Morgan Advanced Materials plc
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10 April 2018
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Publication of 2017 Annual Report and Notice of 2018 Annual General Meeting
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The following documents have today been posted or otherwise made available to shareholders:
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a.�� Annual Report and Financial Statements for the year ended 31 December 2017 (2017 Annual Report);
b.�� Notice of the 2018 Annual General Meeting (AGM) to be held at the offices of Addleshaw Goddard LLP, Milton Gate, 60 Chiswell Street, London EC1Y 4AG on Friday 11 May 2018 at 10.30 am; and
c.�� Form of Proxy for the 2018 AGM.
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In accordance with Listing Rule 9.6.1, a copy of each of these documents has been uploaded to the National Storage Mechanism and will be available for viewing shortly at: www.morningstar.co.uk/uk/NSM �
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The documents are also available in the 'Investors' section of the Company's website at: www.morganadvancedmaterials.com .
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The Company's preliminary results announcement of 27 February 2018 contained a management report as well as audited financial statements which were prepared in accordance with the applicable accounting standards.� The financial information set out in the Company's preliminary results announcement of 27 February 2018 does not constitute the Company's statutory accounts for the year ended 31 December 2017.� Statutory accounts for 2017 are included in the 2017 Annual Report, which will be delivered to the registrar of companies following the Company's 2018 AGM. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006 in respect of the accounts for 2017.
The information below, which is extracted from the 2017 Annual Report, is included solely for the purpose of complying with DTR 6.3.5. This information should be read in conjunction with the Company's preliminary results announcement issued on 27 February 2018 (available at www.morganadvancedmaterials.com ). This announcement is not a substitute for reading the full 2017 Annual Report. All page numbers and cross-references in the extracted information below refer to page numbers in the 2017 Annual Report.
Related party transactions
There are no related party transactions requiring disclosure.
Risk management
Morgan has an established risk management methodology which seeks to identify, prioritise and mitigate risks, underpinned by a 'three lines of defence' model comprising an internal control framework, internal monitoring, and independent assurance processes.
The Board considers that risk management and internal control are fundamental to achieving the Group aim of delivering long-term sustainable growth in shareholder value.
Risks are identified both 'top down' by the Board and the Executive Committee, and 'bottom up' through the Group's global business units (GBUs) and Divisions, and are quantified by assessing their inherent impact and mitigated probability to ensure that residual risk exposures are understood and prioritised for control throughout the Group.
Senior executives are responsible for the strategic management of the Group's principal risks, including related policy, guidelines and process, subject to Board oversight.
Throughout 2017, the Board reviewed the status of all principal risks with a significant potential impact at Group level. Additionally, the Audit Committee carried out focused risk reviews of each Division/GBU. These reviews included an analysis of both the principal risks, and the controls, monitoring and assurance processes established to mitigate those risks to acceptable levels. As a result of these reviews, a number of actions were identified to continue to improve internal controls and the management of risk.
High-level guidance on the Board's appetite for different risks is included again this year. The Group is willing to take considered risks to develop new technologies, applications, partnerships and markets for its products, and to meet customer needs. The Group strives to eliminate risks to product quality and health and safety, which are essential to the success of our products and the safety of our people and contractors.
The appetite for risk in the areas of legal and regulatory compliance is extremely low and the Group expects its businesses to comply with all laws and regulations in the countries where they operate. The Group has a low appetite for financial risk. Certain risks, such as pension funding, are likely to take a longer period to be mitigated.
As in 2016, an indication of the Board's assessment of the trend of each risk - i.e. whether the potential impact has increased, decreased or is broadly unchanged over the past year - is included. The Board has also identified new risks to the delivery of the Group's strategy and these are indicated in the table below.
The following are the Group's principal risks and uncertainties, representing those risks that the Board feels could have the most significant impact on achieving the Group's strategy of building a sustainable business for the long term and delivering strong returns to the Group's shareholders.
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RISK DESCRIPTION, ASSESSMENT AND TREND FROM 2016 |
MITIGATION |
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Strategic and external risks |
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Technical leadership The Group's strategic success depends on maintaining and developing its technical leadership in materials science over its competitors.
Unforeseen/unmitigated technology obsolescence, the emergence of competing technologies, the loss of control of proprietary technology or the loss of intellectual property/know-how would impact the Group's business and its ability to deliver on its strategic goals.
The advanced technological nature of the Group requires people with highly differentiated skillsets. Any inability to recruit, retain and develop the right people would negatively impact the Group's ability to achieve its strategic goals.
Trend Unchanged
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The Group has a Chief Technology Officer and a dedicated technology team which monitors relevant technology and business developments globally using technology roadmaps linked to 20 major technology families to ensure it remains at the leading edge of development. Two global Centres of Excellence were previously established, with a further Centre opening in Hayward California, USA in 2017. A fourth Centre is being established at Penn State University, Pennsylvania, USA, which will formally open in 2018. These Centres focus Morgan's expertise and research resources on core technologies. They are supported by a Technical Advisory Board comprising some of the world's leading academics in relevant fields, who provide ongoing insight, advice and challenge to inform the Group's technology plans.
The technology team proactively manages the Group's technology pipeline and R&D investment in existing technologies, as well as actively managing the technology lifecycle. The technology pipeline and key R&D projects are regularly reviewed by the Executive Committee and the Board.
Where Group products are designed for a specific customer, they are developed in partnership with the customer in order to maintain leading-edge differentiation. The Group seeks to secure intellectual property protection, where appropriate, for its existing and emerging portfolio of products; external advisers manage this protection globally.
The Group continued its Global Leadership Programme in conjunction with Cranfield University, adding an advanced programme to develop more high-potential commercial, functional and technical leaders. The Graduate Leadership Programme continued to run in 2017.
Further detail on our people can be found on pages 52 to 53.
Further detail on R&D can be found on pages 18 to 19. |
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Operational execution / organisational change / sales effectiveness
As part of the Group's strategy to improve the efficiency of its operations and organisation, various changes have been made to operational processes at individual sites, to the Group's structure, and the structure of and incentives for our sales force. Further improvements and changes are planned for future years. Failure to adequately manage these changes could result in interruption to operations or customer service, or a failure to maximise the Group's opportunities.
Trend New risk, no change |
Changes to operational processes are carefully considered by site, GBU and Divisional management before implementation. Personnel improvements have been made within the businesses to oversee operational changes, for example with a new VP of Operational Excellence joining the Technical Ceramics GBU in 2017.
Operational improvements and savings are monitored against budget by the Executive Committee to ensure that changes deliver the savings promised without disruption to business operations. Organisational changes are assessed by the CEO, the Executive Committee and sometimes the Board before being implemented in line with local employment regulations. Changes to our sales structures and incentives are reviewed at various levels of the organisation, before being launched. |
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Portfolio management
The Group operates across a range of product and technology families. These are subject to long-term market trends which may lead to either obsolescence or opportunities to further expand the Group. Failure to proactively manage the Group's portfolio of businesses in line with this technology profile may lead to the value of the Group's businesses being eroded over time or a failure to exploit opportunities to acquire businesses with the capability to add further value to the Group.
Trend New risk, no change |
The Board performs regular reviews of the Group's portfolio and has disposed of non-core businesses in 2017. |
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Macro-economic and political environment
The Group operates in a range of markets and geographies around the world and could be affected by political, economic, social or regulatory developments or instability, for example an economic slowdown or issues stemming from oil and natural resources price shocks.
The UK's exit from the EU may have an impact on the Group if subsequent tariff changes, or border effects, negatively impact the profitability of the Group's products. The current value of Group UK exports to the EU is approximately £30 million, and imports into the UK from the EU are approximately £15 million.
Trend Decreased |
The Group's broad market and geographic spread helps to mitigate the effects of political and economic changes.
Budgets and forecasts for Morgan's different businesses are used to monitor delivery against expectations and anticipate potential external risks to performance. These are subject to regular review by the Executive Committee and Board.
The overall macroeconomic environment has improved during the course of the year and the Group has delivered organic growth.
The impact of the UK's exit from the EU could be mitigated by moving production to alternative sites where tariffs are not applied to products. |
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Operational risks |
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Environment, health and safety (EHS)
The Group operates a number of manufacturing facilities around the world. A failure in the Group's EHS procedures could lead to environmental damage or to injury or death of employees or third parties, with a consequential impact on operations and increased risk of regulatory or legal action being taken against the Group. Any such action could result in both financial damages and damage to reputation.
Trend Unchanged
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Managing its operations safely is the Group's number one priority. The Group has a comprehensive EHS programme managed by the Director EHS, with clear EHS standards and a programme of independent audits to assess compliance.
The Director EHS sets annual priorities for EHS which are approved by the Executive Committee. These form the basis for individual sites' own EHS priorities and plans, and complement the Group's 'thinkSAFE' behavioural safety programme.
EHS performance is monitored by the Executive Committee and the Board.
As at 31 December 2017 the Group was managing projects to remediate legacy contamination at three former sites and one operational site in conjunction with external specialists and relevant authorities. The anticipated costs of these projects are provided for in the financial statements.
Further detail of the EHS programme can be found on pages 46 to 51. |
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Product quality, safety and liability
Products used in applications for which they were not intended or inadequate quality control/over-commitment on customer specifications could result in products not meeting customer requirements, which could in turn lead to significant liabilities and reputational damage.
Some of our products are used in potentially higher risk applications such as in the aerospace, automotive, medical and power industries.
Trend Unchanged |
Many of the Group's products are designed to customer specifications. Our businesses' quality management systems and training help ensure that all of Morgan's products meet or exceed customer requirements and national/international standards.
The Group Legal Policy requires that contracts relating to products used in potential high-risk applications are subject to legal review to ensure that appropriate protections are in place for product quality risks.
The Group insurance programme includes product liability insurance; this Group-level insurance is reviewed annually by the Board. |
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IT and cyber security
Information security/cyber risks are dynamic and ever-present in the external environment. If the Group were to lose critical data or information, including proprietary technology information, through inadequate data management or compromised information security, the business would be impacted and could suffer reputational damage.
The effective management of the Group's IT infrastructure is important in enabling our businesses to reliably deliver customer requirements. If a key business system were to fail or core systems implementation were ineffective, the ability of the business to deliver on its strategic goals might be impacted.
Trend Unchanged |
The Group has an Information Technology (IT) Policy and guidelines in place as well as Group and business IT teams to manage the Group's infrastructure, IT systems and information security risks. A new IT Security Policy was launched in 2017 to further enhance security.
In 2018 the Group is required to comply with the National Institute of Standards and Technology (NIST) cybersecurity framework in the USA and the EU's General Data Protection Regulations. Programmes to deliver compliance with these requirements are well advanced.
The Group continues to deploy and upgrade enhanced enterprise resource planning (ERP) systems in those businesses where a need for improvement is identified. These deployments are managed in line with IT project management standards. |
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Supply chain / business continuity
The Group has a number of potential single-point exposure risks, which include:
· Single-point supplier - a significant interruption of a key internal or external supply could impact business continuity. · Single-point customer - the unmitigated loss of a major customer could have an impact on Group profit. The Group's largest customer represents circa 2% of Group revenue. · Single-point profit - a key site exposed to a strike, a natural catastrophe or serious incident, such as fire, could impact business continuity. One Group site, Hayward, is situated in the California earthquake zone, (USA).
Trend Unchanged |
The Group has a diversified manufacturing, customer and geographic base which provides a level of resilience against single-point exposures. Were any site to be unavailable, production in most cases could be switched to other sites.
Management of these risks also involves monitoring and reviewing supply chains (internal and external), dual/multiple sourcing of materials or strategic stock, site security and safety mechanisms, business continuity plans, the maintenance of product quality and strong customer relationships.
The Group insurance programme includes business interruption cover and specific cover in relation to the impact of an earthquake in California, USA; this Group-level insurance is reviewed annually by the Board. |
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Financial risks |
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Treasury
The Group's global reach means that it is exposed to uncertainties in the financial markets, the fiscal jurisdictions where it operates, and the banking sector which heighten the Group's funding, foreign exchange, tax, interest rate, credit and liquidity risks as well as the risk that a bank failure could impact the Group's cash.
Trend Decreased
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The Group's treasury function operates on a risk-averse basis. Required controls over selection of banks, cash management and other treasury practices and payments globally are documented in Morgan's Treasury Policy and related procedures. The Group treasury team manages the Group's funding, liquidity, cash management, interest rate, foreign exchange, counterparty credit and other treasury- related risks. Treasury matters are regularly reviewed by the Board and Audit Committee.
In 2017 the Group repaid €20 million and $175 million of private placement debt utilising the funds raised by the 2016 US private debt placement.
Further detail on our Treasury Policy is set out in the Group Financial Review, and can be found on page 39. |
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Tax
The Group operates in many jurisdictions around the world and could be affected by changes in tax laws and regulations within the complex international tax environment.
The OECD Base Erosion and Profit Shifting (BEPS) framework provides additional obligations and filing requirements for the Group as countries implement the actions in the framework. These could have an impact on the tax paid by the Group.
Tax reform in the US could also impact the Group's tax rate.
Trend Unchanged |
The Group's tax function, working in conjunction with external specialists as required, closely monitors fiscal developments and changes such as BEPS and US tax reform, to ensure that the Group's tax arrangements and practices continue to comply with the requirements of all relevant jurisdictions whilst also enabling efficient management of the tax liability. The Group's Head of Tax reports periodically to the Audit Committee on key tax issues and initiatives.
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Trend Decreased |
Morgan's primary means of mitigating pensions funding risk is proactive management of the pension scheme assets and liabilities through an integrated pension strategy focusing on funding, investment and benefit risk. This involves both internal management within the Group and also externally through the scheme Trustees, corporate actuaries and professional advisers.
In the UK, the Morgan Senior Executive Pension and Life Assurance Scheme closed to future accrual in April 2016 and the Morgan Pension Scheme will close to future accrual in April 2018. In consultation with the Company, the Trustees have also adopted a pro-active approach to the management of risk in the Schemes' investment portfolios, significantly reducing their unhedged interest and inflation rate exposure.
In the USA, in June 2016 one Defined Benefit Pension Plan completed a full legal termination, and for the other remaining Scheme, a formal offer of a present-value-equivalent, lump-sum cash payment was made to members. In December 2017, the Company made an additional contribution of $36 million to this Scheme. |
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Compliance risk |
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Contract management
As a global advanced materials business supplying components into critical applications, the Group may be exposed to liabilities arising from the use of its products. Ineffective contract risk management could result in significant liabilities for the Group and could damage customer relationships.
Trend Unchanged
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The Group has an in-house legal function supplemented by specialist external lawyers.
The Group Legal Policy requires in-house legal review of high-value or high-risk contracts to ensure they contain appropriate protections for the Group. The Policy requires CEO approval before a business can enter into an unlimited liability contract or one where the liability cap exceeds £5 million.
During 2017 the legal function transitioned to a geographic model to enable closer engagement between the Group's businesses and lawyers. This model is delivering improved collaboration in managing contract risks.
To the extent that risk cannot be mitigated through contractual arrangements, the Group has insurance cover in place, including product liability insurance. |
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Compliance
The Group's global operations must comply with a range of national and international laws and regulations including those related to bribery and corruption, human rights, trade/export compliance and competition/anti-trust activities.
A failure to comply with any applicable laws/regulations could result in civil or criminal liabilities and/or individual or corporate fines and could also result in debarment from government-related contracts or rejection by financial market counterparties and reputational damage.
Trend Unchanged
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The Group is committed to the highest standards of corporate and individual behaviour. This commitment is set out in the Group's Core Values Statement and Ethics Policy, and is underpinned by ongoing investment in the in-house Responsible Business Programme (RBP). The RBP is a wide-ranging programme which includes policies, standards and guidance; training materials; the provision of an employee ethics hotline; and systems to support effective screening and due diligence of third parties.
A new Director of Ethics & Compliance has been appointed who will oversee further improvements to the RBP in 2018.
The Group also has an Export Compliance Director in the USA whose role is dedicated to ensuring compliance with export controls.
In addition to Group level compliance specialists, our businesses are required to establish compliance officer roles, which are responsible for supporting local training and monitoring. Morgan also employs country-specific trade and export compliance specialists in higher risk businesses and jurisdictions.
Further details on the RBP can be found on page 45. |
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Directors' Responsibility Statement
The 2017 Annual Report contains the following statements regarding responsibility for the financial statements in compliance with DTR 4.1.12. Responsibility is for the 2017 Annual Report and Financial Statements and not the condensed statements required to be set out in the Annual Financial Report announcement.
Each of the Directors in post as at 27 February 2018, the names and roles of whom are set out on pages 56 and 57 of the 2017 Annual Report, confirms to the best of their knowledge:
· the Group's Financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and
· the management report (comprising the Directors' Report and the Strategic Report) includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
Enquiries: Stephanie Mackie, Company Secretary
Telephone: 01753 837000
Notes:
Legal Entity Identifier: I4K14LL95N2PHDL7EG85