Annual Financial Report

RNS Number : 4367I

Morgan Advanced Materials PLC

01 April 2020

 

Morgan Advanced Materials plc

1 April 2020

Publication of 2019 Annual Report

The Annual Report and Financial Statements for the year ended 31 December 2019 (2019 Annual Report) has today been posted or otherwise made available to shareholders:

In accordance with Listing Rule 9.6.1, a copy of the 2019 Annual Report has been uploaded to the National Storage Mechanism and will be available for viewing shortly at: www.morningstar.co.uk/uk/NSM  

The 2019 Annual Report is also available on the Company's website at: www.morganadvancedmaterials.com .

Shareholders who have elected not to receive hard copy documents will receive an email notification from the Company advising that the above listed documents are now available.

A further announcement will be made when the Notice of the 2020 Annual General Meeting and Form of Proxy have been posted or otherwise made available to shareholders.

The Company's preliminary results announcement of 25 February 2020 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 25 February 2020 does not constitute the Company's statutory accounts for the year ended 31 December 2019.  Statutory accounts for 2019 are included in the 2019 Annual Report, which will be delivered to the registrar of companies following the Company's 2020 AGM.  The auditors have reported on those accounts; their report was (i) unmodified, (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 2019.

The information below, which is extracted from the 2019 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 25 February 2020 (available at www.morganadvancedmaterials.com ).  This announcement is not a substitute for reading the full 2019 Annual Report.  All page numbers and cross-references in the extracted information below refer to page numbers in the 2019 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. The severity of each risk is quantified by assessing its inherent impact and mitigated probability to ensure that the residual risk exposure is 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 2019, 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 GBU. These reviews included an analysis of 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, including:

· A group wide refresh of the Group's policies and internal control standards.

· Further roll out of the Group's 'thinkSAFE' programme and development of an environmental strategy.

· Implementation of new ERP systems in two of the Group's businesses, and establishment of a Programme Office to better manage IT initiatives.

· Focused actions within each business unit to mitigate risks.

The Board reviewed its appetite for its principal risks and its appetite for these risks is unchanged from the prior 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 in which they operate. The Group has a low appetite for financial risk. Certain risks, such as pension funding, are likely to take a longer period of time to be mitigated. During the year the Board monitored the Group's current risk exposure relative to the Board's appetite for different risks. There were no risks where the current risk exposure exceeded the Board's risk appetite.

As part of the ongoing risk management process referred to above, the Board and the GBUs also identify and assess emerging risks. Emerging risk areas were identified around pensions regulations due to the evolving regulatory environment and climate change and our role in protecting and enhancing the environment. The two emerging risks are included in the table below, together with the details of how they are being managed.

In 2019, the Board performed a deep dive assessment of the potential risks associated with supplying into the electric vehicle market. This review considered risks associated with the scope of Morgan's supply into these markets; and mitigations provided by product quality controls, contractual protections, and the Group's capability to deliver to customer specifications. Through this review, the Board satisfied itself that its level of appetite for risk in this market was proportionate to the opportunities presented.

An indication of the Board's assessment of the trend of each risk - whether the potential severity has increased, decreased or is broadly unchanged over the past year - is provided.

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.

Risk description, assessment and trend from 2018	Mitigation
OPERATIONAL RISKS
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. Severity: Moderate Trend: Unchanged	The Group has a dedicated technology team within each GBU which monitors relevant technology and business developments using technology roadmaps linked to 20 major technology families to ensure it remains at the leading edge of development. The Group has four Centres of Excellence. These Centres focus Morgan's expertise and research resources on further developing core technologies and identifying new opportunities and applications. The GBU leadership teams proactively monitor their technology priorities and R&D investments. These projects are also 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 and has an in-house counsel dedicated to intellectual property protection with the support of external advisors. The Group continued its global leadership programme adding an advanced programme to develop more high-potential commercial, functional and technical leaders. The graduate leadership programme continued to run in 2019. Further detail on our people can be found on pages 16 and 17. Further detail on R&D can be found on page 20.
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 manage these changes adequately could result in interruption to operations or customer service, or a failure to maximise the Group's opportunities. Severity: Low Trend: Unchanged	Changes to operational processes are carefully considered by site, GBU and Divisional management before implementation. Operational improvements and savings are monitored against budget by the GBUs and Executive to ensure that changes deliver the savings promised without disruption to business operations. New capital investments are approved at appropriate levels of the Group and delivery of these overseen by GBU and Group management. A new capital expenditure assessment process was rolled out in 2019. Organisational changes are assessed by the Chief Executive Officer, 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. Further activities to improve sales effectiveness were rolled out in 2019, including sales force training, more targeted incentives and pricing initiatives. Further initiatives around pricing and extending the roll out of sales incentives are planned for 2020. Further detail on our strategy in action can be found on pages 19 to 23.
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 could lead to the value of the Group's businesses being eroded over time or to a failure to exploit opportunities to acquire businesses with the capability to add further value to the Group. Severity: Moderate Trend: Decreased within severity band	The Board performs regular reviews of the Group's portfolio. During 2019 the Group closed its China ceramics cores business and exited its Venezuela Thermal Ceramics business. Opportunities to acquire businesses are reviewed on a continuing basis.
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 £25 million, and imports into the UK from the EU are approximately £15 million. Severity: High Trend: Increased within severity band	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 the Board. The overall macro-economic environment has weakened during the course of the year, although the Group's revenue has proved resilient. Some longer-term metrics are showing signs of potential weakness. Global issues considered by the Board this year include the continuing impact and uncertainty relating to the trade negotiations between the European Union and the United Kingdom, as well as US/China and Korea/Japan trade relations. The impact of the UK's exit from the EU could be mitigated in the medium term by moving production to alternative sites where tariffs are not applied to products.
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. Given the long history of many of the operations of the Group, there is also a risk that historical operating and environmental standards may not have met today's environmental regulations. In addition, the Group may have obligations relating to prior asset sales or closed facilities. Severity: High Trend: Unchanged	Managing its operations safely is the Group's number one priority. The Group has a comprehensive EHS programme managed by the Group EHS Director, with clear EHS standards and a refreshed programme of audits to assess compliance. The Group EHS Director sets annual priorities for EHS which are approved by the EHS Steering Group (comprising the Executive Committee and GBU EHS leaders) 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 Group Executive and the Board. EHS metrics are assessed and overall EHS performance has improved in 2019. As at 31 December 2019, the Group was managing projects to remediate legacy contamination at a number of former operational sites in conjunction with external specialists and relevant authorities. The Group's commitment to protecting and enhancing the environment, in response to the emerging risk of climate change, is set out on pages 12 to 13. Details of the Group's provisions and contingent liabilities can be found in note 25 to the consolidated financial statements.
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, for example in the aerospace, automotive, medical and power industries. Severity: High 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.

Risk description, assessment and trend from 2018	Mitigation
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 Information Technology (IT) infrastructure is important in enabling our businesses to deliver customer requirements reliably. If a key business system were to fail or core systems implementation were to be ineffective, the ability of the business to deliver on its strategic goals might be impacted. Severity: High Trend: Increased	A new Chief Information Officer was appointed to the Group's Executive Committee in 2019 to drive delivery of the Group's IT strategy. The Group's IT Security policies have been strengthened in 2019, and enhanced security resource will be joining the Group in 2020. The Group has continued to comply with the National Institute of Standards and Technology (NIST) cybersecurity framework in the US and the EU's General Data Protection Regulations without issue in 2019. Focused deployment of enterprise resource planning (ERP) systems in those businesses where a need for improvement continued in 2019. These deployments are managed in line with IT project management standards.
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 site - 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, (US). Certain of the Group's businesses are important for intercompany supply purposes. Communicable disease could also impact the supply chain and ability of employees to travel to work in affected areas. The outbreak of the coronavirus has led to an extended shut down of our manufacturing facilities in China. Our focus has been to take actions and precautions to help ensure the safety and wellbeing of our employees. Whilst we cannot be certain how long this situation will last, based on the delayed startup of our production facilities since the lunar new year break, we currently anticipate that this will have an adverse impact on first half revenues of around £7.0 million and on first half headline operating profit* of around £3.5 million. The coronavirus has been spreading to countries outside of China, including to Italy and South Korea. Our plant in the affected area of Northern Italy, we expect to be closed for two weeks. Severity: Moderate 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 many cases could be switched to other sites. A new Business Continuity policy has been rolled out to support minimum standards at the Group's most important sites for intercompany supply. 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, maintenance of product quality and strong customer relationships. The Group provides clear and timely communication to ensure appropriate safety measures are taken by all employees working in areas affected by communicable disease. The Group insurance programme includes business interruption cover and specific cover in relation to the impact of an earthquake in California, US; this Group-level insurance is reviewed annually by the Board.

Risk description, assessment and trend from 2018	Mitigation
FINANCIAL RISKS
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. These 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. Severity: Moderate Trend: Decreased	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 2019 the Group repaid $75 million of private placement debt utilising its existing revolving credit facility. During 2019 the Group executed its first one-year extension option available under its revolving credit facility, extending the maturing date to September 2024. Further detail on our Treasury Policy is set out in the Group Financial Review, which can be found on page 40.
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's 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. Severity: Moderate Trend: Unchanged	The Group's tax function, working in conjunction with external specialists as required, closely monitors fiscal developments and changes such as BEPS, 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 to the Audit Committee on key tax issues and initiatives. The Group has published its tax strategy on its website in line with UK corporate governance requirements.
Pension funding The Group sponsors several defined benefit pension arrangements, (the Schemes), whose liabilities are subject to fluctuating interest rates, investment values and inflation. This coupled with the increased longevity of members and a tougher regulatory funding regime will result in increased funding burdens on the Group in the future. The deficit in Morgan's global defined benefit pension schemes calculated on the basis required for IAS 19 accounting disclosures decreased from £190.4 million at 31 December 2018 to £156.8 million as at 31 December 2019. The Group also participates in two multi-employer defined benefit schemes in the US, both of which have significant funding deficits. Severity: High Trend: Unchanged	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 Schemes' Trustees, corporate actuaries and professional advisers. In the UK, both Schemes are closed to the future accrual of benefits. In consultation with the Company, the Trustees have adopted a proactive approach to the management of risk in the Schemes' investment portfolios, significantly reducing their unhedged interest and inflation rate exposure. Following the most recent Scheme valuations in March 2019, Company contributions will increase to £16.5 million pa from 2020 for the length of current Recovery Plans (2025 and 2027). The impact of the evolving regulatory environment for occupational pensions, in particular the likely passing of the Pensions Bill in Parliament, will be monitored closely in 2020. In the US, 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 and agreed a move to a significantly de-risked investment portfolio. A liability management strategy for US multi-employer plan is being refined for action in 2020.

 

Risk description, assessment and trend from 2018	Mitigation
LEGAL AND COMPLIANCE RISKS
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. Severity: Significant Trend: Unchanged	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 Chief Executive Officer approval before a business can enter into an unlimited liability contract or one where the liability cap exceeds £5 million. To the extent that risk cannot be mitigated through contractual arrangements, the Group has insurance cover in place, including product liability insurance.
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. Compliance: Moderate Trend: Unchanged	The Group is committed to the highest standards of corporate and individual behaviour. To support this, in 2018 the Group issued the Morgan Code. The Code defines the Group's approach to doing business ethically and confirms Morgan's commitments to high standards of ethical behaviour. The Code is supported by a range of policies, standards and guidance; training materials; the provision of an ethics hotline for employees; and systems to support effective screening of and due diligence on third parties. Further improvements to the programme were delivered in 2019, including a suite of mandatory ethics training for staff, covering topics such as anti-bribery and corruption, competition law, harassment and bullying and trade controls. In depth face-to-face training has also been held in some of the Group's higher risk regions. The Group's speak-up processes were relaunched in 2019 which enable staff to report concerns anonymously. The Group also has an Export Compliance Director in the US 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 ethics and compliance can be found on pages 12 to 13.

Directors' Responsibility Statement

The 2019 Annual Report contains the following statements regarding responsibility for the financial statements in compliance with DTR 4.1.12.  Responsibility is for the 2019 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 25 February 2020, the names and roles of whom are set out on pages 48 and 49 of the 2019 Annual Report, confirms to the best of their knowledge: 

· the Group's Financial Statements, which have been prepared in accordance with IFRSs 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:  [phone]

Notes:

Legal Entity Identifier: I4K14LL95N2PHDL7EG85

 

END

 

 

ACSUARURRRUSRAR