Macfarlane Grp. Regulatory News (MACF)

6 March 2012

MACFARLANE GROUP ANNUAL RESULTS FOR THE YEAR TO 31 DECEMBER 2011

·; Group turnover increased by 7% to £144.6m (2010: £135.5m)

·; Profit before tax and before exceptional items of £3.9m (2010: £3.4m)

·; Profit before tax of £3.9m (2010: £4.2m) after exceptional items in 2010 of £0.8m

·; Pension deficit rises to £20.5m (2010: £15.7m)

Ÿ Proposed final dividend of 1.05p per share, providing full year total of 1.55p

Archie Hunter, Chairman of Macfarlane Group PLC today said: -

"In what continues to be a difficult and uncertain trading environment, I am pleased to report that Macfarlane Group increased both profits and turnover in 2011. The strategic actions we have taken in recent years to target specific market segments in which Macfarlane can add value contributed to a 16% increase in pre-tax profit before exceptional items to £3.9m (2010: £3.4m) and a 15% increase in profit for the year to £3.4m (2010: £3.0m) on turnover up 7% to £144.6m (2010: £135.5m) for the year to 31 December 2011.

Trading

Recurring sales levels in our Packaging Distribution business have felt the inevitable impact of subdued markets but the strategic actions that the Group has taken in recent years to develop specific lines of new business have more than compensated and our Packaging Distribution business grew profit before exceptional items by 3% to £4.6m on a turnover increase of 7% - a combination of 2% volume growth and 5% price recovery. As in the previous year, 2011 saw a considerable increase in supplier prices for corrugate and plastics, before easing in impact towards the end of the year. Wherever possible, we strive to pass on material price increases to customers but there is an inevitable lag and we have not yet fully recovered the supplier price increases experienced in 2011. As a result, gross margin is slightly below that of last year.

Our Manufacturing Operations have also shown resilience to market pressures with profit before exceptional items improving modestly on a turnover, which increased by 6% to £27.9m. However, within our self-adhesive labels business pricing issues were most keenly felt and here profits were down. This result masks a very encouraging performance from our Reseal-it business, in which we have successfully increased both profits and turnover. The opportunity for this product and our trading partnerships hold promise for future returns.

Pension Deficit

The group's pension scheme deficit is proving a difficult legacy issue to tackle - principally due to issues beyond the control of the Group. Corporate bond yields are at unprecedentedly low levels and, as they are a critical feature in measuring pension scheme liabilities, the Macfarlane Group pension deficit, like many others, remains stubbornly high at £20.5m, an increase of £4.8m from the 2010 level. This is despite the payment by the company of £2.2m during 2011 in respect of the deficit. The decline in bond yields in the last quarter of 2011 alone, added £3.0m to our gross pension deficit.

I have described in the past the measures we have taken to control the pension deficit and, while Macfarlane Group is in the position of being able to fund the scheme with annual payments from cash flow we shall undertake a further series of actions to reduce the deficit. My board colleagues and I believe that, in time, the business will successfully reduce the liability to an acceptable level but in the meantime the Group's pension deficit remains subject to the current extremes in bond markets and any further volatility.

Net Debt

In accordance with our normal cash cycle we had strong cash generation in the second half of 2011 and the Group's bank debt at 31 December was £7.2m compared with £6.3m a year earlier. We continue to operate within our bank facility.

Dividends

The directors recognise the importance of dividends to our shareholders and propose to maintain the final dividend at 1.05p per share, making 1.55p per share for the year and, subject to the approval of shareholders at the Annual General Meeting in May 2012, this will be paid on 8 June 2012.

The adverse movement in our pension fund deficit in 2011 has reduced distributable reserves from which dividends are paid. At 31 December 2011 these reserves were £1.3m and will be reduced in 2012 by £1.2m, being the cost of the proposed final dividend. Nevertheless the company's trading and cash position support the level of dividend being declared.

Profitable trading will clearly add to distributable reserves in 2012 and the company continues to take steps to deal with the pension deficit and will also evaluate a number of other actions to benefit reserves. However some of these actions will not have an impact until the second half of 2012. The Board's intention is that a full dividend will continue to be paid for 2012, however the quantum and timing of the interim dividend in 2012 will be subject both to progress on the actions indicated and to further movements in the pension scheme deficit caused by factors outwith the company's control. The company will update shareholders in due course. It is anticipated that this will be less of an issue beyond 2012.

Board Composition

The Macfarlane Group Board of Directors has remained substantially unchanged for a number of years and a great deal has been achieved. There is yet more to be done and I believe that now is the time for a new Chairman to take the company to its next stage of development.

As a consequence, I plan to step down from my position as Chairman following the company's Annual General Meeting in May. A rigorous process to recruit my successor, considering both internal and external candidates, is at an advanced stage and the Board expects to be in a position to make an announcement in this regard shortly.

Future prospects

Macfarlane Group's performance in the early months of 2012 has been encouraging and the Board projects further significant progress in trading in 2012 as we continue both to develop our existing business and to roll out our strategic initiatives.

Throughout my time as Chairman I have enjoyed the support of the Macfarlane Group Board staff and shareholders. I would like to thank them all most sincerely. It has been directly due to the efforts and enthusiasm of our people right across the Group that our recovery has been engineered and a strong platform established. They have created a business that displays great promise and on behalf of the Board and our shareholders, I wish them every success."

Notes to Editors:

Macfarlane Group PLC is a UK-based group of companies focused on packaging-related activities. The Packaging Distribution business is the leading UK distributor of a comprehensive range of packaging consumable products. The Manufacturing Operations comprise the manufacture of transit packaging and the manufacture of self-adhesive and re-sealable labels. Headquartered in Glasgow, Scotland, Macfarlane Group employs 700 people at 22 sites, principally in the UK and Ireland, servicing 20,000+ customers in the UK, Europe and the USA across a wide range of sectors including: consumer goods; logistics; electronics; food manufacturing and retailing; internet and mail order.

Business Review

* There were no exceptional items in 2011.

2011 has been another year of positive progress for Macfarlane Group. Sales at £144.6 million have grown by 7% versus 2010 and the Group increased its profit before tax before exceptional items by 16% from £3.4 million to £3.9 million.

This performance has been achieved despite continuing increases in the cost of raw materials, weakening UK demand and some higher than expected bad debt experience in the UK retail sector at the end of the year.

The Packaging Distribution Division grew sales by 7% versus 2010 of which 5% was price growth as we worked closely with our customers to manage the impact of raw material inflation. Despite an effectively managed price recovery programme the inflationary cost increases were not fully recovered and as a result we experienced a 0.4% gross margin reduction versus 2010. Demand from existing customers weakened in the second half of 2011 but this was offset by our sales teams achieving a number of significant new customer wins resulting in good new business growth. The Packaging Distribution Division grew its operating profit before exceptional items in 2011 by 3% versus 2010.

The Manufacturing Operations experienced a challenging year in 2011. The Packaging Manufacturing business increased sales levels by 6% over 2010 and maintained profitability in line with 2010. Sales in the Labels businesses grew by 4% versus 2010 as a result of improving penetration of our resealable range of machines and labels. However increased price competition in the self-adhesive label business caused a reduction in gross margin, which resulted in the overall profitability of the Labels businesses to be below the 2010 level. In overall terms the Manufacturing businesses continued to be profitable in 2011 with the actions taken in response to the challenging market conditions enabling an improvement in the second half of the year compared to the first.

The weakening demand experienced in the UK in the 2H 2011 and the difficult macroeconomic environment creates an uncertain demand outlook for 2012 and although raw material prices softened in Q4 2011 the overall pricing environment remains volatile. However we remain confident that the plans we have in place in all businesses will enable Macfarlane Group to achieve another year of progress in 2012.

Business Review

The principal risks and uncertainties faced by the Group and factors mitigating these risks are detailed below.

There are a number of other risks that we manage but are not considered to be key risks. In addition the Group is subject to general economic conditions, the competitive environment and risks associated with business continuity. These are all mitigated in ways that are common to all businesses and there are no specific differences for Macfarlane Group.

The above are complemented by an overall governance framework that includes clear and delegated authorities, business performance monitoring and appropriate insurance cover for a wide range of potential risks. There is a dependence on good quality local management, which requires investment in training and development and ongoing performance evaluation.

Business Review

Trading Performance

The Macfarlane Packaging Distribution Division is the leading UK distributor of a comprehensive range of packaging consumable products. In a highly fragmented market, Macfarlane is the market leader with a market share of approximately 20%. The business operates through 17 Regional Distribution Centres (RDCs) supplying customers on a local, regional and national basis. Competition in the distribution market is from local companies with good local connections and capability and national companies who distribute a range of products including packaging materials. Macfarlane competes effectively on a local basis through its strong focus and regular monitoring of customer service, its breadth and depth of product offer and the recruitment and retention of staff with good local market knowledge. On a national basis Macfarlane has focus, expertise and a breadth of product and service that enables it to compete effectively against non-specialist packaging distributors.

We benefit our customers by enabling them to ensure their products are cost-effectively protected in transit and storage by providing a comprehensive product range, single source supply, Just In Time delivery, tailored stock management programmes and independent advice on both packaging materials and packing processes.

2011 Performance

In 2011 Packaging Distribution operating profit was £4.6 million (2010 - £4.6 million). The comparable amounts before exceptional items showed an increase in operating profit from £4.4 million to £4.6 million in 2011. A number of factors contributed to these results:

l Sales revenue increased by 7% reflecting price inflation as well as a modest increase in volumes across a number of the key customer sectors we supply;

l There was another good year on new business with a number of high profile new customer wins resulting in new business sales at almost £9m;

l Our web-based packaging revenues an increasingly important channel, increased by 11% versus 2010;

l Momentum continues to build in our penetration of the third party logistics sector ("3PL"), with sales rising by 24% in 2011 and the sector now representing 9% of turnover;

l There have been some encouraging early successes in the launch of our Presentational & Retail Packaging business ("PRP"), which enables us to broaden our product offer to existing customers and give access to new market sectors;

l Our 2011 customer satisfaction survey showed 85% of customers rating our service above average (2010 - 84%) with 41% rating our service as excellent (2010 - 38%);

l In 2011 our On-Time-In-Full ("OTIF") deliveries averaged 84% (2010 - 85%) against our benchmark of 90%. The method we use to measure OTIF is applied as an internal logistics efficiency monitor rather than a customer satisfaction measure;

l Supplier price inflation continued to be an issue in 2011 and, due to the normal time lag in passing through these price increases, our gross margin reduced to 29.2% compared with 29.6% in 2010. We expect gross margin to recover gradually in the first half of 2012;

l The business sustained higher than expected bad debt charges particularly in retail-related sectors in the final quarter of 2011;

l We have maintained a strong focus on cost control and sales per employee increased as we improved productivity levels within the business;

l Net overheads reduced from 25.6% of sales in 2010 to 25.3% in 2011, evidence of our cost control focus;

l The three units in West London comprising 44,000 sq. ft., from the acquisition of Allpoint Packaging Limited in 2008, were closed in the middle of 2011 and the business transferred to a new Hayes RDC of 23,000 sq. ft; and

l We assigned the lease on our Coventry site in October 2011 and as part of the transaction, entered into sub-leases to accommodate the existing Midlands RDC and the Packaging Distribution head office functions. The National Distribution Centre activities, which operated from this site until 31 July 2011, were absorbed into our existing Wakefield and Enfield RDCs with the whole transaction generating property savings for future years.

Performance Potential

The RDCs in our network are treated as profit centres, albeit with proportionate allocations of central costs. In 2011 we had 11 RDCs performing at or above the target return on sales level. The remaining RDCs, which with two exceptions are profitable, continue to demonstrate improvements that indicate their ability to achieve the target return on sales level.

Acquisitions

One component of the Packaging Distribution strategy is the acquisition of quality businesses offering the opportunity to increase geographic penetration and to more effectively utilise our current RDC infrastructure. During 2011 we evaluated a number of opportunities but none were pursued as they failed to meet our return criteria.

Future Plans

We expect demand in 2012 will be subdued and that the pricing environment will remain volatile. In this context, our plan for 2012 is to focus our management actions in the following areas:

·; Enhance customer engagement to improve customer retention levels and increase product penetration;

·; Ensure the effective management of supplier price changes;

·; Increase new business growth and win market share both through the RDC sales teams and the dedicated 3PL and National Account sales teams;

·; Expand our focus in specific industry sectors which benefit from Macfarlane's national coverage;

·; Accelerate the development of the Presentational and Retail Packaging business to existing and new customers;

·; Strengthen our web-based presence through macfarlanepackaging.com to improve online visibility and access to our products and services;

·; Absorb the Basingstoke RDC into our Fareham RDC on expiry of the Basingstoke lease in Q1 2012;

·; Ensure all RDCs are operating to their full profit potential within the Macfarlane network; and

·; Maintain the focus on working capital management to reduce borrowing levels.

Manufacturing Operations

Macfarlane's Manufacturing Operations comprise Labels, which includes self-adhesive and resealable labels businesses and our Packaging Manufacturing business.

In 2011 Macfarlane's Manufacturing Operations recorded an operating profit of £0.1 million (2010 - £0.8 million). Before exceptional items the profit performance increased modestly. The key features of the Manufacturing Operations performance in 2011 were:

·; Sales increased by 6% versus 2010 driven by increased demand from major customers in key sectors particularly aerospace and general industrial;

·; Gross margins reduced from 36.5% to 34.3% reflecting significant customer pressure on sales prices in the self-adhesive Labels business and an unfavourable customer mix; and

·; Net overheads as a percentage of sales reduced from 36.2% in 2010 to 33.9% in 2011, evidence of our cost control focus.

Labels

Macfarlane Labels businesses produce self-adhesive labels for major FMCG customers in the UK and Europe and resealable labels for major customers in the UK, Europe and the USA. The businesses operate from two production sites in Kilmarnock and Dublin and a sales and design office in Sweden, which focuses on the development and growth of our resealable labels business - Reseal-it. The Labels businesses have a high level of dependency on a small number of major customers. Management work closely with these key customers to ensure high levels of service and introduce product and service development initiatives to create competitive differentiation.

Business Performance

2011 was a disappointing year for the Labels businesses where despite sales growth of 4% profits were below the level achieved in 2010. The reduction in profits was mainly caused by lower gross margin in the self-adhesive label sector where price competition has been particularly intense. In order to offset this issue actions were initiated in 1H 2011 including cost reduction, operational efficiency improvements and the management of customer profitability. The impact of these actions contributed to an improved profit performance in 2H 2011.

There was good progress in the development of our resealable range of labels and systems. Total sales for Reseal-it grew by 41% versus 2010 with increased momentum in the USA through our partnership with Printpack and some new penetration in the UK market through major retailers.

Future Plans

The priorities for the Labels businesses in 2012 are to: -

·; Identify opportunities to rebuild margins in the self adhesive label sector;

·; Improve operational efficiencies to counterbalance market price pressure;

·; Further develop the Reseal-it product in the US market through the Printpack partnership;

·; Build on the early 2011 success with the Reseal-it concept in the UK; and

·; Launch additional resealable label ranges to broaden the appeal of the product to new market sectors.

Packaging Manufacturing

The principal activity of the Packaging Manufacturing business is the design, manufacture and assembly of custom-designed packaging solutions for customers looking for cost-effective methods of protecting higher-value products in storage and transit. The primary raw materials are corrugate, timber and foam. The business operates from two manufacturing sites, in Grantham and Westbury, supplying both directly to customers and also using the RDC network of the Packaging Distribution business.

Key market sectors supplied are aerospace, medical equipment, electronics and automotive. The markets in which we operate are highly fragmented with a range of locally based competitors. We differentiate ourselves through our technical expertise, design capability, industry accreditations and the combination of our in-house manufacturing and RDC distribution network.

Business Performance

2011 sales were 6% above those achieved in 2010 despite demand in a number of the key sectors of UK industry being weak. During the year, we achieved some significant new customer wins, the partnership with the Packaging Distribution business continued to be effective and good progress was made with our directly serviced customers particularly in the aerospace and electronics sectors. The impact of all these factors resulted in Packaging Manufacturing achieving an acceptable overall level of profitability in 2011 which was similar to that achieved in 2010.

Future Plans

The priorities for 2012 are to:

·; Improve sales penetration of our target market sectors both directly and through the relationship with Macfarlane Packaging Distribution;

·; Continually review and flex the cost base of the business to ensure it is at a level consistent with the demand outlook;

·; Maintain gross margins through effective recovery of any further cost price changes;

·; At Grantham the primary focus will be to grow sales both directly and through the partnership with Packaging Distribution; and

·; Our Westbury location is focused on improving the customer mix and enhancing productivity and customer service levels.

2012 Outlook

There continues to be much uncertainty in the markets we serve and we expect demand in 2012 to remain weak and price inflation to be volatile. However, Macfarlane Group has demonstrated an ability to effectively manage these challenges and will do so again in 2012.

Macfarlane Group has a clear strategic plan incorporating a range of actions which based on current progress is enabling the business to continue to achieve profitable growth. The effective implementation of these actions remains our priority.

We expect 2012 to be another year of positive progress for the Group.

Going Concern

The Directors, in their consideration of going concern, have reviewed the Group's future cash flow forecasts and revenue projections, which they believe are based on prudent market data and past experience. The Group's business activities, together with the factors likely to affect its future development, performance and financial position are set out in the Chairman's Statement and Business Review on pages 1 to 9.

The Group's principal financial risks in the medium term relate to liquidity and credit risk. Liquidity risk is managed by ensuring that the Group's day-to-day working capital requirements are met by having access to banking facilities with suitable terms and conditions to accommodate the requirements of the Group's operations. Credit risk, which is heightened as a result of the difficulties customers may face in the current climate, is managed by applying considerable rigour in managing the Group's trade receivables. The Directors believe that the Group is adequately placed to manage its financial risks effectively despite the current uncertain economic outlook.

The Group's principal banking facilities of £11.5 million have been renewed until 28 February 2013 when a further renewal of facilities is expected and the Directors are of the opinion that the Group's cash forecasts and revenue projections, taking account of reasonably possible changes in trading performance given current market and economic conditions, show that the Group should be able to operate within its current facilities and comply with its banking covenants.

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements.

Cautionary Statement

The Chairman's Statement and the Business Review on pages 1 to 9 have been prepared to provide additional information to members of the Company to assess the Group's strategy and the potential for the strategy to succeed. It should not be relied on by any other party or for any other purpose.

This report and the financial statements contain certain forward-looking statements relating to operations, performance and financial status. By their nature, such statements involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors, including both economic and business risk factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report.

Responsibility Statement Of The Directors

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 31 December 2011. Certain parts of the full annual report are not included within this announcement.

The Directors of Macfarlane Group PLC are

A.S. Hunter Chairman

P.D. Atkinson Chief Executive

J. Love Finance Director

K.D. Mellor Non-Executive Director and Senior Independent Director

G. Bissett Non-Executive Director

To the best of the knowledge of the Directors (whose names and functions are set out above), the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit for the Company and the undertakings included in the consolidation taken as a whole; and

Pursuant to Disclosure and Transparency Rules, Chapter 4, the Directors' Report of the Company's annual report includes a fair review of the development and performance of the business and the position of the Company, and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties faced by the business.

Peter Atkinson John Love

Chief Executive Finance Director

6 March 2012 6 March 2012

Macfarlane Group PLC

Consolidated income statement

For the year ended 31 December 2011

* There is no dilution of earnings per share in either 2010 or 2011.

Macfarlane Group PLC

Consolidated statement of comprehensive (expense)/income

For the year ended 31 December 2011

Macfarlane Group PLC

Consolidated statement of changes in equity

For the year ended 31 December 2011

Macfarlane Group PLC

Consolidated balance sheet at 31 December 2011

Macfarlane Group PLC

Consolidated cash flow statement

For the year ended 31 December 2011

Macfarlane Group PLC

Notes to the financial information

For the year ended 31 December 2011

1. General information

The financial information set out in this preliminary announcement does not constitute the Group's statutory financial statements as defined in Section 435 of the Companies Act 2006 and has been extracted from the full statutory accounts for the years ended 31 December 2011 and 31 December 2010 respectively.

The financial statements for 2011 were approved by the Board of Directors on 6 March 2012. The auditors' report on the statutory financial statements for the year ended 31 December 2011 was unqualified pursuant to Section 498 of the Companies Act 2006 and did not contain a statement under sub-section 498 (2) or (3) of that Act.

The information for the year ended 31 December 2010 has been extracted from the Group's statutory accounts, which have been filed with the Registrar of Companies. The auditors' report on these statutory accounts was unqualified pursuant to Section 498 of the Companies Act 2006 and did not contain a statement under either Section 498 (2) or Section 498 (3) of that Act.

2. Basis of preparation

The Group's business activities, together with the factors likely to affect its future development, performance and financial position are set out on pages 1 to 9.

The Group's principal financial risks in the medium term relate to liquidity and credit risk. Liquidity risk is managed by ensuring that the Group's day-to-day working capital requirements are met by having access to banking facilities with suitable terms and conditions to accommodate the requirements of the Group's operations. Credit risk, which is heightened as a result of the difficulties customers may face in the current climate, is managed by applying considerable rigour in managing the Group's trade receivables. The Directors believe that the Group is adequately placed to manage its financial risks effectively despite the current uncertain economic outlook.

The Group's principal banking facility of £11.5 million has been renewed until 28 February 2013 and the Directors are of the opinion that the Group's cash forecasts and revenue projections, which they believe are based on prudent market data and past experience taking account of reasonably possible changes in trading performance given current market and economic conditions, show that the Group should be able to operate within its current facilities and comply with its banking covenants.

After making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the financial statements for the year ended 31 December 2011.

3. Segmental information

The Group's principal business segment is Packaging Distribution, comprising the distribution of packaging materials and supply of storage and warehousing services in the UK. This constitutes over 80% of the turnover and profit of Group operations. As permitted by IFRS 8, the Group has elected to combine the remaining operations for the manufacture and supply of self-adhesive and resealable labels to a variety of FMCG customers in the UK & Europe and the design, manufacture and assembly of timber, corrugated and foam-based packaging materials in the UK into one segment headed Manufacturing Operations. None of the individual business segments within Manufacturing Operations represent more than 10% of Group turnover and profit.

During 2010, Macfarlane Group PLC made the decision to amend benefits for active members in its final salary pension scheme by freezing pensionable salaries with the change taking effect on 30 April 2010. As a result no further salary inflation applies for active members who elected to remain in the scheme and a curtailment gain of £1,200,000 was recorded as a result of this change.

The Group has a number of vacant and partly sub-let leasehold properties, with the majority of the head leases expiring before 2020. The company re-assessed the provision made for residual lease commitments together with other outgoings for dilapidations, after taking into account existing sub-tenant arrangements and assumptions relating to later periods of vacancy and as a result an additional provision of £291,000 was made during 2010.

The standard rate of tax based on the UK average rate of corporation tax, is 26.5% (2010 - 28.0%). Taxation for other jurisdictions is calculated at the rates prevailing in these jurisdictions. The actual tax charge for the current and previous year varies from 26.5% (2010 - 28.0%) of the results as set out in the income statement for the reasons set out in the following reconciliation:

Dividends are not payable on own shares held in the employee share trust.

In addition to the amounts shown above, a proposed dividend of 1.05p per share will be paid on 8 June 2012 to those shareholders on the register at 10 May 2012 and is subject to approval by shareholders at the Annual General Meeting in 2012 and has not been included as a liability in these financial statements.

7 Earnings per share

The calculation of the basic and diluted earnings per share is based on the following data:

Cash and cash equivalents comprise cash at bank and other short-term highly liquid investments with maturity of three months or less.

Retention monies of £24,000 relating to previous years' disposals were received in 2011 (2010 - £32,000). These represent the only cash flows in 2011 and 2010 from discontinued operations.

9. Pension scheme

The Group operates a pension scheme based on final pensionable salary for its UK operations. Active employees accrue benefits of 1/60 of pensionable salary for each completed year's service on attainment of a normal retirement age of 65. The assets of the scheme are held separately from those of the Group in managed funds under the overall supervision of the scheme trustees.

The pension scheme's qualified actuary carries out triennial valuations using the Projected Unit method to determine the level of deficit. The most recent triennial valuation at 1 May 2011 is still in progress. The principal assumptions adopted were that investment returns would average 6.15% per annum and that no further salary increases would apply for active members. The provisional results of the valuation showed that the market value of the relevant assets of the scheme was £46,959,000 and the actuarial value of these assets represented 66% of the value of benefits that had accrued to members.

The final salary scheme was closed to new entrants during 2002.

Following the 2008 actuarial valuation, the Board has agreed to make additional payments to the scheme, which increase the scheme assets and therefore reduce the net pension deficit. The minimum employer contribution to the pension scheme in 2012, including these additional deficit payments, is £2.2 million.

The employer contribution rate is now 11.3% of pensionable salary, and the employee contribution rate is 7% of pensionable salary from 1 July 2010 following actuarial advice.

During 2010, Macfarlane Group PLC made the decision to amend benefits for active members in the scheme by freezing pensionable salaries at the levels current at 30 April 2009. Following a consultation process with the active members affected, the change took effect on 30 April 2010. As a result no further salary inflation applies for active members who elected to remain in the scheme and a curtailment gain of £1.2 million was recorded in 2012 as a result of this change.

During the second half of 2010 the Government announced its intention that statutory minimum increases should be based on the increase in the CPI measure of inflation rather than the RPI measure of inflation. As the Macfarlane Group final salary pension scheme rules define revaluation in deferment to be statutory, this change was effected in 2010 with a resultant reduction in liabilities of £2.3 million.

Balance sheet disclosures

The assets in the scheme, the net liability position for the scheme and the expected rates of return have been based on the provisional results of the actuarial valuation as at 1 May 2011, updated to the year-end.

The scheme's liabilities were calculated on the following bases as required under IAS 19:

The Trustees reviewed the investment profile of the pension scheme in 2011, involving the company in this review. As a consequence more emphasis has been given to investments in multi-asset diversified funds in an effort to protect investment values in periods of market turbulence and thereby reduce balance sheet volatility.

The investments of £46,968,000 (2010 - £45,293,000) include a holding of 1,145,918 ordinary shares in Macfarlane Group PLC (2010 - 1,065,918) held at a value of £269,000 (2010 - £320,000).

The present value of scheme liabilities increased significantly in 2011 as a direct consequence of corporate bond yields reducing from 5.50% to 4.80%. This caused liabilities in 2011 to increase by just over £7.0 million.

Longevity assumptions were strengthened to reflect improvements in life expectancy and whilst this also increased liabilities, the effect was more muted.

The Group continues to pay deficit reduction contributions of £2.0 million per annum and the level of these contributions will be subject to negotiation with the trustees of the scheme in 2012 following the conclusion of the most recent triennial actuarial valuation.

The Company's pension scheme deficit is sensitive to movements in interest rates, inflation and longevity assumptions. This constitutes an ongoing risk, creating significant volatility in the charges and equity in each financial year.

The Finance Act 2011, which provides for a reduction in the main rate of corporation tax from 27% to 25% effective from 1 April 2012, was substantively enacted in July 2011. As it was substantively enacted at the balance sheet date, the rate reduction is reflected within the financial statements. The impact of the 2% rate reduction, which can be seen in the table above, is a reduction in the UK deferred tax asset for the year ended 31 December 2011 of £313,000. The Government has also indicated that it intends to enact future reductions in the main tax rate of 1% each year down to 23% by 1 April 2014. Future 1% main tax rate reductions are expected to have an impact of £210,000 on our financial statements as outlined above, however the actual impact will be dependent on our deferred tax position at that time.

11. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed.

Details of individual and collective remuneration of the Company's Directors and dividends received by the Directors for calendar year 2011 will be disclosed in the Group's Annual Report for the year ending 31 December 2011.

The fair value of investments at 31 December 2011, shown in the pension scheme disclosures in note 9, include 1,145,918 (2009 - 1,065,918) shares in Macfarlane Group PLC with a value of £269,000 (2009 - £320,000).

12. Posting to shareholders and Annual General Meeting

The Annual Report and Accounts will be sent to shareholders on Friday 30 March 2012 and will be available to members of the public at the Company's Registered Office, 21 Newton Place, Glasgow G3 7PY from 6 April 2012. The Annual General Meeting will take place at the Thistle Hotel, Cambridge Street Glasgow at 12 noon on Tuesday 8 May 2012.