future, being at least 12 months from the date of approval of the condensed consolidated financial statements.

 

One of the Group's objectives is to minimise refinancing risk. The Group therefore has a policy that the average maturity of its committed bank facilities and private placement notes is a minimum of two years with a target of two to three years. At 30 June 2018, the average maturity of the Group's facilities was 5.5 years (2017: 4.1 years).

 

The Group maintains certain committed floating rate facilities with banks to ensure sufficient liquidity for its operations. The undrawn committed facilities available to the Group, in respect of which all conditions precedent had been met, were as follows:

	Group
Expiry date	2018 £m	2017 £m
In more than two years but not more than five years	700.0	700.0

In addition, the Group had £81.2m (2017: £71.2m) of undrawn uncommitted facilities available at 30 June 2018.

 

5.4.2     Market risk (price risk)

5.4.2.1  Interest rate risk

The Group has both interest bearing assets and interest bearing liabilities. Floating rate borrowings expose the Group to cash flow interest rate risk and fixed rate borrowings expose the Group to fair value interest rate risk.

 

The Group has a conservative treasury risk management strategy and the Group's interest rates are fixed using both derivatives and fixed rate debt instruments. The Group's interest cover ratio is above 15 times and therefore the current policy is to hedge a proportion of the forecast RCF drawings based on the Group's three year plan. Under this policy, no interest rate hedges are currently required.

The exposure of the Group's financial liabilities to interest rate risk is as follows:

Group	Floating rate financial liabilities £m	Fixed rate financial liabilities £m	Non-interest bearing financial liabilities £m	Total £m
2018
Financial liabilities	-	200.0	1,692.2	1,892.2
Financial liability exposure to interest rate risk	-	200.0	1,692.2	1,892.2
2017
Financial liabilities (excluding derivatives)	16.8	66.2	1,828.7	1,911.7
Impact of interest rate swaps	(25.0)	25.0	-	-
Financial liability exposure to interest rate risk	(8.2)	91.2	1,828.7	1,911.7

Floating interest rates on sterling borrowings are linked to the UK bank rate, LIBOR and money market rates. The floating rates are fixed in advance for periods generally ranging from one to six months. Short term flexibility is achieved through the use of overdraft, committed and uncommitted bank facilities. The weighted average interest rate for floating rate borrowings in 2018 was 1.6% (2017: 3.7%).

Sterling US private placement notes of £200.0m (2017: £nil) were issued on 22 August 2017 with a fixed coupon of 2.77% and a ten year maturity. These fixed rate notes expose the Group to fair value interest rate risk. At 30 June 2017 the Group had US Dollar denominated private placement notes of £61.6m, arranged at fixed interest rates which exposed the Group to fair value interest rate risk. The weighted average interest rate for fixed rate US Dollar denominated private placement notes, after the effect of foreign exchange rate swaps, for 2017 was 8.2% with, at 30 June 2017, a weighted average period of 0.2 years for which the rate was fixed.

Sensitivity analysis

In the year ended 30 June 2018, if UK interest rates had been 0.5% higher/lower (considered to be a reasonably possible change) and all other variables were held constant, the Group's pre-tax profit would increase/decrease by £1.6m (2017: £0.9m), the Group's post-tax profit would increase/decrease by £1.3m (2017: £0.7m) and the Group's equity would increase/decrease by £1.3m (2017: £0.7m).

5.4.3     Credit risk

In the majority of cases, the Group receives cash upon legal completion for private sales and receives advance stage payments from registered providers for affordable housing. Included within trade and other receivables is £83.5m (2017: £64.1m) due from Homes England in respect of the Help to Buy scheme. Since this receivable is due from a UK Government agency, the Group considers that this receivable has an insignificant risk of default. In addition the Group has £982.4m (2017: £784.4m) on deposit with seven financial institutions. Other than this, the Group has no significant concentration of credit risk, as its exposure is spread over a large number of counterparties and customers.

 

The Group manages credit risk in the following ways:

 

·      The Group has a credit policy that is limited to financial institutions with high credit ratings, as set by international credit rating agencies, and has a policy determining the maximum permissible exposure to any single counterparty.

·      The Group only contracts derivative financial instruments with counterparties with which the Group has an ISDA Master Agreement in place. These agreements permit net settlement, thereby reducing the Group's credit exposure to individual counterparties.

The maximum exposure to any counterparty at 30 June 2018 was £152.3m (2017: £140.0m) of cash on deposit with a financial institution. The carrying amount of financial assets recorded in the condensed consolidated financial statements, net of any allowance for losses, represents the Group's maximum exposure to credit risk.

5.4.4     Capital risk management (cash flow risk)

The Group's objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and meet its liabilities as they fall due whilst maintaining an appropriate capital structure.

 

The Group manages its share capital as equity, as set out in the Statement of Changes in Shareholders' Equity; and its bank borrowings (being overdrafts, loan notes and bank loans) and its private placement notes as other financial liabilities.

 

The Group is subject to the prevailing conditions of the UK economy and the quantum of the Group's earnings are dependent upon the level of UK house prices. UK house prices are determined by the UK economy and economic conditions including employment levels, interest rates, consumer confidence, mortgage availability and competitor pricing. The Group's approach to the management of the principal operational risks of the business is set out in the Risk management section in note 7.4.

 

In addition, the other methods by which the Group can manage its short term and long term capital structure include: adjusting the level of dividends and special cash payments paid to shareholders (assuming the Group is paying a dividend or a special cash payment); issuing new share capital; arranging debt to meet liability payments; and selling assets to reduce debt.

 

5.5       Share capital

5.5.1     Ordinary share capital

	2018 £m	2017 £m
Allotted and issued ordinary shares:
10p each fully paid: 1,012,722,682 (2017: 1,007,899,274) ordinary shares	101.3	100.8

 

Options over the Company's shares granted during the year	2018 number	2017 number
Options granted:
LTPP	2,223,717	2,594,923
Sharesave	2,755,257	2,671,967
DBP	567,557	520,442
	5,546,531	5,787,332

 

Allotment of shares during the year	2018 number	2017 number
At 1 July	1,007,899,274	1,003,607,066
Issued to satisfy early exercises under Sharesave schemes	50,846	115,153
Issued to satisfy exercises under matured Sharesave schemes	2,567,996	1,297,729
Issued to satisfy vesting of LTPP awards	1,711,888	2,126,790
Issued to satisfy exercises under the DBP	477,912	712,296
Issued to the EBT to satisfy future exercises	14,766	40,240
At 30 June	1,012,722,682	1,007,899,274

5.5.2     Own shares reserve

The own shares reserve represents the cost of shares in Barratt Developments PLC purchased in the market or issued by the Company and held by the Barratt Developments Employee Benefit Trust on behalf of the Company in order to satisfy options and awards that have been granted under the Barratt Developments PLC Executive and Senior Management Share Option Plans, the LTPP and the DBP. Other than shares in the EBT allocated to share schemes which attract dividend equivalents, these ordinary shares do not rank for dividend and do not count in the calculation of the weighted average number of shares used to calculate earnings per share until such time as they are vested to the relevant employee.

 

	2018	2017
Ordinary shares in the Company held in the EBT (number)	931,605	1,170,233
Market value of shares held in the EBT at 515.4p (2017: 563.5p) per share	£4,801,492	£6,594,263

 

During the year the EBT purchased 483,379 shares in the market and disposed of 736,773 shares in settlement of exercises under the Senior Management Share Option Plan 2009/10, the Executive Share Option Scheme, the DBP and the SMIS. A further 2,204,566 shares were issued to the EBT at par, of which 2,189,800 were used to satisfy the vesting of the 2014 LTPP and the 2014 DBP.

 

Section 6 - Directors and employees

6.1       Retirement benefit obligations

The Group operates defined contribution and defined benefit pension schemes.

6.1.1 Defined contribution schemes

The Group operates defined contribution retirement benefit schemes for all qualifying employees, under which it pays contributions to an independently administered fund. Contributions are based upon a fixed percentage of the employee's pay and once these have been paid, the Group has no further obligations under these schemes.

	2018 £m	2017 £m
Contributions during the year
Group defined contribution schemes Consolidated Income Statement charge	9.4	8.2

At the balance sheet date, there were outstanding contributions of £1.6m (2017: £0.9m), which were paid on or before the due date.

6.1.2 Defined benefit scheme

The Group operates a funded defined benefit pension scheme in Great Britain, the Barratt Group Pension & Life Assurance Scheme (the 'Scheme'), which, with effect from 30 June 2009, ceased to offer future accrual of defined benefit pensions. Alternative defined contribution pension arrangements are in place for current employees.

 

The Scheme provides benefits to members based on their length of service and their salary in the final years leading up to retirement or date of ceasing active accrual if earlier. The Group operates the Scheme under the UK regulatory framework, with a legally separate fund that is Trustee administered. The Trustees are responsible for ensuring that the Scheme is sufficiently funded to meet current and future benefit payments and for the investment policy with regard to scheme assets.

 

The Trustees must agree a funding plan with the Group such that any funding shortfall is expected to be met by additional contributions and investment performance. In order to assess the level of contributions, triennial valuations are carried out using prudent assumptions.

 

The Directors engage a qualified independent actuary to calculate the Group's asset in respect of its defined benefit pension scheme. In calculating this asset, it is necessary for actuarial assumptions to be made, which include estimations of discount rates, salary and pension increases, price inflation, the long term rate of return upon scheme assets and mortality. As actual rates of increase and mortality may differ from those assumed, the pension liability/asset may differ from that included in these condensed consolidated financial statements. The sensitivities regarding the principal assumptions used to measure the Scheme liabilities are set out below.

 

The most recent full actuarial valuation of the Scheme was carried out at 30 November 2016. The results of this valuation have been updated to 30 June 2018 by a qualified independent actuary. The Group agreed with the Trustees of the Scheme to make contributions to the Scheme of £14.5m per annum from 1 July 2017 until 31 March 2020 (with the increase backdated to 1 April 2017 paid in July 2017) to address the Scheme's actuarial deficit. The Group also continues to meet the Scheme's administration expenses and Pension Protection Fund levy.

 

At the balance sheet date, there were outstanding contributions of £1.2m (2017: £2.0m).

 

The Scheme exposes the Group to a number of risks, the most significant being:

Risk	Description
Volatile asset returns	The defined benefit obligation ('DBO') is calculated using a discount rate set with reference to high quality corporate bond yields. If assets underperform this discount rate, this will create a plan deficit. The Scheme holds a proportion of its assets in equities and other growth assets which are expected to outperform corporate bonds in the long term. However, returns are likely to be volatile in the short term, potentially resulting in short term cash requirements and an increase in the defined benefit obligation recorded on the Balance Sheet. The allocation to growth assets is monitored to ensure it remains appropriate given the Scheme's long term objectives.
Changes in bond yields	A decrease in corporate bond yields will increase the funding and accounting liabilities, although this will be partially offset by an increase in the value of the Scheme's investments in corporate and government bonds.
Inflation risk	A significant proportion of the DBO is indexed in line with price inflation, with higher inflation leading to higher liabilities.
Life expectancy	The majority of the Scheme's obligations are to provide a pension for the life of each of the members, so increases in life expectancy will result in an increase in the liabilities.

For the purposes of calculating the accounting costs and obligations of the Scheme, the assets of the defined benefit scheme have been calculated at fair (bid) value. The liabilities of the Scheme have been calculated at each balance sheet date using the following assumptions:

Principal actuarial assumptions	2018	2017
Weighted average assumptions to determine benefit obligations
Discount rate	2.91%	2.60%
Rate of price inflation	3.30%	3.21%
Weighted average assumptions to determine net cost
Discount rate	2.60%	2.90%
Rate of price inflation	3.21%	2.80%

Members are assumed to exchange 19% of their pension for cash on retirement. The assumptions have been chosen by the Group following advice from Mercer Limited, the Group's actuarial advisers.

The following table illustrates the life expectancy for an average member on reaching age 65, according to the mortality assumptions used to calculate the Scheme liabilities:

Assumptions	Male	Female
Retired member born in 1953 (life expectancy at age 65)	23.2 years	25.1 years
Non-retired member born in 1973 (life expectancy at age 65)	24.6 years	26.6 years

The base mortality assumptions are based on the SAPS (S2PA) (2017: S2PA) mortality tables with an adjustment to allow for the Scheme members being treated as if they are 1.5 years younger than the population of the S2PA mortality tables. Allowance for future increases in life expectancy is made in line with the CMI 2017 projections with a long term trend of 1.25% per annum (2017: CMI 2016 projections with a long term trend of 1.25% per annum).

 

The sensitivities regarding the principal assumptions used to measure the Scheme liabilities are set out below:

		Increase in Scheme liabilities
Assumptions	Change in assumption	£m	%
Discount rate	Decrease by 0.1%	7.1	2.0
Rate of inflation	Increase by 0.1%	3.3	0.9
Life expectancy	Increase by 1 year	15.0	4.2

The changes in the actuarial assumptions used in the calculation of sensitivities were selected on the basis that they are considered reasonably possible changes, and they are the same as those used in the prior year.

The amounts recognised in the Consolidated Income Statement were as follows:

	2018 £m	2017 £m
Interest cost	9.9	11.1
Interest income	(10.5)	(11.5)
Total pension income recognised in net finance costs in the Consolidated Income Statement	(0.6)	(0.4)
Total pension income recognised in the Consolidated Income Statement	(0.6)	(0.4)

The amounts recognised in the Group Statement of Comprehensive Income were as follows:

 

	2018 £m	2017 £m
Expected return less actual return on Scheme assets	(11.1)	(20.1)
(Gain)/loss arising from changes in the assumptions underlying the present value of benefit obligations	(18.1)	24.5
Total pension (income)/cost recognised in the Group Statement of Comprehensive Income	(29.2)	4.4

The amount included in the Group Balance Sheet arising from obligations in respect of the Scheme is as follows:

	2018 £m	2017 £m
Present value of funded obligations	357.3	397.2
Fair value of Scheme assets	(416.0)	(410.8)
Surplus for funded Scheme/net asset recognised in the Group Balance Sheet at 30 June	(58.7)	(13.6)

 

	2018 £m	2017 £m
Net asset for defined benefit obligations at 1 July	(13.6)	(8.1)
Contributions paid to the Scheme	(15.3)	(9.5)
Income recognised in the Consolidated Income Statement	(0.6)	(0.4)
Amounts recognised in the Group Statement of Comprehensive Income	(29.2)	4.4
Net asset for defined benefit obligations at 30 June	(58.7)	(13.6)

A deferred tax liability of £11.1m (2017: £2.6m) has been recognised in the Group Balance Sheet in relation to the pension asset.

 

Movements in the present value of defined benefit obligations were as follows:

	2018 £m	2017 £m
Present value of benefit obligations at 1 July	397.2	405.4
Interest cost	9.9	11.1
Actuarial (gain)/loss	(18.1)	24.5
Benefits paid from Scheme	(31.7)	(43.8)
Present value of benefit obligations at 30 June	357.3	397.2

Movements in the fair value of Scheme assets were as follows:

	2018 £m	2017 £m
Fair value of Scheme assets at 1 July	410.8	413.5
Interest income	10.5	11.5
Actuarial gain on Scheme assets	11.1	20.1
Employer contributions	15.3	9.5
Benefits paid from Scheme	(31.7)	(43.8)
Fair value of Scheme assets at 30 June	416.0	410.8

The analysis of Scheme assets was as follows:

	£m	2018 %	£m	2017 %
Quoted equity securities	61.2	14.7	102.4	24.9
Debt securities	349.2	83.9	307.1	74.8
Other	5.6	1.4	1.3	0.3
Total	416.0	100.0	410.8	100.0

The fair values of the Scheme assets in the above table are measured in accordance with level 1 as defined in note 5.3.3 of the Annual Report and Accounts.

 

 

The actual return on Scheme assets was as follows:

	2018 £m	2017 £m
Actual return on Scheme assets	21.6	31.6

The expected employer contribution to the Scheme in the year ending 30 June 2019 is £14.5m.

The Group has obtained legal advice on the rights to the Group's defined benefit pension scheme's assets after the death of the last member. Based on this advice, the Group has concluded that it is appropriate to recognise an asset related to this scheme.

 

Section 7 - Contingencies, related parties and principal risks

7.1       Contingent liabilities

7.1.1     Contingent liabilities related to subsidiaries

Certain subsidiary undertakings have commitments for the purchase of trading stock entered into in the normal course of business.

In the normal course of business, the Group has given counter-indemnities in respect of performance bonds and financial guarantees. Management estimate that the bonds and guarantees amount to £452.7m (2017: £464.1m), and confirm that at the date of these condensed consolidated financial statements the possibility of cash outflow is considered minimal and no provision is required.

As previously disclosed in the Group's financial statements, following correspondence with an industry wide final salary pension scheme, there is a risk of an obligation arising in respect of pension scheme funding, pursuant to Section 75 of the Pensions Act 1995, for employees of a subsidiary who left the Group following disposal of its business and assets.

The Group received notification in January 2018 that no liability exists in respect of certain employees under this scheme, however previous correspondence received in November 2017 stated that the Actuary was not in a position to calculate any remaining Section 75 debts due to the complexities of applying the relevant legislation to this scheme. In July 2018, the Trustees issued their consultation response confirming a proposed methodology for calculating the Section 75 obligation and that debt notices would be issued by June 2019. Disclosure on this matter is therefore made in accordance with note 7.1.3.

The Directors consider that whilst it is increasingly probable that a liability could result in the future, at present there remain uncertainties underlying any such calculation. Given the most recent communication with the Trustees, a provision has been recognised in relation to this matter as at 30 June 2018.

Following the Grenfell Tower tragedy, the Government commissioned an Independent Review of Building Regulations and Fire Safety. It also established a Building Safety Programme to cover existing high-rise residential buildings over 18 metres. The Group has undertaken a review of all of its current and legacy buildings where it has used cladding. Approved Inspectors signed off all of our buildings, including the cladding used, as compliant with the relevant Building Regulations during construction and on completion. While we are satisfied that we currently have no liability in respect of cladding, we have made a £4.0m provision for the work we have undertaken to carry out at one site to remove and replace cladding in line with our commitment to put our customers first. The Financial Statements have been prepared based on currently available information, however, future changes to Building Regulations and Fire Safety Regulations may occur as a result of the Government's review, the impact of which is currently unknown.

 

7.1.2     Contingent liabilities related to joint ventures and associates

The Group has given counter-indemnities in respect of performance bonds and financial guarantees to its joint ventures totalling £33.2m at 30 June 2018 (2017: £62.5m). The Group has also provided principal guarantees of £9.0m (2017: £9.0m) and cost and interest overrun guarantees in relation to the borrowings of a number of the Group's London joint ventures. At 30 June 2018, no cost or interest overruns had been incurred (2017: £nil). The Group's maximum exposure under these cost and interest overrun guarantees is estimated at £18.8m as at 30 June 2018 (2017: £18.1m).

At 30 June 2018, the Group has an obligation to repay £0.9m (2017: £0.9m) of grant monies received by a joint venture upon certain future disposals of land.

The Group has also given a number of performance guarantees in respect of the obligations of its joint ventures, requiring the Group to complete development agreement contractual obligations in the event that the joint ventures do not perform as required under the terms of the related contracts.

There are no contingent liabilities in relation to associates at 30 June 2018.

7.1.3     Contingent liabilities related to legal claims

Provision is made for the Directors' best estimate of all known material legal claims and all legal actions in progress. The Group takes legal advice as to the likelihood of success of claims and actions and no provision is made (other than for legal costs) where the Directors consider, based on such advice, that claims or actions are unlikely to succeed, or a sufficiently reliable estimate of the potential obligations cannot be made.

There are no contingent liabilities in relation to legal claims at 30 June 2018, other than as disclosed in note 7.1.1.

7.2       Related party transactions

7.2.1     Remuneration of key personnel

The Board and certain members of Senior Management are related parties within the definition of IAS 24 (Revised) 'Related Party Disclosures' ('IAS 24') and the Board are related parties within the definition of Chapter 11 of the UK Listing Rules ('Chapter 11'). There is no difference between transactions with key personnel of the Company and transactions with key personnel of the Group.

 

Disclosures related to the remuneration of key personnel as defined in IAS 24 'Related Party Disclosures' will be provided in note 6.1 of the 2018 Annual Report and Accounts.

 

There have been no related party transactions as defined in Listing Rule 11.1.5R for the year ended 30 June 2018.

7.2.2 Transactions between the Company and its subsidiaries

The Company has entered into transactions with its subsidiary undertakings in respect of funding and Group services (which include management accounting and audit, sales and marketing, IT, company secretarial, architects and purchasing). Recharges are made to the subsidiaries based on utilisation of these services.

 

The amount outstanding to the Company from subsidiary undertakings at 30 June 2018 totalled £83.0m (2017: £75.8m).

 

During the year ended 30 June 2018, the Company made management and other charges to subsidiaries of £75.8m (2017: £62.7m) and paid net interest on Group loans from subsidiaries of £1.9m (2017: £9.4m).

 

The Company and Group have entered into counter-indemnities in the normal course of business in respect of performance bonds.           

7.2.3     Transactions between the Group and its joint ventures

The Group has entered into transactions with its joint ventures in respect of development management/other services (with charges made based on the utilisation of these services) and funding. These transactions totalled £16.0m (2017: £10.1m) and £1.6m (2017: £1.8m) respectively. During the year the Group purchased land and part exchange properties from its joint ventures for £2.0m. In addition, one of the Group's subsidiaries, BDW Trading Limited, contracts with a number of the Group's joint ventures to provide construction services.

 

During the year the Group received dividends totalling £41.8m (2017: £85.1m) from its joint ventures.

 

The amount of outstanding loans and interest due to the Group from its joint ventures at 30 June 2018 is £104.9m (2017: £174.9m) which are included within Group investments accounted for using the equity method. The amount of other outstanding payables to the Group from its joint ventures at 30 June 2018 totalled £29.5m (2017: £9.1m).

 

The amount of outstanding loans and other amounts due from the Group to its joint ventures totalled £2.2m (2017: £1.2m).

 

The Group's contingent liabilities relating to its joint ventures are disclosed in note 7.1.2.

7.2.4     Transactions between the Group and its associate

The amount of outstanding loans due to the Group from its associate at 30 June 2018 was £nil (2017: £nil). There were no other amounts outstanding to the Group from its associate as at 30 June 2018.

 

The Group has no contingent liabilities relating to its associate.

7.3       Statutory accounts

The condensed consolidated financial statements for the year ended 30 June 2018 have been approved by the Directors and prepared in accordance with International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB'), International Financial Reporting Interpretations Committee ('IFRIC') interpretations and Standing Interpretations Committee ('SIC') interpretations as adopted and endorsed by the European Union ('EU').

 

Barratt Developments PLC's 2018 Annual Report and Accounts will be circulated to shareholders in September 2018 and will be made available on its website www.barrattdevelopments.co.uk at that point. The financial information set out herein does not constitute the Company's statutory accounts for the year ended 30 June 2018 (as defined in Sections 434 and 436 of the Companies Act 2006) but is derived from the 2018 Annual Report and Accounts and the accounts contained therein. Statutory accounts for 2018 will be delivered to the Registrar of Companies prior to the Company's Annual General Meeting which will be held on 17 October 2018. The auditor has reported on these accounts; their report was unqualified and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

 

The comparative figures for the year ended 30 June 2017 are not the Company's statutory accounts for the financial year but are derived from those accounts which have been reported on by the Company's auditor and which were delivered to the Registrar of Companies. The 2017 report of the auditor is unqualified and does not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

 

Whilst the financial information included in this Annual Results Announcement has been prepared in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS as adopted for use in the EU.

 

 

7.4       Risk management

Our performance is subject to a number of risks. The Board has conducted a robust assessment of the principal risks facing the business. Whilst the principal risks for the Group related to the execution of its business strategy have not fundamentally changed, the likelihood of the risk factors occurring can change.

 

The principal risks are set out in the table below.

 

Risk	A Economic environment, including housing demand and mortgage availability	B Land availability	C Availability of finance and working capital	D Attracting and retaining high-calibre employees	E Availability of raw materials, sub-contractors and suppliers
Risk description	Changes in the UK and European macroeconomic environments, including but not limited to, flat or negative economic growth, inflation, interest rates, buyer confidence, mortgage availability, Government backed schemes, competitor pricing, falls in house prices or land values.	The inability to secure sufficient consented land and strategic land options at an appropriate cost and quality.	Unavailability of sufficient borrowing facilities and the inability to refinance facilities as they fall due, obtain surety bonds, or comply with borrowing covenants. Furthermore, there are risks from management of working capital such as conditional contracts, build costs, joint ventures and the cash flows related to them.	The ability to recruit and/or retain employees with the appropriate skills or sufficient numbers of such employees.	Shortages or increased costs of materials and skilled labour, the failure of a key supplier or the inability to secure supplies upon appropriate credit terms.
Relevance to our strategy	The majority of our customers require mortgages to purchase their new home. Buyer confidence, the availability of mortgages and mortgage interest rates are affected by the economic environment. Changes in the economic environment, including the impact of the Brexit vote and any change or removal of the Government's Help to Buy scheme, may lead to falling demand or lower prices achieved for houses, which in turn would affect our volume targets and ability to provide profitable growth and lead to impairments of the Group's inventories, goodwill and intangible assets.	Securing more sites that meet our hurdle rates of margin and site ROCE will enable disciplined volume growth. Insufficient land would affect our ability to achieve our volume targets and ability to provide profitable growth.	Availability of sufficient committed and surety facilities ensures that the Group can manage changes in the economic environment and take advantage of appropriate land buying and operational opportunities to help deliver sustainable shareholder value. Reduced borrowing facilities and/or working capital would affect the Group's ability to service liabilities (including pension funding).	Development of skilled employees is critical to delivery of the Group's strategy of profit and volume growth through a focus on efficiency and the continued delivery of attractive cash returns. Failure to attract or retain employees with the appropriate skills would affect these targets.	Maintaining sufficient material and skilled sub-contractor availability will enable disciplined volume growth. Failure to do so may lead to increased costs and delays in construction which in turn would affect our volume targets and ability to provide profitable growth.
KPIs	Gross margin, Operating margin, PBT, ROCE, EPS, TSR, Total completions.	Owned and controlled land bank years, Land approvals, Gross margin, Operating margin, PBT, ROCE, EPS, TSR.	Year end net cash/ debt.	Employee engagement score.	Customer service, Gross margin, Operating margin, PBT, ROCE, EPS, TSR, Total completions.
Mitigation	·      Board, Executive Committee, regional and divisional management reviews ·      Quarterly site valuations ·      Comprehensive sales policies and regular review of pricing, local markets and developing good working relationships with mortgage lenders ·      Maintenance of an appropriate capital structure and Balance Sheet control	·      All potential land acquisitions are subject to formal appraisal and approval by the Land Committee ·      Group, regional and divisional review of land currently owned, committed and identified against requirements ·      Formal relationship management with key land suppliers ·      Review by Land Committee and management on strategic land and sites ·      Land forum and academy training events ·      Increased usage of  strategic land	·      Committed bank facilities and private placement notes of £900.0m with maturity on the RCF in 2022 and the private placement notes in 2027 ·      Regular forecasts of working capital and cash requirements and compliance with banking covenants ·      Policy requiring minimum headroom of £150.0m of drawings against committed facilities ·      Maintenance of an appropriate capital structure and Balance Sheet control	·      Comprehensive Human Resources programme including apprenticeship schemes, a graduate development programme, succession planning and training academies tailored to each discipline ·      Ongoing monitoring of employee turnover and absence statistics and feedback from exit interviews ·      Annual employee engagement survey to measure employee satisfaction ·      Remuneration benchmarking against industry competitors	·      Centralised team procures the majority of the Group's materials from within the UK including sub-contractor materials, ensuring consistent quality and costs ·      Seek to establish and maintain long term supplier and sub-contractor partnerships with all of our significant supply agreements fixed in advance, usually for 12 months ·      Establishing a key supplier audit programme to assess risks to the reliability of supply continuity ·      Group policies include tendering, the requirement for multiple suppliers for both labour contracts and material supplies and establish contingency plans should any key supplier fail ·      Control around all build and material costs throughout build programmes
Risk profile	High	Medium	Low	High	High
Change in risk profile from previous year	No change	No change	No change	No change	No change
Likelihood change during the year	No change	No change	No change	No change	No change
Impact of change during the year	No change	No change	No change	No change	No change
Commentary	Sales rates and markets have remained stable over the last year. The economic environment continues to be characterised by low interest rates and good mortgage availability. The UK economic outlook is positive but there is medium term uncertainty due to the Brexit vote.	The Group's land bank is in a strong position and the Group continues to see a good supply of new land and strategic land opportunities.	In August 2017, the Group entered into a new fixed rate £200.0m US private placement. In December 2017, the Group extended its £700.0m RCF. The Group has £791.3m of net cash and net assets of £4,597.7m as at 30 June 2018.	There remains ongoing competitiveness for employees in the operational business, however the Group has implemented a number of initiatives to improve employee retention and engagement.	There continues to be pressure on the availability of certain build materials and skilled labour. The impact of the Brexit vote on the ongoing supply of skilled labour and imported materials is currently uncertain.
Business model link	1, 3, 4	1, 3	1	1, 2, 3, 4, 5	3, 5

 

Risk	F Government regulation and planning policy	G Construction	H Joint ventures and consortia	I Safety, health and environmental	J IT
Risk description	Changing complex regulatory environment which affects planning, technical requirements and the time taken to obtain planning approval.	Failure to identify and achieve key construction milestones (due to factors including the impact of adverse weather conditions), failure to identify cost overruns promptly, design and construction defects, and exposure to environmental liabilities. There are also risks associated with climate change and the use of new technology in the build process, e.g. materials related to carbon reduction.	Large development projects, some of which involve joint ventures or consortia arrangements and/or commercial developments, are complex and capital intensive.	Health and safety or environmental breaches can result in incidents affecting employees, sub-contractors and site visitors.	Failure of any of the Group's IT systems in particular those relating to customer information, surveying and valuation. The Group could suffer significant financial and reputational damage due to the loss, theft or corruption of data either inadvertently or via a targeted cyber-attack.
Relevance to our strategy	Securing sufficient, appropriate planning permissions upon new sites will enable the Group to deliver disciplined volume growth. Changes to the regulatory environment would affect our ability to achieve our volume targets and ability to provide profitable growth.	We aim to reduce the risks inherent in the construction process and help address the shortage of skilled employees and sub-contractors through the use of MMC which is implemented where appropriate. Delays in construction, or poor product quality, could increase costs, reduce selling prices and sales volumes and result in litigation and uninsured losses.	Securing more joint venture sites that meet our hurdle rates enables disciplined volume growth. By engaging with joint ventures this assists in reducing and sharing risks on complex, capital intensive, bespoke and commercial developments. Changes in complex developments may negatively impact upon cash flows or returns.	We continue to prioritise and focus upon health and safety to seek to reduce injury rates and manage the risks inherent in the construction process. Health and safety or environmental breaches could cause potential reputational damage, criminal prosecution and civil litigation, delays in construction or increased costs.	We continue to improve integration of IT systems to enhance business control and drive efficiency. Failures of any of the Group's IT systems could adversely impact the performance of the Group.
KPIs	Gross margin, Operating margin, PBT, ROCE, EPS, TSR, Total completions.	Customer service, Total completions, Gross margin, Operating margin, PBT, ROCE, EPS,  Construction waste intensity and Carbon intensity reduction.	ROCE, Total completions.	SHE internal audit score.	Customer service, Gross margin, Operating margin, PBT, ROCE, EPS.
Mitigation	·      Considerable in-house technical and planning expertise focused on complying with regulations and achieving implementable planning consents that meet local requirements ·      Robust and rigorous design standards for the homes and places we develop ·      Policies and technical guidance manuals for employees on regulatory compliance and the standards of business conduct expected ·      Consultation with Government agencies, membership of industry groups to help understand and monitor proposed regulation changes	·      Executive Committee, regional and divisional reviews and quarterly site valuations ·      Continuous review of MMC and the quality of materials which are evaluated by external and internal technical experts, including the NHBC with additional inspections during build, to ensure compliance with all building and other regulations ·      Monitoring and improving environmental and sustainability impact of construction methods and materials used ·      Maintenance of appropriate insurance cover ·      Detailed build programmes and quality reviews, divisional monthly valuation meetings and sign off ·      Review of use of MMC by Group Design & Technical	·      All potential joint ventures are subject to formal appraisal and approval by the Group's Land Committee and the Board ·      Once operational, the performance of joint ventures and consortia are subject to regular review	·      Internally resourced health and safety team ·      Regular health and safety monitoring by our in-house team, internal and external audits of all operational units ·      Continual reinforcement of Group health and safety and environmental policies and procedures ·      Dedicated SHE Board and Operations Committees which review key performance indicators, improvement plans and reinforce the importance of health, safety and environmental compliance · Quarterly performance reviews by divisional management within all operating units · Regular Senior Management reviews of developments · Independent reviews of our SHE processes	·      Centrally maintained IT systems ·      Fully-tested disaster recovery programme ·      Regular reviews to seek to reduce the risk of successful cyber-attacks ·      We have implemented a series of measures to make our business processes and data management GDPR compliant. There is an ongoing review and governance approach to assess our risks and implement mitigating actions ·      Group wide policies on passwords and transferring data to third parties
Risk profile	Medium	Medium	Medium	Medium	Medium
Change in risk profile from previous year	No change	No change	No change	No change	No change
Likelihood change during the year	No change	No change	No change	No change	Increase
Impact of change during the year	No change	No change	No change	No change	No change
Commentary	The planning process remains highly complex. A number of changes to the National Planning Policy Framework have been made. These measures seek to simplify and speed up the planning process. However, there are a number of other regulatory changes proposed which may impact how we design and deliver our developments, including differences in building regulations across England, Scotland and Wales.	The Group's construction process and policies have remained unchanged in the last year. The Group continues to expand the use of its new product ranges which maintain our high standards of design whilst being faster to build, help us to reduce build cost and waste and are more suitable to MMC.	Our investment in JVs remains at a similar level to previous years at £234.1m (2017: £213.1m). The Group delivered 899 (2017: 750) completions from joint ventures in the year.	The Group continues to focus on Health and Safety including ensuring consistent controls are in place to reduce accidents and injuries. The SHE internal audit score has remained in line with the previous year.	The threat of external cyber-attacks continues to increase with a number of high profile incidents in the last year.
Business model link	1, 2	2, 3	1, 3	2, 3	1, 2, 3, 4, 5

1      Targeted land buying and effective planning.

2      Outstanding design.

3      Construction excellence, innovation and efficiency.

4      Innovative sales and marketing.

5      Industry leading customer experience.

 

 

Statement of Directors' Responsibilities

Financial Statements and accounting records

The Directors are responsible for preparing the Annual Report and Accounts including the Directors' remuneration report and the Financial Statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year. The Directors are required by the International Accounting Standards Regulation (the 'IAS Regulation') to prepare the Group Financial Statements under International Financial Reporting Standards as adopted by the European Union ('IFRS') and have also elected to prepare the Parent Company Financial Statements in accordance with IFRS. The Financial Statements are also required by law to be properly prepared in accordance with the Companies Act 2006 and Article 4 of the IAS Regulation. 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 the Group and of the profit or loss of the Company and the Group for that period.

 

International Accounting Standard 1 requires that Financial Statements present fairly for each financial year the relevant entity's financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board's 'Framework for the preparation and presentation of financial statements'. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. Directors are also required to:

·      properly select and apply accounting policies;

·      present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·      provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

·      make an assessment of the Company's and the Group's (as the case may be) ability to continue as a going concern.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's and the Group's transactions on an individual and consolidated basis and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Fair, balanced and understandable

The Board considers, on the advice of the Audit Committee, that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's and the Group's position, performance, business model and strategy.

 

Directors' responsibility statement

The Directors confirm that, to the best of each person's knowledge:

 

a) the Group and Parent Company Financial Statements in the Annual Report and Accounts, which have been prepared in accordance with IFRS, Standing Interpretation Committee interpretations as adopted and endorsed by the European Union, International Financial Reporting Interpretations Committee interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and of the Group taken as a whole; and

b) the Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Company and the Group taken as a whole, together with a description of the principal risks and uncertainties they face.

 

By order of the Board

 

David Thomas                                        Jessica White

Chief Executive                                      Chief Financial Officer

4 September 2018                                  4 September 2018

 

 

Glossary

Active outlet	A site with at least one plot for sale
AGM	Annual General Meeting
ASP	Average selling price
CMI	The actuarial profession's Continuous Mortality Investigation
DBO	Defined Benefit Obligation
DBP	Deferred Bonus Plan
EBT	Barratt Developments Employee Benefit Trust
EPS	Earnings per share
EU	European Union
FRC	Financial Reporting Council
FY	Refers to the financial year ended 30 June
GDPR	General Data Protection Regulation
Gross margin	Gross profit divided by total revenue
HBF	Home Builders Federation
IAS	International Accounting Standards
IASB	International Accounting Standards Board
IFRIC	International Financial Reporting Interpretations Committee
IFRS	International Financial Reporting Standards
ISDA	International Swaps and Derivatives Association
JVs	Joint ventures
LIBOR	The London Interbank Offered Rate
LTPP	Long Term Performance Plan
MMC	Modern methods of construction
Net cash	Net cash is defined as cash and cash equivalents, bank overdrafts, interest bearing borrowings and foreign exchange swaps
Net tangible assets	Group net assets less other intangible assets and goodwill
New Code	UK Corporate Governance Code issued in July 2018 (a copy of which is available from www.frc.org.uk)
NHBC	National House Building Council
Operating margin	Profit from operations divided by revenue
PBT	Profit before tax
RCF	Revolving Credit Facility
RSPB	Royal Society for the Protection of Birds
ROCE	Return on capital employed ('ROCE') is calculated as earnings before interest, tax, operating charges relating to the defined benefit pension scheme and operating adjusting or exceptional items, divided by average net assets adjusted for goodwill and intangibles, tax, cash, loans and borrowings, retirement benefit assets/obligations and derivative financial instruments
Sharesave	Savings-Related Share Option Scheme
SHE	Safety, Health and the Environment
SIC	Standing Interpretations Committee
Site ROCE	Site ROCE on land acquisition is calculated as site operating profit (site trading profit less overheads less allocated administrative overheads) divided by average investment in site land, work in progress and equity share
SMIS	Senior Manager Incentive Scheme
the Scheme	The Barratt Group Pension & Life Assurance Scheme
Total completions	Unless otherwise stated total completions quoted include JVs
TSR	Total shareholder return