Annual report 2015 Breville Group Limited Annual report 2015 Contents: Chairman’s review CEO’s review Strategy and brands Financial report Shareholder information Company information Annual general meeting: Wednesday 11 November 2015 at 10am Ground Floor, Suite 2, 170-180 Bourke Rd, Alexandria NSW 2015. 1 3 5 11 86 88 (front cover) the Boss™ easy to use high velocity superblender Chairman’s review “… an increasingly international business with core building blocks in place to take advantage of future growth opportunities” in the furtherance of Breville’s “Food Thinking” focus. This office move follows the March 2014 relocation of the Australian business’ warehouse which historically adjoined the Australian business’ offices, to a leased purpose-designed national distribution centre at Minto in Sydney’s south western suburbs. On behalf of the Board, I welcome Jim Clayton who commenced in the role as Breville’s Chief Executive Officer on 1 July 2015. I also would like to take this opportunity to thank Mervyn Cohen, our long standing Chief Financial Officer, who served as Interim CEO during the year. Breville’s commitment to “Food Thinking” and ongoing investment in product development and marketing has continued and these, together with a deep product pipeline, well-positioned brand and key strategic alliances, provide core building blocks. These building blocks, coupled with a strong balance sheet, position Breville well for the future under the leadership and vision of Jim Clayton. I encourage all shareholders to attend the annual general meeting in November and I look forward to meeting as many of you as possible. Finally, I would like to thank my Board colleagues, our passionate and capable Breville team members around the world, shareholders, customers and suppliers for their continued support. Steven Fisher Non-executive chairman During the 2015 financial year, the Breville Group delivered a mixed result not only across the halves, but also within the various geographies. Overall, the Group’s FY15 result, particularly in the second half, was underpinned by a pleasing performance of Breville designed and developed products across all segments. EBIT for the year finished at $69.6m being 1.2% lower than the prior year and net profit after tax decreased by 4.3% to $46.7m. Following softer trading in the first half of FY15, where Group revenues decreased by 5.6%, the second half revenue increase of 1.2% reflected the solid performance in North America, particularly in core categories. The UK business, which distributes Breville designed and developed products under company-owned brand, Sage, continued to perform well as it recorded double digit revenue growth as product resonance with consumers increased. The growth in EBIT in the second half of the year of 4.8% was driven by a strong performance in North America partially compensating the challenging ANZ retail conditions and the one-off business interruption of the ERP system implementation in Australia. The North American and Rest of World segments combined represent 75% of the Group’s FY15 EBIT (FY14: 71%). Following a decrease in North American EBIT in the first half of the year of 9.4% compared to the prior year, North American EBIT for the full FY15 finished 5.9% higher than the prior year. Cash flows used in investing activities increased by $10.1m compared to the prior year with the Group’s net cash position at financial year end finishing at $32.8m, compared to $47.0m at the same time in the prior year. Reflecting the confidence in the strength of the business and commitment to providing strong returns to shareholders, the Board maintained the level of dividends. During the year the Sydney-based Australian business and corporate head office relocated to new leased premises. These new offices create an environment which facilitates open communication and collaboration across the cross-discipline teams 1 Breville Group Limited annual report 2015 the Quick Touch™ Compact Intuitive microwave with shortcuts The easy to use microwave with smart settings that know the right power level and time to suit what you’re cooking. 8 programmed food shortcuts take the guesswork out of common kitchen tasks. 2 Breville Group Limited annual report 2015 CEO’s review “An improved second-half performance with positive momentum in core categories expected to flow into FY16.” Financial summary $ Millions except where indicated 30 June 2015 30 June 2014 Revenue EBIT Net profit after tax Earnings per share (cents) Return on equity (%) 527.0 69.6 46.7 35.88 20.2 541.6 70.4 48.8 37.48 22.9 “Food-Thinking”, innovation, and investment in product development continue to provide the foundation for the Group’s strategic direction. Breville has created a workplace environment that fosters and reinforces Breville’s core values of Creativity, Simplicity, Excellence and Insight. These core values are key to the development of products that produce “simple moments of brilliance”, making day-to-day food-related processes easier and more enjoyable. The Group’s revenue and earnings for the year were impacted by a challenging ANZ retail landscape and a one-off disruption in the second half as the Australian business transitioned to a new ERP system. A solid North American performance, especially during the second half of the year, and the continued success in the UK under the Sage brand, which reported double digit revenue growth, partially offset the ANZ result. In North America, full year revenue from the sale of goods of $202.6m was 2.0% higher than the previous year. While first half total revenue was 10.8% lower than the prior year, driven by the continued re-set of the juicer category, second half total revenue finished 24.1% higher than the second half in the prior year. This positive result was underpinned by growth in core categories and the early signs of a stabilising juicer category in the USA late in 2015. North American EBIT for the year increased by 5.9% to $31.9m (FY14: $30.1m) as a more favourable product mix and lower warranty expenses on certain SKU’s that were being phased out, contributed to the increase in segment EBIT margin to 15.7% (FY14: 15.0%). In ANZ, revenue for the year decreased by $16.5m (6.3%), of which $14.7m related to the second half of the financial year. In addition to the fall in revenue resulting from the ERP transition, revenue was adversely effected by the continuation of discount department store retailers favouring their own brands in the entry to mid-price points in which the Group’s Kambrook and Ronson brands operate. ANZ EBIT decreased to $18.3m (FY14: $24.9m). The fall in EBIT was the result of lower revenues, particularly in the second half, and the negative impact of the USD, which continued to strengthen during the period. Price increases implemented in both the first and the second half of the financial year, along with the benefit of cost efficiency savings, did not fully offset the negative currency impact and volume shortfall. The Rest of World segment comprises the distribution business supplied from Hong Kong as well as the Group’s UK business. The UK business, which distributes Breville designed and developed products under company-owned brand “Sage”, produced an encouraging result as it continued to build relevance with premium UK retailers and increased its product resonance with consumers. The business reported double digit revenue and earnings growth in the year. The Rest of World distribution business that supplies distributors in geographies where the Group does not have in-market infrastructure had a difficult second half as a number of our European distribution partners experienced both economic and competitive challenges in their markets, impacting Rest of World revenue. 3 Breville Group Limited annual report 2015 the Smart Grinder™ Pro With adjustable dose control CEO’s review continued Total Rest of World revenue decreased by 1.2% to $78.8m (FY14: $79.8m), while EBIT increased by 0.7% to $20.3m (FY14: $20.2m). Lower Rest of World distribution business revenue in the year was largely offset by higher revenue in the UK, which represented approximately 25% of the segment’s revenue (FY14: approximately 20%). Although having spent only a short time at Breville, I am encouraged by what I have seen. The Group has a number of core assets it can leverage to achieve meaningful global success: • A passionate and capable team; • A solid innovation driven business model; • Compelling products with a deep pipeline; • Well-positioned brands across geographies; and • Key strategic partnerships. As Breville transitions from an Australian company, which sells products globally, to a truly global business, these assets, along with a strong balance sheet, will provide a solid platform for taking advantage of future growth opportunities. On a personal note, I would like to thank the Board and the entire Breville Group team for their ongoing support and counsel. Jim Clayton Chief executive officer 4 Strategy and brands Breville Group’s primary strategy is the design and development of the world’s best kitchen appliances together with the effective marketing of their performance benefits globally. Europe In the United Kingdom and Europe the Breville brand is not owned or operated by the Breville Group. In the United Kingdom, the Group markets and distributes its Breville premium designed and developed kitchen products under the company owned brand Sage™ which is endorsed by internationally acclaimed chef Heston Blumenthal. Within Europe, the Group has a number of partners who market Breville’s premium designed and developed products under their own brands. In addition to endorsing the Sage™ brand, Heston Blumenthal also plays the role of being Breville’s global brand ambassador in all markets outside of Europe. Rest of the World In the Asia Pacific region and the Middle East, the Group markets its premium designed and developed kitchen products under the Breville brand as well as selected products under the Kambrook brands in parts of Asia and Africa. Distribution in these regions is managed using local third party distributors supplied via the Group’s Hong Kong office. During June 2015 , the Group commenced trading with a new distribution partner in Brazil, leading homewares brand, Tramontina. A range of Breville designed premium products, co-branded ‘Tramontina by Breville’, will be distributed by Tramontina in Brazil commencing in the first half of the 2016 financial year. The Breville brand is at the core of this strategy representing the majority of the Group’s revenues and marketing activities. There are however, a number of additional company owned brands and brand partners in different geographies that assist in the delivery of the business strategy. Australia and New Zealand In Australia and New Zealand, the Group primarily trades under its company owned brands, Breville and Kambrook and also distributes a range of Philips products under a licence agreement. Since 2013, the Breville brand has also included a range of Breville co-branded Nespresso coffee machines as one of Nespresso’s machine partners in Australia and New Zealand. In line with its global strategy, the Breville brand is focused on the premium kitchen segment of the market but still enjoys reasonably broad distribution in Australia and New Zealand. The Kambrook brand extends to categories beyond the kitchen offering not just a full range of kitchen appliances, but also irons, vacuums, heating and cooling products, all at an affordable price without any compromise on quality and performance. Leveraging off its strong distribution base in the Australian and New Zealand markets, the Group distributes a range of Philips’ products in the garment and personal care categories. North America In North America, the Group distributes its range of premium internally designed and developed kitchen products under the Breville brand through premium channels and its own online retailing platform. Since July 2014, North American revenues have also included the newly acquired USA based culinary division of PolyScience, one of the world’s market leaders in premier sous vide cooking in both the commercial and professional markets. 5 Breville Group Limited annual report 2015 Strategy and brands continued Breville - Thought for Food™ On Melbourne Cup day 1932, two Australian entrepreneurs, Bill O’Brien and Harry Norville, combined their surnames together to form the name ‘Breville’ and founded a company manufacturing radios out of Sydney. During the 1960’s, Bill’s son John focused the organisation on solving common kitchen problems and founded the Breville small appliance research and development centre, which led to the invention of the now iconic Breville toasted sandwich maker. The toasted sandwich maker kick-started a long list of innovative Breville products developed in Australia. From the original Kitchen Wizz™ food processor and High-Wall Wok to the launch of the world’s first wide feed chute Juicer, Breville has become synonymous with innovation in the kitchen. In 2000, Breville embarked on a project to expand its design and innovation capabilities, building a much larger internal team that has today become one of Australia’s premier product development teams. This investment culminated in the 2003 launch of its premium range of products into the United States and other international markets. In 2009, Breville combined its design and development capabilities with a more focused marketing, recruitment and cultural initiative entitled ‘Food Thinking’. As a part of this strategy, a new global brand identity was developed and rolled out across packaging, point of sale and all other consumer marketing touch points. Breville’s strategy of ‘Food Thinking’ and creativity remains relevant today and it continues to gain momentum. The strategy centres around: • Deeper understanding of food and the challenges consumers face; • Protectable innovation; • Superior quality and design; and • Increased marketing communication. Breville’s growing appreciation for food science and culinary trends has led to a fostering of relationships with several high profile food thinkers including world renowned baristas and chefs, some of which have helped the Group in a product development capacity. In his ambassadorial role, world renowned chef Heston Blumenthal works closely with Breville’s product development teams, providing invaluable insights into the food science necessary for the Group to continue developing “best in class” products. Sage™ By Heston Blumenthal® In the United Kingdom, the Group distributes its premium designed and developed products under the Group owned brand, Sage™, which is endorsed by Heston Blumenthal. The brand identity and positioning of Sage™ by Heston Blumenthal® is aligned closely to the global Breville brand identity and ‘Food Thinking’ strategy. The Sage™ by Heston Blumenthal distribution strategy is also very similar to that of North America, with distribution limited to premium retailers. The Group continues to invest in marketing activity for the Sage™ by Heston Blumenthal® brand to solidify the brand’s presence in the premium channel in the United Kingdom. Kambrook - The Smarter Choice™ Kambrook has become known for quality, durable products at an affordable price. The ever-expanding product range encompasses appliances for the kitchen, living room, laundry and bedroom. Kambrook continues to highlight the durability of its appliances and the rigorous testing process that each new product undergoes. Products are subjected to extensive laboratory and quality testing before receiving the Kambrook seal of approval. Philips Breville Group is the exclusive distributor for Philips’ personal care and garment care appliances in Australia and New Zealand. The relationship with Philips is now in its 15th year and the Group continues to work collaboratively to grow sales and market share. Philips sets the benchmark for innovation and performance with its flagship shaver range and it also offers a compelling range of high performance garment care products. 6 Breville Group Limited annual report 2015 PolyScience Breville Group acquired the PolyScience culinary division in July 2014. PolyScience was founded in Illinois, USA in 1963, predominantly as a supplier of specialised medical and laboratory equipment that could uniquely control temperatures with great precision. Throughout the last decade, PolyScience expanded into culinary products, employing its temperature control technologies to launch the world’s premier immersion cooking circulators (for sous vide cooking) as well as various specialty cooking accessories such as the Smoking Gun (for rapid food smoking). Innovation & product development The core driving the Group’s growth continues to be investment in product development and focus on design and innovation. Breville has deepened its understanding of food, and how the consumer interacts with it, applying this to solving problems in ways that are both valuable to people, and differentiated from competitors. Breville actively protects this customer value through increased investment in intellectual property protection and via the development of a portfolio of patented innovative products for future sustainable growth. the Citrus Press™ With a juicing cone for all citrus sizes 7 Breville Group Limited annual report 2015 Strategy and brands continued People - creativity & food thinkers Breville enjoys the benefits of a highly experienced and talented team across all departments and geographies. Integrated throughout its food thinking culture, the passion, creativity and insight of staff has helped to consistently deliver world- class innovative products to consumers around the world. The team continues to be awarded both domestically and internationally, with multiple design awards, and recognition through mainstream media. Breville Group invests in the training and education of its team, building strong, collaborative links with world experts in food thinking and technology. Breville was a major sponsor of the award winning Margaret River Gourmet Escape event in Western Australia for the third year running in November 2014. Breville Group is also involved in several consumer facing and chef liaison activities. Strongly committed to its core values of creativity, simplicity, insight and excellence in all departments, Breville recruits, trains, assesses and rewards employees on this basis. With a team anchored around these common values, the business is able to foster a workplace that stimulates idea generation, a passion for learning, and the continuous search for new and better solutions. During the 2015 financial year, the Group relocated its Sydney-based Australian business and its global product development, marketing and corporate head office to new state of the art custom designed premises. These new facilities create an environment which facilitates open communication and collaboration across the cross discipline teams and should ensure that Breville continues to attract and retain a highly talented and experienced team. Breville advocates diversity in its workforce, recognising the insight and creativity that it brings to the business. the Scraper Mixer Twin™ With big and small bowls and electronic speed control 8 Breville Group Limited annual report 2015 Ensuring a safe workplace is another key business commitment, with employees participating in regular work health and safety audits. The organisation promotes and encourages a proactive safety culture. Investing for the future In addition to its relocation of the Sydney based business to new state of the art facilities, the Group has recently invested in its own studio in Sydney. The studio will be responsible for all Group photography as well as all global video content creation. With the increasing importance and relevance of digital communication, video content creation is deemed key to communicating, explaining and demonstrating the innovation, features and points of difference included within the Breville designed and developed products to a global audience including both retailers and consumers. the Juice Fountain™ Compact With onboard pulp container 9 Breville Group Limited annual report 2015 Accolades Australian Powerhouse Museum Selection iF Design Award Housewares Design Award New York 2007 BBL600 ikon Blender 2006 800ES Espresso Machine 2015 2015 BES980 The Oracle Best In Category BWM640 The Smart Waffle 2008 BBL800 Professional Series Blender 2008 BES820 Espresso Machine 2006 800ES Professional Series Espresso Machine 2008 BTA820&840 Professional Toasters Best In Industry BMO700 Quick Touch Microwave Gold iF Design Selection 2007 BES820 Espresso Machine 2006 800CP Citrus Press BCP600 Citrus Press BBL405 The Kinetix Twist BES980 The Oracle Espresso BSG1974 the Original ‘74 BDC600 You Brew Drip Coffee Machine BFP800 Food Processor BGR820 Smart Grill BES400 Espresso Machine 2006 BJE200 Juice Fountain 2005 800CP Citrus Press 2008 BES820 Espresso Machine 2015 2015 2014 2014 2014 2014 2013 2013 2012 2012 BMO700 Quick Touch Microwave BCP600 Citrus Press BES980 The Oracle Espresso BMO734 The Quick Touch BTA720 + 730 The Lift and Look Pro BWM640 The Smart Waffle BEF100 The Thermal Grill Pro BRC600 The Multi Chef BDC600XL You Brew BFP800 Kitchen Wizz Pro 2008 BBL800 Professional Series Blender Shortlisted 2008 BKC600XL Single Cup Brewer 2006 800GR Grill IDSA Design Award – USA IDEA International Design Excellence Awards 2014 Bronze BES980 The Oracle Espresso 2014 Finalist BWM640 The Smart Waffle 2014 Finalist BTA720 + 730 The Lift and Look Pro 2013 Bronze BES900 Dual Boiler Espresso 2013 Finalist BFP800 Kitchen Wizz Food Processor 2013 Finalist BBL 605 Kinetix Control Blender 2013 Finalist BDC600 You-Brew Drip Coffee Machine BBL910 The Boss Superblender 2008 BTA820/840 Toaster BRC600 The Multi Chef BEF100 The Thermal Pro Grill 2008 BES400 Espresso Machine Honourable Mention BCI600 Smart Scoop Ice Cream Maker BES900 Dual Boiler Espresso Machine 2013 2011 BBL605 Kinetix Control Blender 2007 Bronze BBL600 Blender BKE820 Kettle 2015 2015 2015 2014 2013 2012 2011 2010 2007 2014 2013 2013 2012 2012 2011 2011 2010 2010 2010 2010 Good Design Award Chicago Anthenaeum 2010 Breville Smart Oven Finalist Home Beautiful Awards 2012 2012 2012 2012 BOV800 Smart Oven BFP800 Kitchen Wizz Pro BTM800 Tea Maker BCG800 Smart Grinder 2006 BES400 Espresso Machine Cooks Illustrated Best Blender 2012 BBL605xl Hemisphere Control Blender Cooks Illustrated Best Electric Juicer 2012 JE98xl Juice Fountain Plus 2007 Snack ‘n’ Sandwich Toaster Design Icon 2007 BES400 Espresso Machine Winner 2006 BKE450 Kettle Winner Consumer reports 2012 Food Processors #1 BFP800 Sous Chef 2011 Immersion Blender Review #1 BSB510 Control Grip 2010 Toaster Ovens Review #1 BOV800 #2 BOV650 House & Garden Style Awards 2013 BES980 The Oracle - Winner Kitchen & Dining 2010 Tea Maker - Winner Kitchen BCG800 Smart Grinder BTM800 Tea Maker BEM800 Wizz Planetary Mixer BOV800 Smart Oven BES820 Variable Temperature Kettle BES860 Fresca Espresso Machine 2008 BKT500 ikon Toaster & Kettle 2008 BTA800 Professional Series Toaster 2008 BBL800 Professional Series Blender 2007 2007 BJE510 ikon Juicer BBL600 ikon Blender 2006 BKE450 Moda Kettle 2005 2005 2005 CT70 Toaster SK500 & 550 ikon Kettles 800ES Professional Series Espresso Machine 2010 2010 BKE820 - Blue ribbon JE95XL Juice Fountain Plus - Best in Show 2006 SK500 Ikon Kettle - Best Overall 10 Breville Group Limited annual report 2015 Breville Group Limited Financial report 2015 Contents: Directors’ report Corporate governance statement Income statement Statement of comprehensive income Statement of financial position Statement of changes in equity Cash flow statement Notes to the financial statements Directors’ declaration Independent audit report Auditor’s independence declaration 12 31 36 37 38 39 40 41 82 83 85 11 Breville Group Limited annual report 2015 Directors’ report The board of directors of Breville Group Limited (company) has pleasure in submitting its report in respect of the group for the year ended 30 June 2015. During the last three years she has served as a non-executive director of the following other listed companies: • Premier Investments Limited # • FSA Group Limited # denotes current directorship Dean Howell Non-executive director FCA, CTA Mr Howell has had an extensive career in accounting, spanning some 40 years, and accordingly has a wealth of commercial and advisory experience. He was the former senior partner of a Melbourne firm of chartered accountants and also served on that firm’s national and international boards. He is currently a consultant with Grant Thornton. He is also a director of Peter MacCallum Cancer Foundation Ltd. During the last three years he has not served as a director of any other listed company. Steven Klein Non-executive director LLB, B.Com Mr Klein is a Principal of SBA Law. He has had over 25 years’ experience acting on behalf of both public and private companies in merger and acquisition transactions. During the last three years he has not served as a director of any other listed company. Lawrence Myers Non-executive director B.Acct, CA, CTA Mr Myers has over 20 years’ experience as a practising Chartered Accountant. He is the Managing Director and founder of MBP Advisory Pty Limited, a high end Sydney firm of Chartered Accountants. Mr Myers sits on numerous private company and not-for-profit boards and acts as a trusted advisor and mentor on business and financial matters. He is a registered auditor and his specialist areas of practice include business and corporate advisory as well as mergers and acquisitions. Mr Myers is chairman of the audit and risk committee (A&RC) and since August 2014 is the company’s lead independent director. During the last three years he has not served as a director of any other listed company. Board of directors The names and details of the company’s directors in office during the year and until the date of this report are as below. Unless indicated otherwise, directors were in office for this entire period. Steven Fisher Non-executive chairman B.ACC, CA(SA) Mr Fisher has more than 25 years’ experience in general management positions in the wholesale consumer goods industry and is currently chief executive of the Voyager Group. Prior to entering into the consumer goods industry Mr Fisher was a practicing chartered accountant having qualified in South Africa with a Bachelor of Accounting degree. In addition, Mr Fisher serves on various private company boards. During the last three years he has not served as a director of any other listed company. Tim Antonie Non-executive director BEcon Mr Antonie has more than 20 years’ experience in investment banking and formerly held positions of Managing Director from 2004 to 2008 and Senior Advisor in 2009 at UBS Investment Banking, with particular focus on large scale mergers and acquisitions and capital raisings in the Australian retail, consumer, media and entertainment sectors. He holds a Bachelor of Economics degree from Monash University and qualified as a Chartered Accountant with Price Waterhouse. During the last three years he has served as a non-executive director of the following other listed companies: • Premier Investments Limited # • Village Roadshow Limited # # denotes current directorship Sally Herman Non-executive director BA, GAICD Ms Herman is an experienced non-executive director sitting on both public and private company boards in financial services, retailing, property and consumer goods. She had a long career in financial services in both Australia and the United States, including 16 years with the Westpac Group, running business units in most operating divisions of the Group. Ms Herman is based in Sydney and is actively involved in the community, with a particular interest in education, the arts and disability services. She also chairs the board of an independent girls’ school. 12 Breville Group Limited annual report 2015 Board of directors continued Operating and financial review Samuel Weiss Non-executive director AB, Harvard University; MS, Columbia Business School; FAICD Mr Weiss has had a long corporate career in the United States, Europe and Australia with leading consumer brand companies such as Nike, Gateway Computers and Sheridan. Mr Weiss is chairman of the people and performance committee. During the last three years he has served as a director of the following other listed companies: • Altium Limited # • OrotonGroup Limited # • Ensogo Limited (previously iBuy Limited) # • 3P Learning Limited # • # denotes current directorship iProperty Group Limited Company secretaries The names and details of the company’s company secretaries in office during the year and until the date of this report are as below. The company secretaries were in office for this entire period. Mervyn Cohen B.Com, B.Acc, CA Mr Cohen is a chartered accountant and has over 20 years’ experience in senior financial roles after beginning his career in Audit and Advisory. Mr Cohen is also Chief Financial Officer of the company, a position he had held since October 2006. Sasha Kitto LLB, ACA Ms Kitto is a chartered accountant and has over 15 years’ experience as a practising chartered accountant and in senior finance roles. Reporting currency and rounding The financial report is presented in Australian dollars and all amounts have been rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the company under ASIC class order 98/100. The company is an entity to which the class order applies. Performance indicators Management and the board monitor the financial performance of the company by measuring actual results against expectations as developed through an annual business planning and budgeting process. Appropriate key performance indicators (KPI’s) are used to monitor operating performance and management effectiveness. The operating and financial review has been designed to enhance the periodic financial reporting and provide shareholders with additional information regarding the group’s operations, financial position, business strategies and prospects. This review complements the financial report and has been prepared in accordance with the guidance set out in ASIC Regulatory Guide 247. Company overview The Group’s underlying strategy is the design and development of innovative world class small electrical kitchen appliances and the effective marketing of these products across multiple geographies to drive growth in sales and profits. In line with this strategy, the Group has: • built and staffed a world class product development centre in Sydney; • continued to invest in its design and development capabilities; • maintained an efficient procurement and quality assurance centre in Hong Kong; • continued to invest in growth driving marketing activities; • employed experienced marketing and sales executives in its key markets around the world; and • maintained an efficient and effective administration process to support growth initiatives on an international platform. Principal activities During the year, the principal activities of the Group were the innovation, development, marketing and distribution of small electrical appliances. In Australia and New Zealand, the Group principally trades under its company owned brands, Breville and Kambrook and also distributes a range of Philips products in the personal care and garment care categories under a license agreement with Philips. In North America, the Group distributes Breville branded products through premium channels. In the UK, the marketing and distribution of Breville designed premium flagship products to premium retailers is under the company owned brand, Sage. The Group’s Hong Kong office performs the functions of a group procurement and quality assurance centre and also, a supplier of primarily Breville designed products to distributors globally. These distributors are located outside of the Group’s principal markets of Australia, New Zealand, North America and UK. The products sold to distributors located in Europe (excluding UK) are sold on a non-Breville branded basis. The products sold to distributors outside of Europe, including in the Asia Pacific region, the Middle East and South America, are Breville branded products. 13 Breville Group Limited annual report 2015 Directors’ report continued Operating and financial review continued Segment results Strategic initiatives The Group continues to pursue a number of strategic growth initiatives including establishing important alliances with key industry participants and internationally recognised “food thinkers”. During the year the Group has continued its investment in product development and marketing and continued to collaborate with Heston Blumenthal as the Group’s global ambassador for worldwide advertising and marketing communication. During the year the Group acquired the culinary division of the USA-based business PolyScience, one of the market leaders in the sous-vide category in the commercial and professional markets. The product range includes sous-vide, vacuum sealers and other complementary products. Group operating results Year to 30 June Revenue EBITDA EBIT Net profit after taxation Earnings per share EPS (cents) Return on equity (%)1 Dividends per share (cents) Net cash ($m) 2015 $m 527.0 77.0 69.6 2014 $m % Change 541.6 77.9 70.4 (2.7%) (1.2%) (1.2%) 46.7 48.8 (4.3%) 35.88 37.48 (4.3%) 27.0 32.8 27.0 47.0 0.0% Minor differences may arise due to rounding 1 ROE is calculated based on NPAT for the 12 months ended 30 June 2015 (2014: 12 months end 30 June 2014) divided by shareholders’ equity at 30 June. Revenue of the consolidated entity for the year was $527.0m which was 2.7% lower than the previous corresponding year of $541.6m. Earnings before interest and tax (EBIT) decreased 1.2% on the previous corresponding year to $69.6m. The Group’s profit after income tax was $46.7m which decreased 4.3% on the previous corresponding year of $48.8m. The basic earnings per share for the consolidated entity was 35.88 cents per share (2014: 37.48 cents per share). 14 Year to 30 June Australia and New Zealand (ANZ) REVENUE EBIT 2015 $m 2014 $m % Change 2015 $m 2014 $m % Change 245.1 261.6 (6.3%) 18.3 24.9 (26.2%) North America 203.1 200.2 1.4% 31.9 Rest of World 78.8 79.8 (1.2%) 20.3 30.1 20.2 5.9% 0.7% Other TOTAL - - (0.9) (4.7) 527.0 541.6 (2.7%) 69.6 70.4 (1.2%) Minor differences may arise due to rounding ANZ Revenue for the year decreased by $16.5m (6.3%) to $245.1m (2014: $261.6m), of which $14.7m related to the second half of the financial year. EBIT decreased to $18.3m (2014: $24.9m), impacted in the second half by the one-off disruption and associated costs of the transition to the new ERP system in Australia during April/May 2015 (approximately $2.0m of EBIT decrease), as well as the continuation of discount department store retailers favouring their own home brands in the entry to mid-price points in which the Group’s Kambrook/Ronson brands operate. EBIT was also negatively impacted by the USD, which continued to strengthen during the period. Price increases effected in both the first and the second half of the financial year, along with the benefit of cost efficiency savings, did not fully offset the negative currency impact and volume shortfall. North American revenue for the year increased by 1.4% to $203.1m (2014: $200.2m). In the second half of the financial year revenue increased 24.1% in AUD (8.8% in local currencies) compared to the prior corresponding period. This positive revenue result was underpinned by growth in core categories, following a soft first half where revenue was $14.0m or 10.8% less than the prior corresponding period as the juicer category continued to re-set. EBIT for the year increased by 5.9% to $31.9m (2014: $30.1m). A more favourable product mix and lower warranty expenses on certain SKU’s which were being phased out, contributed to the increase in the segment EBIT margin to 15.7% (2014: 15.0%). Rest of World This segment comprises the Rest of the World distribution business supplied from Hong Kong as well as the Group’s UK business. Revenue decreased by 1.2% to $78.8m (2014: $79.8m) whilst EBIT increased by 0.7% to $20.3m (2014: $20.2m). Lower Rest of World distribution business revenue in the year was largely offset by higher revenue in the UK which reported double digit revenue growth in the year. 20.2% 22.9% North America Breville Group Limited annual report 2015 Operating and financial review continued Segment results continued Rest of World continued A number of our European distribution partners are experiencing both economic and competitive challenges in their markets, which impacted Rest of World revenue. Capital expenditure During the year, the Group completed its investment in its previously highlighted capital expenditure projects; the relocation of its Sydney-based Australian business and corporate head office to new leased premises and the implementation of and transition to a new ERP system within the ANZ segment. Other The Group’s Other reporting segment includes the Group’s shared service facility, design and development and global marketing functions, as well as the amortisation charge on capitalised product development projects. The net change from the prior year is attributable to a net over-recovery of intra-group charges and lower employee short term and long term incentive expenses. The higher net finance costs relate to the discounting, required for accounting purposes, of the long term payable in respect of the expected future earn-out associated with the July 2014 acquisition of the culinary division of the USA based PolyScience business. Advertising and marketing expenses Consistent with the Group’s intention of building awareness of its brands locally and internationally, the Group continues its investment in growth driving marketing activities. The importance of online consumer research, reviews and communication continues to increase. The Group invests in communicating its products’ features and benefits through traditional and digital media, including emerging social media channels. In the online world of consumer reviews, consumer blogs and online sales, the quality and performance of Breville’s products together with credible endorsements, will be a key to the Group’s future success. Financial position The total investment in working capital ended higher compared to that of the prior year. Inventory balances at 30 June 2015 of $108.3m (2014: $94.3m) were $14.0m higher than the prior year, of which approximately $8.5m is due to the translation effect of a weaker AUD when converting non-AUD denominated balances into AUD. The remaining increase is broadly distributed across all regions. Receivables compared to the prior year were $8.9m higher, of which approximately $4.7m relates to the translation impact of the weaker AUD compared to the previous year. The remaining increase is primarily due to higher North American revenue in local currencies in the last quarter of the 2015 financial year compared to the same period in the prior year. Net cash at 30 June 2015 was $32.8m (2014: $47.0m). Operating cash flow for the year was $45.7m (2014: $51.2m). Foreign exchange exposures The Group operates in various countries and is subject to a number of exchange rate influences on its earnings. Firstly, the Group has a transactional exposure as its product purchases are primarily paid for in US dollars. In Australia, New Zealand, Canada and the UK, the exchange rate impacts product costs as the US dollar changes relative to those countries’ functional currencies. A stronger US dollar will generally have a negative effect on the Group’s reported earnings in terms of this transactional exposure. The Group also has a translational exposure as its international earnings, a large portion of which are denominated in US dollars, are translated into Australian dollars for reporting purposes. A higher US dollar relative to the Australian dollar will generally have a positive effect on the Group’s reported earnings in terms of this translational exposure. The transactional and translational exposures are considered to result in a partial natural hedge from a Group perspective. A weak Australian dollar is likely to have an adverse impact on the ANZ segment’s earnings (as a result of higher landed costs) but a positive impact on the translation of non-Australian dollar denominated results. Consumer demand risk Given the Group’s reliance on consumer discretionary spending, adverse changes to the general economic and retail landscape and consumer sentiment in the principal markets in which the Group operates, will impact its financial results. The Group mitigates this risk by continued communication with its consumers to gain greater insight into the changing world of food and beverage trends and by keeping abreast with global economic and consumer data and industry trends. Margin risk The highly competitive nature of the small domestic appliance market together with changes in manufacturing costs, including commodity prices, will have an impact on the Group’s financial results. This risk is mitigated by protecting the Group’s intellectual property, brand building initiatives, introducing elements of variability into its cost structure and strengthening its long term supplier relationships. 15 Breville Group Limited annual report 2015 Directors’ report continued Operating and financial review continued Group strategies and prospects with local laws and safety conditions at selected vendors and compliance with the Breville Group ethical sourcing policy. The ongoing investment in innovation provides a strong platform to increase the portfolio of some of the world’s best kitchen products, to expand the Group’s geographic reach and to continue to grow global volumes. Although the economic environment remains uncertain, product development and brand management strengths coupled with a strong balance sheet, mean that the Group is well positioned to take advantage of future growth opportunities. Sustainability and social responsibility The Group is committed to ethical, responsible and sustainable conduct across the entire business. The Group is determined to build a culture through the commitment of its employees, to reduce the organisation’s impact on the environment and increase its contribution to society. In Australia, the Group is a committed signatory to the Australian Packaging Covenant in the reduction of the potential impact of its products, packaging and warehouse operations on the environment. It has also implemented improved waste reduction and recycling practices in its global test kitchens. The Group integrates actions and goals into existing business systems so that sustainable packaging considerations become ‘just how we do business’. Success is being achieved via cross functional teams working together to implement the Group’s Sustainable Packaging Policy. Ethical sourcing The Group is committed to conducting business in a socially responsible manner and managing its business to reflect high ethical and moral values. The Group expects its vendors to respect and adhere to the same philosophy in the operation and management of their businesses and reserves the right not to do business with vendors that do not share and demonstrate commitment to compliance with local and internationally accepted labour and employment laws. The Group has an ethical sourcing policy which includes an ethical sourcing requirements code (‘code’) which sets out the minimum requirements and expectations that all vendors, including sub-contractors engaged by vendors, must comply with. The code specifies compliance in areas such as wages and benefit policies, child labour, working hours, discrimination, health and safety and environmental practices. Suppliers are required to contractually recognise the code and acknowledge their acceptance of these requirements. New suppliers are required to undergo an independent audit to verify that they are in compliance with local laws and safety conditions. Factory visits are conducted by senior management on a regular basis. The Group also uses internationally recognised independent audit firms to verify compliance Anti-bribery and corruption The Group is committed to operating in a manner consistent with the laws of the jurisdictions in which its businesses operate, including those relating to anti- bribery and corruption. Honesty, integrity and trust are considered integral to the ethos of the Group, its products and its brands. Conduct associated with bribery and corruption is inconsistent with these values. Accordingly, the Group adopts a “zero tolerance” approach in relation to these matters. The Group has an anti-bribery policy which, in conjunction with the code of conduct and whistleblowing policy, sets out the responsibilities of all the Group’s employees (including contractors) and directors with regard to dealing with outside parties and prohibits all Group personnel in all jurisdictions in which the company operates or conducts commercial activities, from engaging in any activity that constitutes bribery or corruption and other improper inducements and/or payments. In order to ensure that these values and the policy are properly adhered to, the Group has appointed an Anti-Bribery Compliance Officer who is responsible for monitoring the application of this policy. Risk management The company’s risk management is discussed in the corporate governance statement on page 31. Dividends The following dividends have been paid, declared or recommended since the end of the preceding year. Cents per ordinary share $’000 13.0 16,912 14.0 13.0 18,213 16,912 Final dividends recommended: Dividends paid in the year: Interim FY15 dividend paid Final FY14 dividend paid Significant changes in the state of affairs There were no significant changes in the state of affairs of the consolidated entity that occurred during the year that have not otherwise been disclosed in this report or the consolidated financial statements. 16 Breville Group Limited annual report 2015 Other than the appointment of J. Clayton as Group chief executive officer as from 1 July 2015, there were no other changes to KMP after the reporting date and before the date the financial report was authorised for issue. Compensation philosophy The performance of the company depends, in part, upon the quality of its directors and executives. The company must attract, retain, motivate and develop highly skilled directors and executives in order to secure the short and long term success of the business so to enhance shareholder value. Based on this philosophy, the company’s compensation strategy and framework embodies two interrelated outcomes: improved business results and building a culture of high performance. The following principles define the compensation framework: • Provide competitive rewards (for fixed and variable compensation) to attract high calibre employees; • Link reward to sustained growth in shareholder value from dividends and growth in share price and the delivery of a consistent return on assets; • Link rewards with the strategic goals and performance of the company; and • Reinforce a competitive business strategy to deliver organisational success and enhanced shareholder value. People and performance committee The people and performance committee of the board of directors of the company is responsible for reviewing and recommending to the board executive and employee remuneration arrangements and executive succession as set out in the people and performance committee charter. The people and performance committee assesses the appropriateness of the nature and amount of compensation of executives and employees on an annual basis by reference to relevant individual and company performance and market conditions. The people and performance committee is responsible for the engagement of any external compensation consultants for work on executive remuneration. Compensation structure In accordance with best practice corporate governance, the structure of non-executive director and executive compensation is separate and distinct. Directors’ interests As at the date of this report, the interests of the directors in the shares or other instruments of Breville Group Limited were: S. Fisher T. Antonie S. Herman D. Howell S. Klein L. Myers S. Weiss Ordinary shares 50,288 - 8,000 100,000 117,189 20,000 121,775 Remuneration report (audited) This remuneration report outlines the compensation arrangements in place for directors and executives (collectively “key management personnel”) of Breville Group Limited. For the purposes of this report, key management personnel (KMP) of the group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the group, directly or indirectly. Details of key management personnel Below are details of the KMP of the Group during the financial year ended 30 June 2015. Unless otherwise indicated, the individuals were KMP for the entire financial year. (i) Directors: S. Fisher Non-executive chairman T. Antonie Non-executive director S. Herman Non-executive director D. Howell Non-executive director S. Klein Non-executive director L. Myers S. Weiss Non-executive director and chairman of audit and risk committee Non-executive director and chairman of people and performance committee (ii) Executives: J. Lord Group chief executive officer – resigned 21 August 2014 S. Brady General manager - global marketing M. Cohen Group chief financial officer and interim group chief executive officer* C. Dais Group general manager - business development and operations * M. Cohen served as interim group chief executive officer from 21 August 2014 to 30 June 2015 17 Breville Group Limited annual report 2015 Directors’ report continued Remuneration report (audited) continued Structure Non-executive director compensation Objective The board seeks to set compensation at a level which provides the company with the ability to attract and retain directors of high calibre whilst maintaining a level commensurate with companies of a similar size and type. Structure The Constitution and the ASX Listing Rules specify that the aggregate compensation of non-executive directors shall be determined from time to time by general meeting. The aggregate compensation of $950,000 per year was approved by shareholders at the annual general meeting held in November 2010. The compensation of non-executive directors is reviewed annually. Each director receives a fee for being a director of the company. An additional fee is also paid to each director who also acts as chairman of a board committee. The payment of additional fees for acting as chairman of a committee recognises the additional time commitment required by the director to facilitate the running of the committee. The compensation of non-executive directors for the year ended 30 June 2015 is detailed in Table 1 on page 23 of this report. Executive compensation Objective The company aims to remunerate and reward executives with a level and mix of compensation commensurate with their positions and responsibilities within the company and to: • Reward executives for company and individual performance against specific targets set with reference to business objectives and results; In determining the level and make-up of executive compensation, the people and performance committee may engage an external consultant as appropriate, to provide independent advice detailing market related levels of compensation. No such external consultants were engaged for the year ended 30 June 2015. The group chief executive officer makes recommendations to the people and performance committee for consideration. Employment contracts are entered into with executives. Details of the contracts are provided on page 22. Compensation consists of the following key elements: • Fixed compensation • Variable compensation - Short term incentive (STI); and - Long term incentive (LTI) The proportion of the fixed compensation and variable compensation (potential short term and long term incentives) is established for each executive by the people and performance committee and approved by the board. Table 3 on page 25 of this report details the components (%) of the compensation of key management personnel of the group. Fixed compensation Objective Fixed compensation is set to provide a base level of compensation which is appropriate to the position and responsibility and is competitive in the market. Fixed compensation is reviewed annually by the people and performance committee. The process consists of reviewing company and individual performance, relevant comparative market compensation, internal relativities and, where appropriate, external advice on policies and practices. • Align the interest, focus and performance of the executives with those of the shareholders; Structure • Attract, retain and motivate high performing executives; and • Ensure total compensation is competitive by market standards. Executives are given the opportunity to receive their fixed compensation in a variety of forms including cash and non-cash benefits. 18 Breville Group Limited annual report 2015 Remuneration report (audited) continued Variable compensation – short term incentive (STI) Objective The objective of the STI plan is to reward executives and other employees on the achievement of company and individual value adding performance objectives established annually, providing them with the opportunity to earn over and above their fixed compensation should the agreed objectives be achieved. Depending upon their position and seniority in the organisation, executives and other employees are eligible for a STI award of between 20% - 50% of their fixed or base annual remuneration. The incentive payment is based on the achievement of financial and non-financial objectives, with the former dependant upon a multiplier in accordance with a sliding scale. Objectives for each participant are determined on an individual basis aligned to enhance shareholder value. The principle objectives of the plan are: • To ensure that the company delivers its primary financial results and achieves its targets every year to deliver sustainable performance and continued organisational growth; • To achieve business goals through rewarding value adding individual performance; • To contribute to the development of a performance culture across the company; and • To promote and facilitate the concept of shared ownership whereby executives and employees who contribute to the success of the company will also share in that success. The total potential STI available is set at a level to provide an incentive to the executives and employees to achieve and exceed personal, financial and operational targets. Structure Actual STI payments are determined on the basis of the achievement of specific targets and objectives set at the commencement of the year. Financial performance targets include net profit before tax. Individual objectives are aligned to the non-financial components of the Group strategy. The company has predetermined financial performance benchmarks which must be met in order to trigger payments under the STI plan and these are varied on a yearly basis in line with the annual budgeting process. On an annual basis, after consideration of performance against the established targets/objectives, incorporating both company financial targets and individual objectives, the group chief executive officer recommends to the people and performance committee an amount, if any, of the STI payment each executive (excluding the group chief executive officer) is eligible to receive. This recommendation, together with a recommendation by the people and performance committee of an amount if any, of the STI payment the group chief executive officer is eligible to receive, is then put to the board for approval. The group chief executive officer may also award discretionary bonuses to recognise and reward key contributions from high performing employees. All discretionary bonuses are presented as recommendations to the people and performance committee and the board for approval. The aggregate of the annual STI payments available for executives across the company is subject to the approval of the people and performance committee and the board and payments are typically paid in cash. The minimum amount of the STI payments assuming that no executives meet their respective targets/objectives (including company financial targets and individual objectives) for the 2015 financial year is nil (2014: nil). Variable compensation – long term incentive (LTI) Objective The objective of the LTI plan is to reward executives and other employees in a manner that aligns this element of compensation with the creation of shareholder value. The LTI plan is only made available to executives and other employees who are able to influence the generation of shareholder value and have a direct impact on the company’s performance against relevant long term performance hurdles. Depending upon their position and seniority in the organisation, executives and other employees are eligible for a LTI award of between 20% - 50% of their fixed annual compensation. Structure – performance rights plan LTI grants to executives and other employees (collectively “participants”) are provided in the form of performance rights awards issued in accordance with the Breville Group Limited Performance Rights Plan (PRP). LTI grants to participants (excluding the group chief executive officer) are recommended by the group chief executive officer to the people and performance committee. This recommendation, together with a recommendation by the people and performance committee of a LTI grant to the group chief executive officer, is then put to the board for approval. An offer under the PRP grants a participant the right to a certain number of fully paid ordinary shares in the company. Upon satisfaction of the performance hurdles, the right will vest and be convertible into shares. The company uses time-based and financial-based hurdles. Earnings per share (EPS) is the financial-based performance hurdle for the LTI plan. EPS represents the earnings per share from operations adjusted for non- trading items. The use of EPS ensures an alignment between shareholder return and reward for participants. In addition to the grant of performance rights awards which are subject to an EPS performance hurdle, performance rights awards may also be granted in accordance with the PRP as a retention award where the performance condition is continued employment with the company to vesting date. 19 Breville Group Limited annual report 2015 Directors’ report continued Remuneration report (audited) continued Variable compensation – long term incentive (LTI) continued Structure – performance rights plan continued If the performance hurdle is not met or if the participant ceases to be employed by the company, any unvested performance rights will lapse unless otherwise determined by the board. There are no cash alternatives. The performance rights cannot be transferred and are not quoted on the ASX. Holders of performance rights are not entitled to notice of, or attend, a meeting of shareholders of the company, or receive any dividends declared by the company, until the rights have vested and then converted into shares. Once allocated, disposal of shares is subject to restrictions whereby board approval is required to sell the shares granted within three years of the shares being allocated to the participant or; if the participant ceases to be employed by the company, within twelve months of the date employment ceases; or such other date as the board determines. In the event of a takeover bid where the bidder and its associates become entitled to at least 50% of the voting shares of the company, any performance rights granted will vest where the board, in its absolute discretion, is satisfied that pro rata performance is in line with any performance condition applicable to those performance rights. Any performance rights which do not vest will immediately lapse, unless otherwise determined by the board. Other The number of ordinary shares in the company which could be acquired by executives and other employees holding performance rights if all outstanding performance rights were vested shall not exceed 5% of the total number of issued shares of the company. 20 Breville Group Limited annual report 2015 Remuneration report (audited) continued Variable compensation – long term incentive (LTI) continued Relationship of rewards to performance The table below shows the details of LTI plans for which compensation has been included in the remuneration tables on pages 23 and 24 of this report. LTI Plan (for the year ended) Performance hurdles/conditions Performance rights June 2012 Issued for nil consideration. - - Exercise price is $0. - Term of three years and there are 2 performance hurdles each representing 50% of the total number of performance rights: (a) Base EPS hurdle – to vest, group’s underlying EPS for the year ending 30 June 2014 must be at least 33.50 cents per share. (b) Stretch EPS hurdle – to vest, the group’s underlying EPS for the year ending 30 June 2014 must be at least 36.50 cents per share. - 100% vested as at 30 June 2015. Number outstanding 30 June 2015 (Executive only) Number outstanding 30 June 2014 (Executive only) - 152,000 Performance rights June 2013 Issued for nil consideration. - - Exercise price is $0. - Term of three years and there are 2 performance hurdles each representing 50% of 66,000 156,000 the total number of performance rights: (a) Base EPS hurdle – to vest, group’s underlying EPS for the year ending 30 June 2015 must be at least 43.22 cents per share. (b) Stretch EPS hurdle – to vest, the group’s underlying EPS for the year ending 30 June 2015 must be at least 47.33 cents per share. - 0% vested as at 30 June 2015. Performance rights June 2014 Issued for nil consideration. - - Exercise price is $0. - Term of three years and there are 2 performance hurdles each representing 50% of 41,000 84,000 the total number of performance rights: (c) Base EPS hurdle – to vest, group’s underlying EPS for the year ending 30 June 2016 must be at least 46.00 cents per share. (d) Stretch EPS hurdle – to vest, the group’s underlying EPS for the year ending 30 June 2016 must be at least 49.20 cents per share. - 0% vested as at 30 June 2015. Performance rights June 2015 Issued for nil consideration. - - Exercise price is $0. - Term of three years and there are 2 performance hurdles each representing 50% of 52,000 - the total number of performance rights: (a) Base EPS hurdle – to vest, group’s underlying EPS for the year ending 30 June 2017 must be at least 46.50 cents per share. (b) Stretch EPS hurdle – to vest, the group’s underlying EPS for the year ending 30 June 2017 must be at least 51.50 cents per share. - 0% vested as at 30 June 2015. 21 Breville Group Limited annual report 2015 Directors’ report continued Remuneration report (audited) continued Group performance The table below shows the performance of the group over the past five years. Year ended Underlying basic earnings per share (cents) Basic earnings per share (cents) Total dividends (cents) Share price at 30 June ($) Employment contracts 30 June 2011 30 June 2012 30 June 2013 30 June 2014 30 June 2015 27.61 24.47 16.50 3.30 35.35 35.35 24.00 4.38 38.23 38.23 26.00 7.06 37.48 37.48 27.00 8.11 35.88 35.88 27.00 6.21 None of the key management personnel have fixed term employment contracts. Amounts payable on termination vary from a minimum statutory entitlement to a maximum of 12 months based on a calculation of total fixed remuneration (which includes base salary, superannuation and allowances (if applicable)). In accordance with the terms of the performance rights plan, any performance rights not vested at the date of termination will be forfeited and shall lapse, unless otherwise determined by the board. Prohibition on hedging by key management personnel The group has adopted a policy which prohibits key management personnel and their closely related parties from entering into an arrangement that has the effect of limiting the exposure of a member of the key management personnel to risk relating to an element of that member’s compensation. The policy complies with the requirements of s.206J of the Corporations Act 2001. 22 Breville Group Limited annual report 2015 Remuneration report (audited) continued Remuneration of key management personnel Table 1: Remuneration for the year ended 30 June 2015 Short-term employee benefits Post-em- ployment benefits Termi- nation payments Long- term employee benefits Share- based payment Total Salary & fees Cash bonuses $ $ Other $ Total short term employee benefits Super- annuation Long service leave Per- formance rights $ $ $ $ $ Non-executive directors S. Fisher – chairman T. Antonie S. Herman D. Howell S. Klein (a) L. Myers S. Weiss Sub-total non-executive directors Other key management personnel 183,066 102,974 102,974 90,474 112,500 115,789 115,789 823,566 S. Brady (b) 372,061 M. Cohen (b),(c) 703,205 C. Dais (b) J. Lord (d) Sub-total executive KMP Totals Note 473,052 107,373 1,655,691 2,479,257 - - - - - - - - - - - - - - - - - - - - - - 183,066 17,391 102,974 102,974 9,783 9,783 90,474 22,283 112,500 - 115,789 11,000 115,789 11,000 823,566 81,240 30,000 402,061 38,196 30,000 733,205 35,000 473,052 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 200,457 112,757 112,757 112,757 112,500 126,789 126,789 904,806 30,677 (20,899) 450,035 12,758 (26,667) 754,296 - (21,231) 451,821 107,373 11,635 698,387 (62,779) (205,382) 549,234 60,000 1,715,691 84,831 698,387 (19,344) (274,179) 2,205,386 60,000 2,539,257 166,071 698,387 (19,344) (274,179) 3,110,192 (a) S. Klein is a principal of the legal firm SBA Law. His director’s fees (which are subject to GST) were paid to SBA Law and are shown above net of GST. (b) Share-based payment represents the net reversal of related non-cash expenditure due to the uncertainty in achieving the non- market vesting conditions. (c) M. Cohen received additional remuneration as interim CEO in FY15. (d) J. Lord ceased employment on 21 August 2014, and ceased to be key management personnel on that date. Share-based payment for J. Lord includes the reversal of non-cash expenditure following cessation of employment and the forfeiture and lapse of unvested performance rights. 23 Breville Group Limited annual report 2015 Directors’ report continued Remuneration report (audited) continued Remuneration of key management personnel Table 2: Remuneration for the year ended 30 June 2014 Short-term employee benefits Post-em- ployment benefits Long-term employee benefits Share- based payment Total Total short term employee benefits Super- annuation Long service leave Per- formance rights $ $ 183,066 16,934 54,259 102,975 5,019 9,525 109,037 10,086 112,500 91,905 17,823 - 8,501 1,649 115,789 10,711 787,354 62,425 $ - - - - - - - - - $ - - - - - - - - - $ 200,000 59,278 112,500 119,123 112,500 100,406 19,472 126,500 849,779 - - - - - - - - - Salary & fees Cash bonuses $ $ Other $ Non-executive directors S. Fisher – chairman T. Antonie (a) S. Herman D. Howell S. Klein (b) L. Myers (c) J. Schmoll (d) S. Weiss Sub-total non-executive directors Other key management personnel S. Brady M. Cohen C. Dais J. Lord 183,066 54,259 102,975 109,037 112,500 91,905 17,823 115,789 787,354 304,854 373,400 - - - - - - - - - - - 30,000 334,854 30,974 30,000 403,400 25,000 4,952 5,951 62,460 433,240 81,997 516,348 468,913 73,441 725,000 - - - 542,354 - - 57,471 599,825 725,000 25,000 8,594 167,957 926,551 Sub-total executive KMP 1,872,167 73,441 60,000 2,005,608 80,974 19,497 369,885 2,475,964 Totals Note 2,659,521 73,441 60,000 2,792,962 143,399 19,497 369,885 3,325,743 (a) T. Antonie was appointed 18 December 2013, effective 19 December 2013. (b) S. Klein is a principal of the legal firm SBA Law. His director’s fees (which are subject to GST) were paid to SBA Law and are shown above net of GST. (c) L. Myers was appointed 19 August 2013, effective 1 September 2013. (d) J. Schmoll resigned 19 August 2013, effective 1 September 2013. 24 Breville Group Limited annual report 2015 Remuneration report (audited) continued Remuneration of key management personnel continued Table 3: Key management personnel compensation mix Name Non-executive directors S. Fisher T. Antonie (b) S. Herman D. Howell S. Klein L. Myers (c) J. Schmoll (d) S. Weiss Other key management personnel S. Brady M. Cohen C. Dais J. Lord Fixed compensation Short term incentive Long term incentive (a) 2015 2014 2015 2014 2015 2014 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - 100.00% 100.00% 100.00% 104.64% 85.58% 103.54% 84.12% 104.70% 78.18% 137.39% 81.87% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (4.64%) (3.54%) 12.24% (4.70%) - - - - - - - - 14.42% 15.88% 9.58% - (37.39%) 18.13% (a) LTI values are based on the accounting value of performance rights. (b) T. Antonie became key management personnel on 19 December 2013. (c) L. Myers became key management personnel on 1 September 2013. (d) J. Schmoll resigned 19 August 2013, effective 1 September 2013 and ceased to be key management personnel on that date. Table 4: Other key management personnel cash bonuses and share-based compensation Name S. Brady M. Cohen C. Dais J. Lord Cash bonuses Share-based compensation % Earned 2015 % Forfeited 2015 Year granted % Vested 2015 % Forfeited 2015 - - - - 100.00% 100.00% 100.00% 100.00% 2015 2014 2013 2012 2015 2014 2013 2012 2015 2014 2013 2012 2015 2014 2013 2012 - - - 100.00% - - - 100.00% - - - 100.00% - - - 100.00% - - - - - - - - - - - - 100.00% 100.00% 100.00% - 25 Breville Group Limited annual report 2015 Directors’ report continued Remuneration report (audited) continued Remuneration of key management personnel continued Table 5: Shareholdings of key management personnel Ordinary shares held* in Breville Group Limited (number) 30 June 2015 Directors S. Fisher T. Antonie S. Herman D. Howell S. Klein L. Myers S. Weiss Other key management personnel S. Brady M. Cohen C. Dais J. Lord (b) Total 30 June 2014 Directors S. Fisher T. Antonie S. Herman D. Howell S. Klein L. Myers J. Schmoll (c) S. Weiss Other key management personnel S. Brady M. Cohen C. Dais J. Lord Total * Held directly, indirectly or beneficially. Balance at 1 July 2014 On exercise of performance rights Net change other (a) Balance at 30 June 2015 50,288 - 8,000 100,000 117,189 10,000 121,775 315,732 308,000 - 285,000 1,315,984 - - - - - - - 35,000 39,000 31,000 47,000 152,000 - - - - - 10,000 - - (179,000) (10,300) (332,000) (511,300) 50,288 - 8,000 100,000 117,189 20,000 121,775 350,732 168,000 20,700 - 956,684 Balance at 1 July 2013 On exercise of performance rights Net change other (a) Balance at 30 June 2014 50,288 - 8,000 100,000 117,189 - 100,000 121,775 276,732 305,500 - 220,000 1,299,484 - - - - - - - - 39,000 72,500 - 105,000 216,500 - - - - - 10,000 (100,000) - - (70,000) - (40,000) (200,000) 50,288 - 8,000 100,000 117,189 10,000 - 121,775 315,732 308,000 - 285,000 1,315,984 (a) All equity transactions with key management personnel have been entered into under terms and conditions no more favourable than those the group would have adopted if dealing at arm’s length. (b) J. Lord ceased employment on 21 August 2014 and ceased to be key management personnel on that date. (c) J. Schmoll resigned 19 August 2013, effective 1 September 2013 and ceased to be key management personnel on that date. 26 Breville Group Limited annual report 2015 Remuneration report (audited) continued Performance rights Table 6: Performance rights granted The terms and conditions of each grant of performance rights affecting remuneration of key management personnel in this financial year or future reporting years are as follows: Grant date * First exercise date Last exercise date Expiry date Exercise price 12 Oct 11 (a) 1 Sept 14 3 Oct 14 3 Oct 14 2 Oct 12 (b) 3 Sept 15 5 Oct 15 5 Oct 15 2 Oct 13 (c) 2 Sept 16 5 Oct 16 5 Oct 16 7 Oct 14 (d) 4 Sept 17 5 Oct 17 5 Oct 17 0.00 0.00 0.00 0.00 Fair value per performance right at grant date ($) (Note 27) Vested and exercised 30 June 2015 Vested and exercised 30 June 2014 2.41 4.73 7.61 6.10 100% - - - - - - - (a) There are two performance hurdles each representing 50% of the total number of performance rights granted - Base EPS (group underlying EPS for the year ending 30 June 2014 is at least 33.50 cents per share) and Stretch EPS (group underlying EPS for the year ending 30 June 2014 is at least 36.50 cents per share). (b) There are two performance hurdles each representing 50% of the total number of performance shares granted – Base EPS (group underlying EPS for the year ending 30 June 2015 is at least 43.22 cents per share) and Stretch EPS (group underlying EPS is at least 47.33 cents per share). (c) There are two performance hurdles each representing 50% of the total number of performance shares granted – Base EPS (group underlying EPS for the year ending 30 June 2016, is at least 46.00 cents per share) and stretch EPS (group underlying EPS is at least 49.20 cents per share). (d) There are two performance hurdles each representing 50% of the total number of performance shares granted – Base EPS (group underlying EPS for the year ending 30 June 2017, is at least 46.50 cents per share) and stretch EPS (group underlying EPS is at least 51.50 cents per share). * In addition to the EPS performance hurdle, the participant must be employed by the company on the vesting date. 27 Breville Group Limited annual report 2015 Directors’ report continued Remuneration report (audited) continued Performance rights continued Table 7: Performance rights and options holdings of key management personnel 30 June 2015 Other key management personnel S. Brady M. Cohen C. Dais J. Lord (c) 30 June 2014 Other key management personnel S. Brady M. Cohen C. Dais J. Lord Balance 30 June 2014 Granted as remuneration (a) Vested and exercised Other (b) Balance 30 June 2015 67,000 78,000 67,000 180,000 392,000 15,000 18,000 19,000 - (35,000) (39,000) (31,000) (47,000) 52,000 (152,000) - - - (133,000) (133,000) 47,000 57,000 55,000 - 159,000 Balance 30 June 2013 Granted as remuneration (a) Vested and exercised Other (b) Balance 30 June 2014 94,000 135,500 53,000 279,234 561,734 12,000 15,000 14,000 43,000 84,000 (39,000) (72,500) - (105,000) (216,500) - - - (37,234) (37,234) 67,000 78,000 67,000 180,000 392,000 (a) All performance awards granted during the year are subject to EPS performance hurdles and remaining in employment until date of vesting. (b) Includes forfeitures and lapses. (c) J. Lord ceased employment on 21 August 2014 and ceased to be key management personnel on that date. Other transactions and balances with key management personnel and their related parties services Mr Klein is a principal of SBA Law and his director’s fees are paid to SBA Law. These fees are subject to GST. Fees totalling $391,286 (inclusive of GST), including Mr Klein’s director’s fees, were invoiced by SBA Law during the current financial year (2014: $287,482). These fees were all on arm’s length terms. Total amounts recognised at the reporting date in relation to other transactions and balances with key management personnel: Liabilities Current liabilities Total liabilities Expenses Employee expenses (director’s fees) Professional fees Total expenses (GST exclusive) 28 30 June 2015 $’000 30 June2014 $’000 21 21 113 243 356 40 40 113 148 261 Breville Group Limited annual report 2015 Directors’ meetings Indemnification of auditors The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director was as follows: Full board Audit & risk (A&RC) People and performance Number of meetings S. Fisher (a) T. Antonie (b) S. Herman (d) D. Howell S. Klein (a),(e) L. Myers S. Weiss Notes 13 13(c) 13 13 13 13 13 12 4 n/a n/a n/a 4 n/a 4(c) 4 3 3 n/a 3 3 n/a 3 3(c) (a) S. Fisher and S. Klein resigned from the audit and risk committee effective 20 August 2014. (b) T. Antonie is not a member of either the audit and risk committee or the people and performance committee. (c) Designates the current chairman of the board or committee. (d) S. Herman is not a member of the audit and risk committee but is a member of the people and performance committee. (e) S. Klein is not a member of the people and performance committee. Committee membership To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, as part of the terms of its audit engagement agreement, against all claims by third parties arising from the audit, except to the extent that any losses are due to Ernst & Young’s negligent, wrongful or wilful acts or omissions. No payments have been made to indemnify Ernst & Young during or since the financial year. Likely developments and expected results Disclosure of information as to likely developments in the operations of the consolidated entity and expected results of those operations would be prejudicial to the interests of the consolidated entity. Accordingly, such information has not been included in this report. Environmental regulations and performance The consolidated entity is not involved in any activities that have a marked influence on the environment within its area of operation. Corporate governance In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Breville Group Limited support the principles of good corporate governance. The company’s corporate governance statement is on page 31. As at the date of this report, the company had an audit and risk committee and a people and performance committee. The details of the functions and memberships of the committees are presented in the corporate governance statement. Performance rights Unissued shares Indemnification of directors and officers The directors and officers of the company are indemnified by the company against losses or liabilities which they may sustain or incur as an officer of the company in the proper performance of their duties. During the financial year, the company paid premiums in respect of contracts to insure the directors and officers of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of liability and the amount of the premiums. As at the date of this report and the reporting date, there were 558,000 potential unissued shares under performance rights (2014: 920,000). Refer to note 27 of the financial report for further details of the performance rights outstanding. Performance right holders do not have any right, by virtue of the performance right, to participate in any share issue of the company. Lapse of unvested performance rights During the year, 180,000 unvested performance rights lapsed following the cessation of employment of employees or executives. (2014: 37,234 unvested performance rights lapsed, as performance hurdles were not met). 29 Breville Group Limited annual report 2015 Directors’ report continued Auditor’s declaration of independence Attached is a copy of the auditor’s declaration provided under section 307C of the Corporations Act 2001 in relation to the audit for the year ended 30 June 2015. This auditor’s declaration forms part of this directors’ report. Non-audit services During the financial year ended 30 June 2015 the company’s primary auditor, Ernst & Young Australia did not provide any non-audit services. Significant events after year end No matters or circumstances have arisen since the end of the year which significantly affected or may affect the operations of the consolidated entity. Signed in accordance with a resolution of directors. Steven Fisher Non-executive chairman Sydney 20 August 2015 30 Breville Group Limited annual report 2015 Corporate governance statement The board of directors is responsible for the corporate governance practices of the company and is committed to adhering to the Australian Securities Exchange (‘ASX’) Corporate Governance Council (‘council’) ‘Corporate Governance Principles and Recommendations (3rd Edition)’. The ASX principles that have been adopted are outlined below. The company’s corporate governance practices throughout the year ended 30 June 2015 were compliant with the council’s principles and recommendations, except for those differences disclosed and explained in this statement. The following documents are available on the corporate, corporate governance section of the company’s website brevillegroup.com • selection and appointment of directors • criteria for assessing independence • code of conduct • continuous disclosure policy • share trading policy • shareholder communications policy • board charter • audit and risk committee charter • people and performance committee charter • diversity policy • workplace gender equality agency report • ethical sourcing policy Board skills matrix The skills, diversity and term in office of the current directors as at the date of this annual report are as follows: Director Appointed Term in office Qualifications Non-executive Independent Last elected Steven Fisher (chairman) Tim Antonie Sally Herman Dean Howell Steven Klein Lawrence Myers Samuel Weiss 2004 2013 2013 2008 2003 2013 2008 11 years B.ACC, CA (SA) 1 year 2 years 7 years BEcon BA, GAICD FCA, CTA 12 years LLB, B.Com 1 year B.Acct, CA, CTA 7 years AB, Harvard University; MS, Columbia Business School; FAICD Yes Yes Yes Yes Yes Yes Yes No No No Yes No Yes Yes 2013 2014 2013 2014 2014 2013 2014 The board has a wide range of skills which are necessary for the effective management of the business including in the following areas: Principle 1: Lay solid foundations for management and oversight • Corporate strategy and executive leadership Role of the board and management • Banking • Legal and risk management • Compliance and governance • Accounting, tax and financial reporting, including financial analysis • Mergers, acquisitions and capital raisings • Human resources and executive remuneration • • Investor relations International business • Marketing The board guides and monitors the business and affairs of the company on behalf of the shareholders, by whom it is elected and to whom it is accountable. The board has adopted formal guidelines for board operation and membership. These guidelines outline the roles and responsibilities of the board and its members and establish the relationship between the board and management. The board is responsible for approving the strategic direction of the company, establishing goals for management, monitoring the achievement of those goals and establishing a sound system of risk oversight and management. The board will regularly review its performance and the performance of its committees. The respective roles and responsibilities of the board and management are outlined further in the board charter. 31 Breville Group Limited annual report 2015 Corporate governance statement continued Principle 1: Lay solid foundations for management and oversight continued The proportion of women employees in the company and the current targets are as follows: Appointment of board members A detailed process is undertaken for the appointment of new board members, including appropriate checks as to background, history and any potential conflicts of interest. As at the date of this annual report, all directors have a written agreement outlining their roles and responsibilities. New directors receive a comprehensive briefing package prior to their appointment. Company secretary The company secretary is directly accountable to the board on all matters relating to the proper functioning of the board. Diversity policy The company is an equal opportunity employer and values differences such as gender, age, culture, disability, ethnicity and lifestyle choices. The company’s diversity policy aims to ensure a corporate culture that supports workplace diversity whilst providing access to equal opportunities at work based on merit. This policy is available on the company’s website at the corporate, corporate governance section and is subject to periodic review by, and may be changed by resolution of the board. The policy has no contractual effect. Diversity policy objectives The objectives set by the board in accordance with the diversity policy and progress towards achieving them are: Women on the board Women in senior executive roles Women in senior roles Women in company 30 June 2014 30 June 2015 Target by June 2018 14% 14% 25% 17% 23% 25% 26% 27% 30% 55% 50% 50% Senior executives are direct reports to the CEO or a business unit manager. Senior roles include senior executives and direct reports to senior executives or other employees with a strategically important role. To assist the board in fulfilling its responsibilities in relation to diversity, the implementation of these objectives is overseen by the people and performance committee. The people and performance committee shall: • • report to the board at least annually, on the company’s progress in achieving the objectives set for achieving gender diversity; regularly oversee a review of the relative proportion of women across the company and their relative positions; and • consider other initiatives to promote diversity in the workplace. • Representation of women trained in recruitment Workplace equality and selection panels: Ongoing progress was made during the year with further women being trained; • Issuing the company equal opportunity statement to recruiting agencies: This continued in Australia during the year; • Explicit requirement of recruiting agencies to provide a gender balance of suitable, qualified, shortlisted candidates for interview: This initiative continued to progress during the year; • Promoting a safe workplace free from harassment or discrimination of any kind: Training and education programs which included topics on harassment, bullying, victimisation and discrimination were conducted in Australia and the USA during the year; • Enhancing the gender balance in career development in senior and managerial roles; and • Continue flexible working arrangements where operationally appropriate. In accordance with the requirements of the Workplace Gender Equality Act 2012 (Act), Breville Pty Limited lodged its annual compliance report with the Workplace Gender Equality Agency. This report is available on the company’s website at the corporate, corporate governance section. Evaluating the performance of the board The chairman is responsible for evaluating the board’s performance by way of an annual internal assessment. Each director provides written feedback in relation to the performance of the board and directors against a set of agreed criteria. This feedback is reported by the chairman to the board following the assessment. This performance assessment was completed by the chairman during the year. 32 Breville Group Limited annual report 2015 Principle 1: Lay solid foundations for management and oversight continued Evaluating the performance of key executives The performance of key executives is reviewed against specific and measurable qualitative and quantitative performance criteria and includes: • financial measures of the company’s performance; • development and achievement of strategic objectives; • development of management and staff; • compliance with legislative and company policy requirements; and • achievement of key performance indicators. Performance evaluation All key executives were subject to a performance review as described above during the reporting period. Principle 2: Structure the board to add value Board composition The company’s constitution states that there must be a minimum of three directors and contains detailed provisions concerning the tenure of directors. The board currently comprises seven non-executive directors. The directors’ report, on pages 12 and 13, outlines the relevant skills, experience and expertise held by each director in office at the date of this report. In accordance with good corporate governance, where the chairman of the board is not an independent director, the board considers it to be useful and appropriate to designate an independent director to serve in a lead capacity to co-ordinate the activities of the other independent directors, including acting as principal liaison between the independent directors and the chairman and representing the board as the lead independent director when the chairman is unable to do so because of his non independent status. As Mr Fisher is not an independent director, the board has appointed Mr Myers as its lead independent director. Director independence In considering whether a director is independent, the board refers to the company’s “Criteria for assessing independence of directors” at the corporate, corporate governance section of the company’s website, which is consistent with the council’s recommendations. Independent directors of the company are those that are not involved in the day-to-day management of the company and are free from any real or reasonably perceived business or other relationship that could materially interfere with the exercise of their unfettered and independent judgement. In accordance with the definition of independence above, and the materiality thresholds outlined in the company’s policy ‘Criteria for assessing independence of directors’, it is the board’s view that Mr Dean Howell, Mr Lawrence Myers and Mr Samuel Weiss are independent directors. The following directors are not independent directors: • Mr Steven Fisher (non-executive chairman) is employed by an entity associated with a substantial shareholder of the company; • Mr Tim Antonie (non-executive director) is a non- executive director of Premier Investments Ltd, a substantial shareholder of the company; • Ms Sally Herman (non-executive director) is a non- executive director of Premier Investments Ltd, a substantial shareholder of the company; and • Mr Steven Klein (non-executive director) is a principal of SBA Law which is a professional adviser to the company. Regardless of whether directors are defined as independent, all directors are expected to bring independent views and judgement to board deliberations. Material personal interest requirement The Corporations Act provides that unless agreed by the board, where any director has a material personal interest in a matter, the director will not be permitted to be present during discussions, or to vote on the matter. Access to independent advice There are procedures in place to enable directors, in connection with their duties and responsibilities as directors, to seek independent professional advice at the expense of the company. Prior written approval of the chairman is required, which will not be unreasonably withheld. Board committees The board has established the audit and risk committee and people and performance committee to assist in the execution of its duties and to allow detailed consideration of complex issues. The composition of these committees is shown on page 29. Nomination committee During the year ended 30 June 2015, the company did not have a separately established nomination committee. All duties and responsibilities typically delegated to such a committee are the responsibility of the full board. Although the council’s recommendation 2.1 recommends that a nomination committee can be a more efficient mechanism for the detailed examination of selection and appointment practices, particularly in larger companies, the board does not believe at this time that any marked efficiencies or enhancements would be achieved by the creation of a separate nomination committee. 33 Breville Group Limited annual report 2015 Corporate governance statement continued Principle 2: Structure the board to add value continued Nomination committee continued The board brings independent judgement to decisions regarding the composition of the board. The process of recruiting a new director includes the evaluation of relevant skills, knowledge, experience, independence and diversity. The board endeavours to ensure appropriate succession planning, both at a board and senior executive level. • reviews corporate governance practices; • monitors and assesses the systems for internal compliance and control, legal compliance and risk management; and • reviewed and carried out an annual assessment of the company’s risk management framework. Composition of committee The members of the A&RC as at the date of this report are: • Mr Lawrence Myers (chairman) Principle 3: Promote ethical and responsible decision-making Code of conduct The board has formally adopted a code of conduct (“code”) for all employees (including directors). The code aims at maintaining the highest ethical standards, corporate behaviour and accountability across the group. These obligations are also consistent with the duties imposed on directors by the Corporations Act. In addition, directors are obliged to be independent in judgement and to ensure that all reasonable steps are taken to be satisfied as to the soundness of board decisions. • Mr Dean Howell • Mr Samuel Weiss Effective 20 August 2014, Mr Steven Fisher and Mr Steven Klein resigned from the A&RC. The directors’ report, on page 29, outlines the number of A&RC meetings held during the year and the names of the attendees at those meetings. It also outlines the qualifications of A&RC members on pages 12 and 13. The group chief executive officer; company secretary; group chief financial officer; the external auditors and any other persons considered appropriate may attend meetings of the A&RC by invitation. The committee also meets from time to time with the external auditors independent of management. In accordance with the council’s recommendation 4.2, the A&RC is structured so that it: Principle 4: Safeguard integrity in financial reporting • comprises only non-executive directors; • comprises only independent directors; • is chaired by an independent chair, who is not chair of the board; and • has at least three members. In accordance with the council’s recommendation 4.2 the group chief executive officer and group chief financial officer provided the board with a written declaration confirming that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system operated effectively in all material respects. Principle 5: Make timely and balanced disclosure The company’s continuous disclosure policy complies with the council’s recommendation 5.1. This policy is available on the company’s website at the corporate, corporate governance section. Audit and risk committee The board has an audit and risk committee (A&RC), which operates under a charter approved by the board. It is the board’s responsibility to ensure that an effective internal control framework exists within the consolidated entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes, the safeguarding of assets, the maintenance of proper accounting records and the reliability of financial information. The board has delegated the responsibility for the establishment and maintenance of a framework of internal control and ethical standards of the company to the A&RC. Among its responsibilities, the A&RC: • ensures that company accounting policies and practices are in accordance with current and emerging accounting standards; • • reviews all accounts of the group to be publicly released; recommends to the board the appointment and remuneration of the external auditors; • reviews the scope of external audits; • assesses the performance and independence of the external auditors, including procedures governing partner rotation; 34 Breville Group Limited annual report 2015 Principle 6: Respect the rights of shareholders Communication policy The company is committed to providing all shareholders with comprehensive, timely and equal access to information about its activities to enable them to make informed investment decisions. The company’s shareholder communication policy is available on the company’s website at the corporate, corporate governance section. Electronic communication The company’s website displays recent ASX announcements and contains information about the company. Shareholders can elect to receive communications from the company’s share registry electronically which also gives shareholders the opportunity to manage their account details and holdings electronically. Shareholders are also able to send communications to the company and receive responses to these communications electronically. Briefings The company keeps a record of briefings held with investors and analysts, including a record of those present and the time and place of the meeting. Breville does not have an internal audit function and management is ultimately responsible to the board for the system of internal control and risk management and has reported to the board as to the effectiveness of the company’s management of its material business risks. The A&RC assists the board in monitoring this function. During the year ended 30 June 2015, the company did not have a separately established risk committee. All duties and responsibilities typically delegated to such a committee are the responsibility of the full board, with assistance from the A&RC. The Group’s exposure to economic, environmental and social sustainability risks, together with how these risks are managed, are detailed in the Operating and Financial Review section of the Directors report. Principle 8: Remunerate fairly and responsibly People and performance committee The board has a people and performance committee, comprising the following directors as at the date of this report: • Mr Samuel Weiss (chairman) • Mr Steven Fisher • Ms Sally Herman • Mr Dean Howell Principle 7: Recognise and manage risk • Mr Lawrence Myers In accordance with the council’s recommendation 8.1, the people and performance committee comprises: • an independent chairman; and • at least three members. The majority of the people and performance committee is considered to be independent as at the date of this report, although of the five committee members, Mr Steven Fisher and Ms Sally Herman are considered not to be independent for the reasons noted above. For details on the number of meetings of the people and performance committee held during the year and the attendees at those meetings, refer to the directors’ report on page 29. Remuneration disclosure For details of the company’s remuneration philosophy and framework, and the remuneration received by directors and executives in the current period, please refer to the remuneration report contained in the directors’ report on pages 17 to 28. The company is committed to the identification, monitoring and management of risks associated with its business activities including financial, operational, compliance, ethical conduct, brand and product quality risks. The company has embedded in its management and reporting systems a number of risk management controls. These include: • guidelines and limits for approval of capital expenditure; • policies and procedures for the management of financial risk and treasury operations including exposures to foreign currencies and movements in interest rates; • annual budgeting and monthly reporting systems for all businesses which enable the monitoring of progress against performance targets and the evaluation of trends; • policies and procedures which enable management of the company’s material business risks; • formal strategic planning sessions; and • presentation of periodic reports to the board and the A&RC identifying items that represent a potential risk and the manner in which these are being managed and responded to. 35 Breville Group Limited annual report 2015 Income statement for the year ended 30 June 2015 Revenue Cost of sales Gross profit Other income Employee benefits expenses Premises, lease & utilities expenses Advertising and marketing expenses Other expenses Earnings before interest, tax, depreciation & amortisation (EBITDA) Depreciation & amortisation expense Earnings before interest and tax (EBIT) Finance costs Finance income Profit before income tax Income tax expense Net profit after income tax for the year attributable to members of Breville Group Limited Earnings per share for profit attributable to the ordinary equity holders of Breville Group Limited: - basic earnings per share - diluted earnings per share The accompanying notes form an integral part of this income statement. Note 2(a) 2(b) 2(c) 2(f) 2(d) 2(g) 2(g) 3 4 4 30 June 2015 $’000 30 June 2014 $’000 527,036 (353,967) 173,069 787 (48,671) (10,195) (23,464) (14,505) 77,021 (7,421) 69,600 (2,517) 680 67,763 541,615 (365,421) 176,194 1,386 (48,023) (10,911) (25,393) (15,306) 77,947 (7,499) 70,448 (1,939) 863 69,372 (21,083) (20,607) 46,680 48,765 Cents Cents 35.88 35.88 37.48 37.48 36 Breville Group Limited annual report 2015 Statement of comprehensive income for the year ended 30 June 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Net profit after income tax for the year 46,680 48,765 Other comprehensive income/(loss) Items that may be reclassified to profit or loss Foreign currency translation differences Net change in fair value of cash flow hedges Income tax on other comprehensive income and other items taken directly to equity 20(a) 20(c) 3 Other comprehensive income/(loss) for the year, net of income tax 6,979 3,906 (1,296) 9,589 (690) (4,089) 1,794 (2,985) Total comprehensive income for the year attributable to members of Breville Group Limited 56,269 45,780 The accompanying notes form an integral part of this statement of comprehensive income. 37 Breville Group Limited annual report 2015 Statement of financial position as at 30 June 2015 Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Current tax assets Other assets Total current assets Non-current assets Plant and equipment Deferred tax assets Intangible assets – other Intangible assets – goodwill Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Current tax liabilities Provisions Other financial liabilities Total current liabilities Non-current liabilities Other payables Borrowings Provisions Total non-current liabilities Total liabilities Net assets Equity Equity attributable to equity holders of the parent Issued capital Reserves Retained earnings Total equity Note 30 June 2015 $’000 30 June 2014 $’000 6 7 8 9 3 10 11 3 12 13 15 16 3 17 18 16 17 19 20 21 54,634 87,341 108,323 2,548 556 1,406 70,885 78,442 94,274 7 1,110 2,629 254,808 247,347 12,855 6,238 56,877 30,494 106,464 361,272 88,612 76 3,457 9,877 604 102,626 4,295 21,768 1,178 27,241 129,867 231,405 140,050 (5,134) 96,489 231,405 6,860 7,164 50,333 24,558 88,915 336,262 81,793 56 5,037 9,056 1,967 97,909 - 23,780 1,527 25,307 123,216 213,046 140,050 (11,938) 84,934 213,046 The accompanying notes form an integral part of this statement of financial position. 38 Breville Group Limited annual report 2015 Statement of changes in equity for the year ended 30 June 2015 At 1 July 2013 Foreign currency translation reserve Cash flow hedges Income tax on items taken directly to equity Net loss recognised directly in equity Profit for the year Total recognised (loss)/income for the year Dividends paid Ordinary shares acquired by the Trustee of the Breville Group Performance Share Plan Trust Transferred to participants of the performance rights plan Share-based payments At 30 June 2014 Foreign currency translation reserve Cash flow hedges Income tax on items taken directly to equity Net income recognised directly in equity Profit for the year Total recognised income for the year Dividends paid Ordinary shares acquired by the Trustee of the Breville Group Performance Share Plan Trust Transferred to participants of the performance rights plan Share-based payments At 30 June 2015 Note 20(a) 20(c) 3 5(a) 19(b) 19(b) 20(b) 20(a) 20(c) 3 5(a) 19(b) 19(b) 20(b) Issued capital $’000 Reserves $’000 Retained earnings $’000 Total equity $’000 138,368 (7,165) 69,993 201,196 - - - - - - - (1,041) 2,723 - (690) (4,089) 1,794 (2,985) - - - - (690) (4,089) 1,794 (2,985) - 48,765 48,765 (2,985) 48,765 45,780 - - (2,723) 935 (33,824) (33,824) - - - (1,041) - 935 140,050 (11,938) 84,934 213,046 - - - - - - - (2,620) 2,620 - 140,050 6,979 3,906 (1,296) 9,589 - - - - 6,979 3,906 (1,296) 9,589 - 46,680 46,680 9,589 46,680 56,269 - - (2,620) (165) (5,134) (35,125) (35,125) - - - (2,620) - (165) 96,489 231,405 The accompanying notes form an integral part of this statement of changes in equity. 39 Breville Group Limited annual report 2015 Cash flow statement for the year ended 30 June 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Payment for surrender of lease Finance costs paid Income tax paid Finance income received Net cash flows from operating activities 6(b) Cash flows used in investing activities Purchase of plant and equipment Proceeds from sale of plant and equipment Purchase of intangible assets Proceeds from sale of intangible assets 557,104 (491,472) - (2,134) (18,506) 680 45,672 (8,377) 14 (14,141) - 592,001 (514,005) (5,445) (1,939) (20,323) 863 51,152 (4,268) 33 (8,360) 228 Net cash flows used in investing activities (22,504) (12,367) Cash flows used in financing activities Proceeds from borrowings Repayment of borrowings Irretrievable cash contributions paid to the Trustee of the Breville Group Performance Share Plan Trust to acquire ordinary shares Equity dividends paid Net cash flows used in financing activities 19(b) 5(a) Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Net foreign exchange difference Cash and cash equivalents at end of the year 6(a) The accompanying notes form an integral part of this cash flow statement. 21,609 (28,212) (2,620) (35,125) (44,348) (21,180) 70,885 4,928 54,633 49,577 (48,726) (1,041) (33,824) (34,014) 4,771 66,550 (436) 70,885 40 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 1. Summary of significant accounting policies Breville Group Limited is a for profit company limited by shares incorporated in Australia. Breville Group Limited shares are quoted on the Australian Securities Exchange. Subsidiaries are fully consolidated from the date on which control is obtained by the group and cease to be consolidated from the date on which control is transferred out of the group. This financial report covers the consolidated entity comprising Breville Group Limited and its subsidiaries (company or group). A description of the group’s operations and of its principal activities is included in the operating and financial review in the directors’ report on pages 13 to 16. The directors’ report is unaudited (except for the remuneration report) and does not form part of the financial report. (a) Basis of preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial report has also been prepared on a historical cost basis, except for derivative financial instruments which have been measured at fair value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the company under ASIC class order 98/100. The company is an entity to which the class order applies. (b) Statement of compliance The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. (c) Basis of consolidation The consolidated financial statements comprise the financial statements of Breville Group Limited and its subsidiaries as at 30 June each year. Subsidiaries are all those entities over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. The financial statements of subsidiaries are prepared for the same reporting period, using consistent accounting policies. In preparing the consolidated financial statements, all inter-group balances and transactions, income and expenses and profit and loss resulting from intra-group transactions have been eliminated in full. The acquisition of subsidiaries is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. (d) Significant accounting judgements, estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Impairment of goodwill & intangibles with indefinite useful lives The group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash generating units to which the goodwill and intangibles with indefinite useful lives are allocated. The assumptions used in this estimation of recoverable amount and the carrying amount of goodwill and intangibles with indefinite useful lives are discussed in note 14. Share-based payment transactions The group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using either the Black-Scholes or binomial option pricing model, using the assumptions detailed in note 27. Taxes Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. 41 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 1. Summary of significant accounting policies continued (d) Significant accounting judgements, estimates and assumptions continued Taxes continued The group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective group company’s domicile. As the group assesses the probability for litigation and subsequent cash outflow with respect to taxes as remote, no contingent liability has been recognised. Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Warranty and faulty goods Provision for warranty and faulty goods is recognised at the date of sale of the relevant products, at the group’s best estimate of the expenditure required to settle the group’s liability. Factors that could impact the estimated claim information include the success of the group’s productivity and quality initiatives, as well as parts and labour costs. The related carrying amounts are disclosed in note 17. (e) Business combinations All identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of the business combination over the net fair value of the group’s share of the identifiable net assets acquired is recognised as goodwill. Any transaction costs incurred in connection with a business combination are expensed as incurred. (f) Operating segments An operating segment is a component of the group that engages in business activities from which it may earn revenue and incur expenses, including certain inter- group revenue and expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Operating segments have been identified based on the information provided to the chief operating decision makers being the group chief executive officer and board of directors. Operating segments that meet the quantitative criteria as prescribed by AASB 8 Operating Segments are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to the users of the financial report. (g) Foreign currency translation (i) Functional and presentation currency Both the functional and presentation currency of Breville Group Limited and its Australian subsidiaries are Australian dollars (AUD or A$). Each entity in the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. (ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The functional currency of the foreign subsidiaries is either: • USD - United States dollars (Breville Holdings USA, Inc. and Breville USA, Inc.); • HKD - Hong Kong dollars (HWI International Limited); • CAD - Canadian dollars (HWI Canada, Inc., Holding HWI Canada, Inc. and Breville Canada, L.P.); • NZD - New Zealand dollars (Breville New Zealand Limited); • GBP – British pounds (BRG Appliances Limited); and • RMB – Chinese Renminbi (Breville Services (Shenzhen) Company Limited). As at the reporting date the assets and liabilities of these foreign subsidiaries are translated into the presentation currency of Breville Group Limited. They are translated at the rate of exchange ruling at the balance sheet date and the income statements are translated at the weighted average exchange rates for the year. 42 Breville Group Limited annual report 2015 Note 1. Summary of significant accounting policies continued (g) Foreign currency translation continued (ii) Transactions and balances continued Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. The exchange differences arising on the retranslation of the financial statements of foreign subsidiaries are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. (iii) Disposal of foreign operations In some instances companies in the Breville Group provide intra group funding to other group entities by way of permanent equity loans. In these instances any foreign exchange movements are recognised in equity (foreign currency translation reserve) as these equity loans are considered to form part of the net investment in the subsidiary. (h) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. For the purposes of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (i) Trade and other receivables Trade receivables, which generally have 30-60 day terms, are initially recognised at fair value and subsequently measured at amortised cost. Bad debts are written off when incurred. An allowance for uncollectible receivables is established when there is objective evidence that the group will not be able to collect all amounts due. The amount of the allowance is recognised in the income statement. (j) Inventories Inventories are valued at the lower of cost and net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. This includes the transfer from equity of gains and losses on qualifying cash flow hedges of purchases of finished goods. Costs are assigned to individual items of inventory on a weighted average cost basis. (k) Derivative financial instruments and hedging The group may use derivative financial instruments such as forward exchange contracts, foreign exchange option contracts and interest rate swaps to hedge its risks associated with foreign currency and interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to fair value. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives, except for those that qualify for hedge accounting, are taken directly to the income statement for the year. The fair value of forward exchange contracts and foreign exchange option contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles and where applicable exercise prices. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. For the purposes of hedge accounting, hedges are classified as cash flow hedges when they hedge exposure to variability in cash flows that is attributable either to a particular risk associated with a recognised asset or liability or to a forecast transaction. At the inception of a hedge relationship, the group formally designates and documents the hedge relationship to which the group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. When accounting for foreign exchange option contracts, the intrinsic value of the option is the only component subject to the hedging relationship. The time value of money is excluded from the hedge relationship. 43 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 1. Summary of significant accounting policies continued (k) Derivative financial instruments and hedging continued Hedges that meet the strict criteria for hedge accounting are accounted for as follows: Cash flow hedges Cash flow hedges are hedges of the group’s exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when hedged income or expenses are recognised or when a forecast purchase occurs. When the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to the income statement. A hedge of the foreign currency risk of a firm commitment is accounted for as a cash flow hedge. (l) Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation on plant and equipment is calculated on a straight line basis over the estimated useful life of between 2 and 10 years. The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each year end. An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset at the time of derecognition) is included in the income statement in the year in which they arise. (m) Intangible assets - goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the group’s cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represents the lowest level within the group at which the goodwill is monitored for internal management purposes. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. When the recoverable amount of a cash generating unit is less than the carrying amount, an impairment loss is recognised. When goodwill forms part of a cash generating unit and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash generating unit retained. Impairment losses recognised for goodwill are not subsequently reversed. (n) Intangible assets - other Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. 44 Breville Group Limited annual report 2015 Note 1. Summary of significant accounting policies continued (n) Intangible assets - other continued Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefits from the related project. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually or more frequently when an indication of impairment arises during the reporting period. A summary of the policies applied to the group’s intangible assets is as follows: Research and development costs Impairment test Development costs Internally generated or Acquired Internally generated Useful lives Finite Amortisation method used Amortised over the period Impairment test of expected future sales, not exceeding 3 years, from the related project on a straight line basis. Annually and more frequently when an indication of impairment exists. The amortisation method is reviewed at each year end. Computer software Internally generated or Acquired Internally generated and acquired Useful lives Finite Amortisation method used Amortised over the useful life, not exceeding 3 years, on a straight line basis. When an indication of impairment exists. The amortisation method is reviewed at each year end. Brand names Internally generated or Acquired Useful lives Acquired Indefinite Amortisation method used No amortisation Impairment test Annually and more frequently when an indication of impairment exists. Customer relationships Internally generated or Acquired Acquired Useful lives Finite Amortisation method used Amortised over the useful Impairment test life, not exceeding 10 years, on a straight line basis. Annually and more frequently when an indication of impairment exists. The amortisation method is reviewed at each year end. 45 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 1. Summary of significant accounting policies continued (n) Intangible assets - other continued Research and development costs continued Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised. (o) Impairment of non-financial assets other than goodwill Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment; or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non-financial assets other than goodwill that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. (p) Investments and other financial assets Financial assets in the scope of AASB139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables or held-to-maturity investments, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through the income statement, directly attributable transactions costs. The group determines the classification of its financial assets after initial recognition and, when allowed and appropriate, re-evaluates this designation at each year end. All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the marketplace. (i) Financial assets at fair value through the income statement Financial assets classified as held for trading are included in the category ‘financial assets at fair value through the income statement’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognised in the income statement. (ii) Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation process. (iii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. (iv) Available-for-sale investments Available-for-sale investments are those non-derivative financial assets that are designated as available-for- sale or are not classified as any of the three preceding categories. After initial recognition available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in the income statement. The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments with no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same; discounted cash flow analysis and option pricing models. 46 Breville Group Limited annual report 2015 Note 1. Summary of significant accounting policies continued (q) Trade and other payables Trade and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the group prior to the end of the year that are unpaid and arise when the group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non- monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in trade and other payables in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Contributions to the defined contribution fund are recognised as an expense as they become payable. (r) Share-based payment transactions Equity settled transactions The group provides benefits to employees (including key management personnel) in the form of share-based payments, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). Refer to note 27 for details. The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value has been determined by an external valuer using a Black Scholes or binomial model, further details of which are given in note 27. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Breville Group Limited (market conditions), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). At each subsequent reporting date until vesting, the cumulative charge to the income statement is the product of (i) the grant date fair value of the award; (ii) the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and (iii) the expired portion of the vesting period. The charge to the income statement for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding entry to equity. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. (s) Provisions Provisions are recognised when the group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. Provisions are measured as the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Onerous contracts An onerous contract is considered to exist when the group has a contract under which the unavoidable cost of meeting the contractual obligations exceed the economic benefits estimated to be received. Present obligations arising under onerous contracts are recognised as a provision to the extent that the present obligation exceeds the economic benefit estimated to be received. 47 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 1. Summary of significant accounting policies continued (s) Provisions continued Warranties and faulty goods Provisions for warranty and faulty goods are recognised at the date of sale of the relevant products, at the group’s best estimate of the expenditure required to settle the group’s liability. Employee leave benefits - long service leave The liability for long service leave is recognised as a provision and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to the expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using appropriate market yields at the reporting date to estimate the future cash outflows. Provision for make-good The provision for make good represents the value of expected future payments to be made in respect of restoration of leased premises under contracts that have clauses potentially requiring these premises to be restored to their original condition at the conclusion of the lease. The estimate may vary as a result of negotiations between the parties at the end of the lease term. (t) Borrowings All borrowings, including cash advance facilities, are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, borrowings, including cash advance facilities, are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. (u) Contributed equity (i) Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (ii) Ordinary shares held by the Breville Group Performance Share Plan Trust Ordinary shares held by the Breville Group Performance Share Plan Trust in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan are deducted from equity. No gain or loss is recognised in the income statement on the purchase of the group’s equity instruments by the Breville Group Performance Share Plan Trust. (v) Revenue recognition Revenue is recognised at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (i) Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably. Risks and rewards are considered passed to the buyer at the earlier of delivery of the goods or the transfer of legal title to the buyer. Revenue is measured at the fair value of the consideration received or receivable, net of returns, allowances, trade discounts and volume rebates. (ii) Commission income Where an agency relationship exists, the amount included in revenue represents the commission received or receivable. (iii) Finance revenue Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. (iv) Dividends Revenue is recognised when the group’s right to receive the payment is established. (w) Borrowing costs Borrowing costs are recognised as an expense when incurred. 48 Breville Group Limited annual report 2015 Note 1. Summary of significant accounting policies continued (x) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. (i) Group as a lessee Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term. Any lease incentives are recognised in the income statement as an integral part of the total lease expense. (ii) Group as a lessor In some instances the group sub leases surplus operating lease space. Rentals received under sub leases are recognised as a reduction in operating lease expense. Future rentals to be received under non- cancellable sub leases are disclosed in note 24. (y) Income tax and other taxes (i) Current tax Current tax assets and liabilities for the current and prior periods are measured at the amounts expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. (ii) Deferred tax Deferred income tax is provided on all temporary differences between the tax bases of assets/liabilities and their carrying amounts at balance sheet date for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: • when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • when the taxable temporary difference is associated with investments in subsidiaries and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised, except: • when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting nor taxable profit or loss; or • when the deductible temporary difference is associated with investments in subsidiaries in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes in relation to items recognised directly in equity are recognised in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. (iii) Tax consolidation legislation Breville Group Limited and its wholly-owned Australian resident controlled entities (excluding the Breville Group Performance Share Plan Trust) have implemented the tax consolidated legislation as of 1 July 2003. The head entity, Breville Group Limited and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone tax payer in its own right. In addition to its own current and deferred tax amounts, Breville Group Limited also recognises: (a) the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group; and (b) assets or liabilities arising for Breville Group Limited under the tax funding agreement as amounts receivable from or payable to other entities in the group. 49 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 1. Summary of significant accounting policies continued (y) Income tax and other taxes continued (aa) Comparatives (iii) Tax consolidation legislation continued Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. (iv) Other taxes Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST) or value added tax (VAT) except: • where the GST/VAT incurred on the purchase of goods and services is not recoverable from the taxation authority, in which case the GST/VAT is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (ab) New accounting standards and interpretations (i) Changes to accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year. The Group adopted all new and amended Australian Accounting Standards and Interpretations that became applicable during the current financial year. The adoption of these Standards and Interpretations did not have a significant impact on the Group’s financial results or statement of financial position. • receivables and payables, which are stated with the applicable amount of GST/VAT included. (ii) Accounting Standards and Interpretations issued but not yet effective Relevant accounting standards that have been issued but are not yet effective are outlined below: Title Summary AASB 9 Financial Instruments Hedge accounting Revenue recognition AASB 15: Revenue from Contracts with Customers Application Date Impact on Group Immaterial impact Immaterial impact Reporting periods beginning on or after 1 January 2018 Reporting periods beginning on or after 1 January 2018 The Group does not intend to adopt these standards early. The net amount of GST/VAT recoverable/payable is included in receivables/payables in the statement of financial position. Cash flows are included in the cash flow statement on a gross basis and the GST/VAT component of cash flows arising from investing and financing activities are classified as operating cash flows. Commitments and contingencies are disclosed net of recoverable/payable GST/VAT. (z) Earnings per share Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit or loss attributable to members of the parent, adjusted for: • cost of servicing equity (other than dividends); • the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and • other non-discretionary changes in revenue or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. 50 Breville Group Limited annual report 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Note 2. Revenue and expenses (a) Revenue Sale of goods Commission income Total revenue (b) Cost of sales Costs of inventories recognised as an expense (includes write- down of inventory to net realisable value (note 8)) Costs of delivering goods to customers Warranty provision Total cost of sales (c) Other income Other income Total other income (d) Depreciation and amortisation expense Depreciation – plant and equipment Amortisation – computer software Amortisation – development costs Amortisation – customer relationships Total depreciation and amortisation expense 11 12(b) 12(a) 12(d) (e) Lease payments and other expenses included in income statement Included in premises, lease & utilities expenses: • Minimum lease payments – operating lease (excludes onerous leases) Included in other income/expenses: • Net profit on disposal of plant and equipment • Impairment of intangible assets – development cost • Doubtful debts charge • Bad debts written off • Net foreign exchange loss • Other product related costs (f) Employee benefits expenses Wages & salaries, leave and other employee related benefits Defined contribution plan expense Share-based payments expense Total employee benefits expenses 526,525 511 527,036 311,543 20,413 22,011 353,967 787 787 2,414 51 4,774 182 7,421 539,922 1,693 541,615 321,616 20,646 23,159 365,421 1,386 1,386 2,119 110 5,270 - 7,499 7,244 8,587 (14) - 53 2 973 2,966 46,482 2,354 (165) 48,671 (22) 606 37 158 593 2,755 44,904 2,184 935 48,023 51 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Note 2. Revenue and expenses continued (g) Finance costs/(income) Finance costs paid or payable on borrowings and bank overdrafts: - interest - other borrowing costs Interest on other payables – non current Finance costs Finance revenue Total net finance costs (h) Research and development costs Amortisation of previously capitalised development costs included in amortisation expense 2(d) Research and development costs charged directly to the income statement Total research and development costs Note 3. Income tax The major components of income tax expense are: Income statement Current income tax Current income tax charge Adjustments in respect of current income tax of previous years Deferred income tax Relating to the origination and reversal of temporary differences Total income tax expense reported in the income statement Statement of changes in equity Deferred income tax related to items charged or credited directly to equity Foreign currency translation differences Employee equity benefits reserve Net (loss)/gain on revaluation of cash flow hedges Income tax benefit reported in equity A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the parent entity’s applicable income tax rate is as follows: Profit before income tax At the parent entity’s statutory income tax rate of 30% (2014: 30%) • adjustments in respect of current income tax of previous years • effect of different rates of tax on overseas income • expenditure not allowable for income tax purposes • other 338 1,306 873 2,517 (680) 1,837 4,774 8,961 13,735 20,337 52 694 21,083 (229) 300 1,225 1,296 67,763 20,329 52 (544) 789 457 503 1,436 - 1,939 (863) 1,076 5,270 8,260 13,530 19,145 (497) 1,959 20,607 (74) (463) (1,257) (1,794) 69,372 20,812 (497) (670) 782 180 Income tax expense reported in the income statement 21,083 20,607 52 Breville Group Limited annual report 2015 Note 3. Income tax continued Deferred income tax Deferred income tax at 30 June relates to the following: Deferred tax liabilities Brand names Development costs Intangibles Accelerated depreciation for tax purposes Foreign currency translation reserve Gross deferred income tax liabilities Deferred tax assets Losses available for offset against future taxable income Provisions and accruals Other long term creditors Employee benefits Revaluation of inventories Cash flow hedge reserve Employee equity benefits reserve Other Gross deferred income tax assets Net deferred income tax assets Deferred tax (expense)/income Current income tax Current tax asset Current tax liabilities Statement of financial position Income statement 30 June 2015 $’000 30 June 2014 $’000 30 June 2015 $’000 30 June 2014 $’000 1,875 4,587 495 24 - 6,981 93 7,211 1,595 1,988 867 (615) 218 1,862 13,219 6,238 1,875 4,106 - 8 229 6,218 166 5,347 - 2,290 885 610 1,278 2,806 13,382 7,164 - (481) (55) (16) - (87) 1,155 516 (315) (136) - (266) (1,009) - (254) - (8) - (14) (2,432) - (1,227) 207 - 118 1,651 (694) (1,959) 30 June 2015 $’000 30 June 2014 $’000 556 3,457 1,110 5,037 At 30 June 2015, there is no recognised or unrecognised deferred income tax liability (2014: $nil) for taxes that would be payable on the unremitted earnings of certain of the group’s subsidiaries, as the group has no current intention of distributing existing retained earnings in jurisdictions where liability for additional taxation exists should such amounts be remitted. 53 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 3. Income tax continued Tax consolidation Breville Group Limited and its 100% owned Australian resident subsidiaries (excluding the Breville Group Performance Share Plan Trust) have formed a tax consolidated group with effect from 1 July 2003. The head entity, Breville Group Limited, and each subsidiary in the tax consolidated group are required to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone tax payer in its own right. In addition to its own current and deferred tax amounts, Breville Group Limited also recognises: (a) the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group; and (b) assets or liabilities arising for Breville Group Limited under the tax funding agreement as amounts receivable from or payable to other entities in the group. Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement supports the calculation of current tax liabilities (and assets) and deferred tax assets/liabilities on a stand-alone basis. Calculation is performed in accordance with AASB 112 Income Tax. The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the subsidiaries’ intercompany accounts with the tax consolidated group head company, Breville Group Limited. No amounts have been recognised in the financial statements in respect of the tax sharing agreement should the head entity default on its tax payment obligations on the basis that the possibility of default is remote. 30 June 2015 $’000 30 June 2014 $’000 Note 4. Earnings per share The following reflects the income and share data used in the basic and diluted earnings per share computations: Earnings used in calculating basic and diluted earnings per share: Net profit attributable to ordinary equity holders of Breville Group Limited 46,680 48,765 Thousands Thousands Weighted average number of shares: Weighted average number of ordinary shares for basic earnings per share 130,095 130,095 Weighted average number of exercised, forfeited or expired potential ordinary shares included in diluted earnings per share - - There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these financial statements. 54 Breville Group Limited annual report 2015 Note 5. Dividends (a) Dividends on ordinary shares declared and paid during the year: Final franked dividend for the year ending 30 June 2014 of 13.0 cents per share (2014: final fully franked dividend for 2013 of 12.0 cents per share) • Paid in cash Final dividend Fully franked interim dividend for the year ending 30 June 2015 of 14.0 cents per share (2014: interim dividend for 2014 of 14.0 cents per share (fully franked)) • Paid in cash Interim dividend Total fully franked dividends declared and paid during the year of 27.0 cents per share (2014: 26.0 cents per share (fully franked)) (i) Total dividends paid in cash Total dividends (b) Dividends on ordinary shares proposed and not recognised as a liability: Final fully franked dividend for 2015 of 13.0 cents per share (2014: final fully franked dividend of 13.0 cents per share) (c) Franking credit balance The amount of franking credits in the parent available for the subsequent year are: • franking account balance as at the end of the year at 30% (2014: 30%) • franking credits that will arise from the payment of income tax payable as at the end of the year The amount of franking credits in the parent available for future reporting periods: • impact on the franking account of dividends proposed or declared before the financial report was authorised for issue but not recognised as distribution to equity holders during the period Total franking credit balance The tax rate at which dividends are franked is 30% (2014: 30%). Note 30 June 2015 $’000 30 June 2014 $’000 (i) (i) 16,912 16,912 15,611 15,611 18,213 18,213 18,213 18,213 35,125 35,125 33,824 33,824 16,912 16,912 3,051 1,254 4,305 3,989 2,567 6,556 (7,248) (2,943) (7,248) (692) 55 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 6. Cash and cash equivalents Cash at bank and on hand (a) 54,634 70,885 Note 30 June 2015 $’000 30 June 2014 $’000 Notes: (a) Cash at bank earns interest at floating rates based on daily bank deposit rates. (b) At 30 June 2015, the Group had available $25,287,000 (2014: $30,438,000) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. (c) The fair value of cash and cash equivalents is $54,633,000 (2014: $70,885,000). (a) Reconciliation of cash flow statement: For the purposes of the cash flow statement, cash and cash equivalents comprise the following at 30 June: Cash and cash equivalents Bank overdraft Total cash and cash equivalents, net 16 54,634 (1) 54,633 70,885 - 70,885 (b) Reconciliation of net profit after tax for the year to net cash flows from operating activities 46,680 48,765 7,421 (165) (14) 973 (3,246) (5,596) 1,626 555 (160) (3,913) 1,511 45,672 7,499 935 (22) 593 11,586 (10,978) 239 (206) 1,827 (9,322) 236 51,152 Net profit for the year Adjustments for: Depreciation and amortisation Share-based payments Net gain on disposal of plant and equipment Foreign exchange losses Changes in assets and liabilities: (Increase)/decrease in: Trade and other receivables Inventories Prepayments Other current assets Non-current assets (Decrease)/increase in: Current liabilities Non-current liabilities Net cash flows from operating activities (c) Disclosure of financing facilities Refer to note 16. 56 Breville Group Limited annual report 2015 Note 7. Trade and other receivables Current Trade receivables Allowance for uncollectible receivables Trade receivables, net Other receivables Total current trade and other receivables Note 30 June 2015 $’000 30 June 2014 $’000 (a) (b) (c) 86,696 (267) 86,429 912 87,341 78,085 (192) 77,893 549 78,442 Notes: (a) Trade receivables are non-interest bearing and are generally on 30-60 day terms. An allowance for uncollectible receivables is made when there is objective evidence on a case by case basis that a trade receivable is impaired. A charge of $53,000 (2014: $37,000) has been recognised by the group as an expense in ‘other expenses’ for the current year for specific debtors for which such evidence exists. The amount of the allowance/impairment loss has been measured as the difference between the carrying amount of the trade receivables and the estimated future cash flows expected to be received from the relevant debtors. (b) Movements in the allowances for uncollectible receivables are as follows: Balance at beginning of year Charge for the year Net foreign exchange Amounts utilised Balance at end of year 30 June 2015 $’000 30 June 2014 $’000 192 53 22 - 267 291 37 (5) (131) 192 At 30 June 2015 an ageing analysis of those trade receivables which are past due but not impaired are as follows: 1 – 30 days overdue 31 – 60 days overdue 61+ days overdue Total past due but not impaired 30 June 2015 $’000 30 June 2014 $’000 9,103 1,204 381 10,688 16,219 122 10 16,351 Trade receivables past due but not impaired amount to $10,688,000 (2014: $16,351,000). Of this balance, $9,040,000 (2014: $13,803,000) is covered by insurance to be used in the event of default of payment. In all instances each operating unit has been in contact with the relevant debtor and is satisfied that payment will be received in full. (c) Non-trade other receivables are non-interest bearing and have repayment terms between 30 and 60 days. Balances within other receivables do not contain impaired assets and are not past due. It is expected that these balances will be received when due. The carrying value and estimated net fair values of the trade and other receivables is assumed to approximate their fair value, being the amount at which the asset could be exchanged between willing parties. Details regarding the effective interest rate and credit risk of current receivables are disclosed in note 23. 57 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Note 8. Inventories Finished goods (at lower of cost and net realisable value) (a) Stock in transit (at cost) Total inventories Notes: (a) Total net finished goods provision movements recognised in the income statement totalled a $962,000 credit (2014: $1,019,000 expense) for the group. This net credit (2014: expense) is included in the cost of inventories line in the cost of sales. Note 9. Other financial assets Derivative assets Forward exchange contracts – cash flow hedges Total other financial assets Notes: Derivative assets represent the fair value receivable arising from forward exchange contracts disclosed in note 18. Note 10. Other assets Prepayments Total other assets Note 11. Plant and equipment At the beginning of the year At cost (gross carrying amount) Accumulated depreciation and impairment Net carrying amount At the end of the year At cost (gross carrying amount) Accumulated depreciation and impairment Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions Disposals Reclassifications Depreciation Net exchange difference Carrying amount at the end of year 58 (i) (i) 2(d) 89,849 18,474 108,323 77,652 16,622 94,274 2,548 2,548 7 7 1,406 1,406 2,629 2,629 28,763 (21,903) 6,860 32,081 (19,226) 12,855 6,860 8,082 - 107 (2,414) 220 12,855 25,896 (22,157) 3,739 28,763 (21,903) 6,860 3,739 5,174 (11) - (2,119) 77 6,860 Breville Group Limited annual report 2015 Note 12. Intangible assets – other Development costs Computer software Brand names Customer relationships Total intangible assets - other Note 30 June 2015 $’000 30 June 2014 $’000 (a) (b) (c) (d) 16,730 6,919 31,575 1,653 56,877 13,543 5,215 31,575 - 50,333 Notes: Development costs are internally generated and have been capitalised at cost. This intangible asset has been assessed as having a finite life and is amortised using the straight line method over a maximum period of 3 years. If an impairment indication arises, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying amount. Computer software is internally developed and purchased computer software that has been capitalised into other intangible assets at cost. Brand names include intangible assets acquired through previous business combinations. These intangible assets have been determined to have indefinite useful lives as the economic benefits which are obtained from them are expected to be ongoing. The cost model is utilised for their measurement. These assets were tested for impairment as at 30 June 2015 (see note 14). During the year ended 30 June 2015, the group acquired the culinary division of the USA based business PolyScience for consideration of $4,757,000 plus an earn-out which is included in other payables, resulting in goodwill of $5,936,000 and customer relationships of $1,835,000. (a) Development costs At the beginning of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount At the end of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions – internal development Impairment Reclassification Amortisation Carrying amount at the end of year Note 30 June 2015 $’000 30 June 2014 $’000 (i) (i) 2(e) 2(d) 40,034 (26,491) 13,543 48,001 (31,271) 16,730 13,543 7,966 - (5) (4,774) 16,730 36,383 (23,543) 12,840 40,034 (26,491) 13,543 12,840 6,579 (606) - (5,270) 13,543 59 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 12. Intangible assets – other continued Note 30 June 2015 $’000 30 June 2014 $’000 (b) Computer software At the beginning of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount At the end of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions Reclassification Amortisation Net exchange difference Carrying amount at the end of year (c) Brand names At the beginning of the year Net carrying amount At the end of the year Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Disposals Carrying amount at the end of year (d) Customer relationships At the beginning of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount At the end of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions Amortisation Carrying amount at the end of year 60 (i) (i) 2(d) (i) (i) (i) 2(d) (i) 6,850 (1,635) 5,215 8,679 (1,760) 6,919 5,215 1,851 (102) (51) 6 6,919 5,631 (2,611) 3,020 6,850 (1,635) 5,215 3,020 2,303 - (110) 2 5,215 31,575 31,803 31,575 31,575 31,575 - 31,575 31,803 (228) 31,575 - - - 1,835 (182) 1,653 - 1,835 (182) 1,653 - - - - - - - - - - Breville Group Limited annual report 2015 Note 13. Intangible assets – goodwill At the beginning of the year Net carrying amount At the end of the year Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions Carrying amount at the end of year Note 30 June 2015 $’000 30 June 2014 $’000 (i) (i) 24,558 24,558 30,494 24,558 24,558 5,936 30,494 24,558 - 24,558 Note 14. Impairment testing of goodwill and intangibles with indefinite lives Goodwill and brand names acquired through business combinations have been allocated to cash generating units for impairment testing as follows: • Breville Group; Breville Australia; North America Distribution; New Zealand Distribution; Rest of World Distributors In all cases the recoverable amount of the individual cash generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by the Board. The discount rate applied to cash flow projections is 12.3% (2014: 12.8%). Cash flows beyond the approved 30 June 2016 budgets are extrapolated using a 3% growth rate (2014: 3.0%), which is considered a reasonable estimate of the long-term average growth rate for the wholesale consumer products industry. Management has performed sensitivity testing by cash generating unit (CGU), based on assessing the effect of changes in revenue growth rates as well as discount rates. Management consider any reasonable likely combination of changes in these key assumptions would not result in the carrying value of the goodwill exceeding the recoverable amount. Note 30 June 2015 $’000 30 June 2014 $’000 Carrying amount of goodwill and brand names are allocated as follows: Breville Group - brand names with indefinite useful lives Breville Australia - goodwill - brand names with indefinite useful lives North America Distribution - goodwill New Zealand Distribution - goodwill Rest of World Distributors - goodwill All cash generating units - goodwill - brand names with indefinite useful lives Total carrying amount of goodwill and brand names 13 12(c) 13,800 13,800 20,277 17,775 38,052 7,700 276 2,241 62,069 30,494 31,575 62,069 20,277 17,775 38,052 1,764 276 2,241 56,133 24,558 31,575 56,133 61 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 14. Impairment testing of goodwill and intangibles with indefinite lives continued Key assumptions used in value in use calculations for the cash generating units for 30 June 2015 and 30 June 2014 The following describes each key assumption on which management has based its cash flow projections when determining the value in use of the cash generating units. • Budgeted gross margins – the basis used to determine the value assigned to the budgeted gross margins is based on past performance and expectations for the future. • Bond rates – the yield on a ten-year government bond rate at the beginning of the budgeted year is used. Note 15. Trade and other payables Current Trade payables – unsecured Employee benefits Total current trade and other payables Note 30 June 2015 $’000 30 June 2014 $’000 (a) 28 85,207 3,405 88,612 78,437 3,356 81,793 Terms and conditions relating to the above financial instruments: (a) Trade payables are non-interest bearing and are normally settled on 30 day terms. The carrying value and estimated net fair values of the trade and other payables is assumed to approximate their fair value, being the amount at which the liability could be settled in a current transaction between willing parties. Details regarding interest rate, foreign exchange and liquidity risk exposure are disclosed in note 23. Note 30 June 2015 $’000 30 June 2014 $’000 Note 16. Borrowings Current Bank overdrafts – on demand 6(a) Other loans: - Term loan Total current borrowings Non-current Other loans: - Cash advance facilities - Term loan Total non-current borrowings Terms and conditions 1 75 76 - 56 56 21,745 23 21,768 23,687 93 23,780 The group operates under one primary facility with Australia and New Zealand Banking Group Limited (ANZ) enabling all jurisdictions to borrow under one global facility. The facility agreement has a number of financial covenants all of which have been fully complied with as at the years ended 30 June 2015 and 30 June 2014. The Australia and New Zealand financing facilities are secured by a first ranking fixed and floating registered charge (or general security for Breville New Zealand Limited), over all the assets and undertakings of Thebe International Pty Limited, Breville Pty Limited, Breville Holdings Pty Limited, Breville R&D Pty Limited and Breville New Zealand Limited and are guaranteed by Breville Group Limited. The Hong Kong facility is secured via a security agreement over the assets and undertakings of HWI International Limited. Breville Group Limited has issued corporate guarantees in favour of the local bank (HSBC) which provides the day to day US, Canadian and UK transactional banking facilities. A security agreement in favour of ANZ is in existence over the assets and undertakings of Breville USA, Inc. and BRG Appliances Limited. Borrowings may include Australian dollar, US dollar, Canadian dollar, British pounds and New Zealand dollar denominated amounts. 62 Breville Group Limited annual report 2015 Note 16. Borrowings continued Fair value The carrying value and estimated net fair values of the borrowings held with banks (determined under Level 2, as described in note 18) approximates their fair value. Fair values of the Company’s interest-bearing loans are determined by using a discounted cash flow method using a discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The non-performance risk as at 30 June 2015 was assessed to be insignificant (2014: insignificant). Details regarding interest rate, foreign exchange and liquidity risk are disclosed in notes 18 and 23. Note 30 June 2015 $’000 30 June 2014 $’000 Financing facilities available At reporting date, the following financial facilities have been negotiated and were available to the group: Facilities used at the reporting date Facilities unused at the reporting date Total facilities (a) Facilities used at the reporting date: - Non-current cash advance facilities - Trade finance facilities - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Facilities used as at reporting date (b) Facilities unused at the reporting date: - Non-current cash advance facilities - Trade finance facilities - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Facilities unused as at reporting date (c) Total facilities: - Non-current cash advance facilities - Trade finance facilities - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Total facilities (a) (b) (c) 25,557 29,185 54,742 26,672 36,398 63,070 21,745 23,687 - 1 509 3,157 145 25,557 17,556 - 7,731 509 282 3,107 29,185 39,301 - 7,732 1,018 3,439 3,252 54,742 - - 503 1,947 535 26,672 15,693 1,987 12,758 502 1,752 3,706 36,398 39,380 1,987 12,758 1,005 3,699 4,241 63,070 63 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 16. Borrowings continued Seasonal facility Under the primary facility with ANZ, the group also has a seasonal facility available between October 2015 - January 2016 (2014: October 2014 – January 2015) of $8,000,000 (2014: $10,000,000) and a seasonal facility available between September 2015 and March 2016 (2014: September 2014 – March 2015) of $11,056,191 (2014: $7,951,654). These facilities are under the same terms and conditions as described above. Borrowings may include Australian dollar, US dollar, Canadian dollar, British pounds and New Zealand dollar denominated amounts. Note 30 June 2015 $’000 30 June 2014 $’000 Note 17. Provisions Current Warranty and faulty goods Employee benefits – long service Provision for make good Onerous lease contracts Total current provisions Non-current Employee benefits – long service Onerous lease contracts Total non-current provisions 28 (a) 28 (a) 7,815 2,002 - 60 9,877 1,178 - 1,178 Warranty and faulty goods $’000 Employee benefits - long service $’000 Provision for make good $’000 Onerous lease contracts $’000 7,203 1,449 220 184 9,056 1,461 66 1,527 Total $’000 (a) Movement in provisions Carrying amount at the beginning of the year: Current Non-current Total Movement in provisions during the year: Additional provisions made in the year Amounts utilised/reversed during the year Net exchange differences Net movement Carrying amount at the end of the year: Current Non-current Total 7,203 - 7,203 22,011 (22,393) 994 612 7,815 - 7,815 1,449 1,461 2,910 368 (122) 24 270 2,002 1,178 3,180 220 - 220 - (220) - (220) - - - 184 66 250 9,056 1,527 10,583 - 22,379 (213) (22,948) 23 (190) 1,041 472 60 - 60 9,877 1,178 11,055 64 Breville Group Limited annual report 2015 Note 17. Provisions continued Warranty and faulty goods A provision for warranty and faulty goods represents the present value of the best estimate of the future sacrifice of economic benefits expected that will be required for warranty and faulty goods claims on products sold. This estimate is based on the historical trends experienced on the level of repairs and returns. It is expected that these costs will be incurred in the next year. Assumptions used to calculate the provision for warranty and faulty goods were based on the level of warranty and faulty goods claims experienced during the last year. Employee benefits – long service The provision for employee benefits represents the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to the expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using appropriate market yields at the reporting date to estimate the future cash outflows. Provision for make good The provision for make good represents the value of expected future payments to be made in respect of restoration of leased premises under contracts that have clauses potentially requiring these premises to be restored to their original condition at the conclusion of the lease. The estimate may vary as a result of negotiations between the parties at the end of the lease term. Onerous lease contracts The provision for onerous lease contracts represents the present value of the future lease payments that the consolidated entity is presently obligated to make in respect of onerous lease contracts under non-cancellable operating lease agreements, less revenue expected to be earned on the lease including estimated future sub-lease revenue, where applicable. The estimate may vary as a result of changes in the utilisation of the leased premises and sub-lease arrangements where applicable. Note 30 June 2015 $’000 30 June 2014 $’000 Note 18. Other financial liabilities Derivative liabilities Forward exchange contracts – cash flow hedges (i) Total other financial liabilities Instruments used by the group 604 604 1,967 1,967 Derivative financial instruments are used by the group in the normal course of business in order to hedge exposures to fluctuations in interest and foreign exchange rates. The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data. The fair value of all derivative assets and liabilities have been determined under Level 2. 65 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 18. Other financial liabilities continued (i) Forward exchange contracts - cash flow hedges The majority of the group’s inventory purchases from suppliers are denominated in US dollars (US$). In order to manage exchange rate movements and to manage the inventory costing process, the group has entered into forward exchange contracts to purchase US$. These contracts are hedging highly probable forecasted purchases and highly probable forecasted payments and they are timed to mature when settlement of purchases or the payments are scheduled to be made. The cash flows are expected to occur between 0-12 months from 1 July 2015 (2014: 0-12 months) and the cost of sales and where applicable the sale of goods within the income statement will be affected in the next financial year as the inventory is sold or the payments are made. At balance date, the details of outstanding contracts are: 30 June 2015 30 June 2014 Average exchange rate A$’000 Average exchange rate A$’000 Buy US$ / Sell Australian $ Buy US$ - maturity 0-12 months (2014: 0-12 months) 54,549 0.7910 34,658 0.8887 Buy US$ / Sell New Zealand $ Buy US$ - maturity 0-12 months (2014: 0-5 months) 4,614 0.7278 1,731 0.8312 Buy US$ / Sell Canadian $ Buy US$ - maturity 0-11 months (2014: 0-6 months) 26,517 0.7992 10,587 0.9150 Buy US$ / Sell British £ Buy US$ - maturity 0-10 months (2014: 0-6 months) 7,814 1.4919 2,348 1.6757 Buy CHF / Sell Australian $ Buy CHF – maturity nil (2014: 0-7 months) Buy Euro / Sell Australian $ Buy Euro – maturity nil (2014: 0-8 months) - - - - 538 0.8367 1,531 0.6859 The cash flow hedges of the forecast purchases and forecast payments are considered to be highly effective and any gain or loss on the contracts is taken directly to equity. Where the contracts are hedging highly probable forecasted inventory purchases, when the inventory is received the amount recognised in equity is adjusted to the inventory account in the balance sheet. Where the contracts are hedging highly probable forecasted payments, when the payments are made the amount recognised in equity is adjusted to the income statement. During the year $2,970,000 was debited to inventory (2014: $1,099,000 credited) and $6,872,000 was debited (2014: $2,947,000 debited) to equity in respect of the group. 66 Breville Group Limited annual report 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Note 19. Issued capital Ordinary shares – authorised, issued and fully paid Ordinary shares – held by the Breville Group Performance Share Plan Trust Total contributed equity (a) (b) 140,050 140,050 - - 140,050 140,050 Ordinary shares are held by the Breville Group Performance Share Plan Trust in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan. The ordinary shares held by the Breville Group Performance Share Plan Trust, if any, are yet to be allocated to LTI participants. They will be allocated to participants once performance rights vest and they are exercised. The ordinary shares held by the Breville Group Performance Share Plan Trust, if any, have the right to receive dividends as declared and, in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. The ordinary shares held by the Breville Group Performance Share Plan Trust, if any, entitle their holder to one vote, either in person or by proxy, at a meeting of the company. Details are provided in note 25(b) and note 27. 30 June 2015 30 June 2014 Note Number of shares $’000 Number of shares $’000 (a) Movements in ordinary issued shares: Beginning and end of the year 130,095,322 140,050 130,095,322 140,050 (b) Movements in ordinary shares held by the Breville Group Performance Share Plan Trust: Beginning of the year - - (249,000) (1,682) Movements during the year Transferred to participants of the Breville Group Limited Performance Rights Plan Ordinary shares acquired by the Breville Group Performance Share Plan Trust during the year - cash End of the year (i) (ii) 362,000 2,620 370,500 2,723 (362,000) (2,620) (121,500) (1,041) - - - - (i) During the year the Trustee of the Breville Group Performance Share Plan Trust transferred 362,000 ordinary company shares (2014: 370,500) to participants in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan. (ii) During the year the Trustee of the Breville Group Performance Share Plan Trust acquired 362,000 ordinary shares (2014: 121,500) in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan. The average value placed on these acquisitions was $7.24 per share (2014: $8.57). Details are provided in note 25(b) and note 27. (c) Performance rights over ordinary shares: The company has a share-based payment performance rights scheme under which rights to subscribe for the company’s shares have been granted to certain executives and other employees (refer note 27). At the end of the year there were 558,000 (2014: 920,000) potential unissued ordinary shares in respect of performance rights that were outstanding. 67 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 20. Reserves Foreign currency translation reserve Employee equity benefits reserve Cash flow hedge reserve Total reserves (a) Movement in foreign currency translation reserve Balance at beginning of year Currency translation differences Tax effect of foreign currency translation reserve Balance at end of year (b) Movement in employee equity benefits reserve Balance at beginning of year Share-based payments expense Transferred to participants of the performance rights plan Tax effect of employee equity benefits reserve Balance at end of year (c) Movement in cash flow hedge reserve Balance at beginning of year Net gains/(losses) on cash flow hedges Tax effect of net (gains)/losses on cash flow hedges Balance at end of year Nature and purpose of reserves Foreign currency translation reserve Note 30 June 2015 $’000 30 June 2014 $’000 (a) (b) (c) (2,430) (4,033) 1,329 (5,134) (9,638) 6,979 229 (2,430) (948) (165) (2,620) (300) (4,033) (1,352) 3,906 (1,225) 1,329 (9,638) (948) (1,352) (11,938) (9,022) (690) 74 (9,638) 377 935 (2,723) 463 (948) 1,480 (4,089) 1,257 (1,352) This reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. Employee equity benefits reserve This reserve is used to record the value of equity benefits provided to employees as part of their remuneration. Refer to note 27 for further details of these plans. Cash flow hedge reserve This reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. 68 Breville Group Limited annual report 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Note 21. Retained earnings Balance at beginning of the year 84,934 69,993 Net profit for the year attributable to members of Breville Group Limited Dividends Balance at end of the year Note 22. Operating segments 5(a) 46,680 (35,125) 96,489 48,765 (33,824) 84,934 The group has identified its operating segments based on the internal reports that are reviewed by the chief operating decision makers (group chief executive officer and board of directors) in assessing performance and in determining the allocation of resources. The ANZ Distribution and North America Distribution operating segments distribute primarily small electrical appliances to retail customers in their geographical locations. The Rest of World operating segment distributes primarily small electrical appliances to distributors in international locations and also includes the UK business. Other is not an operating segment and comprises the short term incentive plan and group’s shared service facility, including the group’s design and development, global marketing and supply chain functions. The accounting policies of the operating segments are the same as those described in note 1. Transfer prices between operating segments are set at arm’s length basis in a manner similar to transactions with third parties. The segment revenue and segment result include certain transfers between operating segments. Those transfers are eliminated on consolidation. Segment profit before income tax excludes certain transfer prices and includes an allocation of head office costs. Year ended 30 June 2015 ANZ Distribution $’000 North America Distribution $’000 Rest of World $’000 Other $’000 Total $’000 Revenue Sale of goods Commission income Inter-segment revenue 245,122 202,573 78,830 - - 511 - Total segment revenue 245,122 203,084 Inter-segment elimination Total consolidated revenue Segment results EBITDA Depreciation & amortisation EBIT Finance revenue Finance costs 19,571 (1,223) 18,348 654 (291) 32,245 (388) 31,857 12 (917) - 7,870 86,700 20,427 (86) 20,341 7 (420) - - 26,725 26,725 4,778 (5,724) (946) 7 (889) (1,828) 526,525 511 34,595 561,631 (34,595) 527,036 77,021 (7,421) 69,600 680 (2,517) 67,763 Profit before income tax 18,711 30,952 19,928 Other segment information Capital expenditure 3,444 321 92 4,225 8,082 69 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 22. Operating segments continued Year ended 30 June 2014 Revenue Sale of goods Commission income Inter-segment revenue Total segment revenue Inter-segment elimination Total consolidated revenues Segment results EBITDA Depreciation & amortisation EBIT Finance revenue Finance costs ANZ Distribution $’000 North America Distribution $’000 Rest of World $’000 Other $’000 Total $’000 261,621 198,508 79,793 - - 1,693 - 261,621 200,201 - 8,187 87,980 - - 25,857 25,857 25,983 (1,115) 24,868 817 (367) 30,432 (337) 30,095 27 (912) 20,242 (42) 20,200 5 (507) 1,290 (6,005) (4,715) 14 (153) 539,922 1,693 34,044 575,659 (34,044) 541,615 77,947 (7,499) 70,448 863 (1,939) 69,372 Profit before income tax 25,318 29,210 19,698 (4,854) Other segment information Capital expenditure 3,821 242 112 999 5,174 70 Breville Group Limited annual report 2015 Note 23. Financial risk management objectives and policies The group’s principal financial instruments, other than derivatives, comprises cash advances, bank overdrafts, cash at bank and short-term deposits. The main purpose of these financial instruments is to raise finance for the group’s operations. The group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The group also enters into derivative transactions, including forward exchange contracts and at times, foreign exchange option contracts and interest rate swaps. The purpose is to manage the interest rate and currency risks arising from the group’s business operations and its sources of finance. It is the group’s policy that no speculative trading in derivatives shall be undertaken. The main risks arising from the group’s financial instruments are cash flow interest rate risk, foreign currency risk and credit risk. The board reviews and agrees policies for managing each of these risks and they are summarised below. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1 to the financial statements. The fair value of the forward exchange contracts is estimated using market observable inputs. The fair values of these financial instruments are disclosed in notes 9 and 18. Interest rate risk The group is exposed to interest rate risk on its borrowings, cash balances and derivative financial instruments. The group’s policy is to manage its interest rate risk using a mix of fixed and variable rate debt. Historically, fixed rate debt was achieved through the use of interest rate swaps in which the group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. Cash advance facilities have short term fixed interest rates with maturities ranging between 1 and 3 months, therefore within the financial year they are exposed to interest rate risk. At 30 June 2015, the group has the following exposure to interest rate risk: Cash at bank Bank overdraft – on demand Cash advance facilities Term loan Net exposure 30 June 2015 $’000 30 June 2014 $’000 54,634 (1) (21,745) (98) 32,790 70,885 - (23,687) (149) 47,049 At 30 June 2015, 0% of the group’s borrowings (2014: 0%) are at a fixed rate of interest. The remaining 100% (2014: 100%) is exposed to floating rates. On a principal net receivable of $32,790,000 (2014: $47,049,000), at an average payable rate including margin of 1.1% (2014: 2.5%) and average receivable rate of 1.2% (2014: 1.4%), an increment of 0.5% in the market rates would result in a decrease in finance costs of $382,000 (2014: $437,000), conversely a decrement of 0.5% in the market rates would result in an increase in finance costs of $304,000 (2014: $323,000). The group’s net exposure to interest rate risk calculated as at 30 June 2015 is not representative of its exposure during the financial year due to seasonality in the volume of sales such that financial performance is historically weighted in favour of the half to 31 December. This seasonality results in a higher level of receivable and inventory balances and a consequent increase in working capital requirements. All of the group’s borrowings during the year (2014 average borrowings: 100%) are at a floating rate of interest. On an average principal net receivable during the year of $26,042,000 (2014: $31,936,000), at an average payable rate including margin of 1.1% (2014: 2.5%) and average receivable rate of 1.2% (2014: 1.4%), an increment of 0.5% in the market rates would result in a decrease in finance costs of $130,000 (2014: $160,000), conversely a decrement of 0.5% in the market rates would result in a decrease in finance costs of $102,000 (2014: $126,000). 71 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 23. Financial risk management objectives and policies continued Foreign currency risk The group undertakes certain transactions denominated in foreign currently and is exposed to foreign exchange rate fluctuations. Such exposure arises primarily from purchases of inventory by a business unit in currencies other than the unit’s functional currency (purchases are predominately US dollar denominated). Other foreign exchange risk only arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. To hedge exposure arising from the purchase of inventories or payments in currencies other than the business unit’s functional currency, a combination of forward exchange contracts and foreign exchange option contracts may be utilised. At inception these hedge contracts are designated as cash flow hedges to hedge the exposure to the variability in cash flows arising as a result of movements in exchange rates below contracted exchange rates for options and for movements above or below a contracted exchange rate for forward exchange contracts. Also, as a result of the group’s investment in its overseas operations, the group’s balance sheet can be affected significantly by movements in the exchange rates of the jurisdictions it operates within. At 30 June 2015, the group has the following financial assets and liabilities exposed to foreign currency risk: Cash at bank Trade and other receivables Trade and other payables Other financial assets – derivative assets Other financial liabilities – derivative liabilities Net exposure 30 June 2015 $’000 30 June 2014 $’000 12,439 2,013 (7,065) 2,548 (604) 9,331 1,442 2,287 (17) 7 (1,967) 1,752 At 30 June 2015, the group had hedged 79% (2014: 57%) of its foreign currency purchases extending to June 2016 (2014: June 2015). The remaining 21% (2014: 43%) is exposed to foreign exchange risk. Of the total net exposure above, an increment of 10% in the foreign exchange rates would result in a decrease in other expenses of $688,000 (2014: $335,000). A decrement of 10% in the foreign exchange rates would result in an increase in other expenses of $801,000 (2014: $415,000). In respect of net derivative assets and liabilities above, being the fair value of forward exchange contracts designated as cash flow hedges, a decrease of 10% in the US dollar exchange rate against local currencies, all other variables held constant, would result in an increase in equity of $10,536,000 (2014: $5,215,000). Conversely, an increase of 10% in the US dollar exchange rate against local currencies, all other variables held constant, would result in a decrease in equity of $8,620,000 (2014: $4,267,000). Capital management The board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. The board monitors the group’s gearing ratio and compliance with debt covenants on a regular basis. The group’s gearing ratio at 30 June 2015 and 30 June 2014 is nil due to the group being in a net cash position. The gearing ratio is defined as group net borrowings divided by capital employed (net borrowings plus shareholders’ equity). 72 Breville Group Limited annual report 2015 Note 23. Financial risk management objectives and policies continued Credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The credit risk on financial assets, excluding investments, of the group that has been recognised on the balance sheet is the carrying value amount, net of any uncollectible receivables. The group trades only with recognised, creditworthy third parties. It is the group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In certain instances, where deemed appropriate, receivable insurance is acquired to offset the group’s exposure to credit risk. In addition, receivable balances are monitored on an ongoing basis with the result that the group’s exposure to bad debts is not significant. There are no significant concentrations of credit risk across the group. With respect to credit risk arising from the other financial assets of the group, which comprise cash and cash equivalents and certain derivative instruments, the group’s exposure to credit risk arises from default of the counter party with a maximum exposure equal to the carrying amount of these instruments. These counter parties are large multi-national banks. Since the group trades only with recognised third parties, there is no requirement for collateral. Liquidity risk The group’s objective is to maintain a balance between continuity of funding and flexibility through the use of cash advances and bank overdrafts. The group’s bank facilities carry between a one and three year term in Australia, USA, Canada and the UK. As at 30 June 2015, 99.8% of the group’s borrowings will mature in greater than one year (2014: 99.6%) and 0.2% (2014: 0.4%) in less than one year. Management monitors rolling forecasts of the group’s liquidity reserve on the basis of expected cash flows. See note 16 for details of available facilities. At 30 June 2015, the remaining contractual maturities of the group’s financial liabilities are: Less than 1 year Between 1 and 5 years 30 June 2015 $’000 30 June 2014 $’000 89,338 26,063 115,401 83,846 23,780 107,626 The table below analyses the group’s remaining contractual maturities by the type of financial liability. The amounts disclosed are the contractual undiscounted cash flows. 30 June 2015 Less than 1 year $’000 Between 1 and 5 years $’000 Trade and other payables 88,612 Borrowings Other financial liabilities 122 604 4,295 21,768 - Total $’000 92,907 21,890 604 89,338 26,063 115,401 30 June 2014 Less than 1 year $’000 Between 1 and 5 years $’000 81,793 - 86 23,780 Total $’000 81,793 23,866 1,967 1,967 83,846 - 23,780 107,626 Contractual maturities disclosed in the tables above include contracted interest payments. Total borrowings disclosed in note 16 exclude such contracted interest payments. 73 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 24. Commitments and contingencies Operating lease commitments – group as lessee Operating leases are entered into mainly as a means of acquiring access to commercial property and storage facilities and the use of minor items of plant and equipment. Rental payments are generally fixed; however certain property leases contain a rental inflation escalation clause, an agreed rental percentage increase clause, a market rental review clause or a mix of these clauses over the term of the operating lease. Future minimum rentals payable under non-cancellable operating leases as at 30 June are as follows: Within one year After one year but not later than five years More than five years Total future minimum rentals payable 30 June 2015 $’000 30 June 2014 $’000 6,958 16,949 9,596 33,503 6,431 12,567 6,853 25,851 Contingent rentals are determined with reference to known existing rental payments and known rental increases during the existing term of each operating lease. No purchase options exist in relation to operating leases and no operating lease contains restrictions on financing or other leasing activities. Certain property leases contain renewal option clauses. Operating lease commitments receivable – group as lessor The group has entered into commercial property leases for certain surplus office and warehouse space. Rental charges under operating leases with sub lease tenants are generally fixed; however certain property leases contain a rental inflation escalation clause, an agreed rental percentage increase clause, a market rental review clause or a mix of these clauses over the term of the operating lease. Future minimum rentals receivable under non-cancellable operating leases as at 30 June are as follows: Within one year Total future minimum rentals receivable Contingencies 30 June 2015 $’000 30 June 2014 $’000 - - 300 300 Indemnity agreements have been entered into with certain officers of the group in respect of expenses and liabilities they incur in their official capacities. No monetary limit applies to these agreements and no known obligations have emerged as a result of these agreements. Cross guarantees given by Breville Group Limited, Thebe International Pty Limited, Breville Holdings Pty Limited and Breville Pty Limited are described in note 25(a). Breville Group Limited has issued corporate guarantees in favour of the local bank (HSBC) which provides the day to day US, Canadian and UK transactional banking facilities. 74 Breville Group Limited annual report 2015 Note 25. Related party disclosure The consolidated financial statements include the financial statements of Breville Group Limited and the subsidiaries listed in the following table. Legal entity Country of incorporation Note 30 June 2015 % 30 June 2014 % Equity interest (a) (a) (a) (b) Thebe International Pty Limited Investments not held directly by Breville Group Limited: Breville Holdings Pty Limited Breville Pty Limited Breville R&D Pty Limited Breville Group Performance Share Plan Trust Breville New Zealand Limited HWI International Limited Breville Services (Shenzhen) Company Limited Breville Holdings USA, Inc. Breville USA, Inc. Holding HWI Canada, Inc. HWI Canada, Inc. Breville Canada, L.P. BRG Appliances Limited Australia Australia Australia Australia Australia New Zealand Hong Kong China USA USA Canada Canada Canada UK 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 Breville Group Limited, a company incorporated in Australia is the ultimate parent of the group. (a) Entities subject to class order relief Pursuant to class order 98/1418, relief has been granted to Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports. As a condition of the class order, Breville Group Limited and Thebe International Pty Limited entered into a Deed of Cross Guarantee on 4 November 1999. This deed was subsequently assumed by Breville Pty Limited and Breville Holdings Pty Limited under an assumption deed dated 19 December 2001. The effect of the deed is that Breville Group Limited has guaranteed to pay any deficiency in the event of winding up of either controlled entity or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Breville Group Limited is wound up or if it does not meet its obligation under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The entities comprising the class order “closed group” are Breville Group Limited, Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited. The consolidated statement of financial position and income statement of the entities that are members of the “closed group” are detailed in notes 25(i) and 25(ii). (b) Breville Group Performance Share Plan Trust A trust fund has been established with the appointment of an independent Trustee. The trust is funded by funds irretrievably contributed to it by the company and the Trustee uses these funds to either subscribe for a new issue of shares in the company or purchase shares on the ASX in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan. The trust does not form part of the Breville Group Limited Australian tax consolidation group. During the financial year ended 30 June 2015, the Trustee acquired 362,000 company shares (2014: 121,500). The average value placed on these acquisitions was $7.24 per share (2014: $8.57). 75 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Note 25. Related party disclosure continued (i) Consolidated statement of financial position for class order closed group Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Other assets Total current assets Non-current assets Other financial assets Plant and equipment Intangible assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Current tax liabilities Provisions Other financial liabilities Total current liabilities Non-current liabilities Accounts payable Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 76 30,018 51,118 50,261 1,991 571 36,181 51,439 48,255 7 614 133,959 136,496 22,414 11,691 73,286 98 107,489 241,448 51,006 1 1,254 6,636 88 58,985 4,295 1,044 5,339 64,324 177,124 140,050 (8,576) 45,650 177,124 22,084 11,008 55,637 2,030 90,759 227,255 45,886 - 2,567 6,330 1,612 56,395 - 1,350 1,350 57,745 169,510 140,050 (6,548) 36,008 169,510 25(ii) Breville Group Limited annual report 2015 Note 30 June 2015 $’000 30 June 2014 $’000 Note 25. Related party disclosure continued (ii) Consolidated income statement for class order closed group Profit from ordinary activities before income tax expense Income tax expense relating to ordinary activities Net profit Accumulated profits at the beginning of the year Dividends paid or reinvested Accumulated profits at the end of the year 25(i) (a) Ultimate controlling entity The ultimate controlling entity of the group in Australia is Breville Group Limited. (b) Wholly owned group transactions 62,546 (17,779) 44,767 36,008 (35,125) 45,650 65,791 (17,305) 48,486 21,346 (33,824) 36,008 During the financial period, loans were advanced and repayments received on inter-group accounts with subsidiaries in the wholly owned group. These transactions were undertaken on commercial terms and conditions. (c) Key management personnel Details relating to key management personnel, including remuneration paid, are included in the Remuneration Report and note 29. 30 June 2015 $’000 30 June 2014 $’000 Note 26. Parent entity information As at and throughout the financial year ended 30 June 2015 the parent company of the group was Breville Group Limited. Results of the parent entity Profit of the parent entity Total comprehensive income of the parent entity Financial position of the parent entity Current assets Total assets Current liabilities Total liabilities Net assets Equity attributable to the equity holders of the parent Issued capital Employee equity benefits reserve Retained earnings Total shareholders’ equity 35,460 35,460 35,485 35,485 68,243 141,476 (1,253) (1,253) 140,223 140,050 (4,033) 4,206 140,223 71,083 145,540 (2,567) (2,567) 142,973 140,050 (948) 3,871 142,973 77 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 26. Parent entity information continued Contingencies The parent company has guaranteed under the terms of an ASIC class order any deficiency of funds if Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited are wound up. No such deficiency currently exists. The parent company has issued corporate guarantees in favour of the HSBC local banks in the US, Canada and the UK which provides the day to day US, Canadian and UK transactional banking facilities. Note 27. Share-based payment plans Performance rights plan Under the performance rights plan participants are issued with performance rights over the ordinary shares of Breville Group Limited issued in accordance with the Breville Group Limited Performance Rights Plan (PRP). An offer under the PRP grants a participant the right to a certain number of fully paid ordinary shares in the company. Upon satisfaction of the performance hurdle, the right will vest and be convertible into shares. The company uses time-based and financial-based hurdles. Earnings per share (EPS) is the financial-based performance hurdle for the LTI plan. EPS represents the earnings per share from operations adjusted for non-trading items. The use of EPS ensures an alignment between shareholder return and reward for participants. In addition to the grant of performance rights awards which are subject to an EPS performance hurdle, performance rights awards also may be granted in accordance with the PRP as a retention award where the performance condition is continued employment with the company to vesting date. If the performance hurdle is not met or if the participant ceases to be employed by the company, any unvested performance rights will lapse unless otherwise determined by the board. There are no cash alternatives. The performance rights cannot be transferred and are not quoted on the ASX. Holders of performance rights are not entitled to notice of, or attend, a meeting of shareholders of the company, or receive any dividends declared by the company, until the rights have vested and then converted into shares. Once allocated, disposal of shares is subject to restrictions whereby board approval is required to sell the shares granted within three years of the shares being allocated to the participant or; if the participant ceases to be employed by the company, within twelve months of the date employment ceases; or such other date as the board determines. In the event of a takeover bid where the bidder and its associates become entitled to at least 50% of the voting shares of the company, any performance rights granted will vest where the board, in its absolute discretion, is satisfied that pro rata performance is in line with any performance condition applicable to those performance rights. Any performance rights which do not vest will immediately lapse, unless otherwise determined by the board. At 30 June 2015 there are 558,000 (2014: 920,000) performance rights outstanding under this plan. 78 Breville Group Limited annual report 2015 Note 27. Share-based payment plans continued Performance rights granted under the performance rights plan The expense recognised in the income statement in relation to share-based payments is disclosed in note 2(f). The following table illustrates the number and weighted average exercise prices (“WAEP”) of and movements in performance rights issued during the year: 30 June 2015 30 June 2014 Number of performance rights Note Number of performance rights WAEP WAEP Outstanding at the beginning of the year 920,000 0.0000 1,124,734 0.0000 Performance rights granted during the year Performance rights exercised during the year Performance rights lapsed during the year Outstanding at the end of the year (a) Exercisable at the end of the year Notes 180,000 0.0000 203,000 0.0000 (362,000) 0.0000 (370,500) 0.0000 (180,000) 558,000 - 0.0000 0.0000 - (37,234) 920,000 - 0.0000 0.0000 - (a) The outstanding balance as at 30 June 2015 is represented by: Number of performance rights Note * Grant date Vesting date Expiry date WAEP $ Fair value at grant date ($) 122,500 122,500 65,000 65,000 18,000 82,500 82,500 558,000 (i) (ii) (iii) (iv) (v) (vi) 02-Oct-12 03-Sept-15 05-Oct-15 02-Oct-12 03-Sept-15 05-Oct-15 02-Oct-13 02-Sept-16 05-Oct-16 02-Oct-13 02-Sept-16 05-Oct-16 10-Mar-14 02-Jan-17 02-Feb-17 7-Oct-14 04-Sept-17 05-Oct-17 (vii) 7-Oct-14 04-Sept-17 05-Oct-17 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 4.73 4.73 7.61 7.61 8.58 6.10 6.10 (i) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2015 is at least 43.22 cents per share. (ii) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2015 is at least 47.33 cents per share. (iii) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2016 is at least 46.00 cents per share (iv) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2016 is at least 49.20 cents per share (v) Performance condition being that the participant must be employed by the company on 31 December 2016. (vi) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2017 is at least 46.50 cents per share. (vii) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2017 is at least 51.50 cents per share. * In addition to the EPS performance hurdle, the participant must be employed by the company on the vesting date. 79 Breville Group Limited annual report 2015 Notes to the financial statements for the year ended 30 June 2015 Note 27. Share-based payment plans continued The average remaining contractual life for the performance rights outstanding at 30 June 2015 is between 1 and 3 years (2014: 1 and 3 years). The exercise price for performance rights outstanding at the end of the year was $nil (2014: $nil). The weighted average fair value of performance rights granted during the year was $6.10 (2014: $7.70). The fair value of the equity-settled performance rights granted under the performance rights plan, is estimated as at the date of grant using a Black-Scholes option-pricing model, taking into account the terms and conditions upon which the options and performance rights were granted. The following table lists the inputs to the model used for the grants during the year ended 30 June 2015 and 30 June 2014: Grant date Vesting date Dividend yield (%) Expected volatility (%) Historical volatility (%) Risk-free interest rate (%) 30 June 2015 30 June 2014 (Black-Scholes) (Black-Scholes) (Black-Scholes) 7 Oct 14 4 Sep 17 3.50 35.00 35.00 2.65 10 Mar 14 2 Jan 17 3.50 35.00 35.00 3.00 2 Oct 13 2 Sep 16 4.00 35.00 35.00 2.86 Expected life of performance right (years) 2.9 years 2.8 years 2.9 years Performance right exercise price ($) Weighted average share price at grant date ($) Weighted average fair value at grant date ($) 0.00 7.10 6.10 0.00 9.93 8.58 0.00 8.96 7.61 The expected life of the performance rights is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of performance rights granted were incorporated into the measurement of fair value. Note 28. Employee benefits The aggregate employee benefit liability is comprised of: Trade and other payables (current) Provisions – long service (current) Provisions – long service (non-current) Total employee benefits Note 30 June 2015 $’000 30 June 2014 $’000 15 17 17 3,405 2,002 1,178 6,585 3,356 1,449 1,461 6,266 80 Breville Group Limited annual report 2015 Note 29. Key management personnel Compensation by category: key management personnel Short-term Post employment Other long-term Termination payment Share-based payment Total Note 30 June 2015 $’000 30 June 2014 $’000 (i) 2,539 166 (19) 698 (274) 3,110 2,793 143 20 - 370 3,326 (i) This includes defined contribution plans expense of $166,000 (2014: $143,000). 30 June 2015 $ 30 June 2014 $ Note 30. Auditor’s remuneration Amounts received or due and receivable from the entity and any other entity in the consolidated entity: Ernst & Young Australia – primary auditors - an audit or review of the financial report Ernst & Young Australia’s affiliates – primary auditors - an audit or review of the financial report Total auditor’s remuneration Note 31. Significant events after year end 358,000 325,000 308,600 666,600 260,500 585,500 No matters or circumstances have arisen since the end of the year which significantly affected or may affect the operations of the consolidated entity. The financial report of Breville Group Limited for the year ended 30 June 2015 was authorised for issue in accordance with a resolution of the directors on 20 August 2015. 81 Breville Group Limited annual report 2015 Directors’ declaration In accordance with a resolution of the directors of Breville Group Limited, I state that: 1. In the opinion of the directors: (a) the financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2015 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) the financial statements and notes also comply with International Financial Reporting Standards as disclosed in note 1; (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (d) as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 25(a) will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2015. On behalf of the board Steven Fisher Non-executive chairman Sydney 20 August 2015 82 Breville Group Limited annual report 2015 Independent audit report Independent auditor’s report to the members of Breville Group Limited Report on the financial report We have audited the accompanying financial report of Breville Group Limited (the “Company”), which comprises the consolidated statement of financial position as at 30 June 2015, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 83 Breville Group Limited annual report 2015 Independent audit report continued Opinion In our opinion: a. the financial report of Breville Group Limited is in accordance with the Corporations Act 2001, including: i giving a true and fair view of the consolidated entity’s financial position as at 30 June 2015 and of its performance for the year ended on that date; and ii complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the remuneration report We have audited the Remuneration Report included in pages 17 to 28 of the directors’ report for the year ended 30 June 2015. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Breville Group Limited for the year ended 30 June 2015, complies with section 300A of the Corporations Act 2001. Ernst & Young P S Barnard Partner Sydney 20 August 2015 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 84 Breville Group Limited annual report 2015 Auditor’s independence declaration Auditor’s Independence Declaration to the Directors of Breville Group Limited In relation to our audit of the financial report of Breville Group Limited for the year ended 30 June 2015, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young P S Barnard Partner 20 August 2015 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 85 Breville Group Limited annual report 2015 Shareholder information Substantial shareholders as at 7 September 2015 The following information is extracted from the company’s register of substantial shareholder notices: Name S. Lew Custodians Pty Limited Matthews International Capital Management, LLC Bennelong Funds Management Group Pty Ltd Australian Super Pty Ltd Number of ordinary shares % of issued ordinary shares 42,691,756 13,478,788 12,007,874 8,952,060 32.82% 10.36% 9.23% 6.88% Distribution of shareholdings as at 7 September 2015 Size of holding 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total shareholders Number of ordinary shareholders with less than a marketable parcel Voting rights All ordinary shares issued by Breville Group Limited carry one vote per share without restriction. Ordinary shareholders 1,594 1,739 389 297 31 4,050 172 86 Breville Group Limited annual report 2015 Twenty largest shareholders as at 7 September 2015 Name Premier Investments Limited HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Ltd Dancetown Pty Ltd BNP Paribas Noms Pty Ltd Lew Family Investments Pty Ltd Lew Family Investments Ltd Citicorp Nominees Pty Limited S L Nominees Pty Ltd AMP Life Limited Nofusa Pty Limited Josseck Pty Limited Netwealth Investments Limited Warbont Nominees Pty Ltd Australian Executor Trustees Limited HSBC Custody Nominees (Australia) Limited Quotidian No 2 Pty Ltd Total Unquoted equity securities as at 7 September 2015 Performance rights issued under the Breville Group Performance Rights Plan to take up ordinary shares * Number of unissued ordinary shares under the performance rights plan. Shares 35,761,415 22,039,671 18,480,494 8,421,723 7,595,264 5,204,683 3,000,000 2,266,360 1,891,461 1,535,718 1,461,412 711,667 666,905 650,000 622,967 561,881 405,344 376,087 346,479 300,000 % IC 27.49% 16.94% 14.21% 6.47% 5.84% 4.00% 2.31% 1.74% 1.45% 1.18% 1.12% 0.55% 0.51% 0.50% 0.48% 0.43% 0.31% 0.29% 0.27% 0.23% 112,299,531 86.32% Number on issue Number of holders 378,000* 15 87 Breville Group Limited annual report 2015 ABN Breville Group Limited ABN 90 086 933 431 Share register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Enquiries within Australia: (02) 8280 7111 Enquiries outside Australia: (+61 2) 8280 7111 Website: linkmarketservices.com.au Auditors Ernst & Young 680 George Street Sydney NSW 2000 Bankers Australia and New Zealand Banking Group Limited 20 Martin Place Sydney NSW 2000 Company information Directors Steven Fisher Non-executive chairman Tim Antonie Non-executive director Sally Herman Non-executive director Dean Howell Non-executive director Steven Klein Non-executive director Lawrence Myers Non-executive director Lead independent director Samuel Weiss Non-executive director Company secretaries Mervyn Cohen Sasha Kitto Registered office and principal place of business Ground Floor, Suite 2 170-180 Bourke Road Alexandria NSW 2015 Telephone (+61 2) 9384 8100 Company websites brevillegroup.com breville.com kambrook.com.au sageappliances.co.uk 88 Breville Group Limited annual report 2015 This report is printed on Impact: an FSC certified stock made from 100% post consumer waste recycled fibre with a carbon neutral manufacturing process. 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