REPORT OF THE DIRECTORS The Directors have pleasure in presenting their report with the audited Financial Statements for the year ended 31st December 2002 which are set out on pages 46 to 70. Results and Dividends Group turnover at e739.6m was 11% lower than 2001. Group profit on ordinary activities before taxation amounted to e63.7m, a decrease of e9.7m (or 13%) on the previous year. Profit attributable to ordinary shareholders decreased by 9% or e4.9m to e50.5m, while earnings per share were 30.2c representing a decrease of 8% compared with 32.9c in the previous year. An interim dividend of 2.10c per share (2001: 1.75c) was paid in October 2002. It is proposed to pay a final dividend of 3.80c per share to all shareholders on the register on 21st March 2003. Shareholders who have made an election to receive their dividends from exempt income in accordance with S141 TCA 1997 will be paid their dividend on 13th June 2003. Shareholders who have not made this election will be paid their non-exempt dividend on 12th June 2003. The total dividend of 5.90c for the year compares with 4.70c in 2001, an increase of 26%. Also, as a method of paying the shareholders some of the cash generated over the past two years, it is proposed to pay a special dividend of 12.0c per share to all shareholders on the register on 21st March 2003. Shareholders who have elected to receive exempt dividends will be paid on 9th June 2003 and shareholders who have not made this election will be paid their non-exempt dividend on 11th June 2003. Business Review & Future Developments Kingspan Group is a major manufacturer of an integrated range of products for the construction industry. A detailed review of the business and commentary on the results and on future developments are contained in the Chairman’s Statement, Operations Review and Financial Review on pages 2 to 25. Research & Development The Group continues to place considerable emphasis on research and development of existing and new products and on the improvement of the production process. Accounting Records The Directors are responsible for ensuring that proper books and accounting records, as outlined in Section 202 of the Companies Act 1990, are kept by the Group. The Directors have appointed suitable accounting personnel, including a professionally qualified Finance Director, in order to ensure that those requirements are complied with. The books and accounting records of the Group are maintained at the principal executive offices located at Dublin Road, Kingscourt, Co. Cavan.
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Corporate Governance The Directors are committed to maintaining the highest standards of corporate governance and this statement describes how the Principles of Good Governance set out in the Combined Code as adopted by the Irish and London Stock Exchanges are applied. The Directors confirm that the Group in the manner more fully described below has complied throughout the accounting period and up to the date of approval of the annual report with the provisions of the Combined Code with the exception that the number of non-executive Directors was less than one third of the total Board membership provided by the Code. It is the intention of the Board to appoint a number of additional non-executive Directors this year and in this regard it is proposed to change the Articles of the Company at the forthcoming Annual General Meeting to increase the maximum number of Directors from twelve to fifteen. Board of Directors The Board consists of eight executive and three non-executive Directors. Each of the executive Directors has a combination of general industry and business experience, functional skills and experience in the construction materials market. All of the Directors bring an objective judgement to bear on issues of strategy, resources and standards of performance. The Board of Directors reserves for itself a formal schedule of matters on which it takes the ultimate decision. These cover the acquisition and disposal of businesses and other material assets, the raising of capital, strategic plans, operating budgets, treasury and risk management policies, structuring the organisation, recruitment of senior executives and overall personnel policy. Certain other matters are delegated to the Board Committees, further details of which are set out below. The roles of Chairman and chief executive officer are combined and filled by Eugene Murtagh. The Board believes that this is the most appropriate structure for the Group at its current stage of development and that there is sufficient balance within the Board as a whole, including a strong and independent nonexecutive element, to facilitate a sound decision making process and control environment. The Board will be further enhanced by the planned appointment of a number of non-executive Directors and is currently examining the implications for the Group of the Higgs and Smith proposals. The Board meets regularly throughout the year. There are eleven scheduled Board meetings and occasional other meetings if issues arise which require urgent Board consideration. All Directors are properly briefed on issues arising at Board meetings, supplied with appropriate and timely information for such meetings and given the opportunity to probe and question the information supplied and to seek such extra information as they consider appropriate. The Group’s professional advisors are available for consultation with the Board and attend Board meetings as required. Procedures have been agreed for the Directors to take independent professional advice, if necessary, at the Group’s expense. All Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures are followed. The appointment and removal of the Company Secretary are specifically reserved for the approval of the Board as a whole.
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The non-executive Directors, with the exception of Eoin McCarthy who has a consultancy contract with the Group, are considered to be independent and exercise this independence in their advisory and monitoring roles on the Board. Mr. Kevin O’Connell is currently nominated as the senior independent Director of the Company. Newly appointed Directors are subject to election at the Annual General Meeting following their appointments. Excluding any such newly appointed Directors, one third of the Board is subject to re-election at each Annual General Meeting. Non-executive Directors are appointed to the Board for an initial term of three years, renewable with the Board’s agreement, but subject to re-election by the shareholders on the normal rotation basis. Board Committees The Board has appointed audit, remuneration and nominations Sub-committees. All Sub-committees of the Board have written terms of reference setting out their authorities and duties. The Chairman of each Sub-committee is available to give a report on the Committee’s proceedings at Board meetings if required. Membership of the Committees is set out on page 26. The Audit Committee meets a minimum of four times per year. Its brief is to review the interim and annual Financial Statements, internal control matters and the scope and effectiveness of internal and external audit. The Finance Director and Internal Auditor normally attend these meetings, while the External Auditors attend as required and have direct access to the Committee and its Chairman at all times. The Remuneration Committee determines the Group's policy on executive remuneration and considers and approves salaries and other terms of the remuneration packages for the executive Directors. The Report of the Remuneration Committee is set out on pages 33 to 38. The Nominations Committee is responsible for advising the Board on all Board appointments. Communication with Shareholders Communication with shareholders is given a high priority. The Company encourages communication with all shareholders, and welcomes their participation at Annual General Meetings. All shareholders who attend the Company’s Annual General Meeting are given the opportunity to question the Chairman and other members of the Board on any aspect of the Group’s business. The Company’s website, www.kingspan.ie, provides the full text of the annual and interim reports and the presentations to analysts and investors. Internal Control The Board of Directors has overall responsibility for the Group’s system of internal control and has delegated responsibility for the implementation of this system to executive management. This delegation ensures embedding of the system of internal control throughout the Group’s operations, and ensures that the organisation is capable of responding quickly to evolving business risks, and that significant internal control issues, should they arise, are reported quickly to appropriate levels of management.
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Such a system of internal control by its nature is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide reasonable, but not absolute, assurance against material misstatement or loss. The key elements of the Group’s system of internal control include the following:
• A clearly defined organisation structure with formal lines of authority, accountability and
responsibility;
• A formal schedule of matters specifically reserved for decision by the Board; • Regular assessment of major business risks, including investment and financing; • A comprehensive annual budgeting process and a review by the Board of actual performance
compared with budget on a monthly basis;
• Clearly defined and appropriate levels of authorisation for all transactions; • The Audit Committee and an internal audit function; • The Chairman of the Audit Committee reports to the Board on all significant issues
considered by the Committee, and the minutes of its meetings are circulated to all Directors;
• Systematic monitoring and assessment of risk areas through management and Board
reviews. The Directors confirm that the Group’s ongoing process for identifying, evaluating and managing its significant risks is in accordance with the Turnbull guidance (Internal Control; Guidance for Directors on the Combined Code, published in September 1999). The process has been in place throughout the accounting period and up to the date of approval of the Annual Report and Financial Statements, and is regularly reviewed by the Board. The Directors confirm that they have conducted an annual review of the effectiveness of the system of internal control up to and including the date of approval of the Financial Statements. The process used by the Board for this review includes:
• The review by the Audit Committee of the external and internal auditors’ work plans, reports
and internal control recommendations;
• Review by the Board and Audit Committee of the specific identified risk areas; • Consideration of reports from management and internal and external auditors on the system
of internal control and on material control weaknesses;
• Discussions with management on the implementation of strategies on any internal control and
risk areas identified.
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The approach by the Board is proactive in identifying possible weaknesses and obtaining the relevant degree of assurance on specific areas of internal control and not merely reporting by exception. Going concern The Directors have reviewed budgets, projected cash flows and other relevant information, and on the basis of this review are confident that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the Directors consider it appropriate to adopt the going concern basis in preparing the Financial Statements. Board of Directors The Directors of the Company at the date of this report are shown on page 26. Peter Wilson the Managing Director of Kingspan Insulation Limited, was co-opted to the Group Board on 14th February 2003 and offers himself for election by members at the Annual General Meeting. Brendan Murtagh, Gene Murtagh and Robert Barr retire from the Board by rotation and, being eligible, offer themselves for re-election. Report on Directors’ Remuneration Composition of the Remuneration Committee The Remuneration Committee consists entirely of non-executive Directors and its membership is given on page 26. The terms of reference for the Committee are to determine the Group’s policy on executive remuneration and to consider and approve salaries and other elements of the remuneration packages of the executive Directors. Compliance The Company has complied throughout the year with the Listing Rules of the Irish Stock Exchange and its best practice provisions in relation to Directors’ remuneration and has given full consideration to Section B of the Best Practice Provisions annexed to the Stock Exchange Listing Rules. Policy on Remuneration of Executive Directors The Group’s policy on Directors’ remuneration is aimed at ensuring that remuneration packages will attract, retain and motivate executive Directors and senior executives of the calibre necessary to develop the Group and enhance shareholder value. In setting remuneration levels the Remuneration Committee consults with the Chairman, takes into consideration the remuneration practices of other quoted companies of similar size and scope and takes independent professional advice in this regard. The elements of the remuneration package for executive Directors are basic salary and benefits, annual bonus, pensions and participation in the Group share option scheme. In addition, as set out below, there is a long-term incentive plan for Directors and senior executives.
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These packages are reviewed annually by the Remuneration Committee, having regard to personal performance, competitive market practice and comparative information. Performance related rewards consist of bonus payments and grant of options. Bonus payments are based on the attainment of targets determined at the start of the year. No performance related bonus was payable in 2002.
Directors’ Remuneration
Executive Directors Basic Salary Benefits E’000 E’000 360 320 235 265 220 254 317 32 2,003 33 34 18 21 2 17 19 4 148 Performance Pension related bonus contributions E’000 E’000 277 240 176 53 30 34 50 860 2001 Total e’000 721 640 494 435 273 332 419 517 3,831
Total E’000 670 594 429 339 252 305 386 36 3,011
Eugene Murtagh Brendan Murtagh Dermot Mulvihill Robert Barr Gene Murtagh Jim Paul Russell Shiels Eoin McCarthy1
Non-executive Directors
2002 Nonexecutive fees Y’000 Eoin McCarthy1 Kevin O’Connell Danny Kitchen Rory O’Hanlon2 Sam Rusk3 32 43 38 19 132 2001 Nonexecutive fees e’ooo 44 38 38 25 145
1 Eoin McCarthy retired as an Executive Director on 22nd February 2002 and has remained on the Board as a Non-executive Director. 2 Rory O'Hanlon retired from the Board on 20th June 2002. 3 Sam Rusk retired from the Board on 6th September 2001
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Number of Directors at year end
2002 Executive Directors Non-executive Directors Total 7 3 10 2001 8 3 11
Average number of Directors during the year
2002 Executive Directors Non-executive Directors Total 7 3 10 2001 8 4 12
• Benefits relate to health insurance premiums and to the use by Directors of company cars. • Pension contributions represent payments made under defined contribution pension schemes
operated by the Group. Annual Bonus Scheme Bonus payments based on the attainment of targets determined at the start of the year by the Remuneration Committee are payable to Executive Directors. No bonus payments were made in respect of the financial year ended 31st December 2002. Pension Scheme The Group operates a defined contribution pension scheme for Executive Directors. Pension contributions are calculated on basic salary only. The normal retirement age for Executive Directors is 60.
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Standard Share Option Scheme Under the terms of the share option scheme approved by shareholders in May 1998, (the Standard Scheme), share options may be awarded to executive Directors. Such options are exercisable only when earnings per share (eps) growth exceeds growth of the Irish Consumer Price Index over a period of at least three years subsequent to the granting of the options, by at least 2% per annum compound. The percentage of share capital which can be issued under the scheme and individual grant limits comply with I.A.I.M. guidelines. Grants of share options are awarded annually to ensure a smooth progression over the life of the scheme and at the market price of the Company’s shares at the time of the grant. Under the share option scheme, options become exercisable three years after they are granted and remain exercisable for seven years. Details of the options granted to Directors under the Standard Scheme are set out on page 37. Long-Term Incentive Plans Shares provisionally awarded under the terms of the long-term incentive plan approved by shareholders in May 2001, the objective of which is to motivate and reward Directors and senior executives for exceptional performance on a three-year rolling basis, would vest in the individual three years after the award only after certain performance criteria have been achieved, amongst which are:
• EPS growth must increase by at least the composite inflation index plus 10% per annum
compound over the three years and:
• For 100% of the award to vest, EPS growth must be in the top quartile of companies in the
FTSE 250;
• If EPS growth is in the second quartile, between 50% and 99% of the award will vest on a
sliding scale, and, below this, the award is cancelled. Details of the options granted to Directors under the Standard Scheme are set out on page 38.
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Details of Share Options granted to Directors under Standard Share Option Scheme (May 1998)
Director Eugene Murtagh Brendan Murtagh
120,000 120,000 120,000 120,000 120,000 100,000 100,000 100,000
120,000 (b) 120,000 (b) 120,000 (b) 240,000 100,000 (b) 100,000 (b) 200,000 100,000 62,500 40,000 40,000 100,000 100,000 342,500 41,665 (a) 100,000 (b) 100,000 (b) 241,665 289,000 83,335 100,000 100,000 572,335 125,000 62,500 20,830 125,000 125,000 458,330 (750,000) (208,335) (958,335) (a) (a) (a) (a) (a) (a) (a) (b) (b) (a) (b) (b) (b) (b)
245 245 135
245
190 245 135 190 245 267 235 310 245 135 223 145 245 135 182 148 145 245 135 162 92 145 148 208 307 192 245
Dermot Mulvihill
100,000
Robert Barr Gene Murtagh
100,000 62,500 40,000 40,000 100,000 100,000 242,500 100,000
Jim Paul
41,665 100,000 100,000 141,665 100,000
Russell Shiels
289,000 83,335 100,000 100,000 472,335 100,000
Peter Wilson
125,000 62,500 20,830 125,000 125,000 458,330
Eoin McCarthy
750,000 208,335 958,335
Shares under option at the end of the year are designated as follows: (a) where the options are currently exercisable (b) where the options are not yet exercisable
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At 31st Dec 2001
Granted during year
Exercised during year
At 31st Dec 2002
Option price Cent
Weighted average option price Cent
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Details of Share Options granted to Directors under Long-Term Incentive Share Option Scheme
Director Eugene Murtagh Brendan Murtagh
At 31st Dec 2001 41,000 38,000
Granted during year
Exercised during year
At 31st Dec 2002 41,000
Option price Cent 13 13 13
Weighted average option price Cent 13
38,000 38,000 Dermot Mulvihill 33,000 33,000 33,000 Gene Murtagh 33,000 33,000 33,000 Jim Paul 33,000 33,000 33,000 Russell Shiels 33,000 33,000 33,000 33,000 33,000 33,000 33,000 38,000
38,000 38,000 76,000 33,000 33,000 66,000 33,000 33,000 66,000 33,000 33,000 66,000 33,000 33,000 66,000
13 13 13 13 13 13 13 13 13 13 13 13 13
These options are not yet exercisable.
The share price at 31st December 2002 was e1.63. The Company’s Register of Directors’ Interests, which is open to inspection at the Registered Office, contains full details of Directors’ shareholdings and share options. Service Contracts No Director has a service contract in excess of one year. Non-executive Directors The non-executive Directors each receive a fee which is determined by the Board. The nonexecutive Directors, with the exception of Eoin McCarthy who has a consultancy contract with the Group, do not have service contracts and do not receive any pension or other benefits from the Company, nor do they participate in any bonus or share option schemes. Conflict of Interest Save as set out in this Annual Report, none of the Directors has any direct or indirect interest in any contract or arrangement subsisting at the date hereof which is significant in relation to the business of the Company or any of its subsidiaries nor in the share capital of the Company or any of its subsidiaries.
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Directors’ & Secretary’s Interests in Shares The beneficial interests of the Directors and Secretary and their spouses and minor children in the shares of the Company at the end of the financial year are as follows:
31st December 2002 Eugene Murtagh Brendan Murtagh Dermot Mulvihill Robert Barr Gene Murtagh Jim Paul Russell Shiels Peter Wilson Eoin McCarthy Kevin O’Connell Danny Kitchen 40,000,000 7,525,000 1,035,830 10,000 78,000 163,165 204,330 130,830 3,958,335 76,130 3,000 53,184,620
31st December 2001 40,000,000 6,525,000 1,035,830 10,000 78,000 163,165 189,330 130,830 3,000,000 58,330 3,000 51,193,485
There have been no changes in these interests between 31st December 2002 and the date of this report. Significant Events since the Year End There have been no events since the year-end which would require adjustment to the Financial Statements or disclosure therein. Political Donations Neither the Company or any of its subsidiaries has made any political donations in the year which would be required to be disclosed under The Electorial Act, 1997. Special Business at the Annual General Meeting Shareholders are being asked to renew until the Annual General Meeting in 2004, the authority to allot any unissued share capital of the Company. No issue of shares will be made which could effectively alter control of the Company without prior approval of the shareholders in General Meeting. At present the Directors do not intend to issue any shares. Shareholders are being asked to renew, until the Annual General Meeting in 2004, the power of the Directors to disapply the statutory pre-emption provisions applying to ordinary shares in the event of a rights issue or in any other issue for cash up to an aggregate of 5% of the nominal value of the Company’s issued ordinary share capital. Shareholders are also being asked to renew, until the Annual General Meeting in 2004, the authorisation for the Company, or any of its subsidiaries, to purchase up to 10% of the Company’s own shares and to reissue such shares purchased by it and not cancelled. The Directors would only exercise the power to purchase the Company’s own shares at price levels which they considered to be in the best interests of the shareholders generally, after taking
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account of the Company’s overall financial position. The minimum price which may be paid for a purchase of the Company’s own shares shall be the nominal value of the ordinary shares, and the maximum price which may be paid shall be 105% of the then average market price of the ordinary shares. Shareholders are being asked to approve that, where the Company’s shares have been repurchased, (such shares being known as Treasury shares), these shares may be sold off-market at a maximum price of 120% of the Appropriation Average (as defined in the resolution), and a minimum price of 95% of the Appropriation Average. Shareholders are being asked to adopt an amendment to the Company's Memorandum and Articles of Association so as to increase the maximum permitted number of Directors from twelve to fifteen. Shareholders are being asked to authorise the Company to communicate electronically with shareholders. Special Business at the Extraordinary General Meeting Subject to the passing of Resolution 8 renewing the authority of the Company to buy back up to 10% of its issued share capital, and in the circumstances described in the separate circular sent to shareholders on 22nd April, those shareholders who are independent of the Directors of the Company are asked to approve that none of the Murtagh Directors or the Kingspan Directors shall by reason of an increase in their holding be obliged to make an offer to shareholders of the Company under Rule 9.1 or Rule 37(a) of the Irish Takeover Panel Act, 1997 Takeover Rules, 2001 and 2002. Substantial Shareholdings Eugene Murtagh’s shareholding at the date of this report amounted to 24.0% of the issued share capital of the Company, and Brendan Murtagh’s shareholding amounted to 4.5% of the issued share capital of the Company. Details of Directors’ shareholdings at 31st December 2002 are set out on page 39. The Directors have been notified of the following other substantial shareholdings at the date of this report:
Number of Shares AIB Investment Managers Limited Bank of Ireland Asset Management Limited Setanta Asset Management Limited Invesco Perpetual 8,433,315 7,859,621 5,228,912 5,004,444
% Holding 5.1% 4.7% 3.1% 3.0%
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Health and safety The well being of the Group’s employees is safeguarded through the strict adherence to health and safety standards and, in the opinion of the Directors, all relevant Group companies meet the requirements of the Safety, Health and Welfare at Work Act, 1989. Subsidiary companies The Company’s principal subsidiary undertakings at 31st December 2002, country of incorporation and nature of business are listed on pages 67 to 70. Auditors In accordance with Section 160(2) of the Companies Act, 1963 the auditors, Grant Thornton, Registered Auditors, will continue in office.
On behalf of the Board: E. Murtagh, Director D. Mulvihill, Director 11th March 2003
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