Hills Limited Annual Report 30 June 2015 Hills Limited Annual report 30 June 2015 Contents Shareholders’ letter Directors’ report Auditor’s independence declaration Financial statements Independent auditor’s report to the members Shareholder information 4 10 41 43 116 118 ABN 35 007 573 417 3 Hills Limited Annual Report for the year ended 30 June 2015 Shareholders’ letter Dear Shareholder, THE FIRST 70 YEARS The 2015 financial year has been a challenging one for your Company. We have had many shareholders ask whether the strategic direction we took 3 years ago was the right one. To this we answer; absolutely! When Hills started in business 70 years ago, Australia was in a post war boom with manufacturing growing and reaching its highest levels in the following few decades. In the 1970s, Asia started to emerge as a major producer of manufactured goods and its share of global manufacturing doubled from 1970 to 2010, and continues to grow. In Australia, our manufacturing industry could not compete with Asian manufacturers. At the same time, the Australian Government started the reduction in trade protection to “goods-providing industries”. From the early 1980s, trade barriers were progressively wound back. Consequently, the decline of the manufacturing industry in Australia over the following decades continued. The loss of Australia’s motor industry, particularly visible in South Australia, is the latest casualty of this change. The Hills story since 1945 is closely linked to the Australian manufacturing ‘story’. The graph below is taken from the Reserve Bank of Australia’s September 2010 business bulletin titled “Structural Change in the Australian Economy”. Employment by Industry* % 80 70 60 50 40 30 20 10 0 l a t o t f o e r a h S Agriculture Mining Services Manufacturing 1910 1930 1950 1970 1990 2010 *Data are interpolated between 1900 and 1910 Sources: ABS; RBA; Withers, Endres and Perry (1985) Year Source: RBA September 2010 Quarterly Bulletin “Structural Change in the Australian Economy” by Connolly and Lewis. 4 It was against this backdrop and declining profitability that your Board decided, after much deliberation, that the direction of your Company needed to change. Accordingly, the decision was made to “de-risk” the Company by: • exiting low margin, capital intensive manufacturing operations exposed to competition from low cost products; • using the funds from the sale of these businesses to pay down debt and to give your Company a sound balance sheet for organic growth and growth by acquisition; and • exiting businesses and joint ventures where we had limited customers. Your Company has transformed from a conglomerate dependent upon low margin, capital intensive steel fabrication to a higher margin value-added distributor of Security, AV and Health Services. Our competitive advantage is our ability to add value for our customers by providing a broad range of products across both Australia and New Zealand with a bespoke service offering. Hills Limited Annual Report for the year ended 30 June 2015 THE STORY SO FAR Major asset divestments FY13-15 – Steel Steel (Korvest, Orrcon and Fielders), Hills Polymers, Cygnus, KCare, Opticomm, LWG, Bailey Ladders, UHS Strategic partnerships Woolworths Licensing Agreement of Hills Home product range Complementary acquisitions Hostel, LAN1, APG, OPS, HTR, Merlon, Questek, Intek Consolidation and integration of acquired business systems and processes Realising our potential GROWTH In the appendix to this letter financial data shows what Hills looked like before we began the restructure and transformation in 2012, and what it looks like today. A restructure and transformation of this magnitude over a period of 3 years is some feat. The stark contrast between the data as at the end of 2012 and 2015 is self-evident and a clear indication of why Hills embarked on this path. We have now completed the divestment and restructure programme. Your Board acknowledges, however, that the transformation and restructure programme has not been a smooth process. The rapid transformation and integration of our businesses has impacted our results and it will take us further time to return the Company to the profitability expected for a company of our size. The next phase of our journey is to stabilise, consolidate and grow. It is in this context that the results for FY2015 need to be considered. THE YEAR IN REVIEW During the 2015 financial year (FY2015) Hills: • completed the divestment and restructure programme; • progressed the transformation programme – the business moved to a common shared services platform referred to as ‘One Hills’. This included the reduction in sites from approximately 124 to 39. This process impacted our supply chain and our relationships with our customers but we are now seeing improvement in both of these; • progressed the integration of the businesses acquired over the last 3 years. These are solid businesses with good fundamentals in growth sectors with higher margins. However, the integration did not go as well as it could have and results were impacted; • entered into a strategic partnership with Woolworths which we see as very important. Prior to this transaction the Home Segment was not consistently profitable and was not likely to return to an acceptable level of profitability. We now have a steady long term income stream with limited downside risk and uncapped potential; • was impacted by the loss of a key supplier. Unfortunately, Crestron our largest supplier decided to distribute its own product in Australia – this is consistent with its global strategy. The impact of this will affect our results in FY2016, however, we have started to replace the lost revenue with profits on new contracts including Tyco which was agreed in February this year; 5 Hills Limited Annual Report for the year ended 30 June 2015Shareholders’ letter Shareholders’ letter (continued) • was impacted by external events – RESULTS DIVIDENDS Hills underlying FY2015 result was a profit of $11M, which was in line with guidance. The Company recorded a statutory net loss after tax attributable to owners of $86M for the year ended 30 June 2015. This loss reflects the Company’s results post the after-tax impact of asset impairments, including the de-recognition of deferred tax assets, costs of acquisitions and other associated gains or losses on the disposal of businesses as previously advised to the market. To explain the impairment a little further, under accounting standards, an indicator of impairment exists when the book value of the net assets of a company are higher than its market capitalisation. The drop in Hills share price over recent months has seen a discrepancy emerge between the share price and book values, and the associated impairment testing identified that an impairment was required. This is a non-cash accounting charge as at 30 June 2015 with no impact on the future operating cash flows or economics of the business. Our Health and Building Technologies businesses remain solid, operating in growth sectors and our immediate focus is on returning these businesses to their expected growth levels. As part of the impairment process Hills has de-recognised $26M of deferred tax assets. These tax benefits will continue to be available to offset future taxable earnings. We completed the year with net debt at 30 June 2015 of $32M and total facilities in place of $110M. Hills continues to have significant headroom against all of its banking covenants and has capacity for further acquisitions in Australia and New Zealand, in line with our strategic objectives. Having paid a dividend of 2.1 cents per share in the first half and in the context of a statutory loss for FY2015, there will not be a final dividend in relation to the 2015 financial year. The Company’s dividend policy remains unchanged, with a target on an annual basis of 50-75 percent of underlying profits, subject to future acquisitions and working capital requirements. OUTLOOK During the year, we received “Best Distributor of the Year” awards from two of our key suppliers, Axis and Genetec. We also won a number of major contracts, as detailed in our Annual Report. However, we recognise that we can and must do better and we are accelerating efforts to stabilise, consolidate and grow our businesses. Significant energy is being directed to the following areas: • Customer engagement; • Vendor relationships; • Training our people; • Tight capital management; • Margin improvement; and • Growth both organically and by acquisition. This renewed focus on operational performance will continue through FY2016 and the Board has reaffirmed its commitment to consolidating and growing both organically and by acquisition within Australia and New Zealand. As previously advised, we have reduced the annualised corporate costs by approximately $10M and will continue to focus on cost reduction into FY2016. reduced government spending, project deferrals across the construction, health and mining sectors and the declining Australian dollar have all impacted performance. Whilst we have taken corrective action we have been unable to recover all of the margin compression flowing from the decline in the Australian dollar during the financial year. Margin improvement is a key focus for management in FY2016; • completed the purchase of Audio Products Group (APG) which strengthened our market leading position in our Building Technologies business in Australia and New Zealand. This business has now been fully integrated with the existing Hills AV business; • acquired Hospital Telecommunications Pty Ltd (Hostel) which further strengthened our market leading position in patient entertainment and provided growth in the number of facilities serviced – now 350 hospitals and 800 aged care facilities; and • assessed a number of potential acquisitions locally and overseas – the buoyant market in the health and technology sectors meant prices for larger acquisitions moved higher during the year and the Company was unable to find suitable acquisitions within its financial capacity. Your Board is, and remains, determined to maintain financial discipline around mergers and acquisitions. During the second half of FY2015, the Company undertook a realignment of the management team (including making some management changes) in order to focus on stabilising, consolidating and growing our business in Australia and New Zealand. As Chairman, I am pleased to advise that Mr Grant Logan – the incumbent Chief Operating Officer – was appointed CEO on 27 May 2015. The management team under Grant’s leadership is well qualified, has the experience and knowledge of the Hills business and is well placed to consolidate and grow your Company. 6 Hills Limited Annual Report for the year ended 30 June 2015 As we: • roll out the back-to-basics programme to stabilise the business; • work to replace the profit from the loss of the Crestron contract; and • “right size” our cost structure in light of a significantly reduced business, it will take further time for the businesses to return to the profit levels we expect. A full update will be given at the AGM in November. On behalf of your Board and management, we thank you for your continued support. Yours sincerely Jennifer Hill-Ling Chairman Grant Logan Chief Executive Officer 7 Hills Limited Annual Report for the year ended 30 June 2015Shareholders’ letter Appendix A DE-RISKING THE BUSINESS Hills could no longer sustain the significant fixed cost base in invested plant and equipment, working capital or staff numbers tied to manufacturing businesses, nor could Hills accept higher debt or leverage levels in the context of such substantial change. The following tables show the reduced investment in assets and debt levels and other operational risk items over the restructure period: Annual fixed property costs have reduced by 66%: FIXED PROPERTY COST PER ANNUM Annual rental expense Site numbers Staff numbers have reduced by 67%: EMPLOYEES AT YEAR END Employees – Australia and NZ Funds tied up in working capital have reduced by 61%: WORKING CAPITAL Trade receivables Trade payables Inventory Total working capital FY12 $27.240M 124 FY12 2,642 FY12 $169.539M ($51.129M) $165.287M $283.697M FY15 $9.325M 39 FY15 862 FY15 $79.615M ($41.441M) $72.446M $110.620M Net debt and quasi-debt has reduced by 68%; Net debt and quasi-debt per share has reduced 66% from 53c to 18c per share: NET DEBT, BANK GUARANTEES AND LETTERS OF CREDIT Net debt, bank guarantees and letters of credit Shares on offer Net debt, bank guarantees and letters of credit per share Annual capital expenditure has reduced by 62%: CAPITAL EXPENDITURE Annual capital expenditure spend FY12 $129.280M 246.017M 0.53 FY12 $28.9M FY15 $40.958M 231.986M 0.18 FY15 $10.9M 8 Hills Limited Annual Report for the year ended 30 June 2015 Appendix A Foreign exchange exposures have reduced by 53%: FX EXPOSURE Total FX exposure in AUD Workplace injuries have reduced by 87%: WORKPLACE INJURIES Lost time injuries Medical treatment injuries Total reportable injuries PROFITABILITY FY12 $51.387M FY15 $24.045M FY12 11 56 67 FY15 6 3 9 Hills is still a profitable Company after the restructure and divestment programme, but most importantly, the earnings now come from the technology and health sectors, where the risk-profile is substantially reduced: Underlying NPAT is steady at 2.6% of sales both before and after the restructure: UNDERLYING NPAT TO GROSS REVENUE Underlying NPAT Gross revenue Underlying NPAT to gross revenue ratio calculation Underlying EBITDA has improved from 6.1% of sales to 6.8% of sales after the restructure: UNDERLYING EBITDA TO EMPLOYEES AND REVENUE Gross revenue Underlying EBITDA Employees at 30 June Underlying EBITDA to employees ratio Underlying EBITDA to gross revenue FY12 $28.822M $1,082.272M 2.7% FY12 $1,082.272M $65.802M 2,642 24.91 6.1% FY15 $11.045M $427.822M 2.6% FY15 $427.822M $28.962M 862 33.60 6.8% 9 Hills Limited Annual Report for the year ended 30 June 2015 2015 $’000 (85,947) 2014 $’000 24,798 96,992 2,479 11,045 27,277 The Directors present their report on the consolidated entity (referred to hereafter as Hills or the Company) consisting of Hills Limited and the entities it controlled at the end of, or during, the year ended 30 June 2015 (FY2015), and the independent auditor’s report thereon. DIRECTORS The following persons were Directors of the Company during the whole of the financial year and up to the date of this report: Jennifer Helen Hill-Ling Fiona Rosalyn Vivienne Bennett Philip Bullock Ian Elliot David Moray Spence Edward (Ted) Noel Pretty was a Director from the beginning of the financial year until 27 May 2015. Director Mr Peter Stancliffe retired from the Board at the 2014 AGM held on 31 October 2014 after 11 years of service. PRINCIPAL ACTIVITIES The principal activities of Hills during the course of the year are outlined within the Review of Operations. REVIEW OF OPERATIONS Overview The Company recorded a net loss after tax attributable to owners of $85.947 million for the year ended 30 June 2015. This loss reflects the Company’s results post the after tax impact of asset impairments, including the de-recognition of deferred tax assets, costs of acquisitions and other associated gains or losses on the disposal of businesses as previously advised to the market. As part of the impairment process Hills has de-recognised $26.100 million of the deferred tax assets. These tax benefits will continue to be available to be used to offset future taxable earnings. The Company’s underlying FY2015 result was a profit of $11.045 million (note that this is a non IFRS measure and is not subject to audit or review but is reconciled to the equivalent IFRS measure at note 22(c) in the Consolidated financial statements). The reconciliation between statutory and underlying profit is set out below: Net (loss) / profit after tax attributable to the owners of the Company Adjust for the after tax impact of any adjustments including asset impairments, de-recognition of deferred tax assets relating to tax losses, costs of acquisitions and other associated gains or losses on the disposal of businesses (refer note 22(c) in the Annual Report) Underlying net profit after tax for the year attributable to the owners of the Company The Year in Review The strategy of the Company continued to be based on creating value through a focus on delivering technology products and service solutions into the environments people trust most such as homes, schools, hospitals, aged care facilities, educational institutions, workplaces and governments, in growth segments such as health, security, audio visual and access control. It has been a challenging year due to reduced government spending, project deferrals across the construction, health and mining sectors as well as the declining Australian dollar. These factors impacted the Company’s ability to maintain strong margins. In December 2014, Hills announced a strategic partnership with Woolworths Limited to licence the Hills heritage brand, converting the original manufacturing and distribution business into an annuity business. Prior to this transaction the business was not consistently profitable and was not likely to return to an acceptable level of profitability. Together with the divestment of the polymer manufacturing 10 Hills Limited Annual Report for the year ended 30 June 2015Directors’ report and SmartBar businesses, these activities completed Hills exit from sectors exposed to the challenges of the manufacturing industry. In June 2015, the sale of Hills 50% interest in joint venture company Cygnus Satellite was also completed. The Cygnus business had a single customer and it made financial sense for Hills to sell its share in that business to this customer. During the year Hills announced the acquisition of Hospital Telecommunications Pty Ltd (Hostel) which further strengthened the Company’s market leading position in patient entertainment offerings, growing the number of hospital services (now 350) and aged care facilities (now 800). To strengthen our market leading position in the Building Technologies business in Australia and New Zealand, Hills completed the acquisition of Audio Products Group (APG), which has now been fully integrated with the existing Hills AV business. During the year the Board continued to evaluate opportunities to prudently use the balance sheet to acquire new service revenue streams in the communications and health sectors, both onshore and offshore. Hills assessed a number of potential acquisitions locally and overseas – the buoyant market in the health and technology sectors meant prices for larger acquisitions moved higher during the year and the Company was unable to find suitable acquisitions within its financial capacity. Your Board is, and remains, determined to maintain financial discipline around mergers and acquisitions. In May 2015, the Board reviewed and refined the Company’s strategy and committed to consolidating its existing businesses and growing, both organically and by acquisition, within Australia and New Zealand. As a result, the Board agreed with the Group Managing Director and Chief Executive Officer, Edward (Ted) Pretty, that a change in the executive leadership would be appropriate and Mr Pretty left his position on 27 May 2015. Mr Grant Logan, the incumbent Chief Operating Officer, was appointed Chief Executive Officer (CEO). Over the past two financial years, Hills divested businesses exposed to the manufacturing industry, acquired businesses to grow its Building Technologies business and capabilities in the health sector, and actively consolidated its operating structure. This has enabled Hills to operate as an integrated business and leverage its iconic and trusted brand across all markets in which the Company operates. The transformation of our existing business and the integration of its new businesses has taken longer than anticipated. While the rapid change over the last 3 years has had some impact on Hills customers and service capability, the Board stands behind its strategic decision to transform the Company from a diversified manufacturing, low margin and capital intensive business, to a provider of integrated technology products and services into trusted environments. In the last quarter of FY2015, the Company accelerated efforts to focus on driving excellence in the basic elements of a value-added distribution business. Combined with a renewed focus on operational performance, management have made significant cuts to the corporate overhead as the Company is no longer pursuing large acquisition opportunities. Now the streamlining of the processes and businesses acquired through FY2014 and FY2015 has been completed, Hills is committed to consolidating and growing both organically and by acquisition within Australia and New Zealand. Strategic Review and Update At the 2014 AGM, Hills reported that the focus for FY2015 would be the expansion into new markets and a strong push for innovation. The aspirational targets that the Company was pursuing from FY2014 through FY2016 included: • 75% of revenues from technologies and communications • 20-25% of revenues from services • Sustained earnings growth • Return on funds employed (ROFE) of 13-15% While the Company succeeded in meeting the first two of these targets, the third and fourth objectives were not met as operational challenges in the rapid transformation and integration processes, delays in project work and the declining Australian dollar all had a significant impact on earnings growth. In May 2015 the Board reviewed and refined the Company’s strategy and is committed to: • Delivering excellent customer service • Taking a ‘back to basics’ approach to supply chain management • Consolidating and integrating the existing businesses and processes to drive further improvements to customer experience • Pursuing organic growth opportunities • Growing scale by complementary acquisitions within Australia and New Zealand Work began in the fourth quarter of FY2015 and will continue during FY2016. The Board continues to work with management to fine tune our strategy and objectives and the Company intends to provide an update to Shareholders at this year’s AGM. Vision and Values Hills vision is to protect, improve and inspire people’s lives. Over the past 70 years, Hills has built a heritage of trust launched from Australian backyards, where our innovative spirit began. The Company has moved with the times, identifying new technology and service opportunities, and will continue to seek out new innovations to support the core mission: To be a value-added distributor of technology and communication solutions that inspire, protect and improve people’s daily lives in the environments they trust the most: their homes, schools, hospitals, aged care facilities, educational institutions, workplaces and governments across Australia and New Zealand. 11 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REVIEW OF OPERATIONS (continued) Hills will add value by choosing the best products and solutions available while delivering high quality service and expertise for all of our stakeholders. This will enable Hills to deliver steady returns to shareholders. HILLS stands for: • HEROIC CUSTOMER SERVICE • INNOVATION • LEADING CHANGE • LEARNING • SAFE AND CONSIDERATE WORKPLACES Debt and Funding Hills net debt as at 30 June 2015 was $32.030 million (2014: $8.499 million). Gearing, measured as net debt to net debt plus equity, stood at 19.0% at 30 June 2015 (zero at 30 June 2014). In February 2015, a new $110 million 3-year bank debt facility was entered into on substantially better terms and pricing than the previous facility. Hills continues to comfortably meet all of its banking covenants. Dividends The Board declared a fully franked interim dividend of 2.1 cents per share paid to Hills Shareholders on 30 April 2015. In the context of the statutory loss for FY2015, there will not be a final dividend in relation to the 2015 financial year. The Company’s dividend policy remains unchanged with the Board to target, on an annual basis, a dividend payout ratio of 50-75% of underlying profits attributable to owners, subject to acquisitions and working capital requirements. Given the Company’s accumulated tax losses following transformational activities, Hills does not expect to be in a tax paying position and it is unlikely that future dividends will be franked in the near term. Hills strong balance sheet means the Company has continued to suspend its Dividend Reinvestment Plan and Share Investment Plan. On-market Share Buyback During FY2015 the Company acquired 2.207 million shares for a total consideration of $3.185 million (an average price of $1.44 per share). This equates to 0.9% of the issued capital being bought back in FY2015. On 25 February 2015 the Company extended the period during which it may undertake an on-market buyback. No further buyback was undertaken after this announcement to the market as the Board, together with management, continued to consider transformational acquisition targets during this period and considered it prudent to conserve cash for this purpose. Any decision to resume the buyback will be subject to cash required for acquisitions and dividends. Change of Segments The Company has determined that its chief operating decision maker (CODM) is the Board of Hills Limited. The Board of Hills Limited ultimately makes decisions regarding the allocation of resources to the operating segments of Hills and ultimately is the Company’s “chief operating decision maker” within the meaning of AASB 8. Hills currently has four operating segments. The Company’s restructure and divestment programme has resulted in a number of changes to the relative characteristics of Hills segments. In FY2014, all of Hills remaining operating segments had characteristics that were materially so similar in nature that they could reasonably be expected to have had the same prospects. These operating segments had similar economic characteristics, provided similar products and services, had a similar production process, similar types of customers, similar methods for distribution and were subject to a materially similar regulatory environment. Hills operating segments were therefore aggregated into one reportable segment under AASB 8 called the Hills Technologies Segment. This was also borne out by the fact that after its restructure and divestment programme, Hills had actively consolidated its operating structure into what is known as a ‘One Hills’ approach where the business operates as an integrated business rather than a holding company owning disparate operations. In the current year, the materiality of the Health and Home Segments are such that these have been disaggregated from the single reportable segment and the comparative results have been adjusted accordingly. In terms of reviewing the Company as it has gone through its restructure and divestment programme, the CODM is presented with information that separates Hills results into its continuing businesses (Building Technologies Segment, Health Segment, Home Segment, Corporate Segment) and discontinuing business results in one category: the Discontinued Businesses Segment (which contains the results of businesses that have been closed or sold and regardless of whether these are classified as discontinued under IFRS or not). That information ‘through the eyes of management’ has been presented in the Segment note (note 2) in accordance with the principles of AASB 8. Description of Segments Hills currently has the following reportable segments with the following summaries describing the operations of the Company’s reportable segments: Building Technologies Segment Comprising electronic security systems, closed circuit television systems, home and commercial automation and control systems, professional audio products, consumer electronic equipment, communications related products and services, domestic and commercial antennas, master antenna television systems, communications antennas and amplifiers. 12 Hills Limited Annual Report for the year ended 30 June 2015 Health Segment Comprising the supply and installation of health technology solutions, nursecall and patient entertainment systems to hospitals, aged care facilities and similar institutions. Hills earns ongoing revenue from patients utilising its patient entertainment systems on a daily rate basis. Home Segment Comprising the results of the Hills Home Living business which has now been licensed to Woolworths Limited for a period of 7 years, extendable to 19 years. This converted the original manufacturing and distribution business that included products such as garden sprayers and clothes lines into a brand licensing annuity stream. Prior to this transaction the business was not consistently profitable and was not likely to return to an acceptable level of profitability. This partnership means that Hills Shareholders will receive consistency of returns by way of an annuity which will increase as more Hills branded product are sold through Woolworths’ retail outlets. Corporate Segment Comprising the costs of running Hills Corporate, Compliance and Shared Services functions. In prior periods, this cost pool was directly recharged or allocated to Hills other segments in whole or in part. As discontinued businesses have ceased operations, not all of the Corporate Segment could be recharged and while the gross costs have reduced substantially over the past few years, the net cost remaining in this Segment has increased. As outlined in February the Company continues to reduce corporate costs. Corporate costs have reduced by approximately $10 million on an annualised basis. Discontinued Businesses Businesses that have been closed or sold under Hills restructure and divestment programme (whether or not these were classified as discontinued under IFRS), are shown separately to enable the CODM to assess the true continuing operations of the Company. Review of Operations by Reportable Segment Building Technologies Segment The business unit is the market leader – providing an extensive range of electronic security products in Australia and New Zealand ranging from simple domestic alarms to more complicated integrated surveillance and access control systems. The Building Technologies Segment reported revenue of $348.4 million for the year (2014: $327.3 million), an increase of 6.54%. Segment EBITDA was $26.8 million for the year (2014: $36.5 million), a decrease of 26.6%. The domestic alarm market is commoditising with selling prices and margins remaining lower than trend due to increased competition and downward pressure on the Australian dollar. In response, the Company has focused on innovative marketing initiatives to drive sales, undertaken appropriate price book increases and is providing additional value added services. During the year Crestron, the Company’s largest supplier, advised that they were establishing a local Australian presence with effect from 1 July this year and accordingly the Company’s long term vendor agreement came to an end. In February 2015, Hills secured distribution rights to Tyco’s complete range of security products for businesses, retailers and homes including access control systems, electronic identification tags and video surveillance systems. Hills will replace Tyco’s previous local distributors on a phased basis. It was anticipated that Tyco and other new distribution arrangements would replace the lost revenue and margin of Crestron in FY2016, however this is unlikely to be fully realised before the end of FY2016. Hills is a distributor and as such the winning and losing of supply agreements is part of our ordinary business. The Company’s aim is to be indispensable to its suppliers. During the year Hills has been recognised by two of its suppliers – Genetec and Axis – as distributor of the year. Hills Security & IT Practice secured a number of major contracts with system integrators including Ambulance Victoria with Telstra SNP, Aurizon Limited with Multi Communication Systems, Shangri La Fiji with Global Gossip, Arrow Energy with RCS Telecommunications, and Bendigo Hospital with Siemens Australia, Busselton Hospital and the New Royal Adelaide Hospital. Hills Antenna and TV Systems provides a comprehensive range of reception and distribution equipment for wireless and both subscription and free-to-air television along with a range of products for the distribution of internet protocol signals. The renewal of the Foxtel satellite dish contract has seen the continuation of the manufacturing facility at the O’Sullivan Beach antenna factory in Adelaide. The decision was taken to move electronic and traditional antenna manufacturing offshore, but retain the TruRange and other hardware products at O’Sullivan Beach. STEP provides secure communications solutions with key deployments including an extension to the Government DFAT contract to supply further equipment. Demand for free-to-air and satellite equipment remained steady. The acquisition of APG completed at the start of FY2015. During the financial year, the Hills AV (Audio Visual) Product Practice was formed by the integration of the Hills SVL brand portfolio with the brands associated with the acquisition of APG. Combined, and following the new distribution rights, the Hills AV portfolio offers breadth and depth that are unmatched in the AV industry across Australia and New Zealand. Most of the leading brands in the AV portfolio enjoyed record sales during the year, finding application in schools, universities, commercial premises, entertainment venues, courtrooms, houses of worship and transportation hubs throughout Australia and New Zealand. 13 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REVIEW OF OPERATIONS (continued) Hills Connection Solutions in Australia and Signal Master in New Zealand provide subscription television, fixed wireless and satellite installation services. During FY2015, Hills Connection Solutions secured the renewal of the contract for the installation of NBN fixed wireless for a further 4 year period. In recognition of the services provided by Hills Connection Solutions, it was named as a finalist in the communication industry’s prestigious ACOMMS Awards. Management continues to focus on actively tendering for new business in the broadband and media sectors. During the year Hills sold its 50% owned Cygnus Satellite business, which provides bandwidth to rural and remote markets in Australia to the single customer of the business. Health Segment Hills Health Solutions is a market leader and comprises the nurse call and patient engagement businesses of Questek, Merlon, HTR and Hostel. It is focused on the supply of nurse call, patient infotainment and other related solutions including security, Wi-Fi and telephony to the health and aged care sectors. The acquisition of Hostel in February 2015 further strengthened the patient entertainment footprint, adding a further 17 hospitals and 4,000 beds to Hills footprint. The strategic licensing agreement with Ireland and US based Lincor Solutions, a global leader in patient engagement technology and clinical access platforms, assisted Hills in securing the installation of a state-of-the-art system in the new Busselton hospital in Western Australia. The Health Segment reported revenue of $33.5 million for the year (2014: $22.6 million), an increase of 48.2%. Segment EBITDA was $4.1 million for the year (2014: $5.3 million), a decrease of 22.6%. Whilst the fundamentals of its Health business are the right fit for Hills, the Board is disappointment with the trading results. The poor results have been impacted by: • a longer timeframe for the integration of these businesses leading to the delayed benefit of synergies; • delays in the sales pipeline; and • a diversion from the day to day business with the focus on the former overseas Health strategy. The four businesses are now co-located and sales leads are being shared across the teams. The Health management team is focused on improving profitability in the Segment by realising synergies through the completion of integration activities and driving the sales pipeline to compensate for project slippage and opportunities or unsuccessful tenders. Home Segment During the year, Hills entered into a strategic partnership with Woolworths Limited to licence the Hills heritage brand, converting the original manufacturing and distribution business into an annuity business. Under the terms of the agreement, Hills will receive income from the use of the brand and intellectual property by way of a minimum annual licensing fee of $2 million per annum for a minimum of 7 years. The Segment also included Hills Polymers comprising of the polymer processing plant and Smart Bar range of frontal protection systems. During the year both these low margin, capital intensive businesses were sold. Corporate Segment Hills Corporate Segment includes the costs of running Hills Corporate, Compliance and Shared Services functions. In prior periods, this cost pool was directly recharged or allocated to Hills other segments in whole or in part. As discontinued businesses have ceased operations, not all of the Corporate Segment could be recharged and while the gross costs have reduced substantially over the past few years, the net cost remaining in this Segment has increased from $4.3 million in 2014 to $8.3 million in 2015. Additionally, the Company has entered into transitional services 14 agreements (TSAs) as part of the sale of its businesses whereby Hills continues to undertake back office services for the new owners of these businesses for a service fee. As these TSAs with buyers of legacy businesses conclude, the Corporate costs that would otherwise remain within Hills ongoing operations will be reduced. Since the start of the year Hills has removed approximately $10 million of Corporate costs on an annualised basis. The continuing reduction of Corporate overhead costs is a key imperative for the management team in 2016. Discontinued Businesses Businesses that have been closed or sold under Hills restructure and divestment programme (whether or not these were classified as segment discontinued under IFRS), are shown separately to enable the CODM to assess the true continuing operations of the Company. The prior year included significant trading (revenues of $321.6 million) from discontinued businesses, including Hills previous Steel operations for which the sale completed at the end of February 2014. Subsequent Events No matter or circumstance has occurred subsequent to year end that has significantly affected, or may significantly affect, the operations of the Company, the results of those operations or the state of affairs of the Company in subsequent financial years. Hills Limited Annual Report for the year ended 30 June 2015 Dividends Dividends paid to members during the financial year were as follows: Dividend of 3.6 cents fully franked based on tax paid @ 30.0% (2014: 3.25 cents) per fully paid share paid on 26 September 2014 (FY2014: 27 September 2013) Dividend of 2.1 cents fully franked based on tax paid @ 30.0% (2014: 3.4 cents) per fully paid share paid on 30 April 2015 (FY2014: 31 March 2014). Total dividends provided for or paid 2015 $’000 8,400 4,872 13,272 2014 $’000 8,000 8,037 16,037 For more information regarding dividends please refer to note 21 of the financial statements. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Significant changes in the state of affairs of Hills during the financial year are set out in the Review of Operations section of the Directors’ report. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS For likely developments please refer to the Review of Operations section of the Directors’ report. 15 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report INFORMATION ON DIRECTORS Jennifer Helen Hill-Ling LLB (Adel) FAICD Fiona Rosalyn Vivienne Bennett BA (Hons) FCA FAICD FAIM Philip Bullock BA, MBA, GAICD, Dip. Ed. Chairman, Non-Independent Non-Executive Director. Age 53. Independent Non-Executive Director. Age 59. Independent Non-Executive Director. Age 62. Experience and expertise Experience and expertise Experience and expertise Appointed Director in August 1985. Appointed Deputy Chairman in June 2004. Appointed Chairman on 28 October 2005. Jennifer Hill-Ling has extensive experience in corporate and commercial law, specialising in corporate and business structuring, mergers and acquisitions, joint ventures and related commercial transactions. She practiced law for some 25 years and was a senior partner in two Sydney law firms in that time. She was formerly a director of Tower Trust Limited and MS Limited. She is a fellow of the Australian Institute of Company Directors. Other current listed company directorships None. Former listed company directorships in last 3 years None. Special responsibilities Chairman of the Board, Member of the Remuneration Committee, Member of the Nomination Committee. Interests in shares and options at the date of this report 18,040,423 ordinary shares in Hills Limited (including 1,188,918 shares owned by Hills Associates Limited and Poplar Pty Ltd (jointly held) and 16,668,441 shares owned by Hills Associates Limited of which JH Hill-Ling is a Director). Nil options over ordinary shares in Hills Limited. Appointed Non-Executive Director on 31 May 2010. Appointed Non-Executive Director on 23 June 2014. Fiona Bennett is a Chartered Accountant with over 30 years’ experience in business and financial management, corporate governance, risk management and audit. She has previously held senior executive positions at BHP Billiton Limited and Coles Group Limited and has been a Chief Financial Officer at several organisations in the health sector. She is currently Chairman of the Victorian Legal Services Board. Ms Bennett is a graduate of The Executive Program at the University of Virginia’s Darden Graduate School and the AICD Company Directors’ course. Philip Bullock was formerly Vice President of the Systems and Technology Group, IBM Asia Pacific, based in Shanghai, China. Prior to that he was CEO and Managing Director of IBM Australia and New Zealand. Mr Bullock is a Non-Executive Director of Perpetual Limited, CSG Limited, and formerly of Healthscope Limited. He has also provided advice to the Federal Government, through a number of organisations, most notably as Chair of Skills Australia. Other current listed company directorships Other current listed company directorships Non-Executive Director of Perpetual Limited (since June 2010). Director of Beach Energy Limited (since November 2012). Non-Executive Director of CSG Limited (since August 2009). Former listed company directorships in last 3 years Former listed company directorships in last 3 years Director of Boom Logistics Limited (retired in June 2015). None. Special responsibilities Chairman of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report 4,000 ordinary shares in Hills Limited. Nil options over ordinary shares in Hills Limited. Special responsibilities Member of the Audit, Risk and Compliance Committee, Member of the Nomination Committee. Interests in shares and options at the date of this report 10,000 ordinary shares in Hills Limited. Nil options over ordinary shares in Hills Limited. 16 Hills Limited Annual Report for the year ended 30 June 2015 Directors’ report Ian Elliot FAICD David Moray Spence B Com Edward (Ted) Noel Pretty BA LLB (Hons) Independent Non-Executive Director. Age 61. Independent Non-Executive Director. Age 63. Former Group Managing Director & Chief Executive Officer. Age 58. Experience and expertise Experience and expertise Experience and expertise Appointed Group Managing Director and Chief Executive Officer on 3 September 2012. Ceased to be Group Managing Director and Chief Executive Officer on 27 May 2015. Other current listed company directorships None. Former listed company directorships in last 3 years Non-Executive Director of Next DC Limited (retired March 2015) Special responsibilities None. Appointed Non-Executive Director in August 2003. Appointed Non-Executive Director on 1 September 2010. Ian Elliot has spent 39 years in marketing. His speciality is brand building, with extensive involvement in a number of iconic brands. Mr Elliot is a fellow of the Australian Institute of Company Directors and graduate of the Harvard Business School Advanced Management Program. In addition to his listed company directorships he was formerly Chairman of Zenith Media Pty Ltd, Cordiant Communications Group, Allied Brands Limited, Promentum Limited and Artist & Entertainment Group Limited, and Chairman and Chief Executive Officer of George Patterson Advertising, and Director of the National Australia Day Council. He is a current Director of the Australian Rugby League Commission. Other current listed company directorships Director of Salmat Limited (since 2005). Director of McMillan Shakespeare Limited (since May 2014). David Spence has experience in a number of industries and more recently in the technology and communications industry. He has over 25 years of senior management experience, including as Chief Financial Officer (CFO) of Freedom Furniture and OPSM, where he also assumed responsibility for manufacturing and logistics. He has been directly involved in many internet and communications companies including the building of Australia’s first and largest dial up ISP, OzEmail. Mr Spence was the Chief Executive Officer of Unwired Australia until February 2010. He has been involved in a number of listed and non-listed boards including WebCentral, uuNet, Access1, Emitch, Commander Communications, Chaosmusic, ubowireless, Vividwireless and is a past chairman of the Internet Industry Association. He is currently a Non-Executive Director of Vocus Communications Limited, SAI Global Limited and of PayPal Australia Pty Ltd. Other current listed company directorships Former listed company directorships in last 3 years Chairman of Vocus Communications Limited (since June 2010). None. Special responsibilities Director of SAI Global Limited (since October 2013). Chairman of the Nomination Committee, Member of the Remuneration Committee. Former listed company directorships in last 3 years Interests in shares and options at the date of this report Special responsibilities None. 51,735 ordinary shares in Hills Limited. Nil options over ordinary shares in Hills Limited. Chairman of the Remuneration Committee, Member of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report 250,000 ordinary shares in Hills Limited. Nil options over ordinary shares in Hills Limited. 17 Hills Limited Annual Report for the year ended 30 June 2015 Directors’ report INFORMATION ON DIRECTORS (continued) COMPANY SECRETARY Peter William Stancliffe BE (Civil) FAICD Gai Stephens BEC, LLB, LLM, GAICD, FCA, FTIA, FGIA Former Independent Non-Executive Director. Age 67. Experience and expertise Appointed Non-Executive Director in August 2003. Ceased to be a Non-Executive Director on 31 October 2014. Other current listed company directorships Chairman of Korvest Ltd (since 2009, retired 18 September 2014). Director of Automotive Holdings Group Limited (since 2005). Former listed company directorships in last 3 years Gai Stephens was appointed to the position of Director Corporate Services on 14 November 2012 and Company Secretary on 18 December 2012. As Company Secretary, Ms Stephens is responsible for all of the legal and compliance issues associated with Hills Limited. Previously she held the position of Company Secretary and General Counsel at Luxottica (formerly OPSM Group) for 20 years from 1992 until 2012. Ms Stephens has extensive knowledge in intellectual property maintenance, tax structuring, acquisitions and disposals, risk management, company secretarial and legal. None. Special responsibilities None. MEETINGS OF DIRECTORS The number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 30 June 2015, and the number of meetings attended by each Director were: DIRECTOR ATTENDANCE Full Meetings of Directors Audit, Risk and Compliance Nomination Remuneration Jennifer Helen Hill–Ling Fiona Rosalyn Vivienne Bennett Ian Elliot David Moray Spence Philip Bullock Edward Noel Pretty* Peter William Stancliffe** A 16 15 16 15 16 14 6 B 16 16 16 16 16 15 6 A – 5 – 6 3 – 2 B – 6 – 6 3 – 3 A 2 – 2 – 2 – – B 2 – 2 – 2 – – A 3 – 3 3 – – – B 3 – 3 3 – – – A = Number of meetings attended B = Number of meetings held during the time the Director held office or was a member of the committee during the year * = Ceased to be a Director on 27 May 2015 ** = Ceased to be a Non-Executive Director on 31 October 2014 18 Hills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) Dear Shareholders, As your Chairman and Chief Executive Officer have outlined the year in review in the Report of Directors, FY2015 was a challenging year. As the Company starts to move out of the restructuring phase we have seen a realignment to a management team focussed on consolidating and growing our existing businesses in Australia and New Zealand. There has been a departure of executives who oversaw the restructure and divestment process and Grant Logan was appointed CEO on 27 May 2015. Our strategy is to build our solid continuing businesses by improving performance and by growing organically and by acquisition. In line with this strategy your Board has ratified a strategic blueprint. The strategic blueprint outlines the focus for management in the coming year and beyond. The blueprint has 5 pillars of focus – customer, vendor, people, profit and capital. Each of these pillars are tied to STIs of all employees, including the senior executives. 2015 Remuneration Outcomes During FY2015 the Board continued with the implementation of the remuneration strategy which was outlined in the remuneration report for FY2014. This included ensuring that there was a strong alignment between the short term incentive and business results. Our short term incentive programme for FY2015 was geared 80% towards delivering financial outcomes and 20% towards non-financial strategic goals. None of the financial targets have been met for FY2015. Accordingly, 80% of the short term incentives were not paid. The remaining 20% incentive was determined on performance of individual KPIs and only 4% of a total potential payment has been paid to executives for FY2015. At last year’s AGM the grant of performance rights linked to Earnings Per Share growth and relative TSR over a three year period were issued to the former Group Managing Director and CEO and other senior executives. No performance rights vested under this plan or earlier plans and all performance rights relating to terminating executives lapsed on their departure from the Company. With lower than expected profits your Board took the action of reducing directors fees by 20% until the profits of the Company return to increased levels. Future Remuneration Strategies Short Term Incentives The Board reviews the Hills remuneration policy and practices annually. As in previous years we have ensured that management have a strong alignment with the Company’s strategy. As stated above we have introduced a strategic blueprint which outlines management’s focus for the medium term. The strategic blueprint links strategic outcomes to defined measures, focusing on the following key areas: • Customer – ‘Perfect Orders’ (in by 2pm, dispatched same day) – Average Return Per Unit per Hospital Bed • Vendor – Fully developed vendor engagement plans to be developed for all material vendors – Two new key vendors to partner with Hills • People – Hills FY2016 Employee Engagement Survey • Profit – FY2016 underlying EBITDA and NPAT budgets are achieved • Capital – FY2016 Days Sales and outstanding budget met – FY2016 Stock turns budget met – FY2016 Capex budget met Long Term Incentives Due to the current difficult trading environment, your Board has decided to defer the existing Long Term Incentive Plan for FY2016. The Board is currently reviewing the design of the plan and appropriate hurdles to ensure executives are motivated and shareholder value maximised. 2016 Focus on Delivering Outcomes Following the divestments of businesses and the restructure, your Company is much simpler. Hills balance sheet is strong and the Company is in a good position to grow the continuing businesses. We remain committed to delivering sustainable earnings growth and optimising shareholder value as Hills continues to evolve and grow. On behalf of the Board, I invite you to review the following Remuneration Report. David Spence Chairman Remuneration Committee 19 Hills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) (continued) This Remuneration Report explains Hills approach to executive remuneration, performance and remuneration outcomes for Hills and its Key Management Personnel (KMP) for the year ended 30 June 2015 (FY2015). In this report, ‘senior executives’ refers to the KMP excluding non-executive directors. 1. KEY MANAGEMENT PERSONNEL Key Management Personnel (KMP) encompasses all Directors, as well as those senior executives who had specific responsibility for planning, directing and controlling material activities of Hills during FY2015. The information provided in the Remuneration Report has been audited as required by Section 308 (3C) of the Corporations Act 2001. List of KMP Directors The Remuneration Report comprises the following sections: 1. Key Management Personnel 2. Remuneration Governance 3. Executive Remuneration 4. 5. Executive Contracts and Termination Arrangements Five Year Snapshot – Business and Remuneration Outcomes 6. Statutory Remuneration Tables J Hill-Ling Chairman, Non-Independent and Non-Executive Director FRV Bennett Independent, Non-Executive Director P Bullock Independent, Non-Executive Director I Elliot Independent, Non-Executive Director DM Spence Independent, Non-Executive Director EN Pretty (1) Former Group Managing Director & Chief Executive Officer PW Stancliffe (2) Former Independent, Non-Executive Director 7. 8. Non-Executive Directors’ Remuneration Senior Executives G Logan (3) (4) Chief Executive Officer Equity Instrument Disclosures Relating to Key Management Personnel G Turner (5) Chief Financial Officer B Newton (6) Chief Operating Officer L Ison (7) Chief of Health, Innovation & Growth (1) (2) (3) (4) (5) (6) (7) EN Pretty ceased as Managing Director and Chief Executive Officer on 27 May 2015 PW Stancliffe ceased as a Non-Executive Director on 31 October 2014 G Logan ceased as Chief Financial Officer on 2 February 2015, and was promoted to Chief Operating Officer G Logan was promoted to Chief Executive Officer on 27 May 2015 G Turner was promoted to Chief Financial Officer on 2 February 2015 B Newton ceased as Chief Operating Officer on 5 February 2015 L Ison ceased as Chief of Health, Innovation & Growth on 10 June 2015 20 Hills Limited Annual Report for the year ended 30 June 2015 2. REMUNERATION GOVERNANCE 2.3 Hills Share Trading Policy Remuneration Principles The Hills Share Trading Policy imposes trading restrictions on all Hills employees who are considered to be in possession of ‘inside information’ and additional restrictions in the form of trading windows for senior executives. Senior executives and members of the broader management team are prohibited from trading in Hills shares during specific periods prior to the announcement of the half and full year results. This policy applies equally to shares received as part of remuneration. The Share Trading Policy is available on the Hills website at: http://www.corporate.hills. com.au/about-us/governance. The key principles on which the Hills remuneration strategy is based are: • Competitive – Remuneration positioned at the appropriate level relative to the market to be competitive and attract, retain and reward employees • Equitable and Motivational – Employees in similar roles, making similar contributions, with similar performance, receive similar rewards – Motivates employees to deliver business results 2.4 Hills Clawback Policy – Differentiates, but is fair and equitable To strengthen the governance of the remuneration strategy, Hills has an executive remuneration Clawback Policy in place. The policy is designed to further align the remuneration outcomes of the Hills senior executive team with the long term interests of Hills and its shareholders, to ensure that excessive risk taking is not rewarded, and to provide the Board with the ability to claw back incentives paid in relation to a material misstatement in Hills Financial Statements. 3. EXECUTIVE REMUNERATION 3.1 Alignment of Remuneration Strategy with Business Strategy The Board has established a Remuneration Strategy that supports and drives the achievement of the Hills Business Strategy. The Board is confident that the remuneration framework aligns the remuneration of the senior executives with shareholder interests. Hills is a business that is heavily focused on key performance indicators (KPIs) and rewards its people at all levels on achievement of those KPIs. in its application • Linked to Performance – Directly links individual and company performance to remuneration outcomes – Employees understand what results need to be achieved – Provides an integrated remuneration and performance system framework • Aligned – Aligns remuneration and incentive outcomes with business goals and results – Supports the completion of the transformation and delivery of the growth strategy – Withstands external scrutiny • Straightforward – Understood by all stakeholders and employees 2.1 Role of the Remuneration Committee The Board, with assistance from the Remuneration Committee, is ultimately responsible for ensuring that the Hills remuneration framework is consistent with the business strategy and performance, supporting increased shareholder wealth over the long term. The Remuneration Committee, consisting of three Non-Executive Directors: David Spence (Chairman), Jennifer Hill-Ling and Ian Elliot, has been delegated responsibility for reviewing the remuneration strategy annually and advises the Board on remuneration policies and practices generally. The Remuneration Committee is responsible for: • the ongoing appropriateness and relevance of the remuneration framework for the Chairman, the Board Committees and the Non-Executive Directors; • Hills remuneration policy for the CEO, his direct reports and other senior executives, any changes to the policy, and the implementation of the policy including any shareholder approvals required; and • incentive plans for the CEO, his direct reports and other senior executives. Further detail on the Remuneration Committee’s responsibilities is set out in its Charter, which is reviewed annually and which is available on the Hills website at: http://www.corporate.hills.com.au/about- us/governance. 2.2 Use of Independent Remuneration Consultants In accordance with the Remuneration Committee Charter, the Remuneration Committee seeks advice and market data from independent remuneration consultants as required. During the year no advisors were retained. 21 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) 3. EXECUTIVE REMUNERATION (continued) The diagram below shows how the Remuneration Strategy and framework aligned with the FY2015 Hills Business Strategy: Hills Business Strategy Integrated solutions into trusted environments 75% of revenue from technology and communications 20–25% of revenue from services Sustained EPS growth Return on funds employed 13–15% Strategic setting Remuneration strategy Aligning executive reward with achievement of business strategy objectives Motivate and reward outstanding performance Attract and retain key executive talent Challenging KPIs focused on financial and non-financial measures. Short-term and long-term components of remuneration ‘at risk’ are based on performance and outcomes. Provide competitive remuneration in order to attract and retain senior executives with the skills and experience to complete the transformation and deliver the growth strategy. Remuneration framework & policy Fixed remuneration Short-term incentive Long-term incentive Set at levels to attract a senior executive team with the skills and experience required to successfully complete transformation and delivery of the growth strategy. Aligned to the achievement of Hills business objectives measured over the short term (12 months). The KPIs are based on: Aligned to the achievement of increased shareholder wealth over the long term. For FY2015, the performance measures will be: • Financial performance (80%) • EPS three-year CAGR; and • Individual non-financial performance measures (20%) • Relative TSR Both financial and non-financial measures directly support achievement of the Company’s strategic settings. Retention: three-year performance period, with a further one-year restriction on trading. 22 Hills Limited Annual Report for the year ended 30 June 2015 3.2 Remuneration Mix Senior executive remuneration is comprised of Fixed Remuneration (made up of base salary and superannuation), short term incentive (STI) and long term incentive (LTI). The following diagrams show the remuneration mix at target performance. Group Managing Director and CEO (1) Senior Executives (Average) LTI 12% STI 43% LTI 6% STI 25% Fixed 69% LTI 25% STI 30% LTI 9% STI 31% LTI 15% STI 25% Fixed 45% Fixed 45% Fixed 60% Fixed 60% FY2015 Mr Pretty FY2015 Mr Logan Future Market Target FY2015 Mr Pretty Future Market Target (1) Includes G Logan’s cash based retention plan The move to the above remuneration mix is being achieved by incremental adjustments through the annual review process. Outstanding anomalies will be addressed through future annual reviews. A LTI was introduced for senior executives in FY2015, however, due to the current difficult trading environment the Board has decided to defer the existing LTI plan for FY2016. The Board is currently reviewing the design of the plan and appropriate hurdles to ensure senior executives are motivated and shareholder value maximised for FY2017. 23 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) 3. EXECUTIVE REMUNERATION (continued) 3.3 Former Group Managing Director and Short Term Incentive FY2015 Long Term Incentive FY2015 CEO Remuneration – Mr Pretty Fixed Remuneration FY2015 The former Group Managing Director and CEO had a fixed remuneration of $974,000 per annum, which is inclusive of superannuation. Fixed remuneration is reviewed annually by the Board with reference to performance of the Company, performance of the Group Managing Director and CEO and market information. The former Group Managing Director and CEO had a STI opportunity of up to $945,000, which was subject to both financial (80%) and non-financial (20%) KPIs determined by the Board at the commencement of the financial year. KPIs were directly related to the Hills Business Strategy (see section 3.1), with the individual KPIs being a balance between operational activities and initiatives important to completing the Company’s transformation and delivery of the growth strategy. The following diagram shows the weighting of each component of the STI for the former Group Managing Director and CEO: Former Group Managing Director and CEO 5% 16% 5% 5% 5% 32% 16% 32% 16% Return on Funds Employed Corporate Revenue Corporate NPAT Group BU EBIT Customer Employees Suppliers and Service Board Information The FY2015 STI opportunity, which was reviewed annually by the Board, was 97% of Fixed Remuneration. No payment was received by Mr Pretty for the FY2015 STI. 24 The former Group Managing Director and CEO was awarded an LTI of 160,555 performance rights for FY2015. None of these performance rights vested during FY2015. Amounts for long term performance rights shown in the statutory remuneration table at section 6.1 reflect reversal of the accounting expense for the FY2014 and FY2015 LTI awards as all unvested performance rights (being 1,293,887 performance rights) lapsed on cessation of employment on 27 May 2015. 3.4 Chief Executive Officer Remuneration – Mr Logan Mr Logan was promoted to Chief Executive Officer on 27 May 2015 with a Fixed Remuneration of $825,000 (inclusive of superannuation), a STI target value of $300,000, and a retention plan of $75,000. The retention plan is in lieu of participation in the LTI plan for FY2016 and is consistent with Mr Logan’s prior retention plan arrangements. Whilst this salary package is at the higher end of comparable market benchmark to entities of our size, it is lower than the package of the former Group Managing Director and CEO. Refer to section 3.9 for a description of the FY2016 STI plan which will apply to the CEO. Retention Plan – Mr Logan Prior to his Appointment as Chief Executive Officer In FY2013 the terms of employment of Mr Grant Logan were amended to include a ‘cash based LTI’, or ‘Retention Payment’, instead of any other LTI that may have been available to other senior executives. As the longest serving member of the senior executive team, Mr Logan was offered this unique plan in recognition of the need to retain his services through the completion of the transformation, given his in-depth knowledge of Hills and in order to drive future financial performance. Mr Logan performed the role of Chief Financial Officer in addition to his broader responsibilities. In February 2015 he ceased his CFO responsibilities, and took on expanded operational responsibilities across the company as the Chief Operating Officer. Hills Limited Annual Report for the year ended 30 June 2015 This retention plan was for the period from 1 July 2012 to 30 June 2015. The plan had two components: • Performance Component: A potential payment of $75,000 per annum up to and including FY2016. Actual entitlement will be assessed against the same KPIs as those set by the Board for the Group Managing Director and CEO. • Retention Component: An amount of $75,000 per annum for each year up to and including FY2017 and is based only on service. Following Mr Logan’s appointment to CEO, the retention plan was finalised and he was paid $371,250, which represented the full retention component and 66.7% of the performance component of the plan. The proportions of this payment for FY2013 and FY2014 have been disclosed in the respective remuneration reports. For FY2015, he received only the retention component of the plan and the current year expense amount was $75,000. 3.5 Senior Executive Short Term Incentive FY2015 STI – How It Works The STI is an at risk component of remuneration and is designed to reward performance against the achievement of KPIs, which are set annually. The Hills FY2015 STI plan was designed to reward senior executives for the achievement of objectives closely aligned to the Hills Business Strategy focusing on transformation and growth, and shareholder outcomes. 20% 20% 60% Corporate NPAT or EBIT Individual Working Capital In addition to senior executives, other executives and employees may be invited to participate in the STI depending on their role and their level within the Company. The STI performance period was from 1 July 2014 to 30 June 2015. The maximum STI available to each senior executive was set at a level based on role, responsibilities and market data for the achievement of targets against specific KPIs. The maximum STI opportunity for each senior executive is listed at section 3.6 as an absolute dollar amount and as a percentage of the senior executive’s fixed remuneration. The following table summarises the potential FY2015 STI payments where a senior executive ceased employment with Hills: Resignation & Retirement Any entitlement to a payment was subject to the participant being employed by Hills at the time of payment. Company initiated termination Any entitlement to a payment would be for completed months, with no pro-rata for partly completed months. The calculation of an entitlement was based on actual results for the year and paid on the scheduled date. Summary Dismissal If summarily dismissed, a participant forfeits all rights to any payments under the FY2015 STI which had not already been made. How Individual Performance is Translated into STI awards KPIs use both financial and non-financial measures of performance. KPIs are selected based on: • what needs to be achieved over the 12 month period; • what needs to be done to realise the business strategy over the longer term; and • where achievement will contribute to the creation of increased value for shareholders. 25 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) 3. EXECUTIVE REMUNERATION (continued) 3.5 Senior Executive Short Term Incentive FY2015 (continued) 3.6 FY2015 STI Performance and Outcomes Senior Executive KPIs for FY2015 were aligned to the KPIs for the former Group Managing Director and CEO and were based on a mix of day to day operational KPIs and strategic KPIs which support the long term business strategy, adjusted to reflect individual roles. Assessment of Performance & Approval of Payment The Remuneration Committee assessed the individual senior executive’s performance based on the CEO’s recommendations, against the KPIs set at the beginning of the financial year. The assessment of individual performance was combined with the achievement of financial results to determine the amount of payment for each senior executive. The Remuneration Committee recommended the STI payment outcome to the Board for approval. STI payments for FY2015 were delivered as cash payments following approval by the Board. Details of STI payments are provided in section 3.6. FY2015 has been a difficult year for the Company which is reflected in the STI plan results detailed in this report. A summary of Company performance compared to previous years is provided in Section 5. Group Managing Director and CEO STI Plan The specific KPIs for FY2015 for the former Group Managing Director and CEO are set out in the following table. No payment resulted from this plan for FY2015. Objective Rational link to strategy Measurement Weighting Group EBIT Group NPAT Group Revenue Return on Funds Employed (with an EBIT gateway) Individual KPIs Financial Measures which are drivers to achieving the Company’s Strategic Settings Measured by reference to FY2015 budget 16% 16% 16% 32% Individual KPIs include operational activities, and key transformation initiatives which will support achievement of strategic settings in future years Measured by achievement to specified pre- determined targets and objectives 20% Total 100% 26 Hills Limited Annual Report for the year ended 30 June 2015 The KPIs for the senior executives were aligned to the former Group Managing Director and CEO’s KPIs. The STIs received by the former Group Managing Director and CEO, and senior executives for FY2015 (if any) are set out in the following table: Executive Target STI opportunity $ As a % of fixed remuneration Financial outcome (max 80%) Non-financial outcome (max 20%) G Logan $281,667 G Turner $124,667 EN Pretty (1) $787,500 B Newton (2) $168,233 L Ison (2) $245,667 48% 41% 81% 58% 66% Total $1,607,734 – – – – – – – 16% 16% – – – – (1) Pro-rata value as EN Pretty ceased as Group Managing Director and Chief Executive Officer on 27 May 2015 (2) Pro-rata values as B Newton ceased as Chief Operating Officer on 5 February 2015 and L Ison ceased as Chief of Health, Innovation & Growth on 10 June 2015 % Achieved % Forfeited Actual STI outcome $ $45,000 $19,947 – – – 16% 16% – – – $64,947 4% 84% 84% 100% 100% 100% 96% 3.7 Long Term Incentive for the former Group Managing Director and CEO • 33.33% vesting when the EPS of is equal to a CAGR of 15%; FY2015 Long Term Incentive The FY2015 LTI was designed to directly link the former Group Managing Director and CEO to growth in long term shareholder wealth. In February 2015, and following approval by shareholders at the Annual General Meeting on 31 October 2014, the former Group Managing Director and CEO was granted 160,555 performance rights to acquire ordinary Hills shares, subject to achievement of pre-determined performance hurdles. The Board selected the following performance hurdles for the FY2015 grant: • 50% vesting when the TSR is greater than the 50th percentile of companies in the S&P/ASX Small ordinaries index (excluding companies identified by S&P as members of the materials, energy or financials sectors); and • an additional 16.67% vesting when the EPS reaches a CAGR of 19.2% CAGR, with a linear vesting scale between 15% and 19.2%. The rights would have been able to vest after 3 years, subject to achievement of the above performance hurdles, but shares received from vested rights would have been required to be held for an additional year. FY2014 Long Term Incentive In February 2014, and following approval by shareholders at the Annual General Meeting on 8 November 2013, the former Group Managing Director was granted 1,133,332 performance rights to acquire ordinary Hills shares, subject to achievement of pre-determined performance hurdles. The Board selected the following performance hurdles for the FY2014 grant: • a share price hurdle of $4 for 50% of the performance rights granted if this is achieved prior to 30 June 2016; and • an EPS of 28 cents in FY2016 for 50% or 100% of the performance rights where the share price hurdle has not been achieved before 30 June 2016. In determining the performance hurdles for the former Group Managing Director’s performance rights, the Board considered that an absolute share price target was more appropriate than a relative (i.e. peer comparison) share price appreciation or total shareholder return target. This was due to the significant degree of change in the Company’s operations, the difficulty in identifying logical market peers and/or sectors over the course of the company’s transformation and the LTI performance period. 27 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) 3. EXECUTIVE REMUNERATION (continued) Weighting will be distributed across these measures. Long Term Incentive Plan – FY2016 Due to the current difficult trading environment for the Company, the Board has decided to defer the Long Term Incentive plan for FY2016. The Board will review the plan for FY2017. 4. EXECUTIVE CONTRACTS AND TERMINATION ARRANGEMENTS Employment contracts The remuneration and other terms of employment for the CEO and senior executives are covered in their individual employment contracts and are summarised in this table: Chief Executive Officer • The contract for the Chief Executive Officer commenced on 27 May 2015 and will expire on 1 September 2016, with the ability for the parties to agree on an extension for a further term. The Chief Executive Officer’s employment may be terminated by Hills giving six months’ notice. • The Chief Executive Officer may terminate his employment at any time by giving Hills six months’ written notice. • The contracts may be terminated by either party on notice by giving 3 months written notice. • If a senior executive is retrenched there is no entitlement to contractual termination payments. Senior Executives Chief Executive Officer and Senior Executives • There is no guaranteed base pay increases included in any senior executive contract. • In the instance of serious misconduct, Hills may terminate employment at any time. The executive will only receive payment to the date of termination and any statutory entitlements. • Retirement benefits comprise employer contributions to defined contribution superannuation funds. 3.7 Long Term Incentive for the former Group Managing Director and CEO (continued) FY2014 & FY2015 Long Term Incentive Outcomes No performance rights granted through the above plans vested during FY2015, and all performance rights under both plans lapsed when Mr Pretty ceased employment. 3.8 FY2015 Long Term Incentive for Senior Executive In FY2015, senior executives were invited to participate in a LTI plan on the same terms as the grant to the former Group Managing Director and CEO, as described in section 3.7. Further details are provided in section 6.3. 3.9 FY2016 Incentive Design Short Term Incentive Plan – FY2016 Looking ahead to FY2016, the Board has conducted a review of the Short Term Incentive (STI) to align it with the 2016 Strategic Plan. A balanced scorecard approach has been adopted for the year ahead focusing on the following key areas: • Customer – ‘Perfect Orders’ (in by 2pm, dispatched same day) – Average Return Per Unit per Hospital Bed • Vendors – Fully developed vendor engagement plans – Two new key vendors to partner with Hills • People – Hills FY2016 Employment Engagement Survey • Profit – FY2016 underlying EBITDA and NPAT budgets • Capital – FY2016 Days Sales Outstanding budget – FY2016 Stock turns budget – FY2016 Capex budget 28 Hills Limited Annual Report for the year ended 30 June 2015 5. FIVE YEAR SNAPSHOT – BUSINESS AND REMUNERATION OUTCOMES An underlying principle of the Hills remuneration strategy is that remuneration must be linked to the performance of Hills. The following is a summary of financial and share price information and safety performance over the last five years. Key Financials FY2015 FY2014 FY2013 FY2012 FY2011 Earnings before interest and tax (EBIT) ($000) Shareholders’ funds ($000) 17,887 41,689 33,138 44,702 40,376 136,600 245,228 271,018 400,963 402,307 Underlying Net profit (‘$000) (1) 11,045 27,277 19,201 28,822 27,126 Statutory Net profit (‘$000) (85,780) 26,387 (91,387) 28,822 (73,116) Basic Earnings per Share (cents) Dividends (cents) 4.8 2.1 Share Price ($) – as at 30 June 0.455 11.4 7.0 1.74 7.8 5.0 1.01 10.5 10.0 1.06 10.2 10.0 1.20 Short Term Incentive Payments (%) - % of Target Opportunity 4% 85% 87% 36% 28% (1) Underlying net profit after tax attributable to owners has been calculated after adjusting profit / (loss) attributable to the ordinary equity holders of the Company for the after tax impact of any adjustments including asset impairments, de-recognition of deferred tax assets relating to tax losses, costs of acquisitions and other associated gains or losses on the disposal of businesses and CGU impairment, restructure and closure costs and other associated impairments in the previous year. This is as disclosed in note 22 (c) to the Annual Report. Underlying profit is a non IFRS measure used by the Company which is relevant because it is consistent with measures used internally by management and by some in the investment community to assess the operating performance of the business in light of its change programme. The non IFRS measure has not been subject to audit or review. 29 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) (continued) 6. STATUTORY REMUNERATION TABLES 6.1 Senior Executive Remuneration The following table of senior executives’ remuneration has been prepared in accordance with accounting standards and the Corporations Act 2001 requirements. The amounts shown are equal to the amounts expensed (and not necessarily paid) in the Company’s financial statements. 2015 Short–term employee benefits Post- employment benefits Name Cash salary and fees $ Cash bonus $ Other $ Super annuation $ Long-term benefits LSL & cash based LTIP $ Executive Director Share based payments Termination benefits $ Performance rights (7) $ Shares $ Total $ E Pretty (1) 848,435 – 5,418 35,121 – 900,000 (64,222) Other Senior Executives G Logan (2)(3) 529,002 45,000 G Turner (4) L Ison (5) B Newton (6) 117,636 461,225 270,753 19,947 – 16,948 8,993 11,122 15,902 19,696 10,128 31,384 15,688 83,422 – – – – 28,100 – – 728 – – – – – – – 1,724,752 694,068 157,432 531,831 302,343 Total Senior Executives Compensation 2,227,051 64,947 58,383 112,017 83,422 928,100 (63,494) – 3,410,426 (1) E Pretty ceased as Managing Director and Chief Executive Officer on 27 May 2015. $900,000 is shown as a termination benefit in accordance with the separation deed and calculated with reference to the notice period and restraint in his employment contract (2) G Logan ceased as Chief Financial Officer on 2 February 2015, and was promoted to Chief Operating Officer (3) G Logan was promoted to Chief Executive Officer on 27 May 2015 (4) G Turner became a KMP when he was prompted to Chief Financial Officer on 2 February 2015 (5) L Ison ceased as Chief of Health, Innovation & Growth on 10 June 2015. $112,001 of her cash salary relates to a payment in lieu of notice (6) B Newton ceased as Chief Operating Officer on 5 February 2015 (7) The expense relating to unvested performance rights granted to key management personnel was reversed in the current year as service conditions were not met 30 Hills Limited Annual Report for the year ended 30 June 2015 2014 Short–term employee benefits Post- employment benefits Name Cash salary and fees $ Cash (2) bonus $ Other $ Super annuation $ Executive Director E Pretty (1) 879,430 905,500 13,543 25,193 Other Senior Executives G Logan B Newton L Ison(4) M Campbell(5) 528,033 266,666 395,973 273,980 260,317 476,630 157,168 45,000 L Francis(6) 145,410 144,305 – 19,799 10,048 – – 23,364 36,672 24,079 44,088 13,479 Long-term benefits LSL & cash based LTIP $ (3) 4,333 151,669 72,404 288 – 635 Former Senior Executives M McKinstry(7) 72,464 – 5,589 8,250 – Share based payments Termination benefits $ Performance rights $ Shares $ Total $ – – – – 296,208 – – 64,222 – – – – – – – – – – – – – 1,892,221 969,732 798,828 451,900 861,926 303,829 86,303 Total Senior Executives Compensation 2,758,257 1,792,619 48,979 175,125 229,329 296,208 64,222 – 5,364,739 (1) Accounting Value for performance rights for Mr E Pretty represents 3% of Total Remuneration for 2014 (2) (3) Includes Bonus payments for the sale of Steel assets for G Logan ($100,000) and E Pretty ($150,000), and STI Payments for G Logan ($166,666) and E Pretty ($755,500) B Newton received a cash based LTI of $71,250 with payment deferred to after FY2016 in accordance with his employment arrangements (4) L Ison commenced with Hills 9 September 2013 (5) M Campbell ceased employment with Hills effective 1 July 2014 (6) L Francis changed roles on 23 January 2014 and ceased to be a KMP (7) M McKinstry ceased employment with Hills effective 30 August 2013 31 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) 6. STATUTORY REMUNERATION TABLES (continued) 6.2 Remuneration components as a proportion of total remuneration paid or expensed The following table reflects the fixed remuneration, STI and LTI for FY2015 calculated in accordance with the accounting standards as a proportion of the total. Full year potential STI $945,000 $280,000 $124,666 $268,000 $288,400 Pro rata potential STI $787,500 $281,667 $124,667 $245,667 $168,233 Actual STI paid/payable $ – $45,000 $19,947 – – Actual STI paid/payable as % of full year potential STI Actual STI paid/payable as % of pro rata potential STI STI paid/payable as % of fixed remuneration – 16% 16% – – – 16% 16% – – – 8% 16% – – Name E Pretty G Logan G Turner L Ison B Newton The following table reflects the fixed remuneration, STI and LTI and total performance based remuneration for FY2015 calculated in accordance with the accounting standards as a proportion of the total remuneration. Fixed remuneration % At risk/STI paid or payable % Value of performance rights/cash LTI % Total performance based % 100% 83% 94% 100% 100% – 6% 6% – – – 11% 0% – – – 17% 6% – – Name E Pretty G Logan G Turner L Ison B Newton 32 Hills Limited Annual Report for the year ended 30 June 2015 The following table shows the proportion weighting of each element of remuneration for each of the senior executives employed during FY2015 based on maximum potential outcome. Fixed Remuneration % Maximum short-term incentive % Maximum long-term incentive % Name E Pretty G Logan G Turner L Ison B Newton FY2015 FY2014 FY2015 FY2014 FY2015 FY2014 53% 58% 66% 60% 63% 48% 64% – 64% 56% 47% 27% 27% 40% 37% 49% 28% – 36% 35% 0% 15% 7% 0% 0% 3% 8% – 0% 9% 6.3 Details of share based compensation and bonuses Former Group Managing Director and CEO FY2014 LTI Plan At the Annual General Meeting in 2013 shareholders approved a grant of performance rights to the former Group Managing Director and CEO. A grant of 1,133,332 performance rights was issued in February 2014 under the following conditions: • A 3 year performance period from 1 July 2013 to 30 June 2016 • If a share price of $4.00 is reached prior to the end of the performance period, then 50% of the performance rights would vest immediately, but could not be exercised until 30 June 2016 • An EPS of 28 cents in FY2016 for 50% where the share price hurdle has been previously achieved prior to 30 June 2016, or 100% of the performance rights where the share price hurdle had not been previously achieved. FY2015 LTI Plan At the Annual General Meeting in 2014 shareholders approved a grant of performance rights to the former Group Managing Director and CEO. A grant of 160,555 performance rights was issued on 27 February 2015 under the following conditions: • A 3 year performance period from 1 July 2014 to 30 June 2017 with the following hurdles: – 50% vesting if the TSR was greater than the 50th percentile of companies in the S&P/ASX Small ordinaries index (excluding companies identified by S&P as members of the materials, energy or financials sectors); - 33.33% vesting if the EPS was equal to 15% CAGR; and - An additional 16.67% vesting if the EPS reached 19.2% CAGR, with a linear vesting scale between 15% and 19.2%. No performance rights vested during FY2015, and all performance rights in both the FY2013 and FY2014 plans lapsed when the former Group Managing Director and CEO ceased employment with the Company. Senior Executives The terms of the senior executive FY2015 LTI Plan granted on 27 February 2015 are the same as those for the former Group Managing Director and CEO. Details of the performance rights granted to senior executives is provided in section 6.3. 33 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) 6. STATUTORY REMUNERATION TABLES (continued) 6.3 Details of share based compensation and bonuses (continued) The following table provides additional details of the above grant of performance rights: The numbers of performance rights granted, vested and expired / forfeited in FY2015 Name Performance Rights Performance Rights Granted Performance Rights Vested Performance Rights Expired / Forfeited E Pretty G Logan(1) G Turner L Ison B Newton 1 July 2014 1,133,332 – – – – 160,555 – 19,588 42,822 – – – – – – (1,293,887) – – (42,822) – Balance 30 June 2015 – – 19,588 – – (1) G Logan participates in a retention plan and is not eligible to participate in any LTI equity pla The maximum value of the performance rights represents their fair value as at their grant date, determined in accordance with AASB 2 Share Based Payment. The fair value for each performance rights hurdle granted in FY2015 was: • Non Market Hurdle EPS of $0.77; and • Market Hurdle Relative Total Shareholder Return $0.52. 34 Hills Limited Annual Report for the year ended 30 June 2015 The fair value at grant date is independently determined using a Black Scholes methodology for the non-market hurdles and a Monte Carlo valuation methodology for the market hurdles. Details of the assumptions underlying the valuation are set out in note 23 to the financial statements. No terms of equity settled share based payment transactions, granted as compensation to a senior executive, have been altered or modified by the issuing entity during the reporting period or the prior period. Details of performance rights over ordinary shares in Hills provided as remuneration to the former Group Managing Director and CEO and senior executives are set out below. When vested, each performance right is convertible into one ordinary share of Hills. Further information on the options is set out above and in note 23 to the financial statements. The numbers of performance rights granted, vested and expired / forfeited in FY2015 Name E Pretty G Turner L Ison Fair Value @ grant date Accounting Value Financial Year Measure Number of Perf. Rights $ per right Total Value $ Exercised during period $ 2014 2014 2015 2015 2015 2015 2015 2015 Share Price EPS RTSR EPS RTSR EPS RTSR EPS 566,666 566,666 80,278 80,277 9,794 9,794 21,411 21,411 $0.34 $192,666 $1.27 $0.52 $0.77 $0.52 $0.77 $0.52 $0.77 $719,666 $41,744 $61,814 $5,093 $7,541 $11,134 $16,487 – – – – – – – – Expired / forfeited $ $192,666 $719,666 $41,744 $61,814 – – $11,134 $16,487 Shares issued on the exercise of options No performance rights vested during FY2015. Therefore, during or since the end of the financial year, the Company has not issued ordinary shares as a result of the exercise of rights / options. 35 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) (continued) 7. NON-EXECUTIVE DIRECTORS’ REMUNERATION The Board sets Non-Executive Director remuneration at a level which enables the attraction and retention of directors of the highest calibre, while incurring a cost which is acceptable to shareholders. The remuneration of the Non-Executive Directors is determined by the Board on recommendation from the Remuneration Committee within a maximum fee pool. Non-Executive Directors receive a base fee and statutory superannuation contributions. Non-Executive Directors do not receive any performance based pay. 7.1 Fee Pool The maximum amount of fees that can be paid to Non-Executive Directors is capped by a pool approved by shareholders. At the FY2011 Annual General Meeting, shareholders approved the current fee pool of $1.2 million per annum which is recorded on an accrual basis. The fee pool did not change in FY2015. 7.2 Directors’ FY2015 Fee Structure In recognition of the reduced size of the Company and the need to focus on costs, fees paid to Non-Executive Directors were reduced by 20% from 1 May 2015. The following table outlines the main Board and Committee fees as at 30 June 2015. Chair Fee $ Member Fee $ Pre 1 May 2015 From 1 May 2015 Pre 1 May 2015 From 1 May 2015 Board 200,000 160,000 100,000 80,000 Audit, Risk and Compliance Committee Remuneration Committee Nomination Committee 20,000 20,000 10,000 10,000 10,000 10,000 10,000 10,000 Nil Nil Nil Nil 7.3 Non-Executive Directors’ remuneration details Non-Executive Directors J Hill-Ling FRV Bennett P Bullock(1) I Elliot D Spence P Stancliffe(2) Total Year 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Board and Committee Fees Superannuation $ 177,512 183,486 106,507 110,092 94,293 2,174 97,632 100,917 106,507 110,092 33,639 100,917 616,090 607,678 $ 16,800 16,972 10,080 10,183 9,022 207 9,240 9,335 10,080 10,183 3,196 9,335 58,418 56,215 Total $ 194,312 200,458 116,587 120,275 103,315 2,381 106,872 110,252 116,587 120,275 36,835 110,252 674,508 663,893 (1) P Bullock commenced as a Non-Executive Director on 23 June 2014 (2) P Stancliffe ceased as a Non-Executive Director on 31 October 2014 36 Hills Limited Annual Report for the year ended 30 June 2015 7.4 Retirement Allowance for Non-Executive Directors Ms J Hill-Ling is the only Director entitled to receive benefits on retirement under a scheme that was discontinued on 1 August 2003. Under the scheme, Ms J Hill-Ling is entitled to a maximum retirement benefit of twice her annual Director’s fee (calculated as an average of her fees over the last three years) with a vesting period of eight years, which has been achieved. Since the scheme was discontinued, no new Directors have become entitled to any benefit and the benefit multiple (up to a maximum of two times fees) remains fixed. The benefit is fully provided for in the financial statements. 8. EQUITY INSTRUMENT DISCLOSURES RELATING TO KEY MANAGEMENT PERSONNEL 8.1 Rights and options provided as remuneration The numbers of rights / options over ordinary shares in the Company held during the financial year by each Director of the Company and other key management personnel of the Company, including their personally related parties, are set out below. Name E Pretty Balance at start of the year Granted as compensation Exercised Rights / options lapsed / forfeited / cancelled Balance at the end of the year Vested and exerciseable Unvested 1,133,332 160,555 – (1,293,887) – – – 2015 Directors 37 Directors’ reportHills Limited Annual Report for the year ended 30 June 2015 Directors’ report REMUNERATION REPORT (AUDITED) 8. EQUITY INSTRUMENT DISCLOSURES RELATING TO KEY MANAGEMENT PERSONNEL (continued) 8.1 Rights and options provided as remuneration (continued) Share Holdings The numbers of shares in the Company held during the financial year by each Director of Hills Limited and other key management personnel of the Company, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. Share disclosures for JH Hill-Ling includes 1,188,918 (2014: 1,188,918) shares owned by Hills Associates Limited & Poplar Pty Ltd (jointly held) and 17,857,359 (2014: 16,239,441) shares owned by Hills Associates Limited, of which JH Hill-Ling is a Director. Other changes during the year for JH Hill-Ling comprises the acquisition of 429,000 (2014: 350,000) shares in Hills Limited by Hills Associates Limited. 2015 Directors of Hills Limited Ordinary shares Balance at the start of the year Received during the year on the exercise of options / rights Other changes during the year Balance at the end of the year 17,601,423 250,000 4,000 5000 51,735 190,000 50,000 – – – – – – – 439,000 450,000 – 5,000 – 60,000 – 18,040,423 700,000 4,000 10,000 51,735 250,000 50,000 JH Hill-Ling E Pretty(1) F Bennett P Bullock(2) I Elliot D Spence P Stancliffe(3) (1) E Pretty ceased to be a Director on 27 May 2015. Changes during the year include changes after the period in which disclosure is required (2) P Bullock commenced as a Non-Executive Director on 23 June 2014 (3) P Stancliffe ceased as a Non-Executive Director on 31 October 2014 8.2 Loans to Key Management Personnel 8.3 Other transactions with KMP (KMP) There were no outstanding loans to KMP and their related parties at the reporting date. A number of KMP or their related parties hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. From time to time, KMP of the Company or its controlled entities, or their related entities, may purchase goods or services from Hills or make sales of goods or services to Hills. These purchases or sales are on the same terms and conditions as those entered into by Hills employees, customers or suppliers and are trivial or domestic in nature. 38 Hills Limited Annual Report for the year ended 30 June 2015 Directors’ report ENVIRONMENTAL REGULATION INSURANCE OF OFFICERS INDEMNIFICATION OF OFFICERS The Company has agreed to indemnify the Directors and officers of the Company against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as Directors of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. The Company has also agreed to indemnify the current Directors of its controlled entities for all liabilities to another person (other than the Company or a related body corporate) that may arise from their position, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Manufacturing Hills holds all required environmental licences, registrations and permits for its manufacturing sites around Australia. No significant environmental incidents were reported over the 2014-15 financial year and Hills continued to meet or exceed the requirements specified in relevant licenses and authorisations. Greenhouse gas and energy data reporting requirements Due to the divestment of Building & Industrial divisions, Hills no longer triggers the NGER reporting threshold and is no longer required to report to the Clean Energy Regulator. Hills continued to capture and report on energy consumption and GHG emissions as a key environmental sustainability metric in its Environmental Management System during 2014-15. Australian Packaging Covenant The Australian Packaging Covenant (APC) is a voluntary initiative by Government and industry to reduce the environmental impact of packaging. Hills became a signatory to the APC in 2010 and has established a five year action plan aimed at optimising packaging design, material recovery, recycling and product stewardship. Hills remain supportive of the goals and initiatives of the APC and remain compliant following the submission of its fourth annual report during March 2015. Since the end of the previous financial year the Company has paid insurance premiums in respect of Directors’ and officers’ liability and legal expenses insurance contracts, for current and former Directors and officers, including senior executives of the Company and Directors, senior executives and secretaries of its controlled entities. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in Hills Group of Companies, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. The Directors have not included details of the nature of the liabilities covered or the amount of the premiums paid in respect of the Directors’ and officers’ liability and legal expenses insurance contracts as such disclosure is prohibited under the terms of the contracts. 39 Hills Limited Annual Report for the year ended 30 June 2015 Directors’ report Audit services Audit and other assurance services KPMG Australia – audit and review of the financial statements 485,909 628,000 Overseas KPMG firms – audit and review of the financial statements 38,957 22,140 Total remuneration for audit and other assurance services 524,866 650,140 2015 $ 2014 $ Taxation services KPMG Australia – taxation and other services Overseas KPMG firms – taxation services Total remuneration for taxation services Other services Financial advisory services Other consulting services Total remuneration for other services 203,867 102,520 40,253 24,367 244,120 126,887 397,534 833,235 - 40,268 397,534 873,503 Total remuneration for audit and non-audit services 1,166,520 1,650,530 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 44. Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Directors’ Report. Amounts in the Directors’ Report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. This report is made in accordance with a resolution of Directors. Jennifer Helen Hill–Ling Director David Moray Spence Director Sydney 24 August 2015 NON-AUDIT SERVICES The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with Hills are important. Details of the amounts paid or payable to the auditor of Hills, KPMG, and its related practices for audit and non-audit services provided during the year are set out below. The Board of Directors has considered the position and, in accordance with advice received from the Audit, Risk and Compliance Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit, Risk and Compliance Committee to ensure they do not impact the impartiality and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Non-audit fees remained high during the year due to significant work performed in relation to the Company’s restructure and divestment programme, in particular the sale of non-core businesses. These sale transactions were expected to complete early in the financial year, but sales were not complete until June 2015. Non-audit fees will return to normal levels in 2016. During the year the following fees were paid or payable for services provided by the auditor of Hills, its related practices and non-related audit firms: 40 Hills Limited Annual Report for the year ended 30 June 2015 41 Hills Limited Annual Report for the year ended 30 June 2015 This page has been left blank intentionally. 42 Hills Limited Annual Report for the year ended 30 June 2015 Hills Limited ABN 35 007 573 417 Financial statements 30 June 2015 Contents Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report to the members 44 45 46 47 48 49 115 116 These financial statements are the consolidated financial statements of the group consisting of Hills Limited and its subsidiaries. A list of subsidiaries is included in note 30. The consolidated financial statements are presented in the Australian currency. Hills Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office is: Hills Limited Level 7, 130 Pitt Street Sydney NSW 2000 The consolidated financial statements were authorised for issue by the Directors on 24 August 2015. The Directors have the power to amend and reissue the consolidated financial statements. Through the use of the internet, the Company has ensured that its corporate reporting is timely and complete. All press releases, financial reports and other information are available within Corporate section on the Company website: http://www.hills.com.au For queries in relation to corporate reporting please call +61 2 9216 5510 or email info@hills.com.au Consolidated income statement For the year ended 30 June 2015 Continuing operations Revenue Other income Expenses excluding net finance expenses (Loss) / profit before net finance expense and income tax Finance income Finance expenses Net finance expenses (Loss) / profit before income tax Income tax expense from continuing operations (Loss) / profit from continuing operations Profit from discontinued operations (net of tax) (Loss) / profit for the year (Loss) / profit is attributable to: Owners of Hills Limited Non controlling interests Earnings per share for (loss) / profit from continuing operations attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share Earnings per share for (loss) / profit attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share The above consolidated income statement should be read in conjunction with the accompanying notes. 44 Notes 2015 $’000 2014 $’000 3 4 5 5 6 7 22 22 22 22 427,822 448,257 5,323 433,145 15,862 464,119 (488,101) (439,922) (54,956) 200 (3,236) (3,036) (57,992) (27,788) (85,780) - (85,780) (85,947) 167 (85,780) 24,197 1,432 (4,786) (3,354) 20,843 (2,474) 18,369 8,018 26,387 24,798 1,589 26,387 Cents Cents (37.0) (37.0) (37.0) (37.0) 7.0 7.0 10.4 10.4 Hills Limited Annual Report for the year ended 30 June 2015 Consolidated statement of comprehensive income For the year ended 30 June 2015 (Loss) / profit for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges Exchange differences on translation of foreign operations Income tax relating to components of other comprehensive income Other comprehensive income for the year that may be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Reversal of previous revaluation of land and buildings Income tax relating to components of other comprehensive income Other comprehensive loss for the year that will not be reclassified to profit or loss, net of tax Other comprehensive (loss) for the year, net of tax Total comprehensive (loss) / income for the year Total comprehensive (loss) / income for the year is attributable to: Owners of Hills Limited Non controlling interests Total comprehensive (loss) / income for the year attributable to owners of Hills Limited arises from: Continuing operations Discontinued operations The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Notes 2015 $’000 (85,780) 2014 $’000 26,387 20 20 6 20 6 1,127 (710) (338) 79 (7,534) 2,261 (5,273) (5,194) (90,974) (91,141) 167 (90,974) (91,141) – (91,141) 1,084 1,182 (325) 1,941 (14,227) 4,268 (9,959) (8,018) 18,369 16,780 1,589 18,369 8,762 8,018 16,780 45 Hills Limited Annual Report for the year ended 30 June 2015 Consolidated statement of financial position As at 30 June 2015 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Assets classified as held for sale Total current assets Non current assets Trade and other receivables Investments Property, plant and equipment Intangible assets Deferred tax assets Total non current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Current tax liabilities Provisions Derivative financial instruments Total current liabilities Non current liabilities Borrowings Provisions Derivative financial instruments Total non current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves (Accumulated losses) Capital and reserves attributable to owners of Hills Limited Non controlling interests Total equity The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 46 Notes 2015 $’000 2014 $’000 8 9 10 15 7 9 11 12 13 14 16 17 6 18 15 17 18 15 19 20 30 18,801 92,136 72,446 606 45,482 104,479 59,351 - 183,989 209,312 - 183,989 653 3 32,822 39,237 30,833 103,548 287,537 67,690 5,831 407 27,133 310 101,371 45,000 4,566 - 49,566 150,937 136,600 278,439 10,467 (152,306) 136,600 - 136,600 7,800 217,112 - 2 47,605 83,183 56,043 186,833 403,945 75,759 1,983 1,812 36,389 472 116,415 35,000 6,774 528 42,302 158,717 245,228 281,624 28,900 (66,359) 244,165 1,063 245,228 Hills Limited Annual Report for the year ended 30 June 2015 Consolidated statement of changes in equity For the year ended 30 June 2015 Attributable to owners of Hills Limited Contributed equity $’000 Reserves $’000 (Accumulated losses) $’000 Notes Non- controlling interests $’000 Total $’000 Total equity $’000 Balance at 1 July 2013 303,890 32,589 (66,359) 270,120 898 271,018 Total comprehensive income for the year – (8,018) 24,798 16,780 1,589 18,369 Transactions with owners in their capacity as owners: Share buyback, net of transaction costs Dividends provided for or paid Dividends paid to non controlling interests in subsidiaries Share buyback paid to non controlling interests in subsidiaries Acquisition of non–controlling interest Disposal of non–controlling interests in subsidiaries Employee share schemes – value of employee services Transfer current period profit to profits reserve Balance at 30 June 2014 Balance at 1 July 2014 Total comprehensive income for the year Transactions with owners in their capacity as owners: Share buyback, net of transaction costs Dividends provided for or paid 19 21 30 23 20 19 21 Dividends paid to non controlling interests in subsidiaries Disposal of non–controlling interests in subsidiaries Employee share schemes – value of employee services 23 (22,266) – (16,037) – – (4,495) – 63 – – – – – – – – – – – – – – (22,266) (16,037) – – (22,266) (16,037) – – (90) (200) (90) (200) (4,495) (505) (5,000) – 63 – (629) (629) – – 63 – 24,798 (24,798) 281,624 28,900 (66,359) 244,165 1,063 245,228 281,624 28,900 (66,359) 244,165 1,063 245,228 – (5,194) (85,947) (91,141) 167 (90,974) (3,185) – – – – – (13,272) – – 33 – – – – – (3,185) (13,272) – – 33 Balance at 30 June 2015 278,439 10,467 (152,306) 136,600 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. – – (3,185) (13,272) (732) (498) – – (732) (498) 33 136,600 47 Hills Limited Annual Report for the year ended 30 June 2015 Consolidated statement of cash flows For the year ended 30 June 2015 Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) Net finance costs paid Net income taxes received / (paid) Net cash flows from operating activities Cash flows from investing activities Payments for acquisitions of subsidiaries / business operations, net of cash acquired Payments for property, plant and equipment Payments for intangible assets Proceeds from sale of business operations and subsidiaries Proceeds from sale of property, plant and equipment and intangible assets Proceeds from sale of assets held for sale Rent received Net cash flows from investing activities Cash flows from financing activities Proceeds from borrowings Payments for shares bought back, inclusive of transaction costs Repayment of borrowings Dividends paid to the Company’s shareholders Payments to non controlling interests in subsidiaries Acquisition of non-controlling interest Net cash flows from financing activities Net (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of the year The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. Notes 2015 $’000 2014 $’000 486,657 795,108 (494,547) (805,909) (7,890) (3,036) (2,117) 33 (13,043) (26,676) (10,928) (3,468) 5,970 14,029 7,570 3,149 (10,354) 15,831 (3,185) (172) (13,272) (732) – (1,530) (24,927) 43,672 56 18,801 12 13 19 21 30 8 (10,801) (3,310) (1,216) (15,327) (56,560) (14,041) (4,681) 116,421 16,199 11,433 1,777 70,548 460 (22,266) (30,299) (16,037) (290) (5,000) (73,432) (18,211) 61,480 403 43,672 48 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements are for the group consisting of Hills Limited (the “Company” or “parent entity”) and its subsidiaries (together referred to as the “Group” or “Consolidated Entity” and individually as “Group Entities”). (a) Basis of Preparation These general purpose consolidated financial statements have been prepared in accordance with Australian Accounting Standards (AASBs), other authoritative pronouncements of the Australian Accounting Standards Board, and the Corporations Act 2001. Hills Limited is a for profit entity for the purpose of preparing the consolidated financial statements. (i) Compliance with IFRS The consolidated financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) New and Amended Standards Adopted by the Group The Group has not applied any new accounting standards and amendments for the first time for the annual reporting period commencing 1 July 2014. (iii) Early Adoption of Standards The Group has not elected to early adopt any new accounting standards and amendments. (iv) Historical Cost Convention The consolidated financial statements have been prepared on the basis of historical costs, except for the following: • Financial instruments (derivatives) at fair value through profit or loss are measured at fair value; • Assets held for sale are measured at fair value less costs of disposal; • Land and buildings are measured at fair value; and • Contingent consideration assumed in a business combination is measured at fair value. • Note 29 – business combinations and contingent consideration payable (b) Parent Entity Financial Information The financial information for the parent entity, Hills, disclosed in note 31 has been prepared on the same basis as the consolidated financial statements. The methods used to measure fair values are discussed further in notes 1(o), 1(p), 1(q) (v), 12 and 28. (c) Principles of Consolidation (i) Subsidiaries (v) Critical Accounting Estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in the following notes: • Note 6 – tax losses for which no deferred tax asset has been recognised • Note 7 – assets and disposal groups held for sale and discontinued operations • Notes 12 and 13 – valuation of land and buildings and measurement of the useful lives of property, plant and equipment and intangible assets • Note 13 – measurement of the recoverable amounts of cash generating units containing goodwill • Notes 18 and 25 – provisions and contingencies • Note 23 – measurement of share based payments • Note 28 – measurement of fair value The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2015 and the results of all subsidiaries for the year then ended. Subsidiaries are all 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. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(i)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position respectively. 49 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Principles of Consolidation (e) Foreign Currency Translation (continued) (ii) Changes in Ownership Interests The Group treats transactions with non- controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non- controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of Hills. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, jointly controlled entity or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. (d) Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating segments, has been identified as the Board of Directors. Operating segments that exhibit similar long term economic characteristics, and have similar products, processes, customers, distribution methods and regulatory environments are aggregated. (i) Functional and Presentation Currency Items included in the consolidated financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is the Company’s functional and presentation currency and the functional and presentation currency of the majority of the Group. (ii) Transactions and Balances Transactions in foreign currencies are translated to the respective functional currencies of Group entities using exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary assets and liabilities that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. (iii) Group Companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position; • income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and • all resulting exchange differences are recognised in other comprehensive income. (f) Revenue Recognition Revenue is recognised for the major business activities as follows: (i) Sale of Goods Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. (ii) Services Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to estimates of work performed. (iii) Rental Income Rental income from property is recognised in profit or loss on a straight line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. (iv) Dividends Dividends are recognised as revenue when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits. However, the investment may need to be tested for impairment as a consequence, refer note 1(n). 50 Hills Limited Annual Report for the year ended 30 June 2015 (g) Income Tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries operate and generate taxable income. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Hills Limited and its wholly owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Hills Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts arising from temporary differences. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, Hills Limited also recognises 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. 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. (h) Leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 26). Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. (i) Business Combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement and the fair value of any pre- existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition-date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquired entity either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. The excess of the consideration transferred and the amount of any non- controlling interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. 51 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Business Combinations (continued) Contingent consideration is classified as a financial liability. Amounts are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. (j) Impairment of Assets Goodwill and 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. The 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 which 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 an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. (k) Cash and Cash Equivalents For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities 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, and bank overdrafts and at call borrowings. Bank overdrafts and at call borrowings are shown within borrowings in current liabilities in the consolidated statement of financial position. (l) Trade Receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement within 30 to 90 days. They are presented as current assets unless collection is not expected for more than 12 months after the reporting date. The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Cash flows relating to short term receivables are not discounted if the effect of discounting is immaterial. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the impairment loss is recognised in profit or loss. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against expenses in profit or loss. (m) Inventories and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Cost includes the reclassification from equity of any gains/losses on qualifying cash flow hedges relating to purchases of raw material. Costs are assigned to individual items of inventory on the basis of weighted average costs. Costs of purchased inventory are determined after deducting rebates and discounts. Net realisable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale. The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. (n) Investments and Other Financial Assets Classification The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss and loans and receivables. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition. (i) Financial Assets at Fair Value through Profit or Loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current and non-current assets on the basis of the maturity of the underlying derivative. Raw materials and stores, work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable (ii) Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current 52 Hills Limited Annual Report for the year ended 30 June 2015 assets, except for those with maturities greater than 12 months after the reporting date which are classified as non-current assets. Loans and receivables are included in current assets – trade and other receivables in the consolidated statement of financial position. Recognition and Derecognition Regular purchases and sales of financial assets are recognised on trade date – the date on which the Group commits to purchase or sell the asset. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Measurement The Group measures a financial asset at its fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Details on how the fair value of financial instruments is determined are disclosed in note 28. Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. If there is evidence of impairment for any of the Group’s financial assets measured at amortised cost, the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the financial asset’s original effective interest rate. The loss is recognised in profit or loss. (o) Derivatives and Hedging Activities Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative financial instruments used for hedging purposes are disclosed in note 15. Movements in the hedging reserve in shareholder’s equity are shown in note 20. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. The fair value of forward exchange contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk free interest rate (based on government bonds). The fair value of interest rate swaps is determined by discounting estimated future cash flows based on the terms and maturity of each contract and using market rates at the measurement date. (i) Cash Flow Hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and within the hedging reserve in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in profit or loss within ‘finance income’ or ‘finance costs’. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in profit or loss within ‘sales’. However, when the forecast transaction that is hedged results in the recognition of a non- financial asset (for example, inventory or plant and equipment) the gains and losses previously deferred in equity are reclassified from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in profit or loss as cost of goods sold in the case of inventory, or as depreciation or impairment in the case of plant and equipment. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. (ii) Derivatives that do not qualify for Hedge Accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss. 53 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (p) Property, Plant and Equipment Land and buildings are shown at fair value less subsequent depreciation for buildings. Land and buildings are independently valued at least every four years on the basis of open market values, and in the intervening years are valued by the Directors based on the most recent independent valuation combined with current market information. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. The costs of additions since the valuations are deemed to be the fair value of those assets. The Directors are of the opinion that these bases provide a reasonable estimate of fair value. All other plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Increases in the carrying amounts arising on revaluation of land and buildings are recognised, net of tax, in other comprehensive income and accumulated in reserves in equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first recognised in other comprehensive income to the extent of the remaining surplus attributable to the asset; all other decreases are charged to profit or loss. Land is not depreciated. Depreciation on other assets is calculated using the diminishing value or straight line method as considered appropriate to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows (current and comparative periods): • Buildings 0.75% • Plant and equipment, including leasehold improvements 5.0% to 66.7% The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(j)). Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts included in other reserves in respect of those assets to the profits reserve. (q) Intangible Assets (i) Goodwill Goodwill represents the excess of the cost of a business acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash- generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments (note 2). (ii) Patents and Trademarks, Customer Relationships, Distribution Agreements and Brands Patents and trademarks, customer relationships and brands have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost over their estimated useful lives, which vary from: • Patents and trademarks 10 to 20 years • Customer relationships, distribution agreements and brands 2 to 5 years (iii) IT Development and Software Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. Costs capitalised include external direct costs of materials and service and direct payroll and payroll related 54 Hills Limited Annual Report for the year ended 30 June 2015 costs of employees’ time spent on the project. Amortisation is calculated on a straight-line basis over periods generally ranging from 3 to 5 years. IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset. (iv) Research and Development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects (relating to the design and testing of new or improved products) are recognised as intangible assets when it is probable that the project will, after considering its commercial and technical feasibility, be completed and generate future economic benefits and its costs can be measured reliably. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Capitalised development costs are recorded as intangible assets and amortised from the point at which the asset is ready for use on a straight line basis over its useful life, which is estimated to be 5 to 20 years. (v) Fair Value The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. (r) Non-current Assets (or Disposal Groups) Held for Sale and Discontinued Operations Non current assets (or disposal groups) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee benefits and financial assets that are carried at fair value. An impairment loss is recognised for any initial or subsequent write-down of the asset (or disposal group) to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset (or disposal group) is recognised at the date of derecognition. Non-current assets (including those that are part of a disposal group) are not depreciated or amortised while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal Group classified as held for sale continue to be recognised. Non current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the consolidated statement of financial position. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the consolidated statement of financial position. A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the consolidated income statement. (s) Trade and Other Payables Trade and other payables are recognised initially at fair value and subsequently measured at amortised cost. They represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. The amounts are unsecured and are paid in accordance with the Group’s terms of trade. Trade and other payables are presented as current liabilities unless payment is not due within twelve months after the reporting period. (t) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. 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 reporting period. 55 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (u) Provisions Provisions for legal claims, service warranties and make good obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Warranty provisions are recognised when the underlying products or services are sold. Restructuring provisions are recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or been announced publicly. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. (v) Employee Benefits (i) Short-term Obligations Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short term employee benefit obligations are presented as payables. (ii) Other Long Term Employee Benefit Obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees 56 render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on corporate bonds rates with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. The obligations are presented as current liabilities in the consolidated statement of financial position if the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when settlement is expected to occur. (iii) Retirement Benefit Obligations A defined contribution plan is a post employment benefit plan which receives fixed contributions from Group entities and the Group’s legal or constructive obligation is limited to these contributions. Contributions to defined contribution plans are recognised as an expense as they become payable. (iv) Share-based Payments Share based compensation benefits are provided to employees via the Long Term Incentive Share Plan. Information relating to this scheme is set out in note 23. Long Term Incentive Plan The Long Term Incentive Share Plan allows Group executives to acquire shares of the Company. The fair value of performance rights granted under the Long term Incentive Share Plan is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the performance rights granted, measured at the grant date, which includes any market performance conditions and the impact of any non vesting conditions but includes the probability of meeting any service and non market performance vesting conditions. The valuation method takes into account the exercise price of the performance right, the life of the performance right, the current price of the underlying shares, the expected volatility of the share price, the dividends expected of the shares and the risk free interest rate for the life of the performance right. Non market vesting conditions are included in assumptions about the number of rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. No change is made for changes in market conditions. (v) Profit-sharing and Bonus Plans A liability is recognised for the amount expected to be paid under short term cash bonus or profit sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably, or where there is past practice that has created a constructive obligation. (w) Contributed Equity 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. If the Company reacquires its own equity instruments, for example as the result of a share buyback, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss Hills Limited Annual Report for the year ended 30 June 2015 is recognised in profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (x) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. (y) Earnings Per Share (i) Basic Earnings Per Share Basic earnings per share is calculated by dividing: • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares • by the weighted average number of ordinary shares outstanding during the financial year. (ii) Diluted Earnings Per Share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (z) Finance income and Expense Finance income comprises interest income on funds invested, fair value gains on interest rate swap contracts not accounted for using hedge accounting and the ineffective portion of cash flow hedges relating to interest rate swaps. Interest income is recognised as it accrues in profit or loss. Finance expenses comprise interest expense on borrowings, unwinding of the discount on provisions, fair value losses on interest rate swap contracts not accounted for using hedge accounting and the ineffective portion of cash flow hedges relating to interest rate swaps. Borrowing costs are recognised in profit or loss using the effective interest method. (aa) Borrowing Costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. (ab) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (ac) Rounding of Amounts The Group is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the ‘’rounding off’’ of amounts in the consolidated financial statements. Amounts in the consolidated financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. (ad) New Accounting Standards and Interpretations Not Yet Adopted Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2015 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities and sets out new rules for hedge accounting. It is likely to affect the Group’s accounting for its financial assets and financial liabilities. The standard is applicable for financial years beginning on or after 1 January 2018 but is available for early adoption. The Group has not yet decided when to adopt AASB 9 and has not yet determined the potential effect of the standard. AASB 15 Revenue from Contracts with Customers replaces AASB 118 Revenues and applies to contracts with customers. The standard is applicable for financial years beginning on or after 1 January 2017, with early adoption permitted. The Group has not yet decided when to adopt AASB 15 and has not yet determined the potential effect of the standard. AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 is applicable for financial years beginning on or after 1 January 2016. The amendments do not require any significant changes to current practice but facilitate improved reporting. 57 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 2 SEGMENT INFORMATION (a) Change of Segments The Group has determined that its chief operating decision maker (CODM) is the Board of Hills Limited. The Board of Hills Limited ultimately makes decisions regarding the allocation of resources to the operating segments of Hills and ultimately is the Group’s “chief operating decision maker” within the meaning of AASB 8. Hills has a number of operating segments. The Company’s restructure and transformation programme has resulted in a number of changes to the relative characteristics of Hills segments. In the prior year, all of its remaining operating segments had characteristics that were materially so similar in nature that they could reasonably be expected to have had the same prospects. These operating segments had similar economic characteristics, provided similar products and services, had a similar production process, similar types of customers, similar methods for distribution and were subject to a materially similar regulatory environment. Hills operating segments were therefore aggregated into one reportable segment under AASB 8 called the Hills Technologies Segment. This was also borne out by the fact that after its restructure and transformation programme, Hills had actively consolidated its operating structure into what is known as a ‘One Hills’ approach where the business operates as an integrated business rather than a holding company owning disparate operations. In the current year, the materiality of the Health and Home Segments were now such that these have been disaggregated from the single reportable segment and the comparative results have been adjusted accordingly. In terms of reviewing the Group as it has gone through its restructuring and transformation programme, the CODM is presented with information that separates Hills results into its continuing businesses (Building Technologies Segment, Health 58 Segment, Home Segment, Corporate Segment) and discontinuing business results in one category: the Discontinued businesses Segment (which contains the results of businesses that have been closed or sold and regardless of whether these are classified as discontinued under IFRS or not). That information, ‘through the eyes of management’ has been presented in this Segment note in accordance with the principles of AASB 8. cost pool was directly recharged or allocated to Hills other segments in whole or in part. As discontinued businesses have ceased operations, not all of the Corporate Segment could be recharged and while the gross costs have reduced substantially over the past few years, the net cost remaining in this Segment has increased. Discontinued Businesses Businesses that have been closed or sold under Hills restructure and transformation programme (whether or not these were classified as discontinued under IFRS), are shown separately to enable the CODM to assess the true continuing operations of the Group. Although the Group’s divisions are managed on a products and services basis they operate in two main geographical areas: Australia – comprises manufacturing facilities in South Australia and Victoria and sales offices and customers in all states and territories. Overseas – Comprises sales offices and customers in New Zealand and customers in Europe, the Middle East, South Africa and North America. (b) Description of Segments The Group currently has the following reportable segments with the following summaries describing the operations of the Group’s reportable segments: Building Technologies Segment Includes electronic security systems, closed circuit television systems, home and commercial automation and control systems, professional audio products, consumer electronic equipment, communications related products and services, domestic and commercial antennas, master antenna television systems, communications antennas and amplifiers. Health Segment Includes the supply and installation of health technology solutions, nursecall and patient entertainment systems to hospitals, aged care facilities and similar institutions. Hills earns ongoing revenue from patients utilising its patient entertainment systems on a daily rate basis. Home Segment Includes the results of the Hills Home Living business which has now been licensed to Woolworths Limited for a period of 7 years, extendable to 19 years. This converted the original manufacturing and distribution business that included products such as garden sprayers and washing lines into a brand licensing annuity stream. Corporate Segment This includes the costs of running Hills Corporate, Compliance and Shared Services functions. In prior periods, this Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) (b) Information about reportable segments Building Technologies Segment Health Segment Home Segment Corporate Segment Discontinued businesses Total 2015 $’000 2014 (restated)* $’000 2015 $’000 2014 (restated)* $’000 2015 $’000 2014 (restated)* $’000 2015 $’000 2014 (restated)* $’000 2015 $’000 2014 (restated)* $’000 2015 $’000 2014 (restated)* $’000 348,380 327,329 33,530 22,600 42,763 65,600 3,149 1,777 - 319,859 427,822 737,165 348,380 327,329 33,530 22,600 42,763 65,600 3,149 1,777 - 319,859 427,822 737,165 Total segment revenue Revenue from external customers Segment EBITDA 26,789 36,471 4,083 5,300 6,365 5,400 (8,275) (4,300) Segment Assets 187,716 172,735 33,784 74,126 2,981 11,014 12,813 44,543 10,817 11,340 2,862 2,469 175 1,644 542 3,268 Additions to non-current assets (other than financial assets and deferred tax) Segment liabilities 65,844 62,313 6,199 10,800 3,439 13,910 19,715 29,272 *During the year the Group has changed its internal organisation and composition of its reportable segments. Accordingly, the Group has restated the operating segment information for the year ended 30 June 2014 - - - - 8,020 28,962 50,891 - - 237,294 302,418 14,396 18,722 - 95,197 116,295 (c) Other Segment Information (ii) Segment EBITDA The CODM assesses performance based on a measure of Underlying EBITDA. This measurement basis excludes the effects of non-recurring expenditure from the operating segments such as restructuring costs and goodwill impairments when the impairment is the result of an isolated, non-recurring event and business combination acquisition transaction costs which, although expensed under IFRS, are considered to otherwise distort the operational view of the business. Interest income and expenditure are not allocated to segments, as this type of activity is driven by the central treasury function, which manages the cash position of the Group. (i) Segment Revenue There are no sales between segments. The revenue from external parties reported to the CODM is measured in a manner consistent with that in the consolidated income statement. Segment revenue reconciles to total revenue per note 3. The Group is domiciled in Australia. The amount of its revenue (including revenue from discontinued operations) from external customers in Australia is $392.085 million (2014: $702.855million), and the total of revenue from external customers in other countries is $35.737 million (2014: $34.310 million). Segment revenues are allocated based on the country in which the customer is located. The Group does not derive 10% or more of its revenues from any single external customer. 59 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 2 SEGMENT INFORMATION (continued) (c) Other Segment Information (ii) Segment EBITDA (continued) Segment Underlying EBITDA reconciles to profit / (loss) before income tax as follows: Segment EBITDA Depreciation and amortisation Finance income Finance expenses Net costs not considered part of underlying profit Less discontinued operations profit before tax and restructuring costs (Loss) / profit before income tax from continuing operations Net costs not considered part of underlying profit comprise: Current Year Impairment of goodwill Impairment of intangible assets Impairment of land and buildings, net of plant and equipment release of impairment Impairment of inventories and inventory write offs Costs relating to the acquisitions of businesses (for transactions completed and terminated) Loss and costs incurred on sale of properties and assets held for sale Net loss on sale, closure or licensing of business operations and subsidiaries Costs relating to departure of the previous Chief Executive Officer Other net costs arising as a result of the Company’s restructure and transformation programme Prior Year Net costs totalling $5.869 million comprised acquisition costs relating to the acquisitions of businesses and due diligence costs, totalling $4.978 million and net losses on disposal of businesses (net of impairments, provisions and restructuring costs related to those disposals) totalling $0.891 million and were included within Other Income and Other Expenses at 30 June 2014. 60 Notes 5 5 5 2015 $’000 28,962 (11,075) 200 (3,236) (72,843) – (57,992) 2014 $’000 50,891 (9,197) 1,432 (4,786) (5,869) (11,628) 20,843 $’000 55,353 5,661 1,053 3,222 3,885 1,229 464 913 1,063 72,843 Hills Limited Annual Report for the year ended 30 June 2015 (iii) Segment Assets The amounts provided to the CODM with respect to total assets are measured in a manner consistent with that of the consolidated financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. Reportable segments’ assets are reconciled to total assets as follows: Segment assets Unallocated assets: Cash assets Deferred tax assets Derivative financial instruments Investments 2015 $’000 2014 $’000 237,294 302,418 18,801 45,482 30,833 56,043 606 3 – 2 Total Assets as per the Consolidated Statement of Financial Position 287,537 403,945 The total of non-current assets other than deferred tax assets located in Australia is $67.972 million (2014: $126.999 million), and the total of these non-current assets located in other countries is $4.743 million (2014: $3.791 million). Segment assets are allocated to countries based on where the assets are located. Depreciation and amortisation expense for the Group totalled $11.075 million (2014: $9.197 million) which was fully allocated to segments. 61 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 2 SEGMENT INFORMATION (continued) (c) Other Segment Information (continued) (iv) Segment Liabilities The amounts provided to the CODM with respect to total liabilities are measured in a manner consistent with that of the consolidated financial statements. These liabilities are allocated based on the operations of the segment. Reportable segments’ liabilities are reconciled to total liabilities as follows: Segment Liabilities Unallocated liabilities Tax liabilities (including GST payable) Borrowings Derivative financial instruments 2015 $’000 2014 $’000 95,197 116,295 4,599 4,439 50,831 36,983 310 1,000 Total Liabilities as per the Consolidated Statement of Financial Position 150,937 158,717 3 REVENUE Revenue from Continuing Operations Sales revenue Sale of goods Services Other revenue Rents and sub-lease rentals Total Revenue from Continuing Operations Revenue from Discontinued Operations Sales revenue – sale of goods Total Revenue 4 OTHER INCOME Net gain on disposal of plant and equipment Net gain on disposal of businesses Other income 62 2015 $’000 2014 $’000 354,969 409,713 69,704 36,767 424,673 446,480 3,149 1,777 427,822 448,257 – 288,908 427,822 737,165 2015 $’000 522 1,074 3,727 2014 $’000 239 14,596 1,027 5,323 15,862 Hills Limited Annual Report for the year ended 30 June 2015 5 EXPENSES Classification of Expenses by Function Cost of goods sold Cost of services provided Other expenses from ordinary activities: Sales and marketing expenses Distribution expenses Administration expenses Other expenses 2015 $’000 2014 $’000 225,682 261,509 52,576 17,607 77,959 72,950 20,718 23,169 38,323 44,222 72,843 20,465 488,101 439,922 Profit / (Loss) Before Income Tax Includes the Following Specific Expenses: Depreciation Buildings Plant and equipment Total depreciation Amortisation Patents and trademarks Research and development Customer contracts, relationships and brands Software Total amortisation Total depreciation and amortisation Employee benefit expenses Wages and salaries Defined contribution superannuation expense Other employee benefit expenses Equity-settled share-based payment transactions Total employee benefits expenses Finance expenses Interest and finance charges paid/payable Wind-back of discount on provisions Finance income Interest income Fair value gains on derivatives Finance costs expensed 66 5,654 5,720 72 86 3,021 2,176 173 5,529 5,702 61 61 1,436 1,937 5,355 3,495 11,075 9,197 70,148 78,341 6,150 4,956 33 6,285 5,737 64 81,287 90,427 (3,236) (4,440) - (346) (3,236) (4,786) 200 - 200 1,130 302 1,432 (3,036) (3,354) 63 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 6 INCOME TAX EXPENSE (a) Income Tax Expense Current tax Deferred tax Income tax expense is attributable to: Profit from continuing operations Profit from discontinued operations Aggregate income tax expense (b) Numerical Reconciliation of Income Tax Expense to Prima Facie Tax Payable 2015 $’000 2014 $’000 789 2,044 26,999 4,040 27,788 6,084 27,788 – 2,474 3,610 27,788 6,084 (Loss) / profit from continuing operations before income tax expense (57,992) 20,843 Profit from discontinuing operations before income tax expense – 11,628 Tax at the Australian tax rate of 30.0% (2014: 30.0%) Tax effect of amounts which are not deductible / (taxable) in calculating taxable income: Goodwill and other intangible assets impairment Non-deductible expenses Research and development allowances Acquisition costs Gains on sale of assets Impairment of land and buildings De-recognition of deferred tax assets Difference in overseas tax rates Total income tax expense (57,992) 32,471 (17,398) 9,741 18,090 212 (60) 497 - 484 (80) 1,071 (282) (5,090) 662 26,123 27,844 (56) - - 6,126 (42) 27,788 6,084 64 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) (c) Tax (benefit) Relating to Items of Other Comprehensive Income Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss but directly debited or credited to other comprehensive income: (Losses) on revaluation of land and buildings Gains on cash flow hedges Aggregate income tax (benefit) (d) Tax losses Capital items 2015 $’000 2014 $’000 (2,262) (4,268) 338 325 (1,924) (3,943) Unused capital tax losses for which no deferred tax asset has been recognised Potential tax benefit 29,212 34,206 8,764 10,262 The capital tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future capital gains will be available against which the Group can utilise the benefits from these items. Revenue items Revenue tax losses for which no deferred tax asset has been recognised Potential tax benefit The revenue tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because the period over which the Group can utilise the benefits from these items extends beyond 7 years (the time horizon during which their recovery is considered probable). Revenue losses for which a deferred tax asset has been recognised total $16.0 million (2014: $31.067 million). 2015 $’000 2014 $’000 104,733 925 31,420 278 65 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 6 INCOME TAX EXPENSE (continued) (e) Current Tax Assets and Liabilities 7 ASSETS AND LIABILITIES CLASSIFIED AS HELD FOR SALE AND DISCONTINUED OPERATIONS (a) Assets Classified as Held for Sale Certain land and buildings were classified as held for sale at 30 June 2014 and were sold during the year ended 30 June 2015. Non-current assets held for sale: Land and buildings Total assets classified as held for sale 2015 $’000 2014 $’000 – – 7,800 7,800 The current tax liability for the Group of $0.407 million (2014: $1.812 million) represents the amount of income taxes payable in respect of current and prior financial periods. (f) Tax Consolidation Legislation The Company and its wholly owned Australian controlled entities have implemented the tax consolidation legislation. The accounting policy in relation to this legislation is set out in note 1(g). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing agreement which, in the opinion of the Directors, limits the joint and several liability of the wholly owned entities in the case of a default by the head entity, Hills Limited. The entities have also entered into a tax funding agreement under which the wholly owned entities fully compensate the Company for any current tax payable assumed and are compensated by the Company for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Company under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly owned entities’ financial statements. The amounts receivable / payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. The funding amounts are recognised as current intercompany receivables or payables and eliminated on consolidation. 66 Hills Limited Annual Report for the year ended 30 June 2015 (b) Discontinued Operations (i) Description Fielders and Orrcon In the previous financial year the significant operations of Fielders Australia Pty Ltd (Fielders) and Orrcon Operations Pty Ltd (Orrcon) were presented as discontinued operations. Fielders and Orrcon were sold effective 28 February 2014. Financial information relating to the discontinued operations for the previous financial year is set out below. (ii) Financial Performance and Cash Flow Information The financial performance and cash flow information presented are for the period to 28 February 2014. Revenue (note 3) Expenses Other income Finance income Profit before income tax Income tax expense Profit after income tax of discontinued operation Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Net decrease in cash generated by the discontinued operations 2014 $’000 288,908 (277,522) 235 7 11,628 (3,610) 8,018 (25,529) 85,289 (82,450) (22,690) There are no cumulative income or expenses included in other comprehensive income relating to the disposal groups. (iii) Details of the sales The effect of the disposals of Fielders and Orrcon on the financial position of the Group was: Consideration received or receivable – cash Carrying amount of net assets sold Gain on sale before income tax Income tax expense Gain on sale after income tax 2014 $’000 84,923 (84,785) 138 (41) 97 67 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 7 ASSETS AND LIABILITIES CLASSIFIED AS HELD FOR SALE AND DISCONTINUED OPERATIONS (continued) (b) Discontinued Operations (iii) Details of the Sales (continued) There was no income tax expense in relation to the disposals in the previous financial year as a result of the Group utilising carry forward capital losses that had not been recognised. The carrying amounts of assets and liabilities as at the date of sale were: Trade and other receivables Inventories Property, plant and equipment Total assets Trade and other payables Provisions Total liabilities Net assets (c) Disposal of Businesses $’000 65,707 56,643 1,008 123,358 (29,101) (9,472) (38,573) 84,785 During the current financial year the Group sold its Smartbar business (1 September 2014), Hills Polymers operations (30 April 2015) and its interest in its partly owned subsidiary Cygnus Satellite Pty Ltd (25 June 2015) as a continuation of its strategy to dispose of non-core businesses. During the previous financial year the Group sold its interests in two of its partially owned subsidiaries, UHS Systems Pty Ltd (partially owned until January 2014) (31 March 2014) and OptiComm Co Pty Ltd (30 April 2014) and its LW Gemmell operations (31 August 2013). None of these businesses were reclassified as discontinued operations as they were not significant separate major lines of business. Gains on sale are disclosed in note 4. 68 Hills Limited Annual Report for the year ended 30 June 2015 8 CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash at bank and in hand Deposits at call (a) Reconciliation to Cash at the End of the Year 2015 $’000 2014 $’000 13,800 42,482 5,001 3,000 18,801 45,482 The above figures are reconciled to cash at the end of the financial year as shown in the consolidated statement of cash flows as follows: Balances as above Bank overdrafts Balances per consolidated statement of cash flows 2015 $’000 2014 $’000 18,801 45,482 – (1,810) 18,801 43,672 (b) Risk Exposure The Group’s exposure to interest rate risk is discussed in note 27. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. (c) Fair Value The carrying amount for cash and cash equivalents equals its fair value. 69 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 9 TRADE AND OTHER RECEIVABLES Trade receivables Provision for impairment of receivables (a) Other receivables Prepayments (a) Impaired trade receivables The ageing of the Group’s trade receivables at the reporting date is as follows: Not past due Past due 0 – 30 days Past due 31 – 90 days Past due more than 90 days Movements in the provision for impairment of receivables are as follows: At 1 July Provision for impairment recognised during the year 2015 2014 Current $’000 Non–current $’000 Current $’000 Non–current $’000 81,096 (1,481) 79,615 7,930 4,591 92,136 – – – – 653 653 Total $’000 81,096 (1,481) 79,615 7,930 5,244 90,059 (2,750) 87,309 13,912 3,258 92,789 104,479 Total $’000 90,059 (2,750) 87,309 13,912 3,258 104,479 – – – – – – 2015 $’000 42,930 20,883 12,466 4,817 2014 $’000 58,892 19,726 9,166 2,275 81,096 90,059 2015 $’000 2,750 314 2014 $’000 3,332 835 Receivables written off during the year as uncollectable (1,583) (1,286) Decrease on business disposal At 30 June – 1,481 (131) 2,750 Based on low historic default rates, the Group believes that no impairment allowance is necessary in respect of trade receivables not yet past due. The provision for impaired receivables for the Group of $1.481 million (2014: $2.750 million) relates to receivables past due more than 30 days, based upon a case by case assessment. Receivables past due between 0 and 30 days are not considered impaired. (b) Foreign Exchange and Interest Rate Risk Information about the Group’s exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in note 27. (c) Fair Value and Credit Risk Due to the short term nature of these receivables, their carrying amount is assumed to approximate their fair value. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of receivables mentioned above. The fair value of securities held for certain trade receivables is insignificant as is the fair value of any collateral sold or re-pledged. Refer to note 27 for more information on the risk management policy of the Group and the credit quality of the Group’s trade receivables. 70 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) 2015 $’000 2014 $’000 2,046 4,071 136 631 70,264 54,649 72,446 59,351 10 CURRENT ASSETS – INVENTORIES Raw materials and stores Work in progress Finished goods (a) Inventory Expense Write downs of inventories to net realisable value recognised as an expense during the year amounted to $3.722 million (2014: $2.117 million). The expense has been included in cost of sales $0.501 million (2014: $2.117 million) and other expenses $3.222 million (2014: $nil million). 11 NON-CURRENT ASSETS – INVESTMENTS Equity securities 2015 $’000 2014 $’000 3 2 71 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 12 NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Land $’000 Buildings $’000 Plant & equipment $’000 Total $’000 Year ended 30 June 2014 Opening net book amount 37,205 31,547 9,996 78,748 Exchange differences Revaluation to fair value Acquisition through business combinations Additions Disposals Assets included in a disposal group classified as held for sale and other disposals Other disposals Depreciation charge Impairment charge Reclassification – – (5,839) (8,388) 55 – 55 (14,227) – – – 3,163 3,163 2,253 11,788 14,041 (10,413) (4,562) (983) (15,958) (3,150) (4,650) – (7,800) – – – – – (290) (290) (173) (5,529) (5,702) – (936) (936) (3,045) (444) (3,489) Closing net book amount 17,803 12,982 16,820 47,605 At 30 June 2014 Cost 17,803 12,991 84,200 114,994 Accumulated depreciation and impairment – (9) (67,380) (67,389) Net book amount 17,803 12,982 16,820 47,605 Year ended 30 June 2015 Opening net book amount 17,803 12,982 16,820 47,605 Exchange differences – – (67) (67) Revaluation to fair value (4,762) (2,772) – (7,534) Acquisition through business combinations Additions Disposals Depreciation charge Impairment charge – – – 30 3,268 3,268 10,898 10,928 (4,825) (7,286) (2,494) (14,605) – (66) (5,654) (5,720) (1,375) (831) – (2,206) Reversal of impairment charge – – 1,153 1,153 Closing net book amount 6,841 2,057 23,924 32,822 At 30 June 2015 Cost 6,841 2,057 73,414 82,312 Accumulated depreciation and impairment – – (49,490) (49,490) Net book amount 6,841 2,057 23,924 32,822 72 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) (a) Assets in the Course of Construction The carrying amounts of the assets disclosed above and in note 13 Intangible assets include the following expenditure recognised in relation to non current assets (principally plant and equipment, leasehold improvements and software development) which is in the course of construction: Plant and equipment, leasehold improvements and software development (b) Valuations of Land and Buildings Land and buildings are recognised at fair value being the amounts for which the assets could be exchanged between willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the nearby locations using an estimated rate per m2 for freehold land and buildings, adjusted for the condition of the asset. As at 30 June 2014, independent valuers provided informal advice as to the fair value of land and buildings taking into consideration current market assessments and property offers received and the asset class was revalued. The Directors reviewed the assessment and determined that a revaluation decrement of $14.227 million was appropriate. This amount was debited to the asset revaluation reserve in shareholders’ equity. 2015 $’000 2014 $’000 3,102 184 As at 31 December 2014 and again as at 30 June 2015, independent valuers provided updated informal advice as to the fair value of land and buildings taking into consideration current market assessments and property offers received and the asset class was revalued. The Directors reviewed the assessment and determined that revaluation decrements totalling $9.740 million was appropriate. Of this total decrement, $7.534 million was debited to the asset revaluation reserve in shareholders’ equity with the balance of $2.206 million recognised in profit and loss. 73 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Patents, trademarks & other rights $’000 Goodwill $’000 32,649 1,039 – 32,190 – – (754) – 64,085 132,243 (68,158) 64,085 64,085 (154) – 17,702 – (55,353) – 26,280 145,896 (119,616) 26,280 – 2 (61) – (760) – 220 343 (123) 220 220 – 106 – (72) – – 254 449 (195) 254 Distribution agreements, customer contracts & brands $’000 – – 13,346 (1,436) – – – 11,910 13,346 (1,436) 11,910 11,910 – – 1,779 (3,021) (4,710) – 5,958 15,125 (9,167) 5,958 13 NON-CURRENT ASSETS – INTANGIBLE ASSETS Year ended 30 June 2014 Opening net book amount Additions Acquisition through business combinations Amortisation charge Impairment charge Derecognised on disposal Reclassification Closing net book amount At 30 June 2014 Cost Accumulated depreciation and impairment Net book amount Year ended 30 June 2015 Opening net book amount Exchange differences Additions Acquisition through business combinations Amortisation charge Impairment charge Derecognised on disposal Closing net book amount At 30 June 2015 Cost Accumulated depreciation and impairment Net book amount * Software includes capitalised development costs being an internally generated intangible asset. 74 Software* $’000 Development costs $’000 10,463 3,258 1,200 (1,937) (10,475) 633 1,423 – (61) – – (1,025) – 970 Total $’000 44,784 4,681 46,738 (3,495) (10,475) (2,539) 3,489 83,183 3,489 5,998 41,728 (35,730) 5,998 5,998 (18) 2,623 534 (2,176) (951) (232) 5,778 21,761 (15,983) 5,778 1,023 188,683 (53) 970 970 – 739 – (86) – (656) 967 967 – 967 (105,500) 83,183 83,183 (172) 3,468 20,015 (5,355) (61,014) (888) 39,237 184,198 (144,961) 39,237 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) (a) Impairment Tests for Goodwill As part of the financial year end process, the Group carried out a comprehensive review of the carrying value of its assets having due consideration to the Group’s market capitalisation, market growth assumptions and cash flows from ongoing operations. Cash Generating Unit (CGU) impairment tests were based on value in use calculations which were determined by discounting the future cash flows generated from the continuing use of the unit and based on the following key assumptions: • Cash flow projections have been based on the coming year’s Board-approved budget • An explicit five year forecast period detailing projected sales, gross margins, operating expenses, capital expenditure and investment in working capital and other assets. • Sales are based on management assessments with allowances for future growth based upon assessments of growth rates in the markets to which the assets belong. • Gross margins, operating expenses and capital expenditure and working capital investment levels are based on past experience along with CGU-specific assumptions about the future. • A terminal value has been determined at the end of the five year strategic plan using a growth rate of 3.0% (2014: 3.0%), which is no greater than the long term average growth rate for the market to which the asset is dedicated. Pre-tax discount rates of 18.7% (2014: 15.3%) for the Health Segment and 16.3% (2014:15.3%) for the Building Technologies Segment were used in the value in use calculations. These were determined by reference to the Group’s weighted average cost of capital and specific industry factors applied in determining the recoverable amount of the units. Where a range of outputs were established, the mid-point of the range was used. The following key Capital Asset Pricing Model (CAPM) assumption inputs were used in arriving at the applicable discount rates: • Risk free rate: 3% throughout • Asset Betas: 0.8 – 0.9 in Health; 0.9 – 1.0 in Building Technologies • Equity Betas: 0.94 – 1.01 in Health; 0.97 – 1.08 in Building Technologies • Equity Market Risk Premium: 6.5% throughout • Alpha risk adjustment for company size: 4% - 5% in Health; 2% in Building Technologies • Alpha risk adjustment for company specific factors: 1% in Health; 0% - 1% in Building Technologies • Long term debt to value ratio: 20% - 15% in Health; 10% in Building Technologies • Long term cost of debt: 6% - 7% in Health; 5.5% - 6.5% in Building Technologies • Long term tax rate: 30% throughout For the purpose of impairment testing, goodwill is allocated to the Group’s operating units that represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. For the purposes of completing the value in use calculations, Hills Corporate Segment costs are allocated to the Health and Building Technologies segments on a rational basis (directly where a direct utilisation is apparent, or otherwise on a relative revenue mix basis). Hills Home Segment has zero allocation of goodwill. The carrying value of the Home Segment CGU consists almost entirely of net monetary items (receivables, payables and accruals) that are virtually certain of recovery from Woolworths Limited. In addition, Hills receives a minimum $2m per annum license fee contribution from Woolworths in relation to this business. The carrying value of this CGU was therefore considered to be fully recoverable with reference to that counterparty analysis rather than with reference to a separate discounted cash flow calculation. 75 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 13 NON-CURRENT ASSETS – INTANGIBLE ASSETS (continued) (b) Impairment Charges Impairment of Goodwill During the current year, it was determined that the carrying values of the Health and Building Technologies Segments exceeded their recoverable amounts with reference to the value in use calculations described above and an impairment charge was recognised in the profit and loss statement. The aggregate carrying amounts of goodwill allocated to each CGU before and after impairment charges are as follows: Goodwill before impairment charge Building Technologies Health 2015 $’000 50,061 2014 $’000 38,837 2015 $’000 31,572 2014 $’000 25,248 Total 2015 $’000 81,633 Impairment charge (25,929) – (29,424) – (55,353) 2014 $’000 64,085 – Carrying value of Goodwill after impairment charge 24,132 38,837 2,148 25,248 26,280 64,085 Growth Rate at the Start of the 5-Year Explicit Review Period (holding the discount rate and other inputs the same) • A decrease in the growth rate from 4% to 2% would increase impairment in the Building Technologies Segment by $15.4 million. • A decrease in the growth rate from 6% to 4% would increase impairment in the Health Segment by $12.6 million. Impairment of Other Intangible Assets (c) Impact of Possible Changes in At the same time as performing the CGU value in use calculation, the carrying values of separately identified other intangible assets were reviewed. These assets include patents, trademarks and other similar rights, distribution agreements, customer contracts and brands, internally generated software and development costs. During the current year, it was determined that the carrying values of $4.359 million of Health and $0.589 million of Building Technologies separately identified other intangible assets were impaired with reference to specific asset-by-asset considerations and an impairment charge was recognised in the profit and loss statement. In addition, during the current year $0.400 million of Home segment and $0.313 million of Corporate segment intangible assets, being internally generated software, were impaired. These are expensed within other expenses in note 5. In the prior year, $10.475 million of internally generated software was impaired. Key Assumptions During the process of performing the value in use calculations, the assumptions that the models were the most sensitive to were established as the discount rate and the growth rate used at the start of the 5-year explicit review period. A reasonably possible change in these key assumptions would cause the carrying amount of the CGU’s to exceed their recoverable amount and would therefore generate the following additional impairment charges: Discount Rate (holding the growth rate and other inputs the same) • An increase in the discount rate (post- tax) from 11.4% to 12.2% would increase impairment in the Building Technologies Segment by $9.6 million. • An increase in the discount rate (post- tax) from 13.1% to 14.5% would increase impairment in the Health Segment by $3.8 million. 76 Hills Limited Annual Report for the year ended 30 June 2015 14 NON-CURRENT ASSETS – DEFERRED TAX ASSETS The balance comprises temporary differences attributable to: Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax losses Software & other intangible assets Other 2015 $’000 2014 $’000 3,559 2,503 2,865 846 1,218 5,471 66 (65) 2,510 1,864 3,399 1,096 1,218 8,163 1,044 274 16,014 31,067 (2,327) 683 5,218 190 30,833 56,043 77 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 14 NON-CURRENT ASSETS – DEFERRED TAX ASSETS (continued) Balance at 1 July $’000 Recognised in profit or loss $’000 Recognised in other comprehensive income $’000 Acquisition / disposal of businesses / subsidiaries $’000 Balance at 30 June $’000 18,022 7,389 5,430 2,313 1,228 10,754 4,029 599 5,551 4,980 100 (19,749) (5,396) (2,181) (1,214) (10) (2,611) (3,102) – 25,516 4,617 90 4,268 – – – – – – (325) – – – (31) (129) 150 (3) – 20 117 – – (4,379) – 60,395 (4,040) 3,943 (4,255) 2,510 1,864 3,399 1,096 1,218 8,163 1,044 274 31,067 5,218 190 (1,211) 648 (880) (268) – (2,890) (976) (1) (15,053) (6,860) 492 2,262 – – – – – – (338) – – – 56,043 (26,999) 1,924 (2) (9) 346 18 – 198 (2) – – (685) 1 (135) 2,510 1,864 3,399 1,096 1,218 8,163 1,044 274 31,067 5,218 190 56,043 3,559 2,503 2,865 846 1,218 5,471 66 (65) 16,014 (2,327) 683 30,833 Movements 2014 Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax losses Software & other intangible assets Other Movements 2015 Property, plant and equipment Inventories Employee benefits Receivables Loans and borrowings Provisions Other accruals Derivative financial instruments Tax losses Software & other intangible assets Other 78 Hills Limited Annual Report for the year ended 30 June 2015 15 DERIVATIVE FINANCIAL INSTRUMENTS Current assets Forward foreign exchange contracts – cash flow hedges Forward foreign exchange contracts – held for trading Total current derivative financial instrument assets Current liabilities Interest rate swap contracts – cash flow hedges Forward foreign exchange contracts – cash flow hedges Forward foreign exchange contracts – held for trading Total current derivative financial instrument liabilities Non-current liabilities Interest rate swap contracts – cash flow hedges Total non-current derivative financial instrument liabilities 2015 $’000 2014 $’000 526 80 606 (310) – – (310) – – – – – (44) (340) (88) (472) (528) (528) Total derivative financial instrument liabilities Net derivative financial instrument assets / (liabilities) (310) (1,000) 296 (1,000) The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group’s financial risk management policies (refer to note 27). (a) Instruments Used by the Group (i) Interest Rate Swap Contracts – Cash Flow Hedges Bank loans to the Group at 30 June 2015 bear an average variable interest rate of 2.1% (2014: 2.8%). It is the Group’s policy to manage exposure to increasing interest rates by hedging a proportion of the Group’s exposure to variable rate bank loans. Accordingly, the Group has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. The contracts require net settlement of the interest receivable or payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. The gain or loss from remeasuring the hedging instruments at fair value is recognised in other comprehensive income in the hedging reserve, to the extent that the hedge is effective, and reclassified into profit or loss when the hedged item is derecognised. In the year ended 30 June 2015 a profit of $nil was reclassified into profit or loss (2014: $70,000) and included in finance cost due to hedge ineffectiveness in the current or prior year and a gain of $nil was reclassified into profit or loss (2014: $232,000) to offset net interest expense paid. (ii) Forward exchange contracts – cash flow hedges Interest rate swaps in place at 30 June 2015 cover 22% (2014: 57%) of the loan principal outstanding and are taken out with terms of between three and seven years. The fixed interest rates average 5.6% (2014: 4.4%). The Group purchases goods and materials from overseas, principally in US dollars. In order to protect against exchange rate movements, the Group has entered into forward exchange contracts to purchase US dollars. These contracts are hedging highly probable forecasted purchases for approximately the next two to three months. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in other comprehensive income. When the cash flows occur, the Group adjusts the initial measurement of the component recognised in the consolidated statement of financial position by removing the related amount from other comprehensive income. During the year ended 30 June 2015 a gain of $1,000 was recognised in profit or loss for the ineffective portion of these hedging contracts (2014: $2,000). 79 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 15 DERIVATIVE FINANCIAL INSTRUMENTS (continued) (a) Instruments Used by the Group (continued) 16 CURRENT LIABILITIES – TRADE AND OTHER PAYABLES (iii) Forward Exchange Contracts – Held-For-Trading Group subsidiaries have entered into forward foreign exchange contracts which are economic hedges but do not satisfy the requirements for hedge accounting. These contracts are subject to the same risk management policies as all other derivative contracts, see note 27 for details. However, they are accounted for as held for trading. (b) Risk Exposures and Fair Value Measurements Information about the Group’s exposure to credit risk, foreign exchange and interest rate risk and about the methods and assumptions used in determining fair values is provided in note 27. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of derivative financial assets mentioned on previous page. Trade payables Other trade payables and accrued expenses (a) Risk Exposure Information about the Group’s exposure to foreign exchange risk is provided in note 27. (b) Fair Value The carrying amount of trade and other payables are assumed to be the same as their fair values, due to their short term nature. 2015 $’000 2014 $’000 41,441 35,363 26,249 40,396 67,690 75,759 80 Hills Limited Annual Report for the year ended 30 June 2015 17 BORROWINGS 2015 2014 Unsecured Bank overdrafts Other loans Bills payable Total unsecured borrowings Total borrowings Current $’000 Non-current $’000 Total $’000 Current $’000 Non-current $’000 Total $’000 – 5,831 – 5,831 5,831 – – – 5,831 45,000 45,000 45,000 45,000 50,831 50,831 1,810 173 – 1,983 1,983 – – 1,810 173 35,000 35,000 35,000 35,000 36,983 36,983 (a) Bank Loans and Bank Overdraft Standby Letter of Credit Bank Overdrafts Bank overdrafts are denominated in both AUD and NZD. The bank overdraft of a controlled entity is secured by a guarantee from the Company. Interest on bank overdrafts is charged at prevailing market rates. The bank overdrafts are payable on demand and are subject to annual review. The Company and a number of its subsidiaries have a net bank overdraft facility of $1.000 million (2014: $1.000 million), the Company’s New Zealand subsidiary has a separate bank overdraft facility of $1.992 million (2014: $2.091 million). Unsecured Bank Loans The Group has its banking facilities jointly with Commonwealth Bank, National Australia Bank and Westpac Banking Corporation through a Common Deed. The facility totals $110 million, and consists of a $90 million cash revolver tranche and a $20 million multi-option facility tranche, expiring on 27 February 2018. The cash revolver tranche comprises bank loans and the multi-option facility tranche comprises bank guarantees, letters of credit and cash advances. Bank loans are denominated in AUD. The bank loans are Commercial Bills and Fully Drawn Advances with interest charged at prevailing market rates. The Company and its wholly owned subsidiaries have provided an interlocking guarantee and indemnity to its financiers for these facilities. An assessment of the contractual maturities of financial liabilities is provided in note 27. The standby letter of credit facility forms part of the facilities negotiated with the Group’s bankers. Short Term Money Market Borrowings on the short term money market are denominated in AUD. Interest on the borrowings is charged at the prevailing market rates. (b) Fair Value The carrying amounts and fair values of borrowings at the end of the reporting period are: On-balance sheet Non-traded financial liabilities Bank overdrafts Bills payable Other loans Carrying amount 2015 $’000 Fair value 2015 $’000 Carrying amount 2014 $’000 Fair value 2014 $’000 – – 1,810 1,810 45,000 45,000 35,000 35,000 5,831 5,831 173 173 50,831 50,831 36,983 36,983 (c) Risk Exposures Information about the Group’s exposure to interest rate and foreign exchange risk is provided in note 27. 81 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 18 PROVISIONS Employee benefits Outstanding claims Restructuring costs Contingent consideration Other provisions 2015 2014 Current $’000 Non-current $’000 Total $’000 Current $’000 Non-current $’000 8,882 3,846 11,273 3,048 84 27,133 1,418 10,300 – 2,484 – 664 3,846 13,757 3,048 748 9,440 5,885 16,090 4,450 524 1,605 1,078 3,466 – 625 4,566 31,699 36,389 6,774 43,163 Total $’000 11,045 6,963 19,556 4,450 1,149 (a) Description of Provisions Outstanding Claims Restructuring Costs The provision for claims comprises the amounts set aside for estimated claims, as well as the estimated future liability of the Group’s self-insurance arrangements. The value of the provision is determined in consultation with the Group’s actuaries or legal advisers as appropriate. The claims estimate is based on historical claims data and a weighting of the possible outcomes against their associated probabilities. Outstanding claims are recognised for incidences that have occurred that may give rise to a claim and are measured at the cost that the entity expects to incur in settling the claims, discounted using a Commonwealth government bond rate with a maturity date approximating the terms of the Group’s obligations. The restructuring costs provision comprises onerous lease costs, redundancy costs and other costs of closing and restructuring businesses. Contingent Consideration The contingent consideration provision relates to the acquisition of subsidiaries and businesses. For further detail, see note 29. Other Provisions Other provisions comprise mainly provisions for site restoration. 82 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) (b) Movements in Provisions Movements in each class of provision during the financial year, other than employee benefits, are set out below: Movements 2014 Carrying amount at the start of the year Transfer from liabilities associated with assets held for sale Charged/(credited) to profit or loss – additional provisions recognised Included in fair value less costs to sell on disposal of businesses Charged / (credited) to profit or loss – unwinding discount and provisions released Outstanding claims $’000 Restructuring costs $’000 Contingent consideration $’000 Other $’000 Total $’000 5,399 – 4,206 – – 16,297 12,785 – 3,614 – 10,607 1,288 33,591 – – – (427) – – – – 12,785 4,206 3,614 (427) Amounts used during the year (2,622) (13,140) (10,180) (139) (26,081) Increase through acquisition of businesses / subsidiaries Decrease through disposal of business – (20) – – 4,450 – – – Carrying amount at end of year 6,963 19,556 4,450 1,149 4,450 (20) 32,118 Movements 2015 Carrying amount at the start of the year Charged/(credited) to profit or loss – additional provisions recognised 6,963 (948) 19,556 4,450 1,149 32,118 5,782 – (185) 4,649 Amounts used during the year (2,169) (12,240) (3,200) (216) (17,825) Increase through acquisition of businesses / subsidiaries Carrying amount at end of year – 3,846 659 13,757 1,798 3,048 – 748 2,457 21,399 83 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 19 CONTRIBUTED EQUITY (a) Share Capital 2015 Shares ‘000 2014 Shares ‘000 2015 $‘000 2014 $‘000 Ordinary shares – fully paid 231,986 233,913 278,439 281,624 (b) Movements in Ordinary Share Capital Date Details 1 July 2013 Opening balance Share buyback 30 June 2014 Closing balance 1 July 2014 Opening balance Share buyback Executive share options forfeited 30 June 2015 Closing balance Number of shares ’000 $’000 246,220 303,890 (12,307) (22,266) 233,913 281,624 233,913 281,624 (2,207) (3,185) 280 – 231,986 278,439 (c) Ordinary Shares (d) Dividend Reinvestment Plan The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. Ordinary shares have no par value. The Company does not have a limited amount of authorised capital. The Dividend Reinvestment Plan and the Share Investment Plan did not operate in respect of dividends issued during the financial year. 84 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) Net debt is calculated as total borrowings as shown in the consolidated statement of financial position less cash and cash equivalents. Total capital is equity as shown in the consolidated statement of financial position (including non- controlling interests). During 2015, the Group’s strategy, which was unchanged from 2014, was to maintain a target gearing ratio (calculated as net debt divided by net debt plus equity) of less than 40%. The gearing ratios at 30 June 2015 and 30 June 2014 were as follows: Notes 17 8 2015 $’000 2014 $’000 50,831 36,983 (18,801) (45,482) 32,030 (8,499) 136,600 245,228 19.0% 0.0% (e) Employee Share Scheme (h) Capital Risk Management The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the gearing ratio in conjunction with its review of the Group’s banking covenants. This ratio is calculated as net debt divided by net debt plus total capital. Total borrowings Less: cash and cash equivalents Net (funds) / debt Total equity Gearing ratio The Employee Share Plan did not operate in the current or previous financial year. (f) Executive Shares, Performance Rights And Options Information relating to the Long Term Incentive Share Plan and the Executive Share Plan, including details of performance rights and options issued, exercised, lapsed and forfeited during the financial year and performance rights and options outstanding at the end of the financial year, is set out in note 23. (g) Share Buyback During the current financial year the Company bought back 2.207 million shares at an average price of $1.44 per share, with prices ranging from $1.33 to $1.63 per share. The total cost of $3.185 million, including transaction costs of $0.013 million, was deducted from shareholders equity. The Company originally announced an on market buyback on 23 August 2011, giving the Company the option to acquire up to 10% of its issued ordinary shares. The buyback was for ongoing capital management purposes and was to take place over the twelve months from the date of the announcement. The on market buyback was extended on 13 August 2012, again on 6 August 2013 and again on 15 August 2014 and 25 February 2015. During the previous financial year, the Company bought back 12.307 million shares for a total cost of $22.266 million, including transaction costs of $0.088 million. The average price was $1.81 per share, with prices ranging from $1.56 to $1.91 per share. The average price paid over the entire period of the buyback was $1.75 per share. 85 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 20 RESERVES Asset revaluation reserve Hedging reserve – cash flow hedges Equity compensation reserve Foreign currency translation reserve Profits reserve Closing balance 30 June Movements Asset revaluation reserve Opening balance 1 July Revaluation – gross Deferred tax Transfer to profits reserve Closing balance 30 June Hedging reserve – cash flow hedges Opening balance 1 July Revaluation – gross Deferred tax Closing balance 30 June Equity compensation reserve Opening balance 1 July Employee share plan expense Closing balance 30 June Non-controlling interests acquisition reserve Opening balance 1 July Adjustment to non-controlling interest upon change in Group shareholding Transfer to profits reserve Closing balance 30 June Foreign currency translation reserve Opening balance 1 July Currency translation differences arising during the year Closing balance 30 June Profits reserve Opening balance 1 July Transfer of current year profit Transfers from other reserves Dividends paid Closing balance 30 June 86 2015 $’000 2014 $’000 – 18,385 151 754 (571) (638) 721 139 10,133 10,293 10,467 28,900 18,385 32,820 (7,534) (14,227) 2,261 4,268 (13,112) (4,476) – 18,385 (638) (1,397) 1,127 (338) 151 721 33 754 1,084 (325) (638) 658 63 721 – – – – 1,551 (4,495) 2,944 – 139 (1,043) (710) (571) 1,182 139 10,293 – – 24,798 13,112 1,532 (13,272) (16,037) 10,133 10,293 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) (b) Nature and Purpose of Reserves (iv) Non-Controlling Interests (i) Asset Revaluation Reserve The asset revaluation reserve is used to record increments and decrements on the revaluation of property as described in note 1(p). (ii) Hedging Reserve – Cash Flow Hedges The hedging reserve is used to record changes in the fair value of derivative financial instruments designated in a cash flow hedge relationship that are recognised in other comprehensive income, as described in note 1(o). Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. (iii) Equity Compensation Reserve The equity compensation reserve represents the value of performance rights and options held by an equity compensation plan that the Group is required to include in the consolidated financial statements. This reserve will be reversed against share capital when the underlying performance rights and options are exercised and shares vest in the employee. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Acquisition Reserve The non-controlling interests acquisition reserve arises upon changes in the Group’s ownership interest in subsidiaries after control is obtained. The reserve represents the difference between the fair value of consideration paid or received, and the amount of the change in the non-controlling interest’s share of net assets of the subsidiary. (v) Foreign Currency Translation Reserve Exchange differences arising on translation of the financial statements of a foreign controlled entity are recognised in other comprehensive income as described in note 1(e) and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. (vi) Profits Reserve Current year and realised profits are transferred from retained earnings and other reserves to the profits reserve and dividends are paid out of the profits reserve. 87 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 21 DIVIDENDS (a) Ordinary Shares Dividend of 3.6 cents fully franked based on tax paid @ 30% (2014: 3.25 cents) per fully paid share paid on 26 September 2014 (2014: 27 September 2013) 2015 $’000 2014 $’000 8,400 8,000 Dividend of 2.1 cents fully franked based on tax paid @ 30.0% (2014: 3.4 cents) per fully paid share paid on 30 April 2015 (2014: 31 March 2014). 4,872 8,037 Total dividends provided for or paid (b) Dividends Not Recognised at the End of the Reporting Period A final dividend has not been declared for the year ended 30 June 2015. In the previous financial year a dividend of 3.6 cents, fully franked based on tax paid at 30% was declared. The aggregate amount of the proposed dividend which was paid on 26 September 2014, but not recognised as a liability at year end, was: (c) Franked dividends Franking credits available for subsequent reporting periods based on a tax rate of 30% (2014: 30.0%) The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: The consolidated amounts include franking credits that would be available to the Company if distributable profits of subsidiaries were paid as dividends. 13,272 16,037 2015 $’000 2014 $’000 - 8,420 2015 $’000 2014 $’000 1,787 4,839 (a) franking credits that will arise from the payment of the amount of the provision for income tax (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. 88 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) 22 EARNINGS PER SHARE (a) Basic earnings per share From (loss) / profit from continuing operations attributable to the ordinary equity holders of the Company From discontinued operations 2015 Cents 2014 Cents (37.0) – 7.0 3.4 Earnings per share for (loss) / profit attributable to the ordinary equity holders of the Company (37.0) 10.4 From underlying profit attributable to the ordinary equity holders of the Company 1 4.8 11.4 (b) Diluted earnings per share From (loss) / profit from continuing operations attributable to the ordinary equity holders of the Company From discontinued operations (37.0) – 7.0 3.4 Earnings per share for (loss) / profit attributable to the ordinary equity holders of the Company (37.0) 10.4 From underlying profit attributable to the ordinary equity holders of the Company 1 4.8 11.4 1 Underlying profit has been calculated after adjusting profit / (loss) attributable to the ordinary equity holders of the Company for the after tax impact of asset impairments, de-recognition of deferred tax assets relating to tax losses, costs of acquisitions and other associated gains or losses on the disposal of businesses and CGU impairment, restructure and closure costs and other associated impairments. Underlying profit is a non IFRS measure used by the Company which is relevant because it is consistent with measures used internally by management and by some in the investment community to assess the operating performance of the business in light of its change programme. The non IFRS measure has not been subject to audit or review. 89 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 22 EARNINGS PER SHARE (continued) (c) Reconciliation of earnings used in calculating earnings per share 2015 $’000 2014 $’000 Basic earnings per share (Loss) / profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share (85,947) 16,780 From discontinued operation (Loss) / profit used in calculating basic earnings per share Diluted earnings per share – 8,018 (85,947) 24,798 (Loss) / profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share (85,947) 16,780 From discontinued operation (Loss) / profit used in calculating diluted earnings per share Underlying profit earnings per share – 8,018 (85,947) 24,798 (Loss) / profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share (85,947) 24,798 Items not considered part of underlying profit 1 Underlying profit attributable to the ordinary equity holders of the Company used in calculating basic and diluted earnings per share 1 96,992 2,479 11,045 27,277 1 Underlying profit has been calculated after adjusting profit / (loss) attributable to the ordinary equity holders of the Company for the after tax impact of asset impairments, de-recognition of deferred tax assets relating to tax losses, costs of acquisitions and other associated gains or losses on the disposal of businesses and CGU impairment, restructure and closure costs and other associated impairments. Underlying profit is a non IFRS measure used by the Company which is relevant because it is consistent with measures used internally by management and by some in the investment community to assess the operating performance of the business in light of its change programme. The non IFRS measure has not been subject to audit or review. (d) Weighted average number of shares used as denominator 2015 $’000 2014 $’000 Adjustments for calculation of diluted earnings per share: Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 232,215 238,983 Effect of performance rights on issue 52 – Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 232,267 238,983 In the previous financial year the 280,000 share options granted between 2003 and 2007 were not included in the calculation of diluted earnings per share because they were antidilutive for the year ended 30 June 2014. 90 Hills Limited Annual Report for the year ended 30 June 2015 23 SHARE-BASED PAYMENTS (a) Employee Performance Rights and Option Plans In 2010 the Group established the Long Term Incentive Share Plan (LTIP). The Plan was designed to provide long term incentives to eligible senior employees in the Group and entitled them to acquire shares in the Company, subject to the successful achievement of performance hurdles related to earnings per share (EPS) and total shareholder returns (TSR). The previous plan, the Executive Share Option Plan (ESOP), was still operational for employees granted options under that plan. The shares issued pursuant to these options were financed by an interest free loan from the Company repayable within twenty years from the proceeds of dividends declared by the Company. These loans were of a non-recourse nature. For accounting purposes these 20 year loans were treated as part of the options to purchase shares, until the loan was extinguished at which point the shares were recognised. The remaining options under the ESOP were forfeited during the current financial year. Details of performance rights and options under the current and previous scheme are as follows: Grant date Expiry date 2015 Performance rights 17 Feb 2014 30 Jun 2016 27 Feb 2015 30 Jun 2017 Executive share options 1 Feb 2001 1 Jan 2023 1 Feb 2002 1 Jan 2024 1 Feb 2003 1 Jan 2025 1 Feb 2004 1 Jan 2026 1 Feb 2005 1 Jan 2027 Total executive share options $– $– $2.50 $2.90 $3.23 $3.66 $4.16 1,133,332 – – 389,410 25,000 35,000 40,000 55,000 125,000 280,000 – – – – – – Totals 1,413,332 389,410 Balance at start of the year number Granted during the year number Exercised during the year number Forfeited/ cancelled during the year number Balance at end of the year number Exercise price Vested and exercisable at end of the year number – – – – – – – – – (1,133,332) – (267,398) 122,012 (25,000) (35,000) (40,000) (55,000) (125,000) (280,000) – – – – – – (1,680,730) 122,012 – – – – – – – – – 91 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 23 SHARE-BASED PAYMENTS (continued) (a) Employee Performance Rights and Option Plans (continued) Grant date Expiry date 2014 Performance rights Balance at start of the year number Granted during the year number Exercised during the year number Forfeited/ cancelled during the year number Balance at end of the year number Exercise price Vested and exercisable at end of the year number 17 Feb 2014 30 Jun 2016 $– – 1,133,332 Executive share options* 1 Feb 2001 1 Jan 2023 1 Feb 2002 1 Jan 2024 1 Feb 2003 1 Jan 2025 1 Feb 2004 1 Jan 2026 1 Feb 2005 1 Jan 2027 Total executive share options $2.50 $2.90 $3.23 $3.66 $4.16 25,000 35,000 40,000 55,000 125,000 280,000 – – – – – – Totals 280,000 1,133,332 – – – – – – – – – – – – – – – – 1,133,332 25,000 35,000 40,000 55,000 125,000 280,000 1,413,332 – – – – – – – – Weighted average exercise price $3.62 $– $– $– $3.62 $– * Relates to a small number of employees who are not key management personnel. Fair value of performance rights granted The fair value assessed in accordance with AASB 2 Share Based Payment at grant date of performance rights granted during the year ended 30 June 2015 was 52.0 cents per performance right for the performance rights subject to market hurdles and 77.0 cents per performance right for the performance rights subject to non market hurdles. The fair value at grant date was independently determined using a Black Scholes methodology for the non market hurdles and a Monte Carlo valuation methodology for the market hurdles, that took into account the exercise price, the expected life and vesting period of the performance right, the share price at grant date and expected price volatility of the underlying shares, the expected dividend yield and the risk free interest rate for the term of the performance rights. The model inputs for the valuation of performance rights in accordance with AASB 2 Share Based Payment for performance rights granted during the year ended 30 June 2015 included: • exercise price: $0.00 • life: 2.3 years • grant date (for Accounting Standards): 27 February 2015 • expiry date: 30 June 2017 • share price at grant date: $0.88 • expected price volatility of the Company’s shares: 40% • expected dividend yield: 5.7% • risk free interest rate: 1.8% (b) Expenses Arising from Share-based Payment Transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: 2015 $’000 2014 $’000 33 64 Performance rights issued under Long Term Incentive Plans 92 Hills Limited Annual Report for the year ended 30 June 2015 24 RELATED PARTY TRANSACTIONS (a) Parent Entities The parent entity within the Group and the ultimate parent entity is Hills Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 30. (c) Key Management Personnel 2015 $’000 2014 $’000 Short-term employee benefits (fixed and STI remuneration) 2,966,471 5,207,533 Post-employment benefits (superannuation) 170,435 231,340 Long term benefits (cash LTI and accrued long service leave) 83,422 229,329 Termination benefits Share-based payments (LTI expense and employee share bonus plan expense) 928,100 296,208 (63,494) 64,222 4,084,934 6,028,632 Detailed remuneration disclosures are provided in the Remuneration Report. (d) Transactions with Other Related Parties Property rentals within the Group during the year were $nil (2014: $0.976 million). The following transactions occurred with related parties: Subsidiaries All transactions with partly owned controlled entities are on normal commercial terms and conditions. Transactions with controlled entities are determined on a cost basis. Sales of goods and services within the Group, that eliminated with cost of goods sold and services provided amounted to $19.162 million (2014: $7.746 million). Loans and borrowings with Australian wholly owned controlled entities are interest free and payable on demand while loans to or from non wholly owned subsidiaries are charged interest at rates no more favourable than current market rates. Inter entity interest paid and received during the year was $0.219 million (2014: $0.366 million). In the previous financial year, entities within the Group rented properties to or from other entities within the Group at rentals that are market related. Inter entity dividends paid and received during the year amounted to $0.735 million (2014: $33.906 million). Transactions with Director Related Entities A number of KMP or their related parties hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. During the year the following related party transactions with director related entities took place: • Hills purchased goods from Korvest Ltd and provided services to Korvest Ltd, an entity associated with P Stancliffe. Korvest was considered a related party until 18 September 2014 when P Stancliffe retired as a director of Korvest. Services provided to Korvest in this time totalled $0.060 million and goods purchased totalled $0.012 million. • Hills purchased goods from SAI Global, an entity associated with D Spence. Goods purchased totalled $0.003 million. • Hills purchased goods from CSG, an entity associated with P Bullock. Goods purchased totalled $0.127 million. Amounts were billed and payable under normal commercial terms and conditions as a supplier and as a customer. There were no other transactions during the financial year with KMP and their related parties. From time to time, KMP of the Company or its controlled entities, or their related entities, may purchase goods or services from Hills or make sales of goods or services to Hills. These purchases or sales are on the same terms and conditions as those entered into by Hills employees, customers or suppliers and are trivial or domestic in nature. (e) Loans to / from Related Parties Subsidiaries Group entity trading transactions and borrowings result in balances arising in respect of current and non current assets and liabilities. At 30 June 2015 the Group current assets and liabilities that were eliminated were $50.066 million (2014: $167.622 million). 93 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements 25 CONTINGENCIES 26 COMMITMENTS (a) Contingent Liabilities (a) Capital Commitments The Group had contingent liabilities at 30 June 2015 in respect of: Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: (i) Claims In consultation with the Environmental Protection Authority, ground water contamination potentially originating from the Company’s Edwardstown site continues to be monitored by the Company. It is anticipated that ongoing monitoring will be required to be undertaken by Hills. The Company has provided for the anticipated costs of ongoing assessments. The Group has various commercial legal claims common to businesses of its type which constitute contingent liabilities, none of which is material to the Group’s financial position. The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required. (ii) Guarantees Plant and equipment (b) Lease Commitments: Group as Lessee (i) Non-cancellable Operating Leases The Group leases a number of office, warehouse and factory facilities under operating leases. The leases run for a period ranging from 1 to 10 years with the majority running for a period of 3 to 5 years, with an option to renew the lease after that date. Lease payments are increased each renewal period to reflect market rentals. Some leases provide for additional rent payments that are based on changes in the consumer price index, local capital city consumer price indices or a fixed percentage. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Bank guarantees in favour of customers and suppliers amounting to $9.224 million (2014: $11.273 million). Within one year Later than one year but not later than five years (iii) Acquisitions Later than five years For contingent liabilities relating to acquisitions refer to note 29. (c) Lease Commitments: Where a Group Company is The Lessor The future minimum lease payments receivable under non cancellable operating leases are as follows: Within one year Later than one year but not later than five years 94 2015 $’000 2014 $’000 2,335 2,423 2015 $’000 2014 $’000 6,958 8,396 11,166 15,364 1,214 4,813 19,338 28,573 2015 $’000 2014 $’000 1,884 4,133 6,017 895 2,424 3,319 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statementsFor the year ended 30 June 2015 (continued) Risk management is carried out by a central treasury department (Treasury) under policies approved by the Board of Directors. Treasury identifies, evaluates and minimises financial risks in close cooperation with the Group’s operating units. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non derivative financial instruments, and investment of excess liquidity. The Group holds the following financial instruments: 27 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are exclusively used for risk minimisation purposes, ie. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and aging analysis for credit risk. Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Investments Financial liabilities Trade and other payables Borrowings Derivative financial instruments Contingent consideration 2015 $’000 2014 $’000 18,801 45,482 87,545 101,221 606 3 – 2 106,955 146,705 67,690 75,759 50,831 36,983 310 1,000 3,048 4,450 121,879 118,192 95 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 27 FINANCIAL RISK MANAGEMENT (continued) (a) Market Risk (i) Foreign Exchange Risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. Foreign exchange risk arises when future commercial transactions and recognised financial assets and financial liabilities are denominated in a currency that is not the Group’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The companies and business units within the Group are required to hedge their foreign exchange risk exposure arising from future commercial transactions and recognised assets and liabilities using forward contracts transacted by Group Treasury. The Group Treasury’s risk management policy is to hedge approximately three months’ of anticipated cash flows (mainly purchases of inventories) in US dollars. Management and Group Treasury manage the Group’s foreign exchange risk against their functional currency. The Group’s exposure to foreign currency risk at the reporting date, expressed in Australian dollars, was as follows: 30 June 2015 30 June 2014 USD $’000 Euro $’000 JPY $’000 NZD $’000 GDP $’000 Total $’000 USD $’000 Euro ’000 JPY ’000 GBP $’000 Total $’000 Trade receivables Cash at bank 257 1,145 – 3 – – – – – – 257 1,128 1,148 1,024 – 12 – – – – 1,128 1,036 Trade payables (7,201) (828) (55) (23) (156) (8,263) (12,962) (582) (202) (197) (13,943) Forward exchange contracts: – buy foreign currency (cash flow hedges) – buy foreign currency (FVTPL)1 1 Fair Value Through Profit and Loss (21,848) (2,197) – – – – – – – (21,848) (25,058) – (2,197) (330) – – – – – (25,058) – (330) Sensitivity The sensitivity of profit or loss to changes in exchange rates arises mainly from US dollar denominated financial instruments and the impact on other components of equity arises from foreign forward exchange contracts designated as cash flow hedges. Impact on pre tax profit Impact on other components of equity 2015 $’000 2014 $’000 2015 $’000 2014 $’000 Foreign exchange risk – decrease 10% 162 (1,183) 3,680 2,959 Foreign exchange risk – increase 10% (127) 968 (2,054) (2,419) Profit is less sensitive to movements in the Australian dollar / US dollar exchange rates in 2015 than 2014 because of the reduced amount of US dollar denominated trade receivables and payables. There is no significant change in the sensitivity of other components of equity. 96 Hills Limited Annual Report for the year ended 30 June 2015 (ii) Price Risk The Group has no material financial exposure to other market price risk as it is not exposed to equity securities price risk. The Group does not enter into commodity contracts other than to meet the Group’s expected usage requirements. (iii) Cash Flow And Fair Value Interest Rate Risk The Group’s main interest rate risk arises from long term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Group policy is to maintain approximately 50% to 75% of its borrowings at fixed rate using interest rate swaps to achieve this when necessary. During 2015 and 2014, the Group’s borrowings at variable rate were denominated in Australian Dollars and NZ Dollars. The Group manages its cash flow interest rate risk by using floating to fixed interest rate swaps. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Generally, the Group raises long term borrowings at floating rates and swaps them into fixed rates that are lower than those available if the Group borrowed at fixed rates directly. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts. As at the end of the reporting period, the Group had the following variable rate borrowings and interest rate swap contracts outstanding: 2015 2014 Weighted average interest rate % Weighted average interest rate % Balance $’000 Balance $’000 2.1% (45,000) 2.8% (36,810) 1.7% 0.0% 18,801 (5,830) 2.4% 13.1% 45,482 (173) 5.6% 10,000 4.4% 20,000 Bank overdrafts and bank loans Cash and cash equivalents Other loans Interest rate swaps (notional principal amount) An analysis by maturities is provided in note 27(c) below. Sensitivity Profit or loss is sensitive to higher / lower interest income and interest expense from cash and cash equivalents and borrowings respectively, as a result of changes in interest rates. Other components of equity change as a result of an increase / decrease in the fair value of the cash flow hedges of borrowings. Interest rates – decrease by 100 basis points Interest rates – increase by 100 basis points Impact on pre tax profit Impact on other components of equity 2015 $’000 322 (322) 2014 $’000 2015 $’000 2014 $’000 (122) 122 (235) (250) 286 246 Profit is more sensitive to movements in interest rates in 2015 than 2014 mainly as a result of higher levels of borrowings. There is no significant change in the sensitivity of other components of equity. 97 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 27 FINANCIAL RISK MANAGEMENT (continued) (iii) Cash Flow And Fair Value Interest Rate Risk (continued) Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign exchange risk. Interest rate risk Foreign exchange risk –100 bps +100 bps –10% +10% Carrying amount ‘000 Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 Profit $’000 Other equity $’000 2015 Financial assets Cash and cash equivalents 18,801 (186) Trade and other receivables Derivatives – cash flow hedges Derivatives – fair value through profit or loss Total increase / (decrease) in financial assets Financial liabilities Derivatives – cash flow hedges Trade payables Borrowings Contingent consideration Total increase / (decrease) in financial liabilities Total increase / (decrease) 2014 Financial assets Total increase / (decrease) in financial assets Financial liabilities Derivatives – cash flow hedges Derivatives – fair value through profit or loss Trade payables Borrowings Contingent consideration Total increase / (decrease) in financial liabilities Total increase / (decrease) 98 87,545 526 80 (310) (67,690) (50,831) (3,048) – – – (186) – – 508 – – – – – – 186 – – – 186 (235) – – – – – (508) – 508 (235) (508) 322 (235) (322) – – – (250) – – – – 450 – 450 – – – (328) – (450) – – – 328 – 328 (912) (88) (75,759) (36,983) (4,450) – – – – – 286 – – – 286 286 – – – 127 918 – 28 – – (104) (751) – – 3,680 – (2,054) – (23) – 1,073 3,680 (878) (2,054) – (911) – – (911) – – – – – – 751 – – 751 – – – – – 162 3,680 (127) (2,054) 115 127 242 – – – (94) (104) (198) – – – 246 – 2,959 – (2,419) – – – – 124 (1,549) – – – – – – (102) 1,268 – – – – – – (250) (328) 246 (1,425) 2,959 1,166 (2,419) (122) (250) 122 246 (1,183) 2,959 968 (2,419) Cash and cash equivalents 45,482 (450) Trade and other receivables 104,479 – Hills Limited Annual Report for the year ended 30 June 2015 (b) Credit Risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents and deposits with banks and financial institutions, favourable derivative financial instruments as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions. Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings and trade references. Purchase limits are established for each customer, which represent the maximum open amount without requiring further approval. These limits are reviewed monthly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or incorporated legal entity, whether they are a wholesale, retail or end user customer, geographic location, industry, aging profile, maturity and existence of previous financial difficulties. In most cases goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a priority claim. Depending upon the Group’s assessment of industry or company risk, the Group requires personal guarantees from customer company directors and charging clauses over real property. The Group also carries insurance for the majority of its outstanding debtors. The Group has established an allowance for impairment that represents the estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The ageing of the Group’s trade receivables is analysed in note 9. (c) Liquidity Risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Due to the dynamic and diversified nature of the underlying businesses, Group Treasury aims at maintaining flexibility in funding by keeping committed credit lines available with a variety of counterparties. Surplus funds are generally only invested in instruments that are tradeable in highly liquid markets. Financing Arrangements At 30 June 2015 the Group had banking facilities totalling $110 million, through a Common Deed with Commonwealth Bank, National Australia Bank and Westpac Banking Corporation. The facility consists of a $90 million cash revolver tranche and a $20 million multi-option facility tranche and expires on 27 February 2018. The cash revolver tranche comprises bank loans and the multi-option facility tranche comprises bank guarantees, letters of credit and cash advances. The Group had access to the following undrawn borrowing facilities at the end of the reporting period: Floating rate Expiring within one year (bank overdraft and short term money market) Expiring beyond one year (bank loans and standby letters of credit) 2015 $’000 2014 $’000 1,000 38,444 54,746 115,000 55,746 153,444 99 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 27 FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity Risk (continued) Maturities of Financial Liabilities The tables below analyse the Group’s financial liabilities including derivative financial instruments into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. For interest rate swaps the cash flows have been estimated using forward interest rates applicable at the reporting date. At 30 June 2015 Non-derivatives Trade payables Borrowings Contingent consideration Total non-derivatives Derivatives Interest rate swaps At 30 June 2014 Non-derivatives Trade payables Borrowings Contingent consideration Total non-derivatives Derivatives Less than 6 months $’000 6 to 12 months $’000 Between 1 & 2 years $’000 Between 2 & 5 years $’000 Total contractual cash flows $’000 Over 5 years $’000 Carrying amount liabilities $’000 67,690 6,305 3,048 77,043 – 474 – 474 – – 948 45,629 – – 948 45,629 168 175 75,759 2,516 2,950 81,225 – 478 – 478 – – 35,120 1,500 36,620 – – – – – – – – – – – – – – – – 67,690 67,690 53,356 50,831 3,048 3,048 124,094 121,569 343 310 75,759 75,759 38,114 4,450 118,323 36,983 4,450 117,192 1,038 1,000 Interest rate swaps and forward exchange contracts 590 180 268 100 Hills Limited Annual Report for the year ended 30 June 2015 28. FAIR VALUE MEASUREMENTS (a) Fair Value Measurements for Financial Assets and Liabilities The Group measures and recognises the following financial assets and financial liabilities at fair value on a recurring basis: • Derivative financial instruments • Contingent consideration payable AASB 13 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities; (b) Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices); and The following table presents the Group’s financial assets and financial liabilities measured and recognised at fair value: 30 June 2015 Assets Derivatives used for hedging Total assets Liabilities Derivatives used for hedging (c) Level 3 – inputs for the asset or liability Contingent consideration payable that are not based on observable market data (unobservable inputs). Total liabilities 30 June 2014 Liabilities Derivatives used for hedging Contingent consideration payable Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – – – 606 606 310 – 310 – – – 3,048 3,048 606 606 310 3,048 3,358 1,000 – 1,000 – 4,450 4,450 1,000 4,450 5,450 The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the transfer has occurred. There were no transfers between levels 1, 2 and 3 for recurring fair value measurements during the year. The fair value of financial instruments that are not traded in an active market (for example derivatives used for hedging) is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. All significant inputs required to fair value derivatives used for hedging are observable, and hence the instruments are included in level 2. There have been no movements between levels during the year ended 30 June 2015. The carrying amounts of cash and cash equivalents, trade receivables and trade payables are assumed to approximate their fair values due to their short term nature. The fair value of borrowings approximates their carrying amount, as the impact of discounting is not significant. 101 Hills Limited Annual Report for the year ended 30 June 2015Notes to the consolidated financial statements Notes to the consolidated financial statements For the year ended 30 June 2015 28 FAIR VALUE MEASUREMENTS (continued) (a) Fair Value Measurements for Financial Assets and Liabilities (continued) The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy: A discussion on the unobservable inputs is included within Note 29. The valuation of contingent consideration considers the possible scenarios of expected contracts to be signed, revenue and claims, the amount to be paid under each scenario and the probability of each scenario. The estimated fair value would increase / (decrease) if revenue growth is higher / (lower), the number of contracts signed increases / (decreases) and the number and value of agreed claims (increases) / decreases. Reasonably possible changes to the significant unobservable inputs, holding other inputs constant would have the following effect upon profit: Balance at 1 July Unwinding discount on provision Release of contingent consideration Contingent consideration 2015 $’000 2014 $’000 4,450 10,607 – 798 346 (773) Payment of contingent consideration (note 29 (c)) (3,200) (10,180) Arising from business combination Balance at 30 June 1,000 3,408 4,450 4,450 Revenue (5% movement) EBIT (5% movement) Profit or loss 2015 Profit or loss 2014 Increase $’000 Decrease $’000 Increase $’000 Decrease $’000 – – 195 – – (300) 195 300 (b) Fair Value Measurements for Non Financial Assets and Liabilities The Group measures and recognises the following non financial assets and financial liabilities at fair value: 30 June 2015 Land and buildings • Land and buildings • Assets and disposal groups held for sale The following table presents the Group’s non financial assets and non financial liabilities measured and recognised at fair value at 30 June 2015. An explanation of each level is provided in (a) above. Total non-financial assets and liabilities 30 June 2014 Land and buildings Assets and disposal groups held for sale Total non-financial assets and liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – – – – – – – – – 8,898 8,898 8,898 8,898 30,785 30,785 7,800 7,800 38,585 38,585 102 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the transfer has occurred. There were no transfers between levels 1, 2 and 3 for recurring fair value measurements during the year. The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy: Land and buildings 2015 $’000 Land and buildings 2014 $’000 Assets and disposal groups held for sale 2015 $’000 Assets and disposal groups held for sale 2014 $’000 Balance at 1 July Disposals Revaluation Additions at cost Depreciation charges Transfer to assets held for sale Balance at 30 June 30,785 (12,111) (7,534) 30 (2,272) – 8,898 65,706 (14,975) (14,227) 2,254 (173) (7,800) 30,785 7,800 (7,800) – – – – – 70,221 (70,221) – – – 7,800 7,800 29 BUSINESS COMBINATION (a) Current Year Summary of Acquisition On 1 July 2014 the Group acquired 100% of the issued shares in EMG Finance Pty Ltd and Audio Products Group Pty Ltd (together “APG”). The acquisition complements and extends the Group’s Building Technologies business in the specialised audio market. The contribution of revenues and net profit to the Group is not separately determinable because APG has been integrated into the Building Technologies segment during the year. On 6 February 2015 the Group acquired 100% of the issued shares in Hospital Communications Pty Ltd (“Hostel”). The acquisition is consistent with Hills stated strategy to be the number one provider of interactive patient care solutions to hospitals and aged care facilities in Australia. Hostel contributed revenues of $1.7 million and net profit of $0.330 million from the date of acquisition. If the acquisition had been on 1 July 2014, consolidated revenue and consolidated loss for the year ended 30 June 2015 would have been $430.422 million and $85.350 million respectively. Details of the purchase consideration, the net assets acquired and goodwill is set out below. The acquisition accounting for Hostel is classified as provisional as the measurement period has not ended. APG $’000 Hostel $’000 Purchase consideration Cash paid Contingent consideration / retention Total purchase consideration Fair value of net identifiable assets acquired (refer below) Goodwill (refer below) 13,692 1,000 14,692 5,418 9,274 The goodwill is attributable to the synergies expected to arise within the Hills Technologies division. 9,311 – 9,311 4,567 4,744 103 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 29 BUSINESS COMBINATION (continued) (a) Current Year (continued) Assets and Liabilities Acquired The assets and liabilities recognised as a result of the acquisitions are as follows: Cash / (overdraft) Trade and other receivables Inventories Plant and equipment Intangible assets: software Intangible assets: customer contracts / relationships / brands Trade creditors and other liabilities Provision for income tax Deferred tax liability (net) Provision for employee benefits Net identifiable assets acquired Add: goodwill Net assets acquired Fair value APG $’000 Fair value Hostel $’000 247 4,147 3,589 315 – – (2,389) (4) 613 (1,100) 5,418 9,274 14,692 66 687 157 2,953 534 1,779 (786) – (626) (197) 4,567 4,744 9,311 Contingent Consideration (b) Previous Year Contingent consideration comprises retention and is payable to the former owners of APG twelve months after the acquisition was completed. The amount of retention payable is reduced by the value of agreed claims as defined in the sale agreement. Contingent consideration recorded has been determined on the basis of the probability of agreed claims arising. Acquisition Related Costs Acquisition related costs of $0.948 million relating to legal fees and due diligence costs are included in other expenses in profit or loss and in operating cash flows in the consolidated statement of cash flows. Summary of Acquisitions In the previous financial year the Group acquired the following businesses: On 4 September 2013 the Group acquired two healthcare technology businesses. 100% of the issued shares in New Tone Pty Ltd (including TV Rentals Pty Ltd) (“HTR”) were acquired with an effective date of 1 September 2013 and the assets and business of Merlon Technology NSW Pty Limited, Merlon Healthcare Communications Pty Limited and Statewide Communications Australia Pty Limited, (collectively known as “Merlon”) were acquired with an effective date of 1 October 2013. On 31 March 2014 the Group acquired the majority of the assets and business of a healthcare technology business, Questek Pty Ltd (“Questek”). On 31 March 2014 the Group acquired the assets and business of a security solutions business, Open Platform Systems Pty Ltd (“OPS”) and on 31 May 2014 the Group acquired the assets and business of a New Zealand based security solutions business, Intek Ltd (“Intek). Details of the purchase consideration, the net assets acquired and goodwill is set out on following page. 104 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements Purchase consideration Cash paid Contingent consideration / retention Total purchase consideration Fair value of net identifiable assets acquired (refer below) HTR & Merlon $’000 32,137 548 32,685 9,321 Goodwill (refer below) 23,364 3,466 Contingent / Deferred Consideration Contingent consideration is payable to the former owners of Merlon, subject to certain contracts being signed. Additional contracts were signed compared to provisional estimates and as a result contingent consideration has been revised up from nil to $0.548 million. Contingent consideration is payable to the former owners of Questek subject to material contracts being signed and subject to any claims arising. Contingent consideration has been revised down from $0.950 million to nil. Contingent consideration was payable to the former owners of OPS if certain EBITDA results were achieved for the year ended 30 June 2014 and if certain revenue targets are achieved for the year ending 30 June 2015. Consideration paid has been revised up from $5.244 million to $8.444 million. Assets and Liabilities Acquired The assets and liabilities recognised as a result of the acquisitions are as follows: Questek $’000 OPS $’000 Intek $’000 3,312 – 3,312 (154) 8,444 1,500 9,944 3,623 6,321 5,700 – 5,700 2,978 2,722 Cash / (overdraft) Trade and other receivables Inventories Plant and equipment Intangible assets: software Intangible assets: customer contracts / relationships / brands Intangible assets: patents and trademarks Trade creditors and other liabilities Provision for income tax Deferred tax liability (net) Provision for employee benefits Net identifiable assets acquired Add: goodwill Net assets acquired Fair value HTR & Merlon $’000 Fair value Questek $’000 Fair value OPS $’000 Fair value Intek $’000 (111) 1,702 2,388 2,233 807 8,298 2 – 1,871 323 268 345 – 1,926 1,233 120 – 1,995 3,053 – – – 1,092 1,902 577 47 – – (1,661) (4,046) (1,617) (581) (1,184) (2,382) (771) 9,321 23,364 32,685 – (447) (463) (154) 3,466 3,312 – (841) (251) 3,623 6,321 9,944 – 2 (61) 2,978 2,722 5,700 105 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 29 BUSINESS COMBINATION (continued) (b) Previous Year (continued) Assets and Liabilities Acquired (continued) During the period since acquisition date the Company has undertaken reviews of the fair values attributed to assets and liabilities assumed as part of the acquisition. As a result of those reviews the following adjustments were identified: • Merlon and HTR – provision for income tax initially recognised at $1.356 million was reassessed at $1.184 million, resulting in the value of net assets acquired increasing from $9.149 million to $9.321 million. • Questek – trade and other receivables initially recognised at $2.130 million was reassessed at $1.871 million, inventory initially recognised at $0.565 million was reassessed at $0.323 million and trade and other payables initially recognised at $2.391 million was reassessed at $4.046 million. This results in the value of net assets acquired reducing from $2.002 million to $(0.154 million). • OPS – inventory initially recognised at $1.818 million was reassessed at $1.233 million and net deferred tax liabilities initially recognised at $0.836 million was reassessed at $0.841 million. This resulted in the value of net assets acquired reducing from $4.213 million to $3.623 million. • Intek – inventory initially recognised at $2.038 million was reassessed at $1.902 million and net deferred tax liabilities initially recognised at $0.053 million was reassessed at $0.002 million. This resulted in the value of net assets acquired reducing from $3.165 million to $2.978 million. Goodwill Impact on goodwill as a result of post-acquisition information received: Opening balance Adjustment to purchase consideration Adjustment to fair value of net assets acquired Total HTR & Merlon Final $’000 Questek Final $’000 22,988 548 (172) 23,364 2,260 (950) 2,156 3,466 OPS Final $’000 4,531 1,200 590 6,321 Intek Final $’000 2,411 124 187 2,722 106 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements 30 INTERESTS IN OTHER ENTITIES (a) Investments in Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1(c): Name of entity Hills Finance Pty Ltd Hills NZ Limited (formerly Hills Holdings NZ Limited) Audio Products Group Limited Hills Group Operations Pty Ltd Hills Integrated Solutions Pty Ltd (formerly DAS Security Wholesalers Pty Ltd) Audio Products Group Pty Ltd EMG Finance Pty Ltd Pacific Communications (PACOM) Pty Ltd Pacom Security Pty Ltd Hills Health Solutions Pty Ltd (formerly Hills Health Solutions Australia Pty Ltd, CBS Hardware Pty Ltd) New-Tone (Aust) Pty Ltd T.V Rentals Pty Ltd Hospital Telecommunications Pty Ltd Hills Polymers Pty Ltd Hills Hoists Pty Ltd Hills Share Plans Pty Ltd (formerly ACN 089 622 622 Pty Ltd) Step Electronics 2005 Pty Ltd (i) Cygnus Satellite Pty Ltd (i) Lan 1 Pty Ltd Woodroffe Industries Pty Ltd ACN 091 954 442 Pty Ltd (formerly Fielders Australia Pty Ltd) ACN 099 403 139 Pty Ltd (formerly Fielders Mobile Mill Pty Ltd) Zen 99 Pty Ltd ACN 010 853 817 Pty Ltd (formerly Orrcon Holdings Pty Ltd) ACN 094 103 090 Pty Ltd (formerly Orrcon Operations Pty Ltd) ACN 093 760 895 Pty Ltd (formerly Orrcon Tubing Pty Ltd) Access Television Services Pty Ltd Country of incorporation Class of shares Australia Ordinary New Zealand Ordinary New Zealand Ordinary Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary (i) These companies are controlled by virtue of the Company’s control of the Company’s Board through the Chairman’s casting vote, effective management of the Company and exposure to the risks and benefits of ownership, or control of voting rights through the dilution of the minority shareholders. Equity holding 2015 % 2014 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 – 100 100 100 100 100 100 100 100 100 100 100 – 100 100 – – 100 100 100 100 100 – 100 100 100 50 50 100 100 100 100 100 100 100 100 100 107 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 30 INTERESTS IN OTHER ENTITIES (continued) (b) Non-controlling Interests (NCI) Assets and Liabilities Acquired There is no individual subsidiary that has non-controlling interests that are material to the Group in either the current or the prior financial year. Accordingly, summarised financial information is provided in aggregate for all subsidiaries with non-controlling interests. The amounts disclosed are before intercompany eliminations. Summarised statement of financial position Current assets Current liabilities Current net assets Non–current assets Non–current liabilities Non–current net assets Net assets Accumulated NCI Summarised statement of comprehensive income Revenue Profit for the period Total comprehensive income Profit allocated to NCI Dividends paid to NCI Summarised cash flows Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net (decrease) / increase in cash and cash equivalents (c) Transactions with Non-controlling Interests On 25 June 2015 the Group sold its interest in Cygnus Satellite Pty Ltd. In the previous financial year, on 2 January 2014 the Group acquired the remaining 49% of UHS Systems Pty Ltd, for consideration of $5.000 million. Carrying amount of non-controlling interests acquired / (diluted) Consideration paid to non-controlling interests Impact of acquisition / dilution recognised in the transactions with non-controlling interests reserve within equity 2015 $’000 – – – 2014 $’000 505 (5,000) (4,495) 108 2015 $’000 2014 $’000 – – – – – – – – 3,867 2,591 1,276 834 – 834 2,110 1,063 8,544 31,809 333 333 167 732 (558) (139) (1,603) (2,300) 3,419 3,419 1,589 90 3,314 (242) (226) 2,846 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements 31 PARENT ENTITY FINANCIAL INFORMATION (a) Summary Financial Information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Contributed equity Reserves Asset revaluation reserve Hedging reserve – cash flow hedges Equity compensation reserve Profits reserve Retained earnings (Loss) / profit for the year Total comprehensive income 2015 $’000 2014 $’000 109,233 219,292 97,300 153,530 206,533 372,822 31,308 139,106 49,506 41,555 80,814 180,661 125,719 192,161 278,439 281,624 – 15,809 151 754 (638) 721 32,859 35,613 (186,484) (140,968) 125,719 192,161 (45,530) 47,876 (50,724) 40,335 (b) Guarantees Entered into by the Parent Entity Bank guarantees given by the Company in favour of customers and suppliers amounted to $9.224 million (2014: $6.719 million). guaranteed the debt in each other’s companies. Guarantees amount to $149.255 million (2014: $150.143 million). No material deficiency in net tangible assets exists in these companies at reporting date with net tangible assets amounting to $53.297 million (2014: $91.946 million). Cross guarantees are given by the Company and its wholly owned subsidiaries as described in note 32. Under the terms of the Deed of Cross Guarantee the Company and its wholly owned subsidiaries have (c) Contingent Liabilities of the Parent Entity The parent entity had a contingent liability in respect of claims, as disclosed in note 25. For information about guarantees given by the parent entity, please see above. (d) Contractual Commitments for the Acquisition of Plant or Equipment As at 30 June 2015, the Company had contractual commitments for the acquisition of plant or equipment totalling $2.126 million (2014: $2.348 million). These commitments are not recognised as liabilities as the relevant assets have not yet been received. 109 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 (continued) 32 DEED OF CROSS GUARANTEE Pursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, the wholly owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Director’s reports. It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: Subsidiary Hills Finance Pty Ltd Hills Hoists Pty Ltd Woodroffe Industries Pty Ltd ACN 010 853 817 Pty Ltd (formerly Orrcon Holdings Pty Ltd) ACN 094 103 090 Pty Ltd (formerly Orrcon Operations Pty Ltd) Hills Polymers Pty Ltd ACN 091 954 442 Pty Ltd (formerly Fielders Australia Pty Ltd) Access Television Services Pty Ltd Hills Health Solutions Pty Ltd Hills Group Operations Pty Ltd New-Tone (Aust) Pty Ltd TV Rentals Pty Ltd Zen 99 Pty Ltd Lan 1 Pty Ltd Hills Integrated Solutions Pty Ltd Audio Products Group Pty Ltd Hospital Telecommunications Pty Ltd Date of becoming a party to the Deed 15 April 2004 15 April 2004 15 April 2004 23 June 2006 23 June 2006 14 May 2008 29 June 2010 29 June 2010 25 June 2014 25 June 2014 25 June 2014 25 June 2014 25 June 2014 25 June 2014 31 March 2015 31 March 2015 15 May 2015 Hills Limited is the Holding company and Pacom Security Pty Ltd is the Trustee under the Deed. The above companies represent a ‘closed group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by Hills Limited, they also represent the ‘extended closed group’. Set out below is a Consolidated income statement, a Consolidated statement of comprehensive income, a summary of movements in consolidated retained earnings for the year ended 30 June 2015 and a Consolidated statement of financial position as at 30 June 2015 of the Company and controlled entities that are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee. 110 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements (a) Consolidated Income Statement, Consolidated Statement of Comprehensive Income and Summary of Movements in Consolidated Retained Earnings Consolidated income statement Revenue from continuing operations Other income Finance costs Other expenses (Loss) / profit before income tax Income tax expense Profit from discontinued operations (Loss) / profit for the year Consolidated statement of comprehensive income (Loss) / profit for the year Other comprehensive income: Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges Income tax relating to these items Other comprehensive income for the year that may be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Reversal of previous revaluations of land and buildings Income tax relating to these items Other comprehensive loss for the year that will not be reclassified to profit or loss, net of tax Other comprehensive loss for the period, net of tax Total comprehensive (loss) / income for the year Summary of movements in consolidated retained earnings 2015 $’000 2014 $’000 384,208 386,692 5,183 1,032 (3,239) (3,580) (445,673) (373,148) (59,521) 10,996 (27,032) – (584) 8,018 (86,553) 18,430 (86,553) 18,430 1,127 (338) 789 1,084 (325) 759 (7,534) (14,227) 2,261 4,268 (5,273) (9,959) (4,484) (9,200) (91,037) 9,230 Accumulated losses at the beginning of the financial year (81,228) (93,177) Adjustment for subsidiaries entering the deed of cross guarantee – 11,949 (Loss) / profit for the year Transfer to profits reserve Accumulated losses at the end of the financial year (86,553) 18,430 – (18,430) (167,781) (81,228) 111 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 32 DEED OF CROSS GUARANTEE (continued) (b) Consolidated Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Assets classified as held for sale Total current assets Non-current assets Trade and other receivables Investments Property, 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 Derivative financial instruments Total current liabilities Non-current liabilities Borrowings Provisions Derivative financial instruments Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity 112 2015 $’000 2014 $’000 16,044 40,649 86,106 93,222 66,867 52,687 526 – 169,543 186,558 – 7,800 169,543 194,358 653 1,102 – 1,301 31,471 45,430 35,845 80,725 30,460 55,614 99,531 183,070 269,074 377,428 66,873 70,867 5,831 – 172 686 26,675 36,977 310 384 99,689 109,086 45,000 35,000 4,566 5,530 – 527 49,566 41,057 149,255 150,143 119,819 227,285 278,439 281,624 9,161 26,889 (167,781) (81,228) 119,819 227,285 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements 33 RECONCILIATION OF PROFIT AFTER INCOME TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES (Loss) / profit for the year Depreciation and amortisation Impairment of goodwill Impairment of trade receivables Impairment of inventories Impairment of property, plant and equipment Impairment of intangible assets Net (gains) on disposal of businesses 2015 $’000 2014 $’000 (85,780) 26,387 11,075 9,197 55,353 314 3,722 1,053 – 835 2,117 936 5,662 10,475 (1,853) (14,596) Non-cash employee benefits expense – share-based payments 33 63 Net (gain) loss on sale of non-current assets (including assets held for sale) (292) (303) Fair value adjustment to derivatives Wind back of discounts on provisions Rent received Change in operating assets and liabilities, net of effects from purchases and sales of controlled entities and business operations: Decrease / (increase) in trade and other receivables (Increase) in inventories Decrease in deferred tax assets (Decrease) / increase in trade and other creditors (Decrease) / increase in provision for income taxes payable (Decrease) in other provisions Net cash flows from operating activities (169) – (302) 346 (3,149) (1,777) 13,944 (14,955) (16,854) (18,313) 27,014 4,071 (9,994) (1,374) 625 797 (11,748) (20,930) (13,043) (15,327) 113 Hills Limited Annual Report for the year ended 30 June 2015 Notes to the consolidated financial statements For the year ended 30 June 2015 34 REMUNERATION OF AUDITORS During the year the following fees were paid or payable for services provided by the auditor of the Company, its related practices and non related audit firms: Audit services Audit and other assurance services 2015 $ 2014 $ KPMG Australia – audit and review of the financial statements 485,909 628,000 Overseas KPMG firms – audit and review of the financial statements 38,957 22,140 Total remuneration for audit and other assurance services 524,866 650,140 Taxation services KPMG Australia – taxation and other services Overseas KPMG firms – taxation services Total remuneration for taxation services Other services Financial advisory services Other consulting services Total remuneration for other services 203,867 102,520 40,253 24,367 244,120 126,887 397,534 833,235 - 40,268 397,534 873,503 Total remuneration for audit and non-audit services 1,166,520 1,650,530 35 EVENTS OCCURRING AFTER THE REPORTING PERIOD No matter or circumstance has occurred subsequent to year end that has signifi- cantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. 114 Non-audit fees remained high during the year due to significant work performed in relation to the Company’s restructure and transformation programme, in particular the sale of non-core businesses. These sale transactions were expected to complete early in the financial year, but sales were not complete until June 2015. Non-audit fees will return to normal levels in 2016. Hills Limited Annual Report for the year ended 30 June 2015 Directors’ declaration In the opinion of the Directors of Hills Limited (the Company): (a) the consolidated financial statements and notes set out on pages 43 to 114 and the Remuneration Report on pages 19 to 38 are in accordance with the Corporations Act 2001, including: (i) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (ii) giving a true and fair view of the Group’s financial position as at 30 June 2015 and of its performance for the financial year ended on that date; and (b) 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 (c) there are reasonable grounds to believe that the Company and the Group Entities identified in note 32 will be able to meet any obligations or liabilities to which they are, or may become, subject to by virtue of the Deed of Cross Guarantee between the Company and those Group Entities pursuant to ASIC Class Order 98/1418. Note 1(a) confirms that the consolidated financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. David Spence Director Sydney 24 August 2015 115 Hills Limited Annual Report for the year ended 30 June 2015 116 Hills Limited Annual Report for the year ended 30 June 2015 117 Hills Limited Annual Report for the year ended 30 June 2015 Shareholder information The shareholder information set out below was applicable as at 19 August 2015. A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Holding 1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over There were 3,620 holders of less than a marketable parcel of ordinary shares. Class of equity security Ordinary shares Percentage of issued shares 4,171 6,797 3,112 2,862 125 17,067 B. Equity Security Holders The names of the twenty largest holders of quoted equity securities are listed below: Ordinary shares Name J P Morgan Nominees Australia Limited Hills Associates Limited Poplar Pty Limited Citicorp Nominees Pty Limited Hsbc Custody Nominees (Australia) Limited Jacaranda Pastoral Pty Ltd Cariste Pty LtdGreybox Holdings Pty Ltd National Nominees Limited Brispot Nominees Pty Ltd Donald Cant Pty Ltd Bnp Paribas Noms Pty Ltd Hills Associates Limited + Poplar Pty Ltd Colleen Sims Nominees Pty Ltd Ace Property Holdings Pty Ltd Cariste Pty Ltd Venn Milner Superannuation Pty Ltd Mr Gregory Victor Shalit + Ms Miriam Faine Vagana Pty Ltd Mr John Gassner + Mr Nathan Rothchild C. Substantial Holders Substantial holders in the Company are set out below: Holding Poplar Pty Ltd 1 Hills Associates Limited Dimensional Entities Number held 17,811,190 16,568,441 16,550,845 9,749,365 8,040,083 5,968,699 5,585,000 4,490,042 3,413,659 2,938,265 1,337,578 1,326,469 1,188,918 1,129,866 1,080,000 1,006,872 1,000,000 970,000 700,000 620,001 Percentage of issued shares 7.68 7.14 7.13 4.20 3.47 2.57 2.41 1.94 1.47 1.27 0.58 0.57 0.51 0.49 0.47 0.43 0.43 0.42 0.30 0.27 101,475,293 43.75 Number held Percentage of issued shares 23,096,031 16,568,441 12,011,643 9.96 7.14 5.02 1 The total number of shares held includes the joint shareholding held by Poplar Pty Ltd and Hills Associates Limited. 118 Hills Limited Annual Report for the year ended 30 June 2015 Shareholder information I. Offices and Officers Company Secretary Ms Gai Stephens Principal Registered Office Level 7, 130 Pitt Street, Sydney NSW 2000 Telephone: (02) 9216 5510 Facsimile: (02) 9216 5999 Web: http://www.hills.com.au Locations of Share Registries Computershare Investor Services Pty Ltd Level 5, 115 Grenfell Street Adelaide, SA 5000 Telephone (within Australia): 1300 556 161 Telephone (outside Australia): +61 3 9415 4000 Facsimile (within Australia): 1300 534 987 Facsimile (outside Australia): +61 3 9473 2408 Internet address: www.computershare.com.au D. Voting Rights The voting rights attaching to each class of equity securities are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Rights / Options No voting rights. E. On-market Buyback Details of the on-market buyback are disclosed in note 19. F. Direct Payment to Shareholder Accounts Dividends may be paid directly to bank, building society or credit union accounts in Australia. Payments are electronically credited on the dividend date and confirmed by mailed payment advice. Shareholders who want their dividends paid this way should advise the Company’s share register in writing. G. Securities Exchange The Company is listed on the Australian Securities Exchange. The home exchange is Adelaide. H. Other Information Hills Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. 119 Hills Limited Annual Report for the year ended 30 June 2015 This page has been left blank intentionally. 120 Hills Limited Annual Report for the year ended 30 June 2015 This page has been left blank intentionally. 121 Hills Limited Annual Report for the year ended 30 June 2015 This page has been left blank intentionally. 122 Hills Limited Annual Report for the year ended 30 June 2015 Hills Limited Registered Office Level 7 130 Pitt Street Sydney NSW 2000 t + 61 2 9216 5510 f + 61 2 9216 5599 e info@hills.com.au w hills.com.au ABN 35 007 573 417 ABN 35 007 573 417 hills.com.au