Hills Limited
ABN 35 007 573 417
Annual report
for the year ended 30 June 2016
Hills Limited ABN 35 007 573 417
Annual report - 30 June 2016
Contents
Shareholders’ Letter
Directors' report
Auditor's independence declaration
Financial statements
Directors’ declaration
Independent auditor's report to the members
Shareholder information
Corporate directory
Page
2
5
37
38
95
96
98
100
Shareholders’ Letter
Dear Shareholders,
There is no doubt that a lot has happened in the past 12 months and that this period has been crucial in the long history of
our Company. We think it’s worth reflecting on some of the key milestones as we’ve worked through the past 12 months:
September 2015 – Letter to Shareholders
We explained the strategic imperatives behind the decision to transform our Company from a conglomerate dependent
upon low margin, capital intensive steel fabrication to a higher margin value-added distributor of security, Audio Visual (AV)
and Health technology products and services. This was achieved by:
exiting capital intensive manufacturing operations exposed to competition from low cost products;
exiting Joint Ventures reliant on only one or two customers;
reducing foreign exchange exposure;
reducing occupational health and safety liabilities; and
utilising the funds from the sale of assets to pay down debt and give our Company a sound balance sheet.
Whilst the transformation and restructure programme was critical for the long term future of the Company, it was not a
smooth process. We explained that the next phase of our journey was to stabilise the business, consolidate and then
grow.
November 2015 – at the Annual General Meeting
We outlined the key focus for FY2016 which was to stabilise the business through a “Back to Basics” program by:
changing the management team to focus on consolidating and growing the businesses in Australia and New
Zealand;
progressively replacing revenue foregone from Crestron (following their decision to move to a direct distribution
model globally), with new suppliers including Tyco, Vivotek and Ipsotek;
building a deeper and stronger sales pipeline;
improving margins; and
further reducing the Company’s cost base.
February 2016 – FY2016 First Half Results announcement
We announced the first half EBITDA of $5.4million which was better than expected at the time of the November AGM. We
reported a net debt position of $38.5million as at 31 December 2015 and set our outlook for the full year FY2016 with the
expectation that second half EBITDA would be higher than the first.
Hills Limited Annual Report for the year ended 30 June 2016 2
Shareholders’ Letter (continued)
August 2016 – FY2016 Full Year Results announcement
Statutory reported results
The net loss after tax for the full year FY2016 of $68.3million reflects the impairments of goodwill, intangible assets,
deferred tax assets and freehold property already recognised in the first half of the financial year. Revenue and EBITDA
in FY2015 included certain business operations that have ceased or were disposed of, the Home Division as a trading
business before it was converted to a brand licensing arrangement and Crestron sales (Crestron moved to a global direct
model in FY2015).
Improving trading EBITDA results
We are pleased to report that our full year FY2016 EBITDA result of $11.7million is 8.3% higher than the guidance number
we had provided at the first half results announcement. As you will see in the Review of Operations section of the Directors’
report, our key Building Technologies Segment showed an improvement in both Revenue and EBITDA for the second half,
while the Hills Health Solutions Segment went from an EBITDA loss of $0.1million at the end of the first half of FY2016 to
an EBITDA profit of $1.4million in the second half. These are further evidence of our “Back to Basics” business stabilisation
program, as discussed at the AGM, delivering improvements to our trading results.
Reduced net debt
Hills net debt at the end of FY2016 was $24.2million – a significant $14.3million reduction from the net debt position at 31
December 2015.
The Company’s long term financing facilities were updated in May 2016 and now comprise:
a $36 million, 5-year debtor finance facility originated through Assetsecure; and
a $15 million, multi-tranche senior secured debt facility from the Commonwealth Bank of Australia
($10million for 18months and $5 million for 12 months). The $5million 12-month tranche has since been
repaid and cancelled.
Hills’ new long-term facilities are a better fit-for-purpose for the Company both in terms of their size and nature.
Reduced working capital
The net debt reduction was driven for the most part by a substantial decrease in our investment in working capital which
was very pleasing given the increased attention given to this dimension of the business this year. Inventory in particular
has been a key focus during the financial year with the Inventory holding reducing by $16.8 million from $72.4 million at
30 June 2015 to $55.6 million at 30 June 2016.
Improved operating cash flows
Cash generated from operating activities for FY2016 was an inflow of $9.4 million. This was a $22.4 million improvement
from the FY2015 outflow of $13 million. The excellent turnaround in operating cash flow is calculated after the payout of
$10.3 million in legacy restructure provisions in FY2016 ($12.5 million in FY2015). These payments cover warranty costs,
make-good provisions, onerous lease costs, redundancy and restructuring costs resulting from the sale of steel and
industrial assets in prior years. The remaining provision payouts for FY2017 will be approximately $3million. This will
result in a marked improvement in Hills’ cash flow in FY2017.
Hills Limited Annual Report for the year ended 30 June 2016 3
Hills Limited
Directors’ report
30 June 2016
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 2016 (FY2016), 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
Principal activities
The principal activities of Hills during the course of the year are outlined within the Review of operations.
Review of operations
Statutory Result Overview
The Company recorded a net loss after tax attributable to owners of $68.305 million for the year ended 30 June 2016. 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 de-recognised $20.262 million of deferred tax assets during the financial year.
Notwithstanding the accounting de-recognition, these tax benefits will continue to be available to be used to offset future taxable
earnings in Hills tax returns going forward.
The Company’s underlying FY2016 result was a loss of $0.775 million (note that this is a non IFRS measure and is not subject
to audit or review).
The reconciliation between statutory and underlying profit is set out below:
Net loss after tax attributable to the owners of the Company
Items not considered part of underlying profit1
2016
$'000
(68,305)
67,530
2015
$'000
(85,947)
96,992
Underlying net (loss) / profit after tax for the year attributable to the owners of the Company
(775)
11,045
Revenue and profits in FY2015 included certain business operations that have ceased or were disposed of, the Home Division
as a trading business before it was converted to a brand licensing arrangement and Crestron sales (Crestron moved to a global
direct model in FY2015).
1 Underlying net (loss) / profit has been calculated after adjusting the (loss) / profit attributable to the ordinary equity holders of the Company for
the impact of asset impairments, de-recognition of deferred tax assets relating to tax losses and other temporary differences, costs of
acquisitions, other associated gains or losses on the disposal of businesses and other restructure and closure costs. Underlying (loss) / profit is
a non-IFRS measure used by the Company which is relevant because it is consistent with the 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 program. The non-IFRS measure
has not been subject to audit or review.
Hills Limited Annual Report for the year ended 30 June 2016 5
Hills Limited
Directors’ report
30 June 2016
(continued)
Review of operations (continued)
Description of Segments
Hills currently has the following reportable segments with the following summaries describing the operations of the Company’s
reportable segments:
Hills Building
Technologies
Value added distributor of 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.
Hills Health
Solutions
Home
Comprising the supply and installation of health technology solutions, Nursecall and patient
entertainment systems to hospitals, aged care facilities and similar institutions.
Comprising the Hills Home Living business. The Hills Heritage brand was licensed to
Woolworths Limited for a period of 7 years from December 2014, 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.
Corporate
Comprising the costs of running Hills’ Corporate, Compliance and Shared Services
functions.
Review of Operations by Reportable Segment – showing half on half results
The tables above show the operating segment results by half with reference to the full year Segmental Information (note 1 of the
Consolidated Financial Statements) and the half year Segmental Information (note 2 of the first half Interim Financial
Statements).
Earnings before interest, tax, depreciation and amortisation (EBITDA) is the profit measure used by the business in assessing
operational performance as discussed in note 1 to the Consolidated Financial Statements.
Hills Limited Annual Report for the year ended 30 June 2016 6
Revenue (A$M)2HFY161HFY16FY20162HFY151HFY15FY2015Building Technologies147.1 146.9 294.0 182.9 165.5 348.4 Health15.8 15.5 31.3 15.9 17.6 33.5 Home1.0 1.0 2.0 16.5 27.3 43.8 Corporate0.8 0.8 1.6 1.6 1.6 3.1 Segment Revenue164.7 164.2 328.9 216.8 212.0 428.8 EBITDA (A$M)2HFY161HFY16FY20162HFY151HFY15FY2015Building Technologies6.2 5.9 12.1 11.9 14.9 26.8 Health1.4 (0.1)1.3 0.6 3.5 4.1 Home0.9 0.9 1.8 0.4 6.0 6.4 Corporate(2.0)(1.5)(3.5)(4.3)(4.0)(8.3)Segment EBITDA6.5 5.2 11.7 8.6 20.4 29.0
Hills Limited
Directors’ report
30 June 2016
(continued)
Review of Operations (continued)
Review of Operations by Reportable Segment (continued)
Hills Building Technologies Segment
Security and CCTV Practice
Provides Australia and New Zealand with leading security, CCTV and IT solutions to protect homes, businesses and places
where large crowds may gather, such as at sporting events, entertainment facilities, shopping centres and other public
gatherings.
Product offering includes:
Integrated access
Card access
Intruder alert
Cameras
Home hub
Locks
Analytics software
Competitive advantage comes from:
Vendor
Relationships
Customer
Relationships
Expert
Resources
Geographic
Footprint
Size
Long term vendor relationships allow the business to provide its customers with access to the
largest Security Product Portfolio in the industry
The business adds value for its customers by providing them with a full “solution” to their security
needs - Hills is a market-leading “one stop shop”. This includes pre and post installation service
The business has invested in a dedicated and highly experienced team of security experts
across Australia & New Zealand covering sales and technical support
The business has the largest national footprint in Australia and New Zealand making its solutions
accessible for its customers
Companies like dealing with the business because it has high levels of governance, ability to
extend credit and it has sophisticated systems and processes
Audio Visual Practice
Provides businesses in Australia and New Zealand with the next generation of audio visual and lighting technology for homes,
businesses, sporting and entertainment venues.
Product offering includes:
Microphones
LCD Displays
Projectors
Hearing Augmentation
Competitive advantage comes from:
Vendor
Relationships
Customer
Relationships
Expert
Resources
Geographic
Footprint
Size
Long term vendor relationships allow the business to provide its customers with access to the
largest AV Product Portfolio in the industry
The business adds value for its customers by providing them with a full “solution” to their security
needs - Hills is a market-leading “one stop shop”. This includes pre and post installation service
The business has invested in a dedicated and highly experienced team of Audio Visual experts
across Australia & New Zealand covering sales and technical support
The business has the largest national footprint in Australia and New Zealand making our solutions
accessible for its customers
Companies like dealing with the business because it has high levels of governance, ability to
extend credit and it has sophisticated systems and processes
Hills Limited Annual Report for the year ended 30 June 2016 7
Hills Limited
Directors’ report
30 June 2016
(continued)
Review of Operations (continued)
Review of Operations by Reportable Segment (continued)
Building Technologies Segment (continued)
Communications & Satellite Practice
Provides Australian and New Zealand consumers and businesses with communication solutions whether they are in the city or
the outback. Hills delivers technology and equipment to enable television viewing in homes, stadiums, hotels, offices and more,
all around Australia and New Zealand.
Product offering includes:
Antenna
Set top boxes
Digital TV Systems
Professional Services
Installations
Competitive advantage comes from:
Service Model
The business has a unique service model – it is able to harness large teams of installers to
service high volume contracts such as wireless and satellite rollout on behalf of NBN or
satellite dishes for Foxtel
Local Manufacture
Nimble local manufacture of antennas and satellite dishes and consumables
Intellectual
Well-respected product with patent protection
R&D
A small R&D team making sure the business’s products evolve and keep ahead of
competitors
Segment performance
During the prior financial year Crestron, the Company’s largest single supplier, advised that they were establishing a local
Australian presence with effect from FY2016 and accordingly the Company’s long term vendor agreement came to an end. At
the same time, 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 has replaced Tyco’s
previous local distributors on a phased basis during FY2016. It was anticipated that Tyco and other new distribution
arrangements would replace the lost revenue and margin of Crestron in FY2016 and FY2017 but this is taking longer than
initially expected.
Building Technologies is a distributor and as such the winning and losing of supply agreements is part of its ordinary business.
The Segment achieved significant contract wins within key areas of airports, higher education and correctional facilities. The
successful contracts include:
Supply of Ruckus Wi-Fi networks at Western Sydney University in partnership with Big Air Group Limited;
Supply of Genetec unified IP security solutions at Auckland International Airport with Datacom NZ;
Upgrade of the acoustics solutions in lecture theatres at Newcastle University in conjunction with Soundcorp; and
Supply of Genetec unified IP security solutions at Sydney Trains with Indra Australia
The supply of L-Acoustics speakers to Novatech in South Australia and Power Audio in Victoria;
As a value added distributor, Hills continually refreshes its product range by partnering with leading edge vendors. Hills has
recently added Community Sound and Cadac to its suite of vendors and ceased its distribution arrangement with Biamp.
Building Technologies revenue and EBITDA decreased in FY2016 relative to FY2015 driven by certain discontinued business
operations in FY2015, Crestron deciding to take the global distribution of their product back to a direct model for the full year
FY2016, however the second half Revenue and EBITDA both increased over the first half showing the “Back to Basics” program
gaining traction.
Hills Limited Annual Report for the year ended 30 June 2016 8
Hills Limited
Directors’ report
30 June 2016
(continued)
Review of Operations (continued)
Review of Operations by Reportable Segment (continued)
Hills Health Solutions Segment
Hills Health Solutions (HHS) is a market leader and comprises 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 strategic licencing agreement
between HHS and Ireland and US-based Lincor Solutions, a global leader in patient engagement technology and clinical access
platforms, assisted Hills in securing the installation of state-of-the-art systems at significant hospital developments including the
New Royal Adelaide Hospital and Blacktown Hospital.
Following disappointing results in FY2015, a new management team was put in place and HHS had a clear strategic vision
focussed on:
sales and costs to bring the business back to profit
optimising the product and services portfolio
ensuring the go to market model was appropriate; and
operational excellence and quality.
There has been a significant turnaround in the Hills Health Solutions Segment with EBITDA increasing from a loss of $0.1million
at the first half of FY2016, to a profit of $1.4 million in the second half of FY2016.
Home Segment
Following a period of unstable and declining profitability, Hills entered into a strategic relationship with Woolworths Limited from
December 2014 to licence the Hills Heritage brand, converting the original manufacturing and distribution business into an
annuity business. Under the terms of the agreement, Hills receives income from the use of the brand and intellectual property by
way of a minimum annual licencing fee of $2million per annum for a minimum of 7 years, starting from December 2014
(extendable for up to 19 years). Home revenues decreased from FY2015 to FY2016 due to the Segment converting from an
operational business making sales in FY2015 to the guaranteed licensing arrangement from the second half of FY2015.
The Home Segment reported an EBITDA of $1.8 million for FY2016 in line with the above (after the ongoing expensing of
certain small initial deal costs).
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 all of Hills operating segments in whole or in part, including those
segments that have since been disposed of (e.g. Steel). In some cases, the Company also entered into transitional services
agreements (TSAs) as part of the sale of its legacy businesses whereby Hills Corporate Centre continued to deliver 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 are being reduced.
Net Corporate EBITDA costs for FY2016 were $3.5million, down $4.8million from FY2015 (net cost of $8.3million). The second
half of FY2016 showed a small increase of $0.5million related to the conclusion of the Company’s last remaining TSA income
arrangement on its legacy Steel business. The business is continuing to seek cost reductions for this segment including
through the further flattening of the organisation structure.
Reduced net debt
Hills net debt at the end of FY2016 was $24.2million – a significant $14.3million reduction from the net debt position at 31
December 2015.
The Company’s long term financing facilities were updated in May 2016 and now comprise:
a $36 million, 5-year debtor finance facility originated through Assetsecure; and
a $15 million, multi-tranche senior secured debt facility from the Commonwealth Bank of Australia ($10million for
18months and $5 million for 12 months). The $5million 12-month tranche has since been repaid and cancelled.
Hills’ new long-term facilities are a better fit-for-purpose for the Company both in terms of their size and nature.
Hills Limited Annual Report for the year ended 30 June 2016 9
Hills Limited
Directors’ report
30 June 2016
(continued)
Review of Operations (continued)
Reduced working capital
The net debt reduction was driven for the most part by a substantial decrease in investment in working capital which was very
pleasing given the increased attention given to this dimension of the business this year. Inventory in particular has been a key
focus during the financial year with the Inventory holding reducing by $16.8m from $72.4m at 30 June 2015 to $55.6m at 30 June
2016.
Improved operating cash flows
Cash generated from operating activities for FY2016 was a positive $9.4million. This was a $22.4million improvement from the
FY2015 outflow of $13million. It is important to highlight that the excellent turnaround in operating cash flow is calculated after
having paid out $10.3million in legacy restructure provisions in FY2016 ($12.5million in FY2015). These provision payouts have
covered things like warranty costs, make-good provisions, onerous lease costs, redundancy and restructuring cost payouts.
These costs have been a legacy of the exit by Hills of the Steel and industrial businesses and these are now coming to an end.
In FY2017, it is expected that the remaining restructure provision payouts will be approximately $3million in the first half and these
then essentially phase out to immaterial amounts beyond that point. This will generate a marked improvement in Hills’ ongoing
normal operating cash generation going forward.
Outlook: From “Back to Basics” to “Back to Growth”
Significant energy continues to be directed to the following areas:
Customer engagement;
Vendor relationships;
Training our people;
Tight capital management;
Margin improvement; and
Growing Hills’ existing businesses.
The Company will start to move beyond the recent stabilisation phase and focus on growth opportunities in FY2017 and beyond.
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.
Dividends
Year ended 30 June 2016
No dividends were paid during the year and no final dividend has been declared.
Year ended 30 June 2015
Fully franked dividends (based on tax paid at 30%) were paid on the follow dates:
26 September 2014: $8.400 million (3.6 cents per fully paid share)
30 April 2015: $4.872 million (2.1 cents per fully paid share)
A final dividend was not declared for the year.
For more information regarding dividends please refer to note 16 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.
Hills Limited Annual Report for the year ended 30 June 2016 10
Hills Limited
Directors’ report
30 June 2016
(continued)
Likely developments and expected results of operations
For likely developments please refer to the Review of Operations section of the Directors’ report.
Information on Directors
Name
Details
Jennifer Helen Hill-Ling
Experience and expertise
LLB (Adel) FAICD
Chairman
Non-Independent
Non-Executive Director
Age 54
Appointed Director in August 1985. Appointed Deputy Chairman in June 2004. Appointed
Chairman 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
18,146,677 ordinary shares in Hills Limited (including 1,188,918 shares owned by Hills
Associates Limited and Poplar Pty Ltd (jointly held) and 16,768,441 shares owned by Hills
Associates Limited of which JH Hill-Ling is a Director).
Nil options over ordinary shares in Hills Limited.
Fiona Rosalyn Vivienne
Bennett
Experience and expertise
Appointed non-executive Director on 31 May 2010.
BA (Hons) FCA FAICD
FAIM
Independent
Non-Executive Director
Age 60
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.
Other current listed company directorships
Director of Beach Energy Limited (since November 2012)
Former listed company directorships in last 3 years
Director of Boom Logistics Limited (retired in June 2015)
Special responsibilities
Chairman of the Audit, Risk and Compliance Committee.
Interests in shares and options at the date of this report
88,444 ordinary shares in Hills Limited.
Nil options over ordinary shares in Hills Limited.
Hills Limited Annual Report for the year ended 30 June 2016 11
Hills Limited
Directors’ report
30 June 2016
(continued)
Information on Directors (continued)
Name
Details
Philip Bullock
BA, MBA, GAICD, Dip.
Ed.
Independent
Non-Executive Director
Age 63
Ian Elliot
FAICD
Independent
Non-Executive Director
Age 62
Experience and expertise
Appointed non-executive Director on 23 June 2014.
Mr 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, and
formerly of CSG Limited and 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
Non-executive director of Perpetual Limited (since June 2010)
Former listed company directorships in last 3 years
Non-executive Director of CSG Limited (August 2009 to November 2015).
Special responsibilities
Chairman of the Remuneration Committee; Member of the Audit, Risk and Compliance
Committee and Member of the Nomination Committee
Interests in shares and options at the date of this report
100,000 ordinary shares in Hills Limited.
Nil options over ordinary shares in Hills Limited.
Experience and expertise
Appointed non-executive Director in August 2003.
Ian Elliot has spent 39 years in marketing. His speciality is brand building, with extensive
involvement in a number of icon 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 (CEO) of
George Patterson Advertising and director of the National Australia Day Council.
Other current listed company directorships
Director of Salmat Limited (since 2005)
Director of McMillan Shakespeare Limited (since May 2014)
Former listed company directorships in last 3 years
None.
Special responsibilities
Chairman of the Nomination Committee; Member of the Remuneration Committee.
Interests in shares and options at the date of this report
51,735 ordinary shares in Hills Limited.
Nil options over ordinary shares in Hills Limited.
Hills Limited Annual Report for the year ended 30 June 2016 12
Hills Limited
Directors’ report
30 June 2016
(continued)
Information on Directors (continued)
Name
Details
David Moray Spence
BCom
Independent
Non-Executive Director
Age 64
Experience and expertise
Appointed non-executive Director on 1 September 2010.
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
Chairman of Vocus Communications Limited (since June 2010)
Director of SAI Global (since October 2013)
Former listed company directorships in last 3 years
None.
Special responsibilities
Member of the Remuneration Committee; Member of the Audit, Risk and Compliance
Committee.
Interests in shares and options at the date of this report
442,272 ordinary shares in Hills Limited.
Nil options over ordinary shares in Hills Limited.
Company Secretary
Gai Stephens BEC, LLB, LLM, GAICD, FCA, FTIA, FGIA Company Secretary
Ms 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 matters associated with Hills. 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.
Hills Limited Annual Report for the year ended 30 June 2016 13
Hills Limited
Directors’ report
30 June 2016
(continued)
Meetings of Directors
The numbers of meetings of the Company's Board of Directors and of each Board Committee held during the year ended 30
June 2016, and the numbers of meetings attended by each Director were:
Full meetings of
Directors
Audit, Risk and
Compliance
Committee
Nomination
Committee
Remuneration
Committee
Held1
Attended
Held1
Attended
Held1
Attended
Held1
Attended
J Hill-Ling
F Bennett
P Bullock2
I Elliot
D Spence
19
19
19
19
19
19
17
18
13
14
-
6
6
-
6
-
6
6
-
5
1
-
1
1
-
1
-
1
1
-
3
-
1
3
3
3
-
1
3
3
1 Number of meetings held during period that the Director held office or was a member of the committee during the year
2 Mr Philip Bullock joined the Remuneration Committee on 22 February 2016
Hills Limited Annual Report for the year ended 30 June 2016 14
Hills Limited
Directors’ report
30 June 2016
(continued)
Letter from the Chairman of the Remuneration Committee
Dear Shareholders,
On behalf of your Board, I am pleased to present Hills’ FY2016 Remuneration Report which sets out remuneration information for
the Chief Executive Officer (CEO), the Key Management Personnel (KMP), the Non-Executive Directors and the broader
employee group.
In May 2015 the Board reconfirmed its focus on the domestic market and the technology value-added distribution and health
sectors with the appointment of a new CEO, Grant Logan, and the adoption of our “Back to Basics” program. These actions were
designed to stabilize our business, rebuild confidence by our suppliers and customers and set Hills on a path for growth beyond
FY2016.
Given that we had already gone through a number of years of restructuring, we knew that the road ahead would be challenging
for our people. In light of this we attempted to ensure that we targeted our remuneration actions in a manner which complemented
our “Back to Basics program”, was cognizant of the financial position of the Company, while keeping in mind our desire for growth
post FY2016.
FY2016 remuneration outcomes
Let us first turn to the broader population. Given the restructuring that Hills had undergone and the current state of the businesses,
we believed that we could not afford to retain some of the existing cost structures. Hence as of 1 July 2015, Hills employed
approximately 734 FTE and by 30 June 2016, this had been reduced to 673 (as per the May 16 update to market). In addition,
the number of staff earning over $150,000 was reduced from 64 to 39. Reducing staff numbers is never easy, it can be emotionally
draining, but in this case, it was an essential part of helping position Hills for future growth.
At the same time, we needed to recognize that those remaining, needed to continue to enhance our client and supplier
relationships. With this in mind, we budgeted for an overall increase in employee salaries by between 2.0% - 3% for FY2016.
However, the focus for this increase was those employees earning less than $150K fixed remuneration, in fact there were no
increases for employees over $150K, subject to any changes of responsibilities. In addition, and to support the business
transformation we have implemented or continued with several employee benefits such as:
The monthly Hills Heroes Customer Service Awards for each region and state to reward and recognise our staff that provide
exemplary customer service.
Re-signed with AssurePrograms to provide manager support and employees assistance programs that are confidential and
available for work and personal related issues for employees and their immediate families.
Introduced “Purchase Leave” to provide employees with greater flexibility to manage family and personal responsibilities.
CEO remuneration
Grant Logan, our CEO, was tasked to help manage and lead our “Back to Basics” program, as well as oversee the renewal of our
financing arrangements. His compensation and contract details were provided at the time of his appointment and can be found
in:
http://corporate.hills.com.au/getattachment/ee581d11-ada8-4289-9414-2504de630c43/Appointment-of-a-new-Chief-Executive-
Officer
Actual earnings are detailed in the Statutory Remuneration tables below. We are very grateful to Grant for the way he has led the
team, in a difficult 12 months.
Remuneration of Key Management Personnel (KMPs)
As outlined in last year’s Remuneration Report, the compensation of our KMP was typically made up of:
Base Pay (including Superannuation)
Short Term Incentives (STI)
Long Term Incentives (LTI)
Hills Limited Annual Report for the year ended 30 June 2016 15
Hills Limited
Directors’ report
30 June 2016
(continued)
Letter from the Chairman of the Remuneration Committee (continued)
Given the restructuring of the Company during this transition phase, it was agreed to suspend the LTI for all KMPs and instead
focus our executives via targeted incentives which were critical for the FY2016 business. At the same time, we needed to be
mindful to balance the financial performance of the Company with the Variable Pay outcomes of the executives.
For FY2016, our executives’ Variable Pay pool totalled $0.835 million (primarily to be delivered through Short Term Incentives).
For FY2016, Hills will pay its KMPs $0.161 million or 19% of the Variable Pay Pool. This performance reflects the challenging
nature of the year, but also has rewarded key executives for their contributions. Without the attention and focus of our executive
team, Hills could not have progressed our turnaround. Actual amounts paid can be found in the Statutory Remunerations tables
below.
The focus on being targeted and attempting to build compensation structures consistent with a company the size of Hills, also led
to a review of Non-Executive Director compensation. As a result, all Non-Executive Director salaries were reduced by 20%
effective 1 May 2015.
Future remuneration strategies
As we move to complete our “Back to Basics” program, we need to ensure that we have in place a remuneration structure which
supports the ongoing sustainability and future growth of Hills. This is particularly valid for the leadership team who will drive this
next phase of our growth. Hence the focus of this section will be our key executives. For completeness, with regard to the broader
employee population, we have budgeted for salary increases of 2% to be distributed on merit, with a focus again on those earning
less than $150,000. In addition, there are no plans for any changes to non-executive director salaries.
In reviewing our executive compensation scheme, we wanted to ensure that:
Any plan strongly supported the Hills business strategy; and
was considered fair and equitable by both executives and shareholders.
Today a majority of listed companies in Australia operate on an executive KMP/CEO compensation scheme which is based upon:
Base salary
What I get for coming to work
STI
LTI
What I get for achieving my annual plan – both financial and non-financial
What I get if the Company does well over the next 3-4 years, normally based on earnings per share
(EPS) or relative Total Shareholder Returns (TSR) hurdles
Given that the average CEO has a tenure of 3-5 years, by the time they may be eligible for a LTI they are close to the end of their
term. Earnings per share, while being an important focus, may lead to some decisions regarding investments which may not be
in the longer term interests of the Company. In addition, TSR relativity for companies such as Hills is problematic as it is difficult
to find suitable comparable organizations. Hence the value of the LTI component is often discounted by the executives and in
some cases Base Pay and STI payments may be increased to compensate for non-payment of LTI and it does not always lead
to executives holding significant shares in their company, thus reducing alignment with shareholders.
For these and other reasons, Boards are seeking alternatives.
For our part, we believe that shareholder and executives are best aligned when executives are also significant shareholders and
the “rise and fall” of the Hills share price will impact the earnings of the leadership team.
In the Hills model, an executive will receive:
Base Pay
consistent with the market
Variable Pay
made up of cash and shares, paid annually
At the end of each year, an executive's performance is assessed based upon financial and non-financial criteria. The executive is
then paid an amount with 50% cash and 50% in shares which vest over three years.
Given that this type of package is relatively new, I will spend a little more time stepping through how we plan to implement the
new plan and how it supports the business strategy and aligns to the interests of both executives and shareholders.
Hills Limited Annual Report for the year ended 30 June 2016 16
Hills Limited
Directors’ report
30 June 2016
(continued)
Letter from the Chairman of the Remuneration Committee (continued)
Future remuneration strategies (continued)
If we were to consider the example of a future Executive, the package may be in the range of:
Base Pay
$250,000 - $350,000 including superannuation
Variable Pay
$100,000 - $200,000
The first item to note that the “at risk” portion of the compensation is a sizeable amount.
At the start of each year the Board approves the 3-year outlook and strategy for the Company and the annual budget. This forms
the basis for setting the annual objectives for the Variable part of the compensation plan.
The annual objectives for the Variable Pay are similar to those for an “STI” type package, but are heavily weighted to financial
items, such as outlined below.
Financial
Achieve net profit after tax (NPAT)
70% Target
Based upon agreed FY2017
Budget
Non-Financial
30% Target
Achieve net operating positive cash flow
Achieve days sales outstanding (DSO) / Inventory days
Achieve an agreed Employee Engagement Score
Demonstrate Quarterly Business Plans with Top 10 Suppliers and Customers
Following the conclusion of each financial year the Executive is assessed based upon the audited results of the Company and
rewarded according to the achievement against the objectives. The overall Variable Pay compensation is capped at 175% of
targeted remuneration.
The amount of Variable Pay is calculated and 50% is to be paid in cash and 50% to be paid in Hills Shares, on or around 1 Oct .
The share value is determined by the 30 day volume weighted average price (VWAP) following release of the annual audited
results. For example, if the Executive was to receive $90,000 in equity and the 30 day VWAP was $0.30 then he would receive
300,000 Hills performance rights, which would convert to ordinary shares upon vesting.
The shares will then vest over three years. Given that this is a new plan for our executives and to fast track the amount of equity
they will have in the Company we have decided to set the vesting periods as follows:
20%
vest after one year
30%
vest after two years
50%
vest after three years
On vesting, the shares will either be purchased on market or be a fresh issue of shares. The Company will make this determination
based on cash flow and capital management consideration.
During this 3-year period any dividends paid by the Company would be provided to the employee.
If an employee resigns (or is dismissed) prior to vesting, then they forfeit the shares that have not vested. If an employee retires
or due to ill-health, leaves the business, then they will receive the shares as they vest.
Within 3-5 years, executives would be expected to hold:
CEO
1.0 to 1.5 times Base Pay
Other Executives
0.5 times Base Pay
As you can appreciate, this plan closely aligns the Variable Pay to the outcomes of the Company. We have chosen to heavily
weight the financial outcomes at this stage, as this aligns closely with the milestones we have set ourselves for the Company and
should drive enhanced shareholder returns. The accumulation of shares by our executives is also an important element. As you
Hills Limited Annual Report for the year ended 30 June 2016 17
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report (audited)
This Remuneration Report explains Hills’ approach to executive remuneration, performance and remuneration outcomes for
Hills and its KMP for the year ended 30 June 2016 (FY2016). In this report, ‘senior executives’ refers to the KMP excluding non-
executive directors.
The information provided in the Remuneration Report has been audited as required by Section 308 (3C) of the Corporations Act
2001.
The Remuneration Report comprises the following sections:
1 Key Management Personnel
2 Remuneration Governance
3 Executive Remuneration
4 Executive Contracts and Termination Arrangements
5 Five Year Snapshot - Business and Remuneration Outcomes
6 Statutory Remuneration Tables
7 Non-Executive Directors’ Remuneration
8 Equity Instrument Disclosures Relating to Key Management Personnel
1
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 FY2016.
List of Key Management Personnel
Directors
J Hill-Ling
F Bennett
P Bullock
I Elliot
Chairman, Non-Independent and Non-Executive Director
Independent, Non-Executive Director
Independent, Non-Executive Director
Independent, Non-Executive Director
D Spence
Independent, Non-Executive Director
Senior Executives
G Logan
G Turner
D Lenz1
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
D McKim-Smith2
General Manager – Hills Health Solutions
G Stephens3
Company Secretary and Head of Legal and Risk
1 D Lenz was a KMP for the full financial year, as the head of the Technologies business until 13 April 2016 and as Chief Operating Officer
thereafter
2 D McKim-Smith commenced as General Manager – Hills Health Solutions on 30 November 2015
3 G Stephens was a KMP for the full financial year
Hills Limited Annual Report for the year ended 30 June 2016 19
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
2
Remuneration governance
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: Philip Bullock (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.
2.3 Hills share trading policy
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.
2.4 Hills Clawback Policy
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.
Hills Limited Annual Report for the year ended 30 June 2016 20
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
3
Executive remuneration (continued)
3.1 Alignment of Remuneration Strategy with Business Strategy (continued)
Remuneration principles
The key principles on which the 2016 Hills remuneration strategy was based are:
Competitive
Remuneration positioned at the appropriate level relative to the market to be
competitive and attract, retain and reward employees
Equitable &
Motivational
Linked to
Performance
Aligned
Employees in similar roles, making similar contributions, with similar performance,
received similar rewards
Motivated employees to deliver business results
Differentiated, but was fair and equitable in its application
Directly linked individual and company performance to remuneration outcomes
Employees understood what results needed to be achieved
Provided an integrated remuneration and performance system framework
Aligned remuneration and incentive outcomes with business goals and results
Supported the completion of the transformation and delivery of the growth strategy
Stands up to external scrutiny
Straightforward
Understood by all stakeholders and employees
Hills Business Strategy
Integrated solutions into trusted environments
Aligning executive reward
with achievement of
business strategy
objectives
Challenging KPIs focused on
financial and non-financial
measures which are aligned to
the Strategic Settings.
Remuneration Strategy
Motivate and reward outstanding
performance
Attract and retain key executive
talent
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 delivery the corporate
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 corporate strategy.
Aligned to the achievement of Hills
business objectives measured over the
short term (12 months).
Both financial and non-financial
measures directly support achievement
of the company’s strategic settings.
Suspended during FY2016
Hills Limited Annual Report for the year ended 30 June 2016 21
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
3
Executive remuneration (continued)
3.2 Remuneration mix
Senior executive remuneration for 2016 was comprised of fixed remuneration (made up of base salary and superannuation)
plus short term incentive (STI) and the long term incentive (LTI) was suspended. The following diagrams show the remuneration
mix at target performance.
(1)
Includes G Logan’s cash based retention plan
Mr Logan received a retention bonus in lieu of an LTI. As outlined below in section 3.4, the reason for this bonus is historical
and will not be replicated in future CEO’s salary packages.
3.4 Chief Executive Officer remuneration (Mr Logan)
Mr Logan has a fixed remuneration of $825,000 per annum (inclusive of superannuation).
Fixed remuneration is reviewed annually by the Board with reference to performance of the Company, performance of the CEO
and market information.
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. Since this plan
was introduced Mr Logan has moved from CFO to COO and to CEO. Through each of these roles it has been important to
retain his services as the Company continues to evolve.
The plan provided a retention bonus of $75,000 per annum based only on service.
Short Term Incentive FY2016
Mr Logan had an STI opportunity of up to $300,000.
Given the significant changes that have occurred over the last 12 months the Board focussed the ‘CEO’s KPI’s on the following
items:
Group Results
Capital Management – New Banking Arrangements
Hills Limited Annual Report for the year ended 30 June 2016 22
Fixed70%Fixed68%Fixed60%STI 24%STI 32%Variable40%LTI 6%FY2016 Mr LoganSenior ExecutivesFuture Market TargetsCEO(1)Senior Executives(average)ExecutiveCEO/ KMP
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
3
Executive remuneration (continued)
3.5 Senior Executive Short Term Incentive FY2016
STI – how it worked
The STI is an at risk component of remuneration and is designed to reward performance against the achievement of KPIs,
which are set annually.
As with the CEO, the Board took the opportunity to refocus performance around the following measures:
Group Results
Capital Management
Thus, Senior Executives’ KPIs were aligned to the KPIs of the CEO.
The STI performance period was from 1 July 2015 to 30 June 2016.
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 FY2016 STI payments where a senior executive ceases employment with Hills:
Resignation
and retirement
Any entitlement to a payment is subject to the participant being employed by Hills at the time
of payment.
Company
initiated
termination
Summary
dismissal
Any entitlement to a payment would be for completed months, with no pro-rata for partly
completed months where notice is given before 31 December. The calculation of an
entitlement would be based on actual results for the year and paid on the scheduled date.
If summarily dismissed, a participant forfeits all rights to any payments under the FY2016 STI
which had not already been made.
Assessment of performance and approval of payment
The Remuneration Committee assessed each 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. Following approval by the Board,
STI payments for FY2016 will be delivered as cash payments. Details of STI payments are provided in section 3.6.
3.6 FY2016 STI performance and outcomes
FY2016 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.
CEO STI Plan
The specific KPIs for FY2016 for the CEO are set out in the following table:
Objective
Link to strategy
Measurement
Weighting
Outcome
Group results
Financial measures which are
drivers to achieving annual results
Measured by reference to
financial and specified
individual outcomes
67%
27%
Capital
management
New banking arrangements in
place
New banking arrangements in
place
33%
33%
Hills Limited Annual Report for the year ended 30 June 2016 23
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
3
Executive remuneration (continued)
3.6 FY2016 STI performance and outcomes (continued)
The KPIs for the Senior Executives were aligned to the CEO’s KPIs. The STIs received by the CEO and senior executives for
FY2016 (if any) are set out in the following table:
Target STI
opportunity
$
% of fixed
remuneration
Actual STI
outcome
$
%
%
Achieved
Forfeited
G Logan
G Turner
D Lenz
D McKim-Smith
G Stephens
TOTAL
300,000
155,000
150,000
80,000
149,500
834,500
34%
48%
50%
39%
51%
42%
45,000
60,000
25,000
12,000
18,688
160,688
15%
39%
17%
15%
13%
19%
85%
61%
83%
85%
87%
81%
3.7 Long Term Incentive for the CEO
FY2016 Long Term Incentive
In FY2016, the LTI plan was suspended for the CEO.
3.8 FY2016 Long Term Incentive for Senior Executives
In FY2016, the LTI plan was suspended for senior executives.
The FY2015 LTI plan was designed to link senior executives to growth in long term shareholder wealth.
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)
33.33%
vesting when the EPS is equal to a CAGR of 15%
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 will vest after 3 years, subject to achievement of the above performance hurdles, but shares received from vested rights
are required to be held for an additional year
3.9 FY2017 incentive design
As outlined in the letter from the Chairman of the Remuneration Committee, which is at the front of this report, your Board has
assessed the most appropriate remuneration structure for the CEO and Senior Executives for Hills whilst in its “turnaround” phase.
For FY2017, the CEO and Senior Executives will receive:
Base pay
consistent with market benchmarks (including superannuation); and
Variable incentive
awarded in cash (50%) and equity (50%)
Hills Limited Annual Report for the year ended 30 June 2016 24
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
3
Executive remuneration (continued)
3.9 FY2017 incentive design (continued)
Variable Incentive Plan – FY2017
The Variable incentive for KMPs will be approximately 30% - 40% of Total Remuneration and will be dependent upon the
satisfaction of KPIs. The KPIs will be set at the beginning of each year once the annual budget process is complete and the
needs of the business for the following 12 months are clear. It is anticipated that the KPIs will be a combination of financial KPIs
representing 70% and non-financial KPIs of 30%. These weightings may vary from year to year.
The cash component will be paid annually once the annual audited financial results are released. The equity will vest over three
years:
20%
vest after one year
30%
vest after two years
50%
vest after three years
The amount of equity that will be awarded will be determined by 50% of the total Variable incentive divided by the Company’s
share price. The share price will be determined by the volume average weighted share price of the share price 30 days before
issue and after the announcement of the full year results.
The equity will either be purchased on market or be a fresh issue of shares. The Company will make this determination based
on cash flow and capital management considerations.
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
Senior Executives
Chief Executive
Officer and Senior
Executives
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.
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.
Hills Limited Annual Report for the year ended 30 June 2016 25
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
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
FY2016
FY2015
FY2014
FY2013
FY2012
Underlying earnings before interest and tax1
Shareholders’ funds
Underlying net (loss) / profit1
Statutory net (loss) / profit
Underlying Basic Earnings per Share1
Dividends
Share Price – as at 30 June
Short Term Incentive Payments – % of
Target Opportunity
$000
$000
$000
$000
cents
cents
$
%
2,305
17,887
41,689
33,138
44,702
69,077
136,600
245,228
271,018
400,963
(775)
11,045
27,277
19,201
28,822
(68,305)
(85,780)
26,387
(91,387)
28,822
(0.3)
-
4.8
2.1
0.245
0.455
11.4
7.0
1.74
19%
4%
85%
7.8
5.0
1.01
87%
10.5
10.0
1.06
36%
1 Underlying earnings before interest and tax, net (loss) / profit and basic earnings per share have been calculated after adjusting the (loss) /
profit attributable to the ordinary equity holders of the Company for the impact of asset impairments, de-recognition of deferred tax assets
relating to tax losses and other temporary differences, costs of acquisitions, other associated gains or losses on the disposal of businesses and
other restructure and closure costs. Underlying (loss) / profit is a non-IFRS measure used by the Company which is relevant because it is
consistent with the 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 program. The non-IFRS measure has not been subject to audit or review.
Hills Limited Annual Report for the year ended 30 June 2016 26
Hills Limited
Directors’ report
30 June 2016
(continued)
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.
2016
Name
Senior Executives
G Logan
G Turner
D Lenz1
D McKim-Smith2
G Stephens3
Total Senior
Executives
Compensation
Short-term employee benefits
Cash salary and
fees $
Cash bonus $
Other $
Post-
employment
benefits
Superannuation
$
Long term
benefits
LSL & Cash
based LTIP $
Performance
rights $
Total $
826,059
288,044
262,276
178,149
263,401
45,000
60,000
25,000
12,000
18,688
18,110
6,529
15,030
10,432
-
6,428
23,889
24,699
15,883
25,607
94,382
3,907
684
174
3,905
1,817,929
160,688
50,101
96,506
103,052
-
2,183
-
-
3,567
5,750
989,979
384,552
327,689
216,638
315,168
2,234,026
1 D Lenz was a KMP for the full financial year, as the head of the Technologies business until 13 April 2016 and as Chief Operating Officer thereafter
2 D McKim-Smith was appointed on 30 November 2015
3 G Stephens was a KMP for the full financial year
Hills Limited Annual Report for the year ended 30 June 2016 27
Hills Limited
Directors’ report
30 June 2016
(continued)
Remuneration report – audited (continued)
6
Statutory remuneration tables (continued)
6.1 Senior Executive remuneration (continued)
2015
Name
Executive Director
E Pretty2
Other Senior Executives
G Logan3
G Turner4
L Ison5
B Newton6
Total Senior
Executives
Compensation
Short-term employee benefits
Post-employment
benefits
Cash salary and
fees $
Cash bonus $
Other $
Superannuation $
Long term
benefits
LSL & Cash
based LTIP $
Termination
benefits $
Share-based payments
Shares
Performance
rights $1
$
848,435
-
5,418
35,121
-
900,000
(64,222)
529,002
117,636
461,225
270,753
45,000
19,947
-
16,948
8,993
11,122
15,902
19,696
10,128
31,384
15,688
83,422
-
-
-
-
28,100
-
-
728
-
-
2,227,051
64,947
58,383
112,017
83,422
928,100
(63,494)
-
-
-
-
-
-
Total $
1,724,752
694,068
157,432
531,831
302,343
3,410,426
1 The expense relating to unvested performance rights granted to key management personnel was reversed in the year as service conditions were not met.
2 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.
3 G Logan ceased as Chief Financial Officer on 2 February 2015, and was promoted to Chief Operating Officer. He was promoted to Chief Executive Officer on 27 May 2015.
4 G Turner became a KMP when he was promoted 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.
Hills Limited Annual Report for the year ended 30 June 2016 28
Hills Limited
Directors’ report
For the year ended 30 June 2016
(continued)
Remuneration Report – audited (continued)
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 FY2016 calculated in accordance with the accounting standards
as a proportion of the total.
Full Year
Potential STI
Pro rata
Potential STI
Actual STI
payable $
Actual STI
payable as
% of full year
potential STI
Actual STI
payable as
% of pro rata
potential STI
STI payable
as % of fixed
remuner-
ation
G Logan
G Turner
D Lenz
$300,000
$300,000
$45,000
$155,000
$155,000
$60,000
$150,000
$150,000
$25,000
D McKim-Smith
$80,000
$46,667
$12,000
G Stephens
$149,500
$149,500
$18,688
15%
39%
17%
15%
13%
15%
39%
17%
26%
13%
5%
19%
8%
6%
6%
The following table reflects the fixed remuneration, STI and LTI and total performance based remuneration for FY2016 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 %
G Logan
G Turner
D Lenz
D McKim-Smith
G Stephens
87%
83%
92%
94%
93%
5%
16%
8%
6%
6%
8%
1%
0%
0%
1%
13%
17%
8%
6%
7%
The following table shows the proportion weighting of each element of remuneration for each of the senior executives employed
during FY2016 based on maximum potential outcome.
Fixed remuneration %
Maximum STI %
Maximum LTI %
FY2016
FY2015
FY2016
FY2015
FY2016
FY2015
G Logan
G Turner
D Lenz
D McKim-Smith
G Stephens
70%
68%
67%
72%
65%
58%
66%
-
-
-
24%
32%
33%
28%
34%
27%
27%
-
-
-
6%
0%
0%
0%
1%
15%
7%
-
-
-
Hills Limited Annual Report for the year ended 30 June 2016 29
Hills Limited
Directors’ report
For the year ended 30 June 2016
(continued)
Remuneration Report – audited (continued)
6
Statutory remuneration tables (continued)
6.3 Details of share based compensation and bonuses
FY2015 LTI Plan
Senior Executives
The terms of the Senior Executive FY2015 LTI Plan granted on 27 February 2015 are as follows:
A 3-year performance period from 1 July 2014 to 30 June 2017 with the following hurdles:
50%
vesting if 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)
33.33%
vesting if the EPS is equal to a CAGR of 15%
16.67%
vesting if the EPS reaches a CAGR of 19.2% CAGR, with a linear vesting scale between 15% and
19.2%
The following table provides additional details of the above grant of performance rights:
The numbers of performance rights granted, vested and expired / forfeited in FY2016
Performance
Rights
Performance
Rights Granted
Performance
Rights Vested
Performance
Rights Expired/
G Logan1
G Turner
G Stephens
1 July 2015
-
19,588
32,010
-
-
-
-
-
-
-
-
-
Balance
30 June 2016
-
19,588
32,010
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
Market hurdle: TSR
$0.77
$0.52
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
29 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 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 29 to the financial statements.
1 G Logan participates in a retention plan and is not eligible to participate in any LTI equity plan
Hills Limited Annual Report for the year ended 30 June 2016 30
Hills Limited
Directors’ report
For the year ended 30 June 2016
(continued)
Remuneration Report – audited (continued)
6
Statutory remuneration tables (continued)
6.3 Details of share based compensation and bonuses (continued)
The numbers and value of performance rights granted, vested and expired/forfeited in FY2016
Measure
Number of
rights
$ per right
Total value $
Exercised
during period $
Expired /
forfeited $
Fair value at grant date
Accounting value
G Turner
TSR
EPS
G Stephens TSR
EPS
9,794
9,794
16,005
16,005
$0.52
$0.77
$0.52
$0.77
$5,093
$7,541
$8,323
$12,324
-
-
-
-
-
-
-
-
Shares issued on the exercise of options
No performance rights vested during FY2016. 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.
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 FY2016.
7.2 Directors’ FY2016 fee structure
The following table outlines the main Board and Committee fees as at 30 June 2016.
Chair fee $
Member fee $
Board
160,000
Audit and Risk Committee
16,000
Remuneration Committee
Nomination Committee
8,000
8,000
80,000
8,000
Nil
Nil
Hills Limited Annual Report for the year ended 30 June 2016 31
Hills Limited
Directors’ report
For the year ended 30 June 2016
(continued)
Remuneration Report – audited (continued)
7
Non-executive Directors’ remuneration (continued)
7.3 Non-executive Directors’ remuneration details
Non-Executive
Directors
J Hill-Ling
F Bennett
P Bullock
I Elliot
D Spence
TOTAL
Year
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Board and
Committee fees $
Superannuation $
Total $
146,119
177,512
87,671
106,507
82,507
94,293
80,366
97,632
85,096
106,507
481,759
582,451
13,881
16,800
8,329
10,080
8,312
9,022
7,634
9,240
8,084
10,080
46,241
55,222
160,000
194,312
96,000
116,587
90,820
103,315
88,000
106,872
93,180
116,587
528,000
637,673
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 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.
During the year, and as announced at the 2015 AGM, the Company has introduced a policy requiring directors to hold a
minimum number of shares. Specifically, directors are required to hold the equivalent of one year of directors fees in Hills
shares to be achieved over a 3-year period.
2016 Directors of Hills Limited
Ordinary shares
Balance at 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
J Hill-Ling
F Bennett
P Bullock
I Elliot
D Spence
18,035,377
4,000
10,000
51,735
300,000
-
-
-
-
-
111,300
84,444
90,000
-
142,272
18,146,677
88,444
100,000
51,735
442,272
Hills Limited Annual Report for the year ended 30 June 2016 32
Hills Limited
Directors’ report
For the year ended 30 June 2016
(continued)
Remuneration Report – audited (continued)
8
Equity instrument disclosures relating to Key Management Personnel (continued)
8.1 Share holdings (continued)
2016 Senior Executives of Hills Limited
Ordinary shares
Balance at 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
G Logan
G Turner
G Stephens
228,409
50,000
150,000
-
-
-
-
-
228,409
50,000
861,408
1,011,408
8.2 Loans to Key Management Personnel
There were no outstanding loans to KMP or their related parties at the reporting date.
8.3 Other transactions with Key Management Personnel
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 and domestic in nature.
Hills Limited Annual Report for the year ended 30 June 2016 33
Hills Limited
Directors’ report
For the year ended 30 June 2016
(continued)
Environmental regulation
Manufacturing
Hills holds all required environmental licences, registrations and permits for its sole remaining manufacturing site in O’Sullivan’s
Beach in South Australia. No significant environmental incidents were reported over the 2015-16 financial year and Hills
continued to meet or exceed the requirements specified in relevant licenses and authorisations.
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 established ongoing action plans aimed at optimising
packaging design, material recovery, recycling and product stewardship. Hills remains supportive of the goals and initiatives of
the APC and remains compliant following the submission of its annual report during March 2016.
Insurance of officers
Since the end of the previous financial year the Company has paid insurance premiums in respect of Directors’ and officers’
liability and legal expenses 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.
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.
Hills Limited Annual Report for the year ended 30 June 2016 34
Hills Limited
Directors’ report
For the year ended 30 June 2016
(continued)
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.
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:
KPMG audit and non-audit services
Audit and other assurance services
KPMG Australia - audit and review of the financial statements
Overseas KPMG firms - audit and review of the financial statements
Total remuneration for audit and other assurance services
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
Total remuneration of KPMG
Auditor's independence declaration
2016
$
2015
$
343,375
39,951
485,909
38,957
383,326
524,866
76,239
11,605
203,867
40,253
87,844
244,120
-
8,342
8,342
397,534
-
397,534
479,512
1,166,520
A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on
page 37.
Hills Limited Annual Report for the year ended 30 June 2016 35
Hills Limited ABN 35 007 573 417
Consolidated financial statements
for the year ended 30 June 2016
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
Section A: About this report
Section B: Business performance
Section C: Operating assets & liabilities
1 Segment information
2 Revenue
3 Other income
4 Expenses
5 Income tax
6 Earnings per share
Page 47
Page 50
Page 51
Page 51
Page 53
Page 57
7 Cash and cash equivalents
8 Trade and other receivables
9 Inventories
10 Trade and other payables
11 Property, plant and equipment
12 Intangible assets
13 Provisions
Page 39
Page 40
Page 41
Page 42
Page 43
Page 44
Page 51
Page 58
Page 59
Page 60
Page 60
Page 61
Page 64
Page 67
Section D: Capital and financing
Section E: Group structure
14 Contributed equity
15 Reserves
16 Dividends
17 Borrowings
18 Derivative financial instruments
19 Capital and financial risk management
20 Fair value measures
Page 70
Page 70
Page 71
Page 72
Page 73
Page 75
Page 80
21 Business combinations
22 Interests in other entities
23 Related party transactions
24 Parent entity financial information
25 Deed of cross guarantee
Page 82
Page 83
Page 84
Page 85
Page 86
Section F: Unrecognised items
Section G: Other
26 Contingencies
27 Commitments
28 Events after the reporting period
Page 89
Page 89
Page 90
29 Share-based payments
30 Remuneration of auditors
31 Other accounting policies
Signed reports
Directors’ declaration
Independent auditor’s report
ASX information
Shareholders information
Corporate directory
Page 91
Page 93
Page 93
Page 95
Page 96
Page 98
Page 100
Hills Limited Annual Report for the year ended 30 June 2016 38
Hills Limited
Consolidated income statement
For the year ended 30 June 2016
Continuing operations
Revenue
Other income
Expenses excluding net finance expenses
Loss before net finance expense and income tax
Finance income
Finance expenses
Net finance expenses
Loss before income tax
Income tax expense from continuing operations
Loss from continuing operations
Loss for the year
Loss is attributable to:
Owners of Hills Limited
Non-controlling interests
Notes
2016
$'000
2015
$'000
2
3
4
4
5
328,913
428,822
3,192
4,323
332,105
433,145
(377,068)
(488,101)
(44,963)
(54,956)
305
200
(3,659)
(3,236)
(3,354)
(3,036)
(48,317)
(57,992)
(19,988)
(27,788)
(68,305)
(85,780)
(68,305)
(85,780)
(68,305)
(85,947)
-
167
(68,305)
(85,780)
Cents
Cents
Earnings per share for loss from continuing operations attributable to the
ordinary equity holders of the Company:
Basic and diluted earnings per share
6
(29.4)
(37.0)
The above consolidated income statement should be read in conjunction with the accompanying notes.
Hills Limited Annual Report for the year ended 30 June 2016 39
Hills Limited
Consolidated statement of comprehensive income
For the year ended 30 June 2016
Loss for the year
Other comprehensive income
Notes
2016
$'000
2015
$'000
(68,305)
(85,780)
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
15
15
5
5
Other comprehensive loss for the year, net of tax
Total comprehensive loss for the year
Total comprehensive loss for the year is attributable to:
Owners of Hills Limited
Non-controlling interests
(113)
945
34
866
-
-
-
1,127
(710)
(338)
79
(7,534)
2,261
(5,273)
866
(5,194)
(67,439)
(90,974)
(67,439)
-
(91,141)
167
(67,439)
(90,974)
The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.
Hills Limited Annual Report for the year ended 30 June 2016 40
Hills Limited
Consolidated statement of financial position
As at 30 June 2016
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Current tax assets
Derivative financial instruments
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
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Contributed equity
Reserves
Accumulated losses
Total equity
Notes
2016
$'000
2015
$'000
7
8
9
5
18
8
11
12
5
10
17
5
13
18
17
13
14
15
3,994
71,911
55,617
183
103
18,801
92,136
72,446
-
606
131,808
183,989
534
2
19,948
753
10,808
653
3
32,822
39,237
30,833
32,045
103,548
163,853
287,537
50,400
472
-
12,512
-
67,690
5,831
407
27,133
310
63,384
101,371
27,695
3,697
31,392
94,776
69,077
45,000
4,566
49,566
150,937
136,600
278,439
11,249
(220,611)
278,439
10,467
(152,306)
69,077
136,600
The above consolidated statement of financial position should be read in conjunction with the accompanying notes.
Hills Limited Annual Report for the year ended 30 June 2016 41
Hills Limited
Consolidated statement of changes in equity
For the year ended 30 June 2016
Attributable to owners of Hills Limited
Contributed
equity
$'000
Reserves
$'000
(Accumulated
losses)
$'000
Total
$'000
Non-controlling
interests
$'000
Total equity
$'000
Notes
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
Dividends paid to non-controlling interests in subsidiaries
Disposal of non-controlling interests in subsidiaries
Employee share schemes
Balance at 30 June 2015
Balance at 1 July 2015
Total comprehensive income for the year
Transactions with owners in their capacity as owners:
Employee share schemes
16
29
29
281,624
-
(3,185)
-
-
-
-
278,439
278,439
-
-
28,900
(5,194)
-
(13,272)
-
-
33
10,467
10,467
866
(66,359)
(85,947)
-
-
-
-
-
(152,306)
(152,306)
(68,305)
(84)
-
Balance at 30 June 2016
278,439
11,249
(220,611)
244,165
(91,141)
(3,185)
(13,272)
-
-
33
136,600
136,600
(67,439)
(84)
69,077
1,063
167
-
-
(732)
(498)
-
-
-
-
-
-
245,228
(90,974)
(3,185)
(13,272)
(732)
(498)
33
136,600
136,600
(67,439)
(84)
69,077
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
Hills Limited Annual Report for the year ended 30 June 2016 42
Hills Limited
Consolidated statement of cash flows
For the year ended 30 June 2016
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 paid
Notes
2016
$’000
2015
$’000
386,190
(372,974)
486,657
(494,547)
13,216
(3,354)
(486)
(7,890)
(3,036)
(2,117)
Net cash flows from operating activities
7
9,376
(13,043)
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
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
11
12
16
22
(2,653)
(4,247)
(3,244)
-
6,902
-
1,526
(26,676)
(10,928)
(3,468)
5,970
14,029
7,570
3,149
(1,716)
(10,354)
46,510
-
(69,175)
-
-
15,831
(3,185)
(172)
(13,272)
(732)
(22,665)
(1,530)
(15,005)
(24,927)
18,801
198
43,672
56
Cash and cash equivalents at end of the year
7
3,994
18,801
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
Hills Limited Annual Report for the year ended 30 June 2016 43
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
Section A: About this report
These 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").
The notes to the consolidated financial statements that follow present information relevant to understanding the Group’s:
business performance;
operating assets and liabilities;
capital and financing arrangements, including the Group’s approach to risk;
structure, including related party transactions and parent entity information; and
unrecognised items at the end of the reporting period.
Other information that is required to be disclosed to comply with the accounting standards, the Corporations Act 2001 or the
Corporations Regulations, but are not considered significant to understand the financial performance or financial position of the
Group are provided at the end of the notes.
Hills Limited is a for profit company limited by shares, incorporated and domiciled in Australia.
The consolidated financial statements were authorised for issue by the Directors on 17 August 2016. The Directors have the
power to amend and reissue the consolidated financial statements.
Basis of preparation
These general purpose consolidated financial statements:
are presented in Australian dollars;
have been prepared in accordance with Australian Accounting Standards (AASBs), other authoritative
pronouncements of the Australian Accounting Standards Board, and the Corporations Act 2001;
comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB); and
have been prepared on the basis of historical costs, except for the following that are measured at fair value:
financial instruments (derivatives) at fair value through profit or loss;
land and buildings; and
contingent consideration assumed in a business combination.
The methods used to measure fair values are discussed further in notes 8, 11, 20 and 21.
Key accounting estimates
In preparing these financial statements, management are required 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:
Hills Limited Annual Report for the year ended 30 June 2016 44
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Key accounting estimates (continued)
Note 5
Tax losses for which no deferred tax asset has been recognised
Notes 11 and 12
Valuation of land and buildings and measurement of the useful lives of property, plant
and equipment and intangible assets
Note 12
Measurement of the recoverable amounts of cash generating units containing goodwill
Notes 13 and 26
Provisions and contingencies
Note 20
Note 21
Measurement of fair value
Business combinations and contingent consideration payable
Principles of consolidation
Subsidiaries
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June
2016 and the results of all subsidiaries for the year then ended. A list of subsidiaries is included in note 22.
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 obtained by 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 (see note 21).
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.
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.
Foreign currency translation
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'). Australian dollars is the Company's
functional and presentation currency and the functional and presentation currency of the majority of the Group.
Hills Limited Annual Report for the year ended 30 June 2016 45
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Foreign currency translation (continued)
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.
Group entities
The results and financial position of all Group Entities that have a functional currency different from the presentation currency
are translated into the presentation currency as follows:
Closing rate
Assets and liabilities for each statement of financial position
Average rate
Income and expenses for each income statement: average rates, unless this is not a
reasonable approximation of the cumulative effect of the rates prevailing on the
transactions dates (in which case, the rates on the transaction dates are used)
All resulting exchange differences are recognised in other comprehensive income.
Rounding
The Company is an entity to which the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191
applies. Amounts have been rounded off in accordance with the instrument to the nearest thousand dollars, or in certain cases,
the nearest dollar.
Hills Limited Annual Report for the year ended 30 June 2016 46
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Section B: Business performance
This section contains information relevant to understanding the results and performance of the Group during the reporting
period:
1
2
3
4
5
Segment information
Revenue
Expenses
Income Tax
Earnings per share
1
Segment information
The Board of Hills Limited examine and monitor the Group’s performance according to the nature of the products and services
provided. Four reportable segments of the Group’s business have been identified:
Building
Technologies
Value added distributor of 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
Hills Health
Solutions
Includes the supply and installation of health technology solutions, Nursecall and patient
entertainment systems to hospitals, aged care facilities and similar institutions.
Home
Includes the Hills Home Living business, which has 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
This includes the costs of running Hills’ Corporate, Compliance and Shared Services
functions.
Although the Group’s divisions are managed on a products and services basis, they operate in two main geographical areas:
Australia
Overseas
Comprises manufacturing facilities in South Australia and Victoria and sales offices and
customers in all states and territories.
Comprises sales offices and customers in New Zealand and customers in Europe, the Middle
East, South Africa and North America.
Recognition and measurement
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision
maker (CODM). The CODM, 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.
Hills Limited Annual Report for the year ended 30 June 2016 47
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
1
Segment information (continued)
(a) Information about reportable segments
Building
Technologies
Hills Health
Solutions
Home
Corporate
Total
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
2016
$’000
2015
$’000
Total segment revenue
293,973
348,380
31,309
33,530
2,020
43,763
1,611
3,149
328,913
428,822
Revenue from external customers
293,973
348,380
31,309
33,530
2,020
43,763
1,611
3,149
328,913
428,822
Segment EBITDA
12,108
26,789
1,271
4,083
1,854
6,365
(3,484)
(8,275)
11,749
28,962
Segment Assets
122,822
187,716
19,593
33,784
1,254
2,981
5,094
12,813
148,763
237,294
Additions to non-current assets (other
than financial assets and deferred tax)
3,478
10,817
3,414
2,862
-
175
599
542
7,491
14,396
Segment Liabilities
44,062
65,844
6,054
6,199
599
3,439
11,611
19,715
62,326
95,197
Hills Limited Annual Report for the year ended 30 June 2016 48
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
1
Segment information (continued)
(b) Other segment information
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 2. The
Group does not derive 10% or more of its revenues from any single external customer.
Segment EBITDA
The CODM assesses performance based on a measure of underlying EBITDA. This excludes the effects of non-recurring
expenditure from the operating segments such as restructuring costs and goodwill and other intangible asset 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.
Segment underlying EBITDA reconciles to the loss before income tax as follows:
Segment EBITDA
Depreciation and amortisation
Finance income
Finance expenses
Net costs not considered part of underlying profit
Notes
4
4
4
2016
$'000
11,749
(9,444)
305
(3,659)
(47,268)
2015
$'000
28,962
(11,075)
200
(3,236)
(72,843)
Loss before income tax from continuing operations
(48,317)
(57,992)
Net costs not considered part of underlying profit comprise:
Impairment of goodwill
Impairment of intangible assets
Impairment of property, plant and equipment
Impairment of inventories and inventory write offs
Impairment of other receivables
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 program
26,435
12,685
3,786
-
2,900
-
-
-
-
1,462
55,353
5,661
1,053
3,222
-
3,885
1,229
464
913
1,063
47,268
72,843
Segment assets
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
Current tax receivable
Deferred tax assets
Derivative financial instruments
Investments
2016
$’000
2015
$’000
148,763
237,294
3,994
183
10,808
103
2
18,801
-
30,833
606
3
Total assets as per the consolidated statement of financial position
163,853
287,537
Hills Limited Annual Report for the year ended 30 June 2016 49
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
1
Segment information (continued)
(b) Other segment information (continued)
Segment liabilities
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
2016
$’000
2015
$’000
62,326
95,197
4,283
28,167
-
4,599
50,831
310
Total liabilities as per the consolidated statement of financial position
94,776
150,937
The amounts provided to the CODM with respect to total assets and total liabilities are measured in a manner consistent
with that of the consolidated financial statements.
Geographical information
Segment revenue and non-current assets (excluding financial instruments and deferred tax assets) by geographical location
are shown below. Segment revenues are allocated based on the country in which the customer is located. Segment assets
are allocated based on where the assets are located.
Australia
Other countries
2
Revenue
Revenue from continuing operations
Sales revenue
Sale of goods
Services
Other revenue
Rents and sub-lease rentals
Licence fee revenue
Total revenue from continuing operations
Revenue
Non-current assets
2016
$’000
302,606
26,307
328,913
2015
$’000
393,085
35,737
428,822
2016
$’000
20,203
1,034
21,237
2015
$’000
67,972
4,743
72,715
2016
$’000
2015
$’000
264,169
61,218
325,387
354,969
69,704
424,673
1,526
2,000
3,149
1,000
328,913
428,822
Hills Limited Annual Report for the year ended 30 June 2016 50
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
2
Revenue (continued)
Recognition and measurement
Revenue
Revenue is recognised for the major business activities as follows:
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.
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.
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.
Licence fee revenue
Licence fee revenue is recognised on an accrual basis in accordance with the substance of the relevant licence agreement
when it is probable that the economic benefits associated with the transaction will flow to the Group and the amount of revenue
can be measured reliably.
3
Other income
Net gain on disposal of plant and equipment
Net gain on disposal of businesses
Other income
4
Expenses
(a) 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
2016
$’000
155
-
3,037
3,192
2015
$’000
522
1,074
2,727
4,323
Notes
2016
$’000
2015
$’000
188,140
36,683
237,287
40,971
64,389
18,390
22,198
47,268
77,959
20,718
38,323
72,843
377,068
488,101
1
Hills Limited Annual Report for the year ended 30 June 2016 51
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
4
Expenses (continued)
(b) 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
Finance income
Interest income
Fair value gains on derivatives
Net finance costs expensed
Recognition and measurement
Depreciation and amortisation
2016
$’000
2015
$’000
13
6,652
6,665
3
213
1,310
1,253
2,779
9,444
59,587
5,294
4,231
(84)
66
5,654
5,720
72
86
3,021
2,176
5,355
11,075
70,148
6,150
4,956
33
69,028
81,287
(3,659)
(3,236)
(3,659)
(3,236)
305
-
305
200
-
200
(3,354)
(3,036)
Refer to notes 11 and 12 for recognition and measurement of depreciation and amortisation.
Employee benefits expense
Refer to note 13 for information relating to employee benefits expense.
Finance income and expense
Finance income comprises interest income on funds invested. Interest income is recognised as it accrues in profit or loss.
Finance expenses comprise interest expense on borrowings and unwinding of the discount on provisions. Borrowing costs are
recognised in profit or loss using the effective interest method.
Hills Limited Annual Report for the year ended 30 June 2016 52
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
5
Income tax
(a) Income tax expense
Current tax
Deferred tax
2016
$’000
2015
$’000
(100)
20,088
789
26,999
19,988
27,788
(b) Numerical reconciliation of income tax expense to prima facie tax payable
Loss from continuing operations before income tax expense
(48,315)
(57,992)
Tax at the Australian tax rate of 30% (2015: 30%)
Tax effect of amounts which are not deductible / (taxable) in calculating taxable income:
(14,494)
(17,398)
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
Tax effect of prior year adjustments
Difference in overseas tax rates
Total income tax expense
(c) Tax expense / (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
(Losses) / gains on cash flow hedges
Aggregate income tax expense / (benefit)
(d) Current tax assets and liabilities
7,930
222
-
(304)
805
-
20,282
5,526
19,967
21
18,090
212
(60)
497
(282)
662
26,123
-
27,844
(56)
19,988
27,788
2016
$’000
2015
$’000
-
(34)
(34)
(2,262)
338
(1,924)
The current tax asset for the Group of $0.183 million (2015: $0.407 million liability) represents the amount of income taxes
refundable (2015: payable) in respect of current and prior financial periods.
Hills Limited Annual Report for the year ended 30 June 2016 53
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
5
Income tax (continued)
(e) Deferred tax
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
2016
$'000
149
9,009
1,283
16
-
16
366
(31)
-
-
-
10,808
2015
$'000
3,559
2,503
2,865
846
1,218
5,471
66
(65)
16,014
(2,327)
683
30,833
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
(1,211)
2,262
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
Movements 2016
Property, plant and equipment
Inventories
Employee benefits
Receivables
Loans and borrowings
Provisions
Other accruals
Derivative financial instruments
Tax losses
Software & other intangible assets
Other
Exchange differences
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
-
648
(880)
(268)
-
(2,890)
(976)
(1)
(15,053)
(6,860)
492
(26,999)
(3,410)
6,506
(1,582)
(830)
(1,218)
(5,455)
300
-
(16,014)
2,327
(683)
(29)
-
-
-
-
-
-
(338)
-
-
-
1,924
-
-
-
-
-
-
-
34
-
-
-
29
63
(2)
(9)
346
18
-
198
(2)
-
-
(685)
1
(135)
-
-
-
-
-
-
-
-
-
-
-
-
-
3,559
2,503
2,865
846
1,218
5,471
66
(65)
16,014
(2,327)
683
30,833
149
9,009
1,283
16
-
16
366
(31)
-
-
-
-
10,808
30,833
(20,088)
Hills Limited Annual Report for the year ended 30 June 2016 54
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
5
Income tax (continued)
(f) Tax losses
At the end of the reporting period, the Group had unused tax losses in respect of revenue items of $125.6 million (2015:
$158.1 million) and capital items of $54.4 million (2015: $29.2 million).
Unused losses for which no deferred tax asset has been
recognised
Potential tax benefit
Revenue items
Capital items
2016
$’000
2015
$’000
2016
$’000
2015
$’000
125,613
104,733
54,398
29,212
37,684
31,420
16,319
8,764
Revenue and capital tax losses do not expire under current legislation.
Revenue
losses
Deferred tax assets have not been recognised in respect of all revenue tax losses because
the period over which the Group expects to utilise the benefits from these items extends
beyond 3 years (the time horizon during which their recovery is considered probable).
Revenue losses for which a deferred tax asset has been recognised at 30 June 2016 total
$nil (2015: $53.4 million).
Capital
losses
Deferred tax assets have not been recognised in respect of capital losses because it is not
probable that future capital gains will be available against which the Group can utilise the
benefits from these items.
(g) Tax consolidation legislation
The Company and its wholly owned Australian controlled entities have implemented the tax consolidation legislation.
Tax sharing
agreement
Tax funding
agreement
On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered
into a tax sharing agreement that, 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
reporting period. 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.
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.
Hills Limited Annual Report for the year ended 30 June 2016 55
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
5
Income tax (continued)
Recognition and measurement
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.
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.
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.
Deferred tax
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.
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.
Offsetting
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.
Tax consolidation
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.
Key estimate: unrecognised deferred tax assets
Deferred tax assets are only recognised for deductible temporary differences and tax losses to the extent that it is probable that
taxable profits will be available to utilise them. The financial projections used in assessing the probability of taxable profits are
inherently subject to management judgement.
Hills Limited Annual Report for the year ended 30 June 2016 56
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
6
Earnings per share
(a) Basic and diluted earnings per share
From loss from continuing operations attributable to the ordinary equity holders of the
Company
From underlying (loss) / profit attributable to the ordinary equity holders of the Company1
(b) Reconciliation of earnings used in calculating earnings per share
2016
Cents
2015
Cents
(29.4)
(0.3)
(37.0)
4.8
2016
$’000
2015
$’000
Basic and diluted earnings per share
Loss attributable to the ordinary equity holders of the Company used in calculating basic
earnings per share
(68,305)
(85,947)
Underlying loss earnings per share
Loss attributable to the ordinary equity holders of the Company used in calculating basic
earnings per share
Items not considered part of underlying loss per note 11
Income tax expense not considered part of underlying loss1
(68,305)
(85,947)
47,268
20,262
72,843
24,149
Underlying (loss) / profit attributable to the ordinary equity holders of the Company used in
calculating basic and diluted earnings per share1
(775)
11,045
(c) Weighted average number of shares used as denominator
Adjustments for calculation of diluted earnings per share:
Weighted average number of ordinary shares used as the denominator in calculating basic
earnings per share
Effect of performance rights on issue
2016
'000
2015
'000
231,986
232,215
-
52
Weighted average number of ordinary and potential ordinary shares used as the denominator
in calculating diluted earnings per share
231,986
232,267
Recognition and measurement
Earnings per share
Basic
earnings per
share
Diluted
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 reporting period.
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.
1 Underlying (loss) / profit has been calculated after adjusting the (loss) / profit attributable to the ordinary equity holders of the Company for the
impact of asset impairments, de-recognition of deferred tax assets relating to tax losses and other temporary differences, costs of acquisitions,
other associated gains or losses on the disposal of businesses and other restructure and closure costs. Underlying (loss) / profit is a non-IFRS
measure used by the Company which is relevant because it is consistent with the 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 program. The non-IFRS measure has not been
subject to audit or review.
Hills Limited Annual Report for the year ended 30 June 2016 57
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Section C: Operating assets and liabilities
This section provides information on the operating assets used and the operating liabilities incurred by the Group:
Inventories
7 Cash and cash equivalents
8 Trade and other receivables
9
10 Trade and other payables
11 Property, plant and equipment
12
13 Provisions
Intangible assets
7
Cash and cash equivalents
Cash at bank and in hand
Deposits at call
2016
$’000
3,994
-
3,994
2015
$’000
13,800
5,001
18,801
(a) Reconciliation of loss after income tax to net cash inflow from operating activities
Loss for the period
(68,305)
(85,780)
Depreciation and amortisation
Impairment of goodwill
Impairment of other receivables
Impairment of inventories
Impairment of property, plant and equipment
Impairment of intangible assets
Net gains on disposal of businesses
Non-cash employee benefits (credit) / expense - share-based payments
Net gain on sale of non-current assets (including assets held for sale)
Fair value adjustment to derivatives
Rent received
Change in operating assets and liabilities, net of effects from purchases and sales of
controlled entities and business operations:
Decrease in trade and other receivables
Decrease / (increase) in inventories
Decrease in deferred tax assets
Decrease in trade and other payables
Decrease in provision for income taxes payable
Decrease in other provisions
Net cash flows from operating activities
Recognition and measurement
Cash and cash equivalents
9,444
26,435
2,900
-
3,786
12,685
-
(84)
(141)
82
(1,526)
11,075
55,353
-
3,221
1,053
5,662
(1,853)
33
(292)
(169)
(3,149)
17,893
17,204
20,096
(17,632)
(593)
(12,868)
14,258
(16,353)
27,014
(9,994)
(1,374)
(11,748)
9,376
(13,043)
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 that are
subject to an insignificant risk of changes in value.
Hills Limited Annual Report for the year ended 30 June 2016 58
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
8
Trade and other receivables
Trade receivables
Provision for impairment of
receivables (a)
Other receivables
Prepayments
2016
2015
Current Non-current
$’000
$’000
Total
$’000
Current Non-current
$’000
$’000
61,319
(1,275)
60,044
6,573
5,294
71,911
-
-
-
534
-
534
61,319
81,096
(1,275)
(1,481)
60,044
79,615
7,107
5,294
7,930
4,591
72,445
92,136
-
-
-
653
-
653
Total
$’000
81,096
(1,481)
79,615
7,930
5,244
92,789
(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 period
Receivables written off during the period as uncollectable
At 30 June
2016
$’000
2015
$’000
39,462
13,819
5,610
2,428
42,930
20,883
12,466
4,817
61,319
81,096
1,481
389
(595)
1,275
2,750
314
(1,583)
1,481
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 $1.275 million (2015: $1.481 million) relates to receivables past due
more than 30 days, on a case by case assessment. Receivables past due between 0 and 30 days are not considered
impaired.
(b) Financial risk
See note 19 for information about the Group’s exposure to foreign currency risk, interest rate risk and credit risk in relation to
trade and other receivables.
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.
Recognition and measurement
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.
Hills Limited Annual Report for the year ended 30 June 2016 59
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
8
Trade and other receivables (continued)
Recognition and measurement (continued)
Trade receivables (continued)
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. 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.
9
Inventories
Raw materials and stores
Work in progress
Finished goods
(a) Impaired inventory
2016
$’000
1,730
1,298
52,589
2015
$’000
2,046
136
70,264
55,617
72,446
Write downs of inventories to net realisable value recognised as an expense during the period amounted to $1.392 million
(2015: $3.722 million). The expense has been included in cost of sales $1.392 million (2015: $0.501 million) and other
expenses $nil (2015: $3.222 million).
Recognition and measurement
Inventories
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 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.
10
Trade and other payables
Trade payables
Other trade payables and accrued expenses
2016
$’000
29,538
20,862
2015
$’000
41,441
26,249
50,400
67,690
Other trade payables and accrued expenses include amounts payable in respect of certain employee benefits including
superannuation/pension contributions and bonuses.
Hills Limited Annual Report for the year ended 30 June 2016 60
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
10
Trade and other payables (continued)
Recognition and measurement
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 reporting period that 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.
11
Property, plant and equipment
Year ended 30 June 2015
Opening net book amount
Exchange differences
Revaluation to fair value
Acquisition through business combinations
Additions
Disposals
Depreciation charge
Impairment charge
Reversal of impairment charge
Closing net book amount
At 30 June 2015
Cost
Land
$’000
Buildings
$’000
Plant &
equipment
$’000
Total
$’000
17,803
12,982
16,820
47,605
-
(4,762)
(2,772)
-
-
-
30
(4,825)
(7,286)
-
(1,375)
-
6,841
(66)
(831)
-
2,057
(67)
-
3,268
10,898
(2,494)
(5,654)
-
1,153
23,924
(67)
(7,534)
3,268
10,928
(14,605)
(5,720)
(2,206)
1,153
32,822
6,841
2,057
73,414
82,312
Accumulated depreciation and impairment
-
-
(49,490)
(49,490)
Net book amount
Year ended 30 June 2016
Opening net book amount
Exchange differences
Additions
Disposals
Depreciation charge
Impairment charge
Closing net book amount
At 30 June 2016
Cost
Accumulated depreciation and impairment
Net book amount
6,841
2,057
23,924
32,822
6,841
2,057
23,924
32,822
-
-
(5,625)
-
-
-
(593)
(13)
(1,216)
(1,451)
100
4,247
(552)
(6,652)
(1,119)
100
4,247
(6,770)
(6,665)
(3,786)
-
-
-
-
-
-
-
-
19,948
19,948
73,350
73,350
(53,402)
(53,402)
19,948
19,948
Hills Limited Annual Report for the year ended 30 June 2016 61
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
11
Property, plant and equipment (continued)
(a) Assets in the course of construction
The carrying amounts of the assets disclosed above and in note 12 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:
2016
$'000
2015
$'000
Plant and equipment, leasehold improvements and software development
2,284
3,102
(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 2015
As at
31 December 2015
As at
30 June 2016
Independent valuers provided updated informal advice on the fair value of land and
buildings, taking into consideration current market assessments and property offers
received.
The Directors reviewed the assessment and determined that revaluation decrements
totalling $9.740 million were appropriate. Of this, $7.534 million was debited to the asset
revaluation reserve in shareholders’ equity and $2.206 million was recognised in profit and
loss.
Independent valuers reassessed the fair value of land and buildings, taking into
consideration current market assessments and the asset class was revalued.
The Directors reviewed the assessment and determined a net revaluation decrement of
$2.675 million was appropriate. This amount was recognised within other expenses in profit
or loss.
In May 2016, the Group sold its last remaining land and buildings.
Key estimate: useful lives of property, plant and equipment
The assessment of the useful lives of property, plant and equipment requires management judgement based on past
experience and industry practice. Management reassess the useful lives when there are indications of a change in economic
circumstances that may impact the assets.
Recognition and measurement
Property, plant and equipment
Land and buildings
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.
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.
Hills Limited Annual Report for the year ended 30 June 2016 62
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
11
Property, plant and equipment (continued)
Recognition and measurement (continued)
Property, plant and equipment (continued)
Plant and equipment
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.
Depreciation
Land is not depreciated. Depreciation on other assets is calculated using the 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
Plant and equipment, including leasehold improvements
0.75%
5.0% to 66.7%
Impairment
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.
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.
Hills Limited Annual Report for the year ended 30 June 2016 63
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
12
Intangible assets
Goodwill
Patents,
trademarks
& other
rights
$’000
$'000
Distribution
agreements,
customer
contracts &
brands
$'000
Software1
Development
costs
Total
$'000
$'000
$'000
Year ended 30 June 2015
Opening net book amount
Exchange differences
Additions
Acquisition through business
combinations
Amortisation charge
Impairment charge
Derecognised on disposal
64,085
(154)
-
17,702
-
(55,353)
-
220
-
106
-
(72)
-
-
11,910
-
-
1,779
(3,021)
(4,710)
-
5,998
(18)
2,623
534
(2,176)
(951)
(232)
Closing net book amount
26,280
254
5,958
5,778
970
-
739
-
(86)
83,183
(172)
3,468
20,015
(5,355)
-
(61,014)
(656)
967
(888)
39,237
At 30 June 2015
Cost
Accumulated amortisation and
impairment
145,896
449
15,125
21,761
967
184,198
(119,616)
(195)
(9,167)
(15,983)
-
(144,961)
Net book amount
26,280
254
5,958
5,778
967
39,237
Year ended 30 June 2016
Opening net book amount
Exchange differences
Additions
Transfers between categories
Amortisation charge
Impairment charge
Closing net book amount
At 30 June 2016
Cost
Accumulated amortisation and
impairment
26,280
155
-
-
-
(26,435)
-
254
5,958
-
-
(208)
(3)
(43)
-
-
-
-
(1,253)
(4,705)
5,778
16
2,871
-
(1,310)
(6,723)
967
-
373
208
39,237
171
3,244
-
(213)
(2,779)
(1,214)
(39,120)
-
632
121
753
146,131
58
15,125
23,234
1,779
186,327
(146,131)
(58)
(15,125)
(22,602)
(1,658)
(185,574)
Net book amount
-
-
-
632
121
753
(a) Impairment tests for goodwill
Management have comprehensively reviewed the carrying value of the Group’s assets, having due consideration to its
market capitalisation, market growth assumptions and cash flows from ongoing operations. Cash Generating Unit (CGU)
impairment tests were based on value in use calculations that were determined by discounting the future cash flows
generated from the continuing use of the unit and based on the assumptions that follow:
1 Software includes capitalised development costs being an internally generated intangible asset
Hills Limited Annual Report for the year ended 30 June 2016 64
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
12
Intangible assets (continued)
(a) Impairment tests for goodwill (continued)
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% (2015: 3.0%), which is no greater than the long term average growth
rate for the market to which the asset is dedicated.
The following pre-tax discount rates were used in the value in use calculations:
Building Technologies
Hills Health Solutions
2016
16.3%
18.7%
2015
16.3%
18.7%
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
Asset betas
Equity betas
Equity market risk premium
Alpha risk adjustment for company size
Building
Technologies
Hills Health
Solutions
3%
3%
0.9 – 1.0
0.8 – 0.9
0.97 – 1.08
0.94 – 1.01
6.5%
2%
6.5%
4% - 5%
Alpha risk adjustment for company specific factors
0% – 1%
1%
Long term debt to value ratio
10%
20% – 15%
Long term cost of debt
Long term tax rate
5.5% - 6.5%
6% – 7%
30%
30%
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 Hills Health
Solutions and Building Technologies segments on a rational basis (directly where a direct utilisation is apparent, or
otherwise on a relative revenue mix basis).
The Home segment has no 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, the Group receives a minimum licence fee of $2 million per annum 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.
Hills Limited Annual Report for the year ended 30 June 2016 65
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
12
Intangible assets (continued)
(b) Impairment charges
Impairment of goodwill
During the current period, it was determined that the carrying values of the Hills Health Solutions 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
Impairment charge
Carrying value of Goodwill after
impairment charge
Building
Technologies
2016
$’000
2015
$’000
Hills Health
Solutions
Total
2016
$’000
2015
$’000
2016
$’000
2015
$’000
24,287
(24,287)
50,061
(25,929)
2,148
(2,148)
31,572
(29,424)
26,435
(26,435)
81,633
(55,353)
-
24,132
-
2,148
-
26,280
The difference between the carrying amount of goodwill at 30 June 2015 and the carrying amount of goodwill at 30 June
2016 before impairment charges is due to the effect of movements in the NZD exchange rate during the year on goodwill
related to the New Zealand part of the Building Technologies business.
Impairment of other intangible assets
While performing the CGU value in use calculation, the carrying values of other separately identified 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 period, it was determined that the
carrying values of other intangible assets were impaired and an impairment charge of $12.685 million was recognised in the
profit and loss statement. These are included within other expenses shown in note 1.
Recognition and measurement
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 but is tested for impairment annually, or more frequently if events or changes in
circumstances indicate that it might be impaired. It 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 1).
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. The Group’s intangible assets were fully impaired at 31 December 2015. To that date,
amortisation was calculated using the straight line method to allocate the cost over their estimated useful lives, which varied
from:
Patents and trademarks:
Customer relationships, distribution agreements and brands
10 to 20 years
2 to 5 years
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 costs of employees' time
Hills Limited Annual Report for the year ended 30 June 2016 66
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
12
Intangible assets (continued)
Recognition and measurement (continued)
IT development and software (continued)
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.
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.
13
Provisions
Employee benefits
Outstanding claims
Restructuring costs
Contingent consideration
Other provisions
(a) Description of provisions
2016
Current Non-current
$’000
$’000
7,040
2,188
3,200
-
84
926
954
1,153
-
664
Total
$’000
7,966
3,142
4,353
-
748
2015
Current Non-current
$’000
$’000
8,882
3,846
11,273
3,048
84
1,418
-
2,484
-
664
4,566
Total
$’000
10,300
3,846
13,757
3,048
748
31,699
12,512
3,697
16,209
27,133
Employee benefits
Outstanding claims
Provisions for employee benefits include liabilities for annual leave and long service leave.
The provision for claims comprises the amounts set aside for estimated warranty claims, as
well as the estimated future liability of the Group’s self-insurance arrangements.
The value of the self-insurance 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.
Restructuring costs
The restructuring costs provision comprises onerous lease and make-good costs,
redundancy costs and other costs of closing and restructuring businesses.
Contingent
consideration
See note 21 for details of contingent consideration.
Other provisions
Other provisions mainly comprise provisions for site restoration.
Hills Limited Annual Report for the year ended 30 June 2016 67
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
13
Provisions (continued)
(b) Movements in provisions
Movements in each class of provision during the reporting period, other than employee benefits, are set out below:
Outstanding
claims
$’000
Restructuring
costs
$’000
Contingent
consideration
$’000
Other
$’000
Total
$’000
Movements 2015
Carrying amount at the start of the year
Charged/(credited) to profit or loss –
additional provisions recognised
Amounts used during the year
Increase through acquisition of businesses /
subsidiaries
Carrying amount at end of year
Movements 2016
Carrying amount at the start of the year
Charged/(credited) to profit or loss –
additional provisions recognised
Amounts used during the year
Carrying amount at end of year
Recognition and measurement
Provisions
6,963
19,556
4,450
1,149
32,118
(948)
5,782
-
(185)
4,649
(2,169)
(12,240)
(3,200)
(216)
(17,825)
-
659
3,846
13,757
1,798
3,048
-
2,457
748
21,399
3,846
13,757
3,048
748
21,399
762
2,169
(1,466)
(11,573)
(395)
(2,653)
-
-
2,536
(15,692)
3,142
4,353
-
748
8,243
Provisions for legal claims, service warranties, make good obligations and onerous leases 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.
Employee benefits
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.
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 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.
Hills Limited Annual Report for the year ended 30 June 2016 68
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
13
Provisions (continued)
Recognition and measurement (continued)
Employee benefits (continued)
Other long term employee benefit obligations (continued)
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.
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.
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.
Hills Limited Annual Report for the year ended 30 June 2016 69
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Section D: Capital and financing
This section provides information on how the Group manages its capital structure and financing, including its exposure to
financial risk:
14 Contributed equity
15 Reserves
16 Dividends
17 Borrowings
18 Derivative financial instruments
19 Capital and financial risk management
20 Fair value measures
14
Contributed equity
(a) Share capital
2016
2015
Shares '000 Shares '000
2016
$'000
2015
$'000
Ordinary shares - fully paid
231,986
231,986
278,439
278,439
(b) About share capital
Ordinary shares
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. Ordinary shares have
no par value. The Company does not have a limited amount of ordinary share capital.
Performance rights
Information relating to the Long Term Incentive Share Plan, including details of
performance rights issued, exercised, lapsed and forfeited during the reporting period and
performance rights outstanding at the end of the reporting period, is set out in note 29.
Recognition and measurement
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 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.
15
Reserves
Hedging reserve - cash flow hedges
Equity compensation reserve
Foreign currency translation reserve
Profits reserve
2016
$'000
72
670
374
10,133
2015
$'000
151
754
(571)
10,133
11,249
10,467
Hills Limited Annual Report for the year ended 30 June 2016 70
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
15
Reserves (continued)
(a) Movements in reserves
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 (credit) / expense
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
Transfers from other reserves
Dividends paid
Closing balance 30 June
(b) Nature and purpose of reserves
151
(113)
34
72
754
(84)
670
(571)
945
374
(638)
1,127
(338)
151
721
33
754
139
(710)
(571)
10,133
-
-
10,293
13,112
(13,272)
10,133
10,133
Hedging reserve –
cash flow hedges
Equity compensation
reserve
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. Amounts are reclassified to profit or loss when the associated
hedged transaction affects profit or loss.
The equity compensation reserve represents the value of performance rights held by an
equity compensation plan of the Group. This reserve will be reversed against share
capital when the underlying performance rights 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.
Foreign currency
translation reserve
Exchange differences arising on translation of the financial statements of a foreign
controlled entity are recognised in other comprehensive income and accumulated in this
reserve. The cumulative amount is reclassified to profit or loss when the net investment is
disposed of.
Profits reserve
Current period and realised profits are transferred from retained earnings and other
reserves to the profits reserve and dividends are paid out of the profits reserve.
Dividends
16
(a) Ordinary shares
Year ended 30 June 2016
No dividends were paid during the year and no final dividend has been declared.
Year ended 30 June 2015
Fully franked dividends (based on tax paid at 30%) were paid on the follow dates:
26 September 2014: $8.400 million (3.6 cents per fully paid share)
30 April 2015: $4.872 million (2.1 cents per fully paid share)
A final dividend was not declared for the year.
Hills Limited Annual Report for the year ended 30 June 2016 71
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
16
Dividends (continued)
(b) Franked dividends
Franking credits available for subsequent reporting periods based on a tax rate of 30%
(2015: 30.0%)
2016
$'000
2015
$'000
1,787
1,787
The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for franking
credits that will arise from:
the payment of the amount of the provision for income tax;
the payment of dividends recognised as a liability at the reporting date; and
the receipt of dividends recognised as receivables at the reporting date.
The consolidated amounts include franking credits that would be available to the Company if distributable profits of subsidiaries
were paid as dividends.
Recognition and measurement
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.
17
Borrowings
Other loans
Bills payable
Total borrowings
(a) Loans
Secured loans
2016
2015
Current Non-current
$’000
$’000
Total
$’000
Current Non-current
$’000
$’000
472
-
472
27,695
28,167
-
-
27,695
28,167
5,831
-
5,831
-
45,000
45,000
Total
$’000
5,831
45,000
50,831
The Group has its banking facilities with Commonwealth Bank (CBA) through a Bilateral
Facility Deed and with Recfin Nominees Pty Ltd through a Receivables Purchase Facility.
The CBA facility totals $10 million, and consists of a multi-option facility tranche comprising
bank loans, bank overdraft and contingent liabilities, expiring on 13 November 2017.
The Recfin Nominees Pty Ltd facility totals $36 million with funding provided based upon
the Group’s accounts receivable book. The facility expires on 13 May 2021.
CBA loans and Recfin Nominees Pty Ltd loans are denominated in AUD.
Interest is charged at prevailing market rates plus a fixed margin.
The Company and its wholly owned subsidiaries have provided an interlocking guarantee
and indemnity to its financiers for these facilities.
The Recfin Nominees Pty Ltd facility is secured on the Group’s Accounts Receivable book,
with a second mortgage over the other assets of the Group.
CBA hold a fixed and floating charge over the assets of the Group (excluding Accounts
Receivable).
An assessment of the contractual maturities of financial liabilities is provided in note 19.
Hills Limited Annual Report for the year ended 30 June 2016 72
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
17
Borrowings (continued)
Recognition and measurement
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 capitalised as a prepayment 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.
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.
18
Derivative financial instruments
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 19).
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
Total current derivative financial instrument liabilities
Net derivative financial instrument assets / (liabilities)
(a) Instruments used by the Group
2016
$'000
2015
$'000
103
-
103
-
-
103
526
80
606
(310)
(310)
296
Forward exchange
contracts: cash flow
hedges
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 following two to three months.
Forward exchange
contracts: held-for-
trading
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 2016 a loss of $5,000 was recognised in profit or loss
for the ineffective portion of these hedging contracts (2015: $1,000).
Group Entities have entered into forward foreign exchange contracts that 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
19 for details. However, they are accounted for as held for trading. There were no forward
exchange contracts outstanding at 30 June 2016 that were accounted for as held for
trading.
Hills Limited Annual Report for the year ended 30 June 2016 73
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
18
Derivative financial instruments (continued)
(a) Instruments used by the Group (continued)
Interest rate swap
contracts: cash flow
hedges
In the prior year, the Group had entered into interest rate swaps to manage its exposure
to interest rate risk on variable interest rate borrowings. Interest rate swaps in place at 30
June 2015 covered 22% of the loan principal outstanding. There were no outstanding
interest rate swaps at 30 June 2016.
Recognition and measurement
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 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.
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.
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.
Hills Limited Annual Report for the year ended 30 June 2016 74
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
19
Capital and financial risk management
(a) Capital risk management
The Group's objective when managing capital is to safeguard its 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.
To maintain or adjust the capital structure, the Group may vary the amount of dividends paid to shareholders, return capital
to shareholders, issue new shares or sell assets to reduce debt.
The Group monitors capital by assessing its gearing ratio in conjunction with monitoring its banking covenants. The gearing
ratio is calculated as:
net debt
net debt + total capital
Net debt
Total borrowings as shown in the consolidated statement of financial
position less cash and cash equivalents
Total
capital
Equity as shown in the consolidated statement of financial position
(including non-controlling interests)
During 2016, the Group's strategy 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 2016 and 30 June 2015 were as follows:
Total borrowings
Less: cash and cash equivalents
Net debt
Total equity
Gearing ratio
(b) Financial risk management
Notes
17
7
2016
$'000
28,167
(3,994)
2015
$'000
50,831
(18,801)
24,173
32,030
69,077
136,600
25.9%
19.0%
The Group’s central treasury function (“Group Treasury”) manages the Group’s exposure to financial risks under policies
approved by the Board. Group Treasury identifies, evaluates and manages financial risks in close cooperation with the
Group's business 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 financial instruments and investment of
excess liquidity.
The risk management approach 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 exclusively for risk mitigation and not as
trading or other speculative instruments.
The Group holds the following financial instruments:
Financial assets
Cash and cash equivalents
Trade and other receivables
Derivative financial instruments
Investments
2016
$'000
2015
$'000
3,994
67,151
103
2
71,250
18,801
87,545
606
3
106,955
Hills Limited Annual Report for the year ended 30 June 2016 75
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
19
Capital and financial risk management (continued)
(b) Financial risk management (continued)
Financial liabilities
Trade and other payables
Borrowings
Derivative financial instruments
Contingent consideration
2016
$'000
2015
$'000
50,400
28,167
-
-
67,690
50,831
310
3,048
78,567
121,879
The Group uses different methods to measure different types of risk, including sensitivity analysis (for interest rate, foreign
exchange and other price risks) and aging analysis (for credit risk).
(i) Market risk
Price risk
Foreign exchange 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.
Foreign exchange risk arises when future commercial transactions and recognised
financial assets and financial liabilities are denominated in currencies other than the
Group's functional currency. The risk is measured using sensitivity analysis and cash flow
forecasting.
The Group’s main foreign exchange risk exposure is to US dollars.
Group Entities and business units are required to hedge their foreign exchange risk
exposure using forward exchange contracts transacted by Group Treasury.
The Group’s policy is to hedge approximately three months’ of anticipated cash flows
(mainly purchases of inventories) in US dollars.
Cash flow and fair
value interest rate risk
Borrowings issued at variable rates expose the Group to cash flow interest rate risk.
See details of the Group’s borrowings in note 17.
Foreign exchange risk
The Group's exposure to foreign exchange risk at the reporting date, expressed in Australian dollars at the closing
exchange rates, was:
30 June 2015
Cash at bank
Trade receivables
Trade payables
Forward exchange contracts
USD
$'000
1,145
257
EUR
$'000
GBP
$'000
3
-
-
-
Total
$'000
1148
257
(7,201)
(828)
(156)
(8,185)
buy foreign currency (cash flow hedges)
(21,848)
-
buy foreign currency (FVTPL)1
-
(2,197)
-
-
(21,848)
(2,197)
1 Fair Value Through Profit and Loss
Hills Limited Annual Report for the year ended 30 June 2016 76
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
19
Capital and financial risk management (continued)
(b) Financial risk management (continued)
(i) Market risk (continued)
Foreign exchange risk (continued)
30 June 2016
Cash at bank
Trade receivables
Trade payables
Forward exchange contracts:
buy foreign currency (cash flow hedges)
buy foreign currency (FVTPL)
Cash flow interest rate risk
USD
$'000
EUR
$'000
GBP
$'000
Total
$'000
703
1,126
-
-
-
-
703
1,126
(8,986)
(234)
(14)
(9,234)
(22,955)
-
-
-
-
-
(22,955)
-
Group policy was previously to maintain approximately 50% to 75% of its borrowings at fixed rate using interest rate swaps
to achieve this when necessary. The Group’s financing arrangement is now principally a Receivables Purchase Facility,
where the balance outstanding changes daily. Accordingly, the Group no longer uses interest rate swaps and interest rate
swaps in existence at the beginning of the financial year expired during the year.
During 2016 and 2015, the Group's borrowings at variable rate were denominated in Australian Dollars and NZ Dollars.
As at the end of the reporting period, the Group had the following variable rate borrowings outstanding:
Bank overdrafts and loans
Cash and cash equivalents
Other loans
Interest rate swaps (notional principal amount)
An analysis by maturities is provided in section (iii) below.
2016
2015
Weighted
average
interest rate
%
5.71%
0.67%
8.33%
-
Weighted
average
interest rate
%
2.1%
1.7%
0.0%
5.6%
Balance
$’000
(27,695)
3,994
(472)
-
Balance
$’000
(45,000)
18,801
(5,830)
10,000
Sensitivity analysis
Foreign exchange
rates
Interest rates
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 forward exchange contracts designated as cash flow hedges.
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.
Hills Limited Annual Report for the year ended 30 June 2016 77
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
19
Capital and financial risk management (continued)
(b) Financial risk management (continued)
(i) Market risk (continued)
Sensitivity analysis (continued)
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
-100 bps
+100 bps
Foreign exchange risk
+10%
-10%
Carrying
amount Profit
$'000
$'000
Other
equity Profit
$'000
$'000
Other
equity Profit
$'000
$'000
Other
equity Profit
$'000
$'000
Other
equity
$'000
30 June 2015
Financial assets
Cash and cash equivalents
Trade and other receivables
Derivatives - cash flow hedges
Derivatives - fair value through
profit or loss
Total increase / (decrease) in
financial assets
18,801
87,545
526
(186)
-
-
80
-
(186)
-
-
-
-
-
186
-
-
-
186
Financial liabilities
Derivatives - cash flow hedges
Trade payables
Borrowings
Contingent consideration
Total increase / (decrease) in
financial liabilities
(310)
(67,690)
(50,831)
(3,048)
Total increase / (decrease)
30 June 2016
Financial assets
Cash and cash equivalents
Trade and other receivables
Derivatives - cash flow hedges
3,994
67,151
103
Total increase / (decrease) in
financial assets
Financial liabilities
Trade payables
Borrowings
Total increase / (decrease) in
financial liabilities
Total increase / (decrease)
50,400
28,167
-
-
508
-
508
322
(22)
-
-
(22)
-
282
282
260
(235)
-
-
-
-
(508)
-
(235)
(508)
(235)
(322)
-
-
-
-
-
-
-
-
44
-
-
44
-
(282)
(282)
(238)
-
-
-
-
-
286
-
-
-
286
286
-
-
-
-
-
-
-
-
127
918
-
-
3,680
(104)
(751)
-
-
-
(2,054)
28
-
(23)
-
1,073
3,680
(878)
(2,054)
-
(911)
-
-
(911)
-
-
-
-
-
-
751
-
-
751
-
-
-
-
-
162
3,680
(127)
(2,054)
78
125
-
-
-
2,601
(64)
(102)
-
-
-
(2,045)
203
2,601
(166)
(2,045)
(1,039)
-
(1,039)
-
-
-
850
-
850
-
-
-
(836)
2,601
684
(2,045)
Hills Limited Annual Report for the year ended 30 June 2016 78
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
19
Capital and financial risk management (continued)
(b) Financial risk management (continued)
(ii) Credit risk
Nature of the risk
Risk management
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a
financial instrument fails to meet its contractual obligations and arises principally from the
Group’s customers.
Credit risk is managed at a Group level through a credit policy and trade credit insurance,
which is carried for the majority of Group debtors.
Each new customer is assessed for creditworthiness before the Group’s standard payment
and delivery terms and conditions are offered. The assessment considers external credit risk
ratings.
Purchase limits are established for each customer, which represent the maximum open
amount without requiring further approval. These limits are reviewed periodically and credit
worthiness is continually monitored. Limits in excess of $150,000 must be endorsed by the
trade credit insurer. Customers that fail to comply with the terms of the Trade Credit
Insurance Policy or meet the Group’s benchmark creditworthiness may only transact with the
Group on a prepayment basis.
In most cases, goods are sold subject to retention of title clauses and this security is
registered on the Personal Property Securities Register, 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 may require personal guarantees from customer company directors
and charging clauses over real property. Failure to pay Hills in accordance with the account
terms may result in cessation of supply, loss of credit facilities, and/or recovery and legal
action.
The ageing of the Group’s trade receivables is analysed in note 8.
(iii) Liquidity risk
Nature of the 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.
Risk management
The Group manages liquidity risk by continuously monitoring forecast and actual cash flows
and matching the maturity profiles of financial assets and liabilities. Surplus funds are
generally only invested in instruments that are tradeable in highly liquid markets.
Financing arrangements
Details of the Group’s borrowings are discussed in note 17. The Group had access to the following undrawn borrowing
facilities from its bankers at the end of the reporting period:
Floating rate
- Expiring within one year (bank overdraft and short term money market)
- Expiring beyond one year (loans)
2016
$’000
2015
$’000
-
4,212
4,212
1,000
54,746
55,746
Hills Limited Annual Report for the year ended 30 June 2016 79
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
19
Capital and financial risk management (continued)
(b) Financial risk management (continued)
(iii) 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.
At 30 June 2015
Non-derivatives
Trade payables
Borrowings
Contingent consideration
Total non-derivatives
Derivatives
Interest rate swaps
Total
At 30 June 2016
Trade payables
Borrowings
Total
Less than 6
months
6 – 12
months
Between 1
and 2 years
Between 2
and 5 years
Total
contract-
ual cash
flows
Carrying
amount
liabilities
$’000
$’000
$’000
$’000
$’000
$’000
67,690
6,305
3,048
77,043
168
77,211
-
474
-
474
175
649
-
948
-
948
-
45,629
-
67,690
53,356
3,048
67,690
50,831
3,048
45,629
124,094
121,569
-
-
343
310
948
45,629
124,437
121,879
50,400
-
-
-
810
1,282
1,581
32,187
50,400
35,860
50,400
28,167
51,210
1,282
1,581
32,187
86,260
78,567
20
Fair value measurements
(a) Fair value measurements for financial assets and liabilities
The fair values of cash and cash equivalents, trade receivables, trade payables and borrowings approximate their carrying
amounts due to their short term nature and the impact of discounting not being significant.
The Group measures and recognises the following at fair value on a recurring basis:
Derivative financial instruments
Contingent consideration payable
AASB 13 requires disclosure of fair value measurements by reference to the following fair value measurement hierarchy:
Level 1
Level 2
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
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).
Level 3
Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Hills Limited Annual Report for the year ended 30 June 2016 80
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
20
Fair value measurements (continued)
(a) Fair value measurements for financial assets and liabilities (continued)
The Group's financial assets and financial liabilities at fair value are as follows:
30 June 2015
Assets
Derivatives used for hedging
Total assets
Liabilities
Derivatives used for hedging
Contingent consideration payable
Total liabilities
30 June 2016
Assets
Derivatives used for hedging
Total assets
Level 1
$’000
Level 2
$’000
Level 3
$’000
Total
$’000
-
-
-
-
-
-
-
606
606
310
-
310
103
103
-
-
-
3,048
3,048
-
-
606
606
310
3,048
3,358
103
103
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 2016.
The following table shows a reconciliation from opening to closing balances for fair value measurements in Level 3 of the fair
value hierarchy:
Balance at 1 July
Reassessment of contingent consideration
Payment of contingent consideration
Arising from business combination
Balance at 30 June
Key estimate: measurement of fair value
Contingent consideration
2016
$’000
2015
$'000
3,048
(395)
(2,653)
-
4,450
798
(3,200)
1,000
-
3,048
The assessment of the fair values of financial and non-financial assets and liabilities involves significant management
judgement. The measurement of the fair values of land and buildings is discussed in note 11 and contingent consideration is
discussed in note 21.
Hills Limited Annual Report for the year ended 30 June 2016 81
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Section E: Group structure
This section provides information on the Hills Limited Group structure, including business acquisitions and disposals, controlled
entities and related parties:
Interests in other entities
21 Business combinations
22
23 Related party transactions
24 Parent entity financial information
25 Deed of cross guarantee
21
Business combinations
There were no business combinations during the current reporting period and no adjustments were made to the fair values
attributed to assets acquired and liabilities assumed as part of business combination in prior years.
Contingent consideration in respect of business combinations was paid during the reporting period as follows:
Business
Effective
date
APG
1 Jul 2014
Segment
Details
Building
Technologies
OPS
31 Mar 2014 Building
Technologies
Merlon
1 Oct 2013
Hills Health
Solutions
The Group acquired 100% of the issued shares in EMG Finance Pty Ltd
and Audio Products Group Pty Ltd (together “APG”), complementing and
extending the Group’s business in the specialised audio market.
Contingent consideration of $1.000 million comprised retention, payable
twelve months after the acquisition was completed. The amount was paid
during the reporting period.
The Group acquired the assets and business of a security solutions
business, Open Platform Systems Pty Ltd (“OPS”).
The consideration was subject to certain EBITDA results being achieved
for the year ended 30 June 2014 and certain revenue targets being
achieved for the year ended 30 June 2015. Contingent consideration of
$0.998 million was paid during the reporting period.
The Group acquired 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”).
The consideration was subject to certain contracts being signed.
Additional contracts were signed compared to provisional estimates and
contingent consideration of $0.655 million was paid during the reporting
period.
Recognition and measurement
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
Hills Limited Annual Report for the year ended 30 June 2016 82
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
21
Business combinations (continued)
Recognition and measurement (continued)
Business combinations (continued)
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.
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.
Key estimate: contingent consideration
Accounting for contingent consideration requires significant management judgement in assessing the likely outcome.
Management consider the possible scenarios of expected contracts to be signed, revenue generated and claims made; the
amount to be paid under each scenario; and the probability of each scenario.
22
Interests in other entities
(a) Investments in subsidiaries
The controlled entities of the Group listed below were wholly owned during the current and prior year, unless otherwise
stated.
Australia
Hills Finance Pty Ltd
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
Cygnus Satellite Pty Ltd
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
Hills Limited Annual Report for the year ended 30 June 2016 83
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
22
Interests in other entities (continued)
(a) Investments in subsidiaries (continued)
New Zealand
Hills NZ Limited (formerly Hills Holdings NZ Limited)
Audio Products Group Limited
These entities are party to a Deed of Cross Guarantee – see note 25.
50% ownership interest. Step Electronics 2005 Pty Ltd is controlled by virtue of the Company's control of this entity’s Board through the
Chairman’s casting vote, effective management of the entity and exposure to the risks and benefits of ownership, or control of voting
rights through the dilution of the minority shareholders.
On 25 June 2015, the Group sold its 50% interest in Cygnus Satellite Pty Ltd.
(b)
Non-controlling interests (NCI)
There is no individual subsidiary that has non-controlling interests that are material to the Group in either the current or the
prior reporting period. The Group sold its interest in Cygnus Satellite Pty Ltd during the previous reporting period.
23
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 22.
(c) Key management personnel
Short-term employee benefits (fixed and STI remuneration)
Post-employment benefits (superannuation)
Long term benefits (cash LTI and accrued long service leave)
Termination benefits
Share-based payments (LTI expense and employee share bonus plan expense)
Detailed remuneration disclosures are provided in the Remuneration Report.
(d) Transactions with other related parties
The following transactions occurred with related parties:
Subsidiaries
2016
$
2015
$
2,510,910
142,314
103,052
-
5,750
2,966,471
170,435
83,422
928,100
(63,494)
2,762,026
4,084,934
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
Sales of goods and services within the Group, that eliminated with cost of goods sold and
services provided amounted to $13.757 million (2015: $19.162 million).
Loans and
borrowings
Dividends
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 and overseas wholly
controlled entities are charged interest at rates no more favourable than current market rates.
Intragroup interest paid and received during the year was $0.152 million (2015: $0.219 million).
Intragroup dividends paid and received during the year amounted to $3.837 million (2015:
$0.735 million).
Hills Limited Annual Report for the year ended 30 June 2016 84
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
23
Related party transactions (continued)
(d) Transactions with other related parties (continued)
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:
Entity
CSG
Association
Details
Associated with P Bullock Goods purchased by the Group from CSG totalled $0.102 million (2015:
$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 reporting period 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 2016 the Group current assets and liabilities that were eliminated totalled $37.355 million (2015:
$50.066 million).
24
(a)
Parent entity financial information
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
Hedging reserve - cash flow hedges
Equity compensation reserve
Profits reserve
Retained earnings
Loss for the year
Total comprehensive income
2016
$'000
2015
$'000
55,431
99,617
109,233
97,300
155,048
206,533
57,486
31,392
88,878
31,308
49,506
80,814
66,170
125,719
278,439
278,439
72
670
151
754
32,859
32,859
(245,870)
(186,484)
66,170
125,719
(59,384)
(45,530)
(59,463)
(50,724)
Hills Limited Annual Report for the year ended 30 June 2016 85
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
24
Parent entity financial information (continued)
(b) Guarantees, contingent liabilities and commitments of the parent entity
Guarantees
Bank guarantees given by the Company in favour of customers and suppliers amounted to $5.788
million (2015: $9.224 million).
Cross guarantees are given by the Company and its wholly owned subsidiaries as described in note
25. Under the terms of the Deed of Cross Guarantee the Company and its wholly owned subsidiaries
have guaranteed the debt in each other's companies. Guarantees amount to $94.062 million (2015:
$149.255 million). No material deficiency in net tangible assets exists in these companies at reporting
date with net tangible assets amounting to $49.551 million (2015: $53.297 million).
Contingent
liabilities
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.
Contractual
commitments
As at 30 June 2016, the Company had contractual commitments for the acquisition of plant or
equipment totalling $0.426 million (2015: $2.126 million). These commitments are not recognised as
liabilities as the relevant assets have not yet been received.
Recognition and measurement
Parent entity financial information
The financial information for the parent entity has been prepared on the same basis as the consolidated financial statements.
25
Deed of cross guarantee
The wholly owned subsidiaries identified with a ‘’ in note 22 are relieved from the Corporations Act 2001 requirements for
preparation, audit and lodgement of financial reports and Directors’ reports, under ASIC Class Order 98/1418 (as amended).
The Company and each of these subsidiaries have entered into a Deed of Cross Guarantee (the “Deed”), under which each
company guarantees the debt of the others. No entities have become a party to the Deed during the reporting period.
Hills Limited is the Holding company and Pacom Security Pty Ltd is the Trustee under the Deed.
The entities identified with a ‘’ in note 22 represent a ‘closed group' for the purposes of the Class Order, and as there are
no other parties to the Deed 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 2016 and a consolidated statement of financial
position as at 30 June 2016 of the Company and controlled entities that are a party to the Deed, after eliminating all
transactions between parties.
Hills Limited Annual Report for the year ended 30 June 2016 86
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
25 Deed of cross guarantee (continued)
(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 before income tax
Income tax expense
Loss for the year
Consolidated statement of comprehensive income
Loss for the year
Other comprehensive income:
Items that may be reclassified to profit or loss
2016
$'000
2015
$'000
309,809
2,949
(3,514)
(348,003)
(38,759)
(20,282)
384,208
5,183
(3,239)
(445,673)
(59,521)
(27,032)
(59,041)
(86,553)
(59,041)
(86,553)
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
(113)
34
(79)
-
-
-
(79)
1,127
(338)
789
(7,534)
2,261
(5,273)
(4,484)
Total comprehensive loss for the year
(59,120)
(91,037)
Summary of movements in consolidated retained earnings
Accumulated losses at the beginning of the reporting period
Loss for the year
Accumulated losses at the end of the reporting period
(167,781)
(59,041)
(81,228)
(86,553)
(226,822)
(167,781)
Hills Limited Annual Report for the year ended 30 June 2016 87
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
25
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
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
Provisions
Derivative financial instruments
Total current liabilities
Non-current liabilities
Borrowings
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Accumulated losses
Total equity
2016
$'000
2015
$'000
2,666
67,941
50,987
103
16,044
86,106
66,867
526
121,697
169,543
534
814
18,915
753
10,212
31,228
653
1,102
31,471
35,845
30,460
99,531
152,925
269,074
48,306
472
12,136
-
60,914
27,695
3,697
31,392
92,306
60,619
66,873
5,831
26,675
310
99,689
45,000
4,566
49,566
149,255
119,819
278,439
9,002
(226,822)
278,439
9,161
(167,781)
60,619
119,819
Hills Limited Annual Report for the year ended 30 June 2016 88
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Section F: Unrecognised items
This section contains information about items that are not recognised in the financial statements but may have a significant
impact on the Group’s financial position or performance.
26 Contingencies
27 Commitments
28 Events occurring after the reporting period
26
Contingencies
(a) Contingent liabilities
The Group had contingent liabilities at 30 June 2016 in respect of:
Claims
In consultation with the Environmental Protection Authority, ground water contamination potentially
originating from the Company’s former 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 that 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.
Guarantees
Bank guarantees in favour of customers and suppliers totalling $5.788 million (2015: $9.224 million).
27
Commitments
(a) Capital commitments
Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows:
Plant and equipment
(b) Lease commitments: Group as lessee
Non-cancellable operating leases
2016
$'000
2015
$'000
426
2,335
The Group leases a number of office, warehouse and factory facilities under operating leases.
The leases run for a period from 1 to 12 years with the majority running for a period of 3 to 5 years, with options 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:
Within one year
Later than one year but not later than five years
Later than five years
2016
$'000
2015
$'000
6,914
8,294
478
15,686
6,958
11,166
1,214
19,338
Hills Limited Annual Report for the year ended 30 June 2016 89
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
27
Commitments (continued)
(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
Recognition and measurement
Leases
2016
$'000
375
-
375
2015
$'000
1,884
4,133
6,017
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. 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.
28
Events occurring after the reporting period
No matter or circumstance has occurred subsequent to year end that has significantly 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 reporting
periods.
Hills Limited Annual Report for the year ended 30 June 2016 90
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
Section G: Other
This section contains disclosures required for the Group to comply with the accounting standards and other pronouncements,
the Corporations Act 2001 or the Corporations Regulations but are not considered to be significant in understanding the
financial position or performance of the Group:
29 Share-based payments
30 Remuneration of auditors
31 Other accounting policies
29
Share-based payments
(a) Executive share options
All executive share options were forfeited or cancelled during the previous reporting period.
(b) Employee performance rights
In 2010, the Group established the Long Term Incentive Share Plan (LTIP). The LTIP was designed to provide long term
incentives to eligible senior employees of 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).
Details of performance rights under the LTIP are as follows:
Grant
date
Expiry
date
Exercise
price
Balance at
start of the
year
Granted
during the
year
Exercised
during the
year
Forfeited /
cancelled
during the
year
Balance at
the end of
the year
Vested &
exercisable
at the end
of the year
Number
Number
Number
Number
Number
Number
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
Total
2016
-
-
1,133,332
-
-
389,410
$2.50
$2.90
$3.23
$3.66
$4.16
25,000
35,000
40,000
55,000
125,000
280,000
-
-
-
-
-
-
1,413,332
389,410
Performance rights
27 Feb 2015 30 Jun 2017
-
Total
122,012
122,012
-
-
Fair value of performance rights granted
-
-
-
-
-
-
-
-
-
-
-
(1,133,332)
-
(267,398)
122,012
(25,000)
(35,000)
(40,000)
(55,000)
(125,000)
(280,000)
-
-
-
-
-
-
(1,680,730)
122,012
(38,404)
83,608
(38,404)
83,608
-
-
-
-
-
-
-
-
-
-
-
The fair value assessed in accordance with AASB 2 Share Based Payment at grant date of performance rights granted
during the previous reporting period 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
Hills Limited Annual Report for the year ended 30 June 2016 91
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
29
Share-based payments (continued)
(b) Employee performance rights (continued)
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 granted during the year ended 30 June 2015 included:
Exercise price
Life
$0.00
2.3 years
Grant date (for Accounting Standards)
27 February 2015
Expiry date
30 June 2017
Share price at grant
Expected price volatility
Expected dividend yield
Risk free interest rate
$0.88
40%
5.7%
1.8%
(b) Expenses arising from share-based payment transactions
Total (credit) / expenses arising from share-based payment transactions recognised during the period as part of employee
benefit expense were as follows:
Performance rights issued under Long Term Incentive Share Plan
Recognition and measurement
Share-based payments
2016
$'000
2015
$'000
(84)
33
Share based compensation benefits are provided to employees via the Long Term Incentive Share Plan – see below:
Long Term Incentive Share 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.
Hills Limited Annual Report for the year ended 30 June 2016 92
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
30
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:
KPMG audit and non-audit services
Audit and other assurance services
KPMG Australia - audit and review of the financial statements
Overseas KPMG firms - audit and review of the financial statements
Total remuneration for audit and other assurance services
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
Total remuneration of KPMG
2016
$
2015
$
343,375
39,951
485,909
38,957
383,326
524,866
76,239
11,605
87,844
-
8,342
8,342
203,867
40,253
244,120
397,534
-
397,534
479,512
1,166,520
31
Other accounting policies
(a) 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 30 June 2016.
(b) Early adoption of standards
The Group has not elected to early adopt any new accounting standards and amendments.
(c) New accounting standards and interpretations not yet adopted
Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2016 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.
Title
Effective date
(reporting periods
beginning on or after…)
Details
AASB 9
Financial Instruments
1 January 2018
(early adoption
permitted)
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 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
1 January 2018
(early adoption
permitted)
Replaces AASB 118 Revenues and applies to contracts with
customers. The Group has not yet decided when to adopt AASB 15
and has not yet determined the potential effect of the standard.
Hills Limited Annual Report for the year ended 30 June 2016 93
Hills Limited
Notes to the consolidated financial statements
For the year ended 30 June 2016
(continued)
31
Other accounting policies (continued)
(c) New accounting standards and interpretations not yet adopted (continued)
Title
AASB 16
Leases
AASB 2015-1
Amendments to Australian
Accounting Standards –
Annual Improvements to
Australian Accounting
Standards 2012-2014 Cycle
Effective date
(reporting periods
beginning on or after…)
Details
1 January 2019
(early adoption
permitted)
1 January 2016
(early adoption
permitted)
Removes the classification of leases as either operating or finances
leases for the lessee, effectively treating all leases as finance
leases. Short term leases and leases of low value assets are
exempt from the lease accounting requirements. The Group has not
yet decided when to adopt AASB 16 and has not yet determined the
potential effect of the standard.
Amendments to existing accounting standards, particularly in
relation to:
AASB 5 – when an asset (or disposal group) is reclassified from
‘held for sale’ to ‘held for distribution’ or vice versa, this does not
constitute a change to a plan of sale or distribution and does not
have to be accounted for as such
AASB 7 – specific guidance for transferred financial assets to help
management determine whether the terms of a servicing
arrangement constitute ‘continuing involvement’ and, therefore,
whether the asset qualifies for derecognition
AASB 7 – that the additional disclosures relating to the offsetting of
financial assets and financial liabilities only need to be included in
interim reports if required by AASB 134
AASB 119 – that when determining the discount rate for post-
employment benefit obligations, it is the currency that the liabilities
are denominated in that is important and not the country where they
arise
These changes are not expected to have a material impact on the
Group.
AASB 2015-2
Amendments to Australian
Accounting Standards –
Disclosure Initiative
1 January 2016
(early adoption
permitted)
The amendments do not require any significant changes to current
practice but facilitate improved reporting. They do not affect the
Group’s accounting policies or any of the disclosures.
(d) 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 that
are recoverable from, or payable to the taxation authority, are presented as operating cash flows.
Hills Limited Annual Report for the year ended 30 June 2016 94
Shareholder information
The shareholder information set out below was applicable as at 15 August 2016.
Distribution of equity securities
Analysis of numbers of ordinary shareholders by size of holding:
Size of holding
Number of holders
1 - 1000
1,001 - 5,000
5,001 - 10,000
10,001 - 100,000
100,001 and over
4,056
6,265
2,770
2,728
179
There were 6,235 holders of less than a marketable parcel of ordinary shares.
Twenty largest shareholders
The names of the 20 largest holders of ordinary shares are listed below:
Name
HILLS ASSOCIATES LIMITED
POPLAR PTY LIMITED
CITICORP NOMINEES PTY LIMITED
CARISTE PTY LTD
JACARANDA PASTORAL PTY LTD
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
RBC INVESTOR SERVICES AUSTRALIA PTY LIMITED
GREYBOX HOLDINGS PTY LTD
J P MORGAN NOMINEES AUSTRALIA LIMITED
CAMBROSE PTY LIMITED
IQ RENTAL & FINANCE PTY LTD
ACE PROPERTY HOLDINGS PTY LTD
VENN MILNER SUPERANNUATION PTY LTD
DONALD CANT PTY LTD
HILLS ASSOCIATES LIMITED & POPLAR PTY LTD
MR JOHN GASSNER
COLLEEN SIMS NOMINEES PTY LTD
MR JACK BOGHOS
CVC LIMITED
BRISPOT NOMINEES PTY LTD
Number of
shares
% of shares
issued
16,768,441
16,550,845
11,723,794
6,691,872
5,968,699
4,644,295
4,593,972
4,550,042
3,553,223
3,176,510
1,800,000
1,600,000
1,500,000
1,337,578
1,188,918
1,181,752
1,162,445
1,100,000
987,509
983,097
7.23
7.13
5.05
2.88
2.57
2.00
1.98
1.96
1.53
1.37
0.78
0.69
0.65
0.58
0.51
0.51
0.50
0.47
0.43
0.42
Hills Limited Annual Report for the year ended 30 June 2016 98
Shareholder information (continued)
Substantial holders
Substantial holders in the Company are set out below:
Name
Poplar Pty Ltd1
Hills Associates Limited
Number
held
17,775,724
16,768,441
% of
shares
issued
7.66
7.23
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.
On-market buyback
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.
The Company did not buy back any shares during the current reporting period. The on market buyback has now expired.
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.
Securities exchange
The Company is listed on the Australian Securities Exchange. The home exchange is Adelaide.
1 The total number of shares held includes the joint shareholding held by Poplar Pty Ltd and Hills Associates Limited and the shareholding held
by Ling Nominees Pty Ltd
Hills Limited Annual Report for the year ended 30 June 2016 99
Corporate directory
Registered office
Level 7, 130 Pitt Street, Sydney NSW 2000
Telephone: (02) 9216 5510
Facsimile: (02) 9216 5999
Web: http://www.hills.com.au
Executives
Grant Logan, Chief Executive Officer
Gareth Turner, Chief Financial Officer
Non-executive directors
Jennifer Helen Hill-Ling
Fiona Rosalyn Vivienne Bennett
Philip Bullock
Ian Elliot
David Moray Spence
Company secretary
Ms Gai Stephens
Share registry
Link Market Services Limited
Level 12, 680 George Street, Sydney NSW 2000
Telephone
Australia: 1300 554 474
International: +61 2 8280 7100
Facsimile
Australia and International: +61 2 9287 0303
Web: www.linkmarketservices.com.au
Hills Limited Annual Report for the year ended 30 June 2016 100