Hill International Annual Report 2017

Plain-text annual report

ANNUAL report Hills Limited ABN 35 007 573 417 for the year ended 30 June 2017 2 3 Hills limitedShareholders‘ letter2 Hills Limited Annual report for the year ended 30 June 2017 ABN 35 007 573 417 Contents Shareholders’ letter Directors’ report Auditor’s independence declaration Financial statements Directors’ declaration Independent auditor’s report to the members Shareholder information Corporate directory 3 4 6 34 35 95 96 100 102 3 Hills Limited Annual Report for the year ended 30 June 20174 Dear Shareholder, Today, the Company’s spirit of innovation is focused on delivering technology products and service solutions that connect, entertain and secure people’s lives. We have diversified and divested from clothes lines and metal products, and expanded our product range and solutions to include Audio Visual, Communications, Security and Surveillance, Fire, Nurse Call, Patient Engagement and asset tracking solutions, but our focus has remained constant: We are committed to delivering technology solutions into the environments that people need and trust most: their homes, hospitals, places of learning, entertainment venues, retail spaces, transport and infrastructure, banking and finance, workplaces and government institutions. Financial Year 2017 (FY17) was another busy year for everyone at Hills. David Lenz, our CEO, has completed 12 months in the role following the planned retirement of Grant Logan. Chris Jacka was promoted to the position of CFO and David Fox, our General Counsel and Company Secretary, was also promoted, having previously filled the role of General Counsel for a number of years. Net profit performance of your Company improved during the year following the impairment charges booked in the prior year. Revenue declines within the core distribution business in part following changes in vendor portfolios did impact overall profitability along with Hills decision to exit NBN Co satellite installations, with significant effort during the year focused on: 5 • a further reduction in corporate costs; • selectively outsourcing some administrative functions to Cognizant; • strengthened vendor and customer relationships; • continued training and development of our people; • integration of Hills Health Solutions (HHS) into the Group and continued improvement of its profitability in FY17; transition of the Hills Home Living assets to AMES Australasia from Woolworths following the exit of Woolworths from its Masters business; and reducing net debt by $1.6 million and working capital by $8.9 million on the back of a small operating cash outflow of $0.8 million. • • It was disappointing that we recorded a net loss of $7.9 million for the year, which was in line with the market guidance provided in June 2017, after allowing for: • • • • • professional costs associated with the termination of the proposed Lincor merger; redundancy costs incurred in further reducing overheads and “right-sizing” the Company; inventory write downs; incurring additional costs under the satellite installation services with Ericsson/NBN; and transition of the Hills Home Living assets to AMES Australasia from Woolworths, following the exit of Woolworths from its Masters business. Most importantly, during the period we continued to establish a solid platform for growth in the healthcare, security and surveillance, communications and audio visual sectors which will have a positive impact on our profitability in FY18 and beyond. These projects included: • commencing our investment of $2-2.5 million in our market-leading Digital Platform, which will enable us to better service our customers early in the new calendar year with: – 24 x 7 e-commerce access; – real-time inventory access; – customer statements, invoices and price books; – online payments; – product specifications; and – delivery information. 4 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedShareholders‘ letter4 5 implementing annualised cost savings of $12 million in FY17, with an $8 million benefit in FY18; • • continued development of our own IP, including our new dementia software and the refresh of our Australian • Monitor portfolio; expansion of our patient engagement by including BYOD offerings and the securing of finance options for our healthcare customers; • securing the sole distribution rights to UTC security and surveillance solutions; and • launching new technologies such as TruVision CCTV solutions to address our low end CCTV market and HillsTrak providing our customers with an asset-tracking solution. Hills again secured a number of large contracts, which will add to our FY18 profitability, including: • working with Siemens to supply the security solution to Perth Stadium; • • • • • delivery of a unified Genetec Security Centre solution with AXIS cameras to NSW Parliament House; supply of a Genetec Video, AXIS cameras and Dell hardware solution to Mirvac Retail Properties; delivery of a Genetec Video and AXIS cameras solution to Transurban Limited nationally; through Virtual Graffiti, supply of a Ruckus solution (station wifi) to Sydney Trains; delivery of Samsung Panels through Fredon and Telstra to the Melbourne and Sydney offices of PricewaterhouseCoopers; supply of L’Acoustics speakers for the Asia Games Kuala Lumpur and two hall upgrades at Sydney Grammar School; supply of Williams Sound Hearing loops as part of an overall upgrade for Sydney Trains; supply of the Hills IP-Series nurse call to the new Joan Kirner’s Women’s and Children’s Hospital in Victoria; supply of a nurse call solution as part of the Stage 2 redevelopment for Blacktown Hospital in NSW; the supply of nurse call and patient engagement services to Northern Beaches Hospital (NSW); a five-year contract extension to provide patient engagement services to Northern Health (Victoria) including The Northern Hospital, the Bundoora Extended Care Centre and the Broadmeadows Health Service; supply of patient engagement services for over 1200 beds for Sydney Local Health District – Royal Prince Alfred, Concord, Canterbury and Balmain Hospitals; and a patient engagement contract extension for four hospitals in Eastern Health (Victoria), including Angliss, Box Hill, Maroondah and Peter James Centre Hospitals. • • • • • • • • It is a tribute to the whole Hills team that we won a number of key awards again during FY17, including: • Genetec: SDK Developer of the year APAC • Genetec: Distributor of the year APAC • Ruckus: Distributor of the year ANZ Hills continues to add value by delivering high quality service and unequalled expertise to our Customers. We have invested in a dedicated and highly experienced team of experts, specialising in sales, design, technical support, installation, internal quality and governance. More than a distributor, Hills is a unique provider of managed services and end to end solutions, with competencies across the sectors in which we operate that few others can match. Whilst we still have work to do we have now established a base for a platform from which to grow and this could not have been achieved without significant effort and commitment from all Hills employees and we thank them all for their contribution. Yours sincerely Jennifer Hill-Ling Chairman David Lenz Chief Executive Officer 5 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Shareholders‘ letterHills limited 7 6 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 $7.9 million for the year ended 30 June 2017. This loss includes the impact of costs associated with the proposed demerger of the Hills Health Solutions business and other net costs associated with structuring the Company in line with our future growth opportunities. The Directors present their report on the consolidated entity (referred to hereafter as Hills, the Company or the Group) consisting of Hills Limited and the entities it controlled at the end of, or during, the year ended 30 June 2017 (FY17), 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 AO David Moray Spence was a director from the beginning of the period until his retirement on 20 September 2016. Ian Elliot was a director from the beginning of the period until his retirement on 4 November 2016. Kenneth James Dwyer was appointed a director on 20 September 2016 and continues in office at the date of this report. Net loss after tax attributable to the owners of the Company 2017 $’000 2016 $’000 (7,932) (68,305) The net loss for the year ended 30 June 2017 includes an expense of $4.395 million relating to the impairment of inventory (comprising inventory purchased on signing a distribution agreement with Tyco in February 2015 of $3.461 million and other exited brands of $0.934 million). Reduced Net Debt and Working Capital Hills net debt reduced by $1.6 million in the year, from $21.6 million at 30 June 2016 to $20.0m at 30 June 2017. This was driven by a reduction in working capital, which was achieved through continued focus on reducing the Group’s inventory holding and reducing aged receivables. Hills investment in net working capital decreased from $74.6 million at 30 June 2016 to $65.7 million at 30 June 2017. Reduced Operating Expenses Hills reduced operating expenses by $6.4 million in the year ended 30 June 2017, a decrease of 6.3% (excluding depreciation and amortisation and net costs not considered part of segment EBITDA). This has been achieved by ‘right sizing’ the business and the outsourcing of certain administrative functions to Cognizant. The Company expects to see continued savings in operating expenses as a result of these changes. 6 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report6 7 REVIEW OF OPERATIONS (continued) Description of Operating Segment During the year ended 30 June 2017, there were changes to elements of the business that led to a review of the Group’s reportable operating segments. These changes included: Lincor merger On 13 September 2016, Hills announced that it had entered into a conditional merger agreement to combine its Hills Health Solutions (HHS) business with international healthcare technology business, Lincor Solutions, to create a new ASX listed company, Lincor Limited. As announced, the conditional merger agreement was terminated in December 2016. Following the termination, management have integrated HHS into the operational activities of the remainder of the Group. Sale of Hills Home Living assets The Hills Home Living (HHL) business was operated by Woolworths Limited (Woolworths) under a licencing arrangement until October 2016, when the agreement was terminated after the decision by Woolworths to exit its home improvement business and close its Masters stores. In December 2016, Hills entered into an agreement with AMES Australasia (AMES) to take over the manufacture and sale of HHL products. The transaction with AMES involved the sale of tooling equipment and trademarks related to HHL products, which are no longer used by the continuing Hills business. No further revenue, expenses or profit is expected from this business. Hills operations are now integrated into a single segment, reflective of Hills business categories, which have: • • a common customer base, covering building contractors, consultants and system integrators; and products and services sold primarily through common channels: building contractors and system integrators. The business operations fall into three areas: • Hills Health Solutions • Hills Security, Surveillance & Communication • Hills Audio Visual The businesses are described in detail below. One Hills, One Vision Today, Hills spirit of innovation is focused on delivering technology products and service solutions that connect, entertain and secure people’s lives through our three businesses. Hills is committed to delivering technology solutions into the environments that people need and trust most: • their homes • hospitals • places of learning • entertainment venues • retail spaces • transport and infrastructure • banking and finance • workplaces • government institutions Hills provides end to end solutions in the building technology sector, across all verticals, and offers shared services like asset management and service capabilities, to complement its portfolio. Hills adds value by delivering high quality service and unequalled expertise through a dedicated and highly experienced team of experts, specialising in sales, technical support, installation, internal quality and governance. More than a distributor, Hills is a unique provider of managed services, with competencies across the sector that few others can match. 7 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)8 REVIEW OF OPERATIONS (continued) Hills Health Solutions Hills Health Solutions (HHS) is a market leader and comprises the supply and installation of health technology solutions, nurse call and patient entertainment and other related solutions including security, Wi-Fi and telephony, into the health and aged care sectors. HHS has products and services located in 400 hospitals and 570 aged care facilities throughout Australia and New Zealand. HHS continues to: • maintain market leadership in patient engagement with over 18,000 beds; • maintain its strategic distribution relationship with Lincor Inc.; and • invest in research and development (R&D), Nurse Call, bring your own device (BYOD), dementia software and guest wi-fi – all Hills owned IP. Key wins for HHS in FY17: • • • • Joan Kirner’s Women’s and Children’s Hospital (VIC) – Hills has successfully tendered to supply the Hills IP-Series integrated nurse call system. Blacktown Hospital (NSW) – a $2.5 million nurse call solution as part of the hospital’s Stage 2 redevelopment project. Northern Health (VIC) – a new five-year contract extension to provide patient engagement services to The Northern Hospital, Bundoora Extended Care Centre and the Broadmeadows Health Service. Sydney Local Health District (NSW) – Hills has been awarded the patient engagement services (1200+ beds) contract for Royal Prince Alfred, Concord, Canterbury and Balmain Hospitals. Security, Surveillance and Communications Hills is the leading value-added provider of electronic security systems, closed circuit television systems, home and commercial automation and control systems, consumer electronic equipment, communications related products and services, domestic and commercial antennas, master antenna television systems, communications antennas and amplifiers in the Australian and New Zealand market. This business has recently diversified to include Fire and Asset Management. Hills provides solutions to consumers and businesses across the following vertical markets in Australia and New Zealand homes, hospitals, places of learning, entertainment venues, retail spaces, transport and infrastructure, banking and finance, workplaces and government institutions. Solutions offerings include: • Integrated access • Card access • Intruder alert • Cameras • Home hub • Locks • Analytics software • HillsTrak (asset management) • Fire detectors and alarms • Antenna, Set top boxes, Digital TV Systems • Professional Services • Installations Key wins for Security, Surveillance and Communications in FY17: • UTC Fire & Security: Hills signed a sole-distribution agreement with UTC Fire & Security, which will help the Company to compete in the low-end CCTV market. Perth Stadium: Hills, working with Siemens, supplied the security solution to Perth Stadium. NSW Parliament House: Hills delivered a unified Genetec Security Centre solution with AXIS cameras. Mirvac Retail Properties: Hills supplied a Genetec Video, AXIS cameras and Dell hardware solution. Transurban Limited: Hills delivered a Genetec Video and AXIS cameras solution nationally. Sydney Trains: through Virtual Graffiti, Hills supplied Ruckus solution (station wifi) to Sydney Trains. • • • • • 8 9 Hills Limited Annual Report for the year ended 30 June 2017Hills limitedDirectors’ reportFor the year ended 30 June 2017 (continued)8 9 REVIEW OF OPERATIONS (continued) Audio Visual Hills Audio Visual provides businesses in Australia and New Zealand with the next generation of audio visual technologies for education, infrastructure projects, businesses, sporting venues, houses of worship, enterprise and entertainment venues. Solutions offerings include: • Unified Communication for Huddle and Conference spaces • LCD Displays • Projectors • Hearing Augmentation • Speakers systems to suit both indoor and outdoor applications Key Wins for AV in FY17: • PricewaterhouseCoopers Office Upgrade – Hills delivered Samsung Panels through Fredon and Telstra to the Melbourne and Sydney Offices. • Asia Games Kuala Lumpur – Hills supplied L’Acoustics speakers • • Sydney Grammar School - Hills supplied L’Acoustics speakers to two Hall upgrades Sydney Trains – Hills supplied Williams Sound Hearing loops as part of an overall upgrade. Hills Competitive Advantage Hills competitive advantage in each business comes from: Vendor Relationships Long term vendor relationships allow Hills to provide its customers with access to the largest portfolios in the industry. Customer Relationships Hills adds value for its customers by providing them with a full “solution” to their security, communications, audio visual and health needs - Hills is a market-leading “one stop shop”, which includes pre and post installation services. Expert Resources Hills has invested in a dedicated and highly experienced team of security, health and audio visual experts across Australia and New Zealand covering sales and technical support. Geographic Footprint Hills has the largest national footprint in Australia and New Zealand making its solutions accessible for its customers. Size Companies like dealing with Hills because of high levels of governance, ability to extend credit and sophisticated systems and processes. Service Model Hills has a unique service model – it is able to harness large teams of installers to service high volume contracts such as the wireless rollout on behalf of NBN and satellite dishes for Foxtel. Local Manufacture Hills ability to manufacture antennas and satellite dishes and consumables locally. Intellectual Property Well-respected products with patent protection, Hills owns the IP for its market leading Nurse Call solution. Research and development R&D teams making sure Hills products evolve and keep ahead of competitors. Subsequent events There have been no events subsequent to balance date that would have a material effect on the Group’s financial statements at 30 June 2017. 9 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)10 Directors‘ report DIVIDENDS INFORMATION ON DIRECTORS Year ended 30 June 2017 No dividends were paid during the year and no final dividend has been declared. Jennifer Helen Hill-Ling LLB (Adel) FAICD Year ended 30 June 2016 No dividends were paid during the year and no final dividend was been declared. Chairman, Non–Independent Non–Executive Director Age 55 For more information regarding dividends please refer to note 16 of the financial statements. Experience and expertise 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. FY18 OUTLOOK Given Hills investments, reduction of operating expenses, strong customer and vendor management, increased profitability of the Hills Health Solutions business and the investment in the digital transformation project, Hills expects to return to profitability in FY18. As with any technology distribution business, Hills is exposed to the risk of potential loss of vendors, potential loss of customers, slippages associated with contracts, supply issues and exposure to foreign exchange rate fluctuations. 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 and 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). She does not hold any options over ordinary shares in Hills Limited. 10 11 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited10 Directors‘ report INFORMATION ON DIRECTORS (continued) Fiona Rosalyn Vivienne Bennett BA (Hons) FCA FAICD FIML Philip Bullock AO BA, MBA, GAICD, Dip. Ed. Independent Non–Executive Director Independent Non–Executive Director Age 61 Experience and expertise Age 64 Experience and expertise Appointed non-executive Director on 31 May 2010. Appointed non-executive Director on 23 June 2014. Fiona Bennett is a Chartered Accountant with over 30 years’ experience in business and financial management, corporate governance, risk management and audit. She has previously held senior executive positions at BHP Billiton Limited and Coles Group Limited and has been a Chief Financial Officer at several organisations in the health sector. She is currently Chairman of the Victorian Legal Services Board. Other current listed company directorships Director of Beach Energy Limited (since November 2012). Director of Select Harvests Limited (since July 2017) Former listed company directorships in last 3 years Director of Boom Logistics Limited (retired in June 2015). Special responsibilities Mr Bullock AO 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 AO 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). Chairman of the Audit, Risk and Compliance Committee. Special responsibilities Interests in shares and options at the date of this report 88,444 ordinary shares in Hills Limited. She does not hold any options over ordinary shares in Hills Limited. Chairman of the Remuneration and Nomination Committee; Member of the Audit, Risk and Compliance Committee Interests in shares and options at the date of this report 100,000 ordinary shares in Hills Limited. He does not hold any options over ordinary shares in Hills Limited. 11 11 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Hills limited12 Directors‘ report For the year ended 30 June 2017 (continued) INFORMATION ON DIRECTORS (continued) Kenneth James Dwyer BCom, GMQ, GAICD Ian Elliot FAICD Independent Non–Executive Director Independent Non–Executive Director Age 59 Age 63 Experience and expertise Experience and expertise Mr Dwyer formerly worked in banking, including investment banking in the US and Australia specialising in M&A, debt and equity funding. Mr Dwyer has established and grown two businesses in the highly competitive audio industry in Australia and New Zealand via a combination of organic growth and acquisitions. Mr Dwyer also has experience in the distribution of premium European machinery for textile manufacturing. Other current listed company directorships None. Former listed company directorships in last 3 years Appointed non-executive Director on 1 September 2010. Retired on 4 November 2016. 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 of George Patterson Advertising and director of the National Australia Day Council. None. Special responsibilities Member of the Remuneration and Nomination Committee; Member of the Audit, Risk and Compliance Committee. Interests in shares and options at the date of this report 200,000 ordinary shares in Hills Limited. He does not hold any options over ordinary shares in Hills Limited. Other current listed company directorships Director of McMillan Shakespeare Limited (since May 2014) Former listed company directorships in last 3 years Director of Salmat Limited (from 2005 until November 2016). 12 13 Hills Limited Annual Report for the year ended 30 June 2017Hills limited12 COMPANY SECRETARY David Fox LLB, BA Mr Fox was appointed to the position of General Counsel on 11 March 2013 and, on 22 December 2016, to the position of General Counsel and Company Secretary. As General Counsel and Company Secretary, Mr Fox is responsible for legal, risk and company secretarial matters associated with Hills. Mr Fox has vast experience in corporate law. He was first admitted to practise law in 2001 and previously held the position of Partner at a Sydney based law firm. 13 Directors‘ report INFORMATION ON DIRECTORS (continued) David Moray Spence BCom Independent Non–Executive Director Age 65 Experience and expertise Appointed non-executive Director on 1 September 2010. Retired on 20 September 2016. 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 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 and PayPal Australia Pty Ltd. Other current listed company directorships Chairman of Vocus Communications Limited (since June 2010) Former listed company directorships in last 3 years Director of SAI Global. 13 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Hills limited14 Directors’ report INFORMATION ON DIRECTORS (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 2017, and the numbers of meetings attended by each Director were: J Hill-Ling F Bennett P Bullock AO I Elliot3 D Spence4 K Dwyer5 Full meetings of Directors Audit, Risk and Compliance Committee Remuneration & Nomination Committee1 Held2 Attended Held2 Attended Held2 Attended 28 28 28 14 8 20 27 25 28 9 5 20 - 4 4 - 1 3 - 4 4 - 1 3 2 - 2 1 1 1 2 - 2 1 1 1 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. 1 The Nomination Committee and the Remuneration Committee were amalgamated into the Remuneration and Nomination Committee on 26 May 2017. No Nomination Committee meetings were held prior to that date. 2 Number of meetings held during the period that the Director held office or was a member of the committee during the year 3 Mr Ian Elliot retired as a director on 4 November 2016 4 Mr David Spence retired as a director on 20 September 2016 5 Mr Kenneth Dwyer was appointed a director on 20 September 2016 14 15 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited14 15 INFORMATION ON DIRECTORS (continued) 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. ENVIRONMENTAL REGULATION Manufacturing Hills holds all required environmental licences, registrations and permits for its sole remaining manufacturing site in O’Sullivan Beach in South Australia. No significant environmental incidents were reported over the 2017 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 2017. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 34. 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. 15 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Directors’ reportHills limited16 16 Directors’ report NON-AUDIT SERVICES (continued) 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 services KPMG Australia – other assurance services 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 Other consulting services Total remuneration for other services Total remuneration of KPMG ROUNDING OF AMOUNTS 2017 $ 2016 $ 298,000 343,375 42,223 39,951 340,223 383,326 165,000 - 505,223 383,326 78,238 3,967 82,250 12,816 12,816 76,239 11,605 87,844 8,342 8,342 600,244 479,512 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. 16 17 17 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited 16 16 17 17 LETTER FROM THE CHAIRMAN OF THE REMUNERATION COMMITTEE Dear Shareholder, CEO Remuneration On behalf of your Board, I am pleased to present Hills FY17 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. FY17 Remuneration Outcomes FY17 remained a challenging year for Hills as we continued the task of right sizing and improving customer service. As part of this work, we saw the completion of the contract with the prior CEO, Grant Logan, and the appointment of David Lenz as the new CEO. In the process, we also transitioned to a new CFO in Chris Jacka. These changes have provided Hills with further opportunities to bring executive compensation more into line with market practices for a company of our size. Both appointments have been from within Hills and we are extremely fortunate to have people of their capabilities and energy leading Hills during these challenging times. Consistent with this approach, the organisation has been flattened at the senior levels and we have seen a reduction in those employees at Hills who have a base salary above $150,000 (inclusive of superannuation) from 35 to 25. For employees earning over $150,000, increases have only been applied as job responsibilities have changed. Overall Full Time Equivalent (FTE) has reduced from 665 to 557 over the period of the year. As a result, Hills average monthly salary cost, comprised of all employees across Australia and New Zealand, has reduced from $5,979,172 in July 2016 to $5,242,290 in June 2017, which is a reduction of 12%. None of this work is easy and it requires strong leadership from our managers and loyalty and dedication from our staff. We are grateful for the sacrifices they have and continue to make to help reshape the future of Hills to become a profitable and sustainable business. With the appointment of David Lenz, we adopted a new market based compensation framework as follows: • Base Pay (including superannuation): $350,000 • Variable Pay: $200,000 The Variable Pay was to be determined as a result of the performance of Hills over FY17 and would be paid 50% in cash and 50% in equity. The equity would vest over three years at the rate of: 20% 30% 50% in year one; in year two; and in year three. The hurdles associated with the variable pay were as follows: Element Measure Financial (80%) • Net Profit After Tax (NPAT) • Operating Cash Flow • EBITDA / Sales • Inventory Management Non-financial (20%) • Employee Engagement • Vendor Engagement Given the financial performance by Hills in FY17, the Board determined that none of the financial targets have been met, with the exception of a reduction in inventory. From a business perspective, it was very pleasing to see that the Hills Health Solutions business achieved their financial targets. With regard to the Company non-financial targets, we saw a concerted effort to help drive improved employee morale and vendor alignment and loyalty. As such, the non-financial targets have been deemed to be met by the Board. 17 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)18 18 Directors’ report LETTER FROM THE CHAIRMAN OF THE REMUNERATION COMMITTEE (continued) Board Changes During the year, we have also continued to refresh the Board with the appointment of Ken Dwyer. Ken was the former owner of an audio visual distribution business and brings with him years of experience, both in this critical area for Hills, but also the technology distribution industry more broadly. At the same time, we farewelled two long serving directors, David Spence and Ian Elliott, both of whom made significant contributions to the ongoing transformation of Hills. FY18 Outlook As we move into FY18, our main focus is the continued alignment of reward to performance and the establishment of market based compensation at all levels through our organisation. This has included an agreement to hold any increases in salary until 1 January 2018, with total salary budget to increase by approximately the Consumer Price Index (CPI) with continued focus on those employees earning less than $150,000 per annum. CEO and CFO measures are largely in line with FY17 and are distributed as follows: Element Measure Financial (60%) Non-financial (40%) • Operating Cash Flow • Net Profit After Tax (NPAT) • Reduce aged inventory > 180 days • Digital Transformation • Employee Engagement • Customer Satisfaction • Supplier Partnership At the same time, we continue to look to enhance employee morale and lift skills by focusing on programs and activities such as the: • Relaunch of the Hills Employee Values, after completing a survey with our employees on the values that they believed best represented Hills. • Introduction of the “Hills Giveback Charity Program” following a survey of our employees on whether they believed it was important to participate in a Charity program and what type of participation they were after. • Launch of the FY18 strategy to all managers at a company sponsored workshop held on the 5th and 6th of July 2017, at which all managers across Australia and New Zealand with people responsibilities were brought together to hear the 18 direction for FY18 and plan on how to deliver on the key outcomes as “one team”. • Compliance with the Workplace Gender Equality Act (2012) Act, whereby all non-public sector employers with 100 or more employees are required to submit a report by 31 May each year for the preceding 12-month period (1 April – 31 March reporting period). • Continuation of flexible, family friendly work options and practices where there is a need for our employees to meet changing work and personal requirements. To augment our flexible work options, we also offer employees the opportunity to purchase up to 4 weeks of additional leave via salary sacrifice. This is particularly helpful for working parents that need more than their 4 weeks of annual leave to assist with family responsibilities or for employees that need to plan for a longer paid holiday. • Investing in the capabilities of our sales and customer service employees by commencing two programs in August 2017: – Hills Dynamic Sales Training – for all Account Managers, Business Development Managers and Sales Managers across all our business areas and across both Australia and NZ operations. – Hills Customer Service Excellence Program – offering our employees engaged in customer service qualifications in Business Management and Leadership & Management via a Registered Training Organisation. Thank you for taking the time to review the FY17 Remuneration Report. We have made progress in terms of better alignment of compensation to the market, however we must remain focused on talent development more broadly to help our people have the skills that they require in this new world. With this in mind, it is fitting to close by thanking the employees of Hills for their ongoing loyalty and dedication to our customers and suppliers; they have and continue to make a significant difference for Hills in the marketplace. Yours sincerely Philip Bullock AO Chairman Remuneration and Nomination Committee 19 19 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited18 18 19 19 REMUNERATION REPORT (AUDITED) (continued) REMUNERATION REPORT (AUDITED) This Remuneration Report explains Hills’ approach to executive remuneration, performance and remuneration outcomes for Hills and its Key Management Personnel (KMP) for the year ended 30 June 2017 (FY2017). 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 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 FY17. Name Position Directors Term as KMP in FY17 J Hill-Ling Chairman, Non-Independent and Non-Executive Director Full Year F Bennett Independent, Non-Executive Director P Bullock AO Independent, Non-Executive Director Full Year Full Year K Dwyer Independent, Non-Executive Director Commenced September 2016 Former Directors D Spence Independent, Non-Executive Director Ceased September 2016 I Elliot Independent, Non-Executive Director Ceased November 2016 Senior Executives D Lenz Chief Executive Officer Commenced September 2016 C Jacka Chief Finance Officer Commenced November 2016 D Fox Company Secretary & General Counsel Commenced December 2016 D Osborne Head of Hills Health Solutions Commenced January 2017 19 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)21 20 REMUNERATION REPORT (AUDITED) (continued) Name Position Former Senior Executives Term as KMP in FY17 G Logan1 Chief Executive Officer Ceased September 2016 G Turner2 Chief Financial Officer Ceased November 2016 G Stephens Company Secretary, Legal & Risk Ceased December 2016 D McKim-Smith Head of Hills Health Solutions Ceased November 2016 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 non-executive directors: Philip Bullock AO (Chairman), Jennifer Hill- Ling, and Ken Dwyer have 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 Security Policy is available on the Hills website at: http://www.corporate.hills.com.au/about-us/governance. 1 G Logan provided consultancy to the Board and CEO until February 2017 2 G Turner became CFO of Lincor Limited in November 2016 and subsequently left Hills in January 2017 when the merger between Hills Health Solutions and Lincor did not proceed. 20 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report20 21 REMUNERATION REPORT (AUDITED) (continued) 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, where there has been 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. Remuneration principles The key principles on which the Hills remuneration strategy is based are: Competitive • Remuneration positioned at the appropriate level relative to the market to be competitive and attract, retain and reward employees Equitable & Motivational • Employees in similar roles, making similar contributions, with similar performance, received similar rewards • Motivates employees to deliver business results • Differentiates, but is fair and equitable in its application Linked to Performance Aligned • Directly links individual and company performance to remuneration outcomes • Employees understand what results needed to be achieved • Provides an integrated remuneration and performance system framework • Aligns remuneration and incentive outcomes with business goals and results • Supports the completion of the transformation and delivery of the growth strategy • Withstands external scrutiny Straightforward • Understood by all stakeholders and employees 3.2 Remuneration mix Senior executive remuneration is comprised of Fixed Remuneration (made up of base salary and superannuation), and Variable Incentive.1 1 Includes G. Logan’s cash based retention plan. 21 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)22 REMUNERATION REPORT (AUDITED) (continued) 3.3 Chief Executive Officer Remuneration The Board appointed David Lenz to the position of CEO on 1 September 2016. This appointment followed the retirement of Grant Logan at the end of his employment contract. Mr Lenz has a fixed remuneration of $350,000 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. Variable Incentive FY17 Mr Lenz has a variable incentive opportunity of up to $200,000. The variable incentive for FY17 adopts a balanced scorecard approach which is aligned to the Company’s strategic plan. The balanced scorecard focuses on the following key areas: 23 Element Measure Financial (80%) • NPAT • Operating Cash Flow • EBITDA / Sales • Inventory Management Non-financial (20%) • Employee Engagement • Vendor Engagement Weighting is distributed across these measures. The variable incentive is paid 50% as cash and 50% as Performance Rights (unless the Board determines otherwise), with vesting to take place over a 3-year period in the following manner: 20% vest after one year 30% vest after two years, and 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 30-day volume weighted average price of the shares immediately following the announcement of the full year results. In addition, Mr Lenz was awarded an initial sign-on bonus of 200,000 Hills Performance Rights on 1 September 2016. The first tranche of 100,000 shares are to be awarded on or around 1 September 2017 and the second tranche in September 2018. The first 50% of Performances Rights will convert to shares on the first anniversary of Mr Lenz’s Commencement Date as CEO, irrespective of whether Mr Lenz remains employed by the Company. The vesting of the second 50% of Performance Rights is subject to Mr Lenz being employed by Hills at time of vesting and will occur on the second anniversary of his commencement date. The fair value of performance rights was 34.0 cents per performance right, based on the quoted share price at grant. 22 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report22 REMUNERATION REPORT (AUDITED) (continued) 3.4 Senior Executive Short Term Incentive FY17 Variable Incentive – How It Works The variable incentive is an at risk component of remuneration and is designed to reward performance against the achievement of a balanced scorecard that is aligned to the Company’s strategic plan. Senior executive variable incentives are determined on the same measures as the CEO. Each senior executive has specific KPIs in each of these areas to achieve the results in the balanced scorecard. The variable incentive performance period was from 1 July 2016 to 30 June 2017. The maximum variable incentive 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 variable incentive opportunity for each senior executive is listed at section 3.5 as an absolute dollar amount and as a percentage of the senior executive’s fixed remuneration. The following table summarises the potential FY17 variable incentive payments where a senior executive ceased employment with Hills: Resignation and retirement Any entitlement to a payment was subject to the participant being employed by Hills at the time of payment. Company initiated termination Any entitlement to a payment would be for completed months, with no pro-rata for partly completed months. The calculation of an entitlement was based on actual results for the year and paid on the scheduled date. Summary dismissal If summarily dismissed, a participant forfeits all rights to any payments under the FY17 variable incentive which had not already vested or been made. Assessment of Performance and Approval of Payment The Remuneration Committee assessed the individual senior executive’s performance based on the CEO’s recommendations, against the KPIs set at the beginning of the financial year. The assessment of individual performance was combined with the achievement of financial results to determine the amount of payment for each senior executive. The Remuneration Committee recommended the variable incentive payment outcome to the Board for approval. Details of Variable Incentive payments are provided in section 3.5. 23 23 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)25 24 REMUNERATION REPORT (AUDITED) (continued) 3.5 FY17 Variable Incentive Performance and Outcomes FY17 has been a difficult year for the Company which is reflected in the variable incentive plan results detailed in this report. A summary of Company performance compared to previous years is provided in section 5. The KPIs for the senior executives were aligned to the CEO’s KPIs. The variable incentives payable to the CEO and senior executives for FY17 (if any) are set out in the following table: Target Variable Incentive opportunity (pro-rata) $50,000 $200,000 $58,178 $62,740 $71,268 $41,863 Name G Logan1 D Lenz2 G Turner3 C Jacka4 G Stephens5 D Fox6 D McKim-Smith7 $26,667 D Osborne8 $49,589 % of fixed remuneration Financial outcome Non- financial outcome Actual Variable Incentive outcome % Achieved 31% 57% 32% 35% 26% 29% 14% 31% - - - $20,000 $40,000 $60,000 - $25,000 $25,000 $10,000 $30,000 $40,000 - $5,000 $5,000 $4,000 $20,000 $24,000 - - - $32,400 $6,850 $39,250 % Forfeited 100% 70% 57% 36% 93% 43% 100% 21% 66% 0% 30% 43% 64% 7% 57% 0% 79% 34% TOTAL $560,305 34% $66,400 $126,850 $193,250 3.6 FY18 Variable Incentive Design for CEO Variable Incentive Plan – FY18 For FY18, it has been decided to continue the variable incentive plan which involves remunerating the CEO on his annual performance by cash and shares which vest over a 3-year period according to the following vesting scale: 20% vest after one year 30% vest after two years; and 50% vest after three years. 1 G Logan was CEO up to 1 September 2016. 2 D Lenz was promoted to CEO from 1 September 2016. Prior to that he was Chief Operating Officer and a KMP; actual variable incentive vests in accordance with the requirements set out in section 3.3. 3 G Turner was CFO, Hills Limited up to 14 November 2016. From 14 November 2016 he was CFO Lincor Limited and then subsequently left Hills on 10 January 2017. 4 C Jacka became CFO on 14 November 2016, replacing G Turner. 5 G Stephens was Company Secretary and Head of Legal and Risk up to 22 December 2016. 6 D Fox became Company Secretary and General Counsel from 22 December 2016. 7 D McKim-Smith ceased as Head of Hills Health Solutions on 1 November 2016. 8 D Osborne became Head of Hills Health Solutions on 1 January 2017. 24 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report24 25 REMUNERATION REPORT (AUDITED) (continued) The annual performance against which the CEO will be measured is in accordance with the balanced scorecards which has the following measures: Element Measure 1. Financial Measures 60% of Variable Incentive 2. Non-financial Measures 40% of Variable Incentive (a) Budgeted NPAT (b) Budgeted Operating Cash Flow (c) Budgeted Aged Inventory > 180 days (a) Digital Transformation delivered on time and on budget (b) Customer Satisfaction (c) Employee Engagement (d) Vendor Commitment Weighting will be distributed across these measures. 4 EXECUTIVE CONTRACTS AND TERMINATION ARRANGEMENTS Employment contracts The remuneration and other terms of employment for the CEO and senior executives are covered in their individual employment contracts and are summarised in this table: Chief Executive Officer • The contract for the Chief Executive Officer commenced on 1 September 2016 for an initial term of 12 months, following which the Chief Executive Officer will continue to be employed until either party provides notice. • Hills or the Chief Executive Officer may terminate his employment at any time by giving three months’ written notice. Senior Executives Chief Executive Officer and Senior Executives • The contracts may be terminated by either party by giving 3 months written notice. • There are 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. 25 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)26 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 performance and share price information over the last five years. Key Financials FY17 FY16 FY15 FY14 FY13 Shareholders’ funds $000 60,931 69,077 136,600 245,228 271,018 Statutory net (loss) / profit $000 (7,932) (68,305) (85,780) 26,387 (91,387) Basic (loss) / earnings per share Dividends Share Price – as at 30 June Short Term Incentive Payments – % of Target Opportunity cents cents $ % (3.4) (29.4) (37.0) - - 2.1 0.155 0.245 0.455 29% 19% 4% 10.4 7.0 1.74 85% (38.2) 5.0 1.01 87% 27 26 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report26 27 FY17 $ Name Senior Executives D Lenz3 C Jacka4 D Fox5 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. Short-term benefits Post- employment benefits Long term benefits Share based payments Cash salary & fees Cash bonus Other Super- annuation Term- ination benefits2 Perfor- mance rights LSL1 TOTAL 310,818 30,000 8,606 26,491 2,237 161,581 40,000 1,984 12,897 498 128,827 24,000 2,465 10,156 2,830 D Osborne6 138,448 39,250 4,906 13,163 2,015 Former Senior Executives G Logan7 G Turner8 130,400 - 12,484 18,286 105,543 25,000 - 15,232 G Stephens9 130,125 5,000 6,938 20,468 D McKim-Smith10 102,002 - - 17,889 - - - - - - - - - 48,167 426,319 - - - - 216,960 168,278 197,782 161,170 63,765 (2,911) 206,629 115,525 (4,756) 273,300 65,407 - 185,298 Total Senior Executives 1,207,744 163,250 37,383 134,582 7,580 244,697 40,500 1,835,736 1 Long Service Leave. 2 In accordance with statutory and legal obligations. 3 D Lenz became CEO on 1 September 2016. Prior to that he was Chief Operating Officer. 4 C Jacka became CFO on 14 November 2016. 5 D Fox became Company Secretary & General Counsel on 22 December 2016. 6 D Osborne became Head of Hills Health Solutions effective 1 January 2017. 7 G Logan ceased as CEO on 1 September 2016. 8 G Turner ceased as CFO and KMP at Hills 14 November 2016. 9 G Stephens ceased as Company Secretary on 22 December 2016. 10 D McKim-Smith ceased as Head of Hills Health Solutions on 1 November 2016. 27 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued) 28 REMUNERATION REPORT (AUDITED) (continued) FY16 $ Short-term benefits Post- employment benefits Long term benefits Share-based payments Name and fees Cash bonus Other Cash salary Super- annuation LSL & Cash LTIP Perfor- mance rights TOTAL Senior Executives G Logan G Turner D Lenz 826,059 45,000 288,044 60,000 18,110 6,529 262,276 25,000 15,030 D McKim-Smith1 178,149 12,000 10,432 6,428 94,382 - 989,979 23,889 24,699 15,883 3,907 684 3,905 2,183 384,552 - - 327,689 216,638 G Stephens 263,401 18,688 - 25,607 174 3,567 315,168 Total 1,817,929 160,688 50,101 96,506 103,052 5,750 2,234,026 6.2 Remuneration components as a proportion of total remuneration paid or expensed The following table reflects the fixed remuneration and Variable Incentive for FY17 calculated in accordance with the accounting standards as a proportion of the total. 29 Full Year Potential Variable Incentive Pro-rata Potential Variable Incentive Actual Variable Incentive paid / payable Actual Variable Incentive paid / payable as % of Full Year Potential Actual Variable Incentive paid / payable as % of Pro-rata Variable Incentive paid / payable as % of Fixed Remuneration Name Senior Executives D Lenz C Jacka D Fox $200,000 $200,000 $30,000 $100,000 $62,740 $40,000 $80,000 $41,863 $24,000 D Osborne $100,000 $49,589 $39,250 Former Senior Executives G Logan G Turner $300,000 $50,000 $0 $155,000 $58,178 $25,000 G Stephens $149,500 $71,268 $5,000 D McKim-Smith $80,000 $26,667 $0 1 D McKim-Smith was appointed on 30 November 2015. 28 15% 40% 30% 39% 0% 16% 3% 0% 15% 64% 57% 79% 0% 43% 7% 0% 9% 23% 17% 25% 0% 14% 2% 0% Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report28 29 REMUNERATION REPORT (AUDITED) (continued) 6.2 Remuneration components as a proportion of total remuneration paid or expensed (continued) The following table reflects the fixed remuneration, Variable Incentive and total performance based remuneration for FY17 calculated in accordance with the accounting standards as a proportion of the total remuneration. Fixed remuneration % At risk Variable Incentive paid or payable % Value of performance rights % Total performance based % Name Senior Executives D Lenz C Jacka D Fox D Osborne Former Senior Executives G Logan G Turner G Stephens D McKim-Smith 82% 82% 86% 80% 100% 89% 100% 100% 7% 18% 14% 20% 0% 12% 2% 0% 11% 0% 0% 0% 0% -1% -2% 0% 18% 18% 14% 20% 0% 11% 0% 0% The following table shows the proportion weighting of each element of remuneration for each of the senior executives employed during FY17 based on maximum potential outcome. Name Fixed remuneration % Maximum Variable Incentive % Maximum Long Term Incentive % FY17 FY16 FY17 FY16 FY17 FY16 Senior Executives D Lenz C Jacka D Fox D Osborne Former Senior Executives G Logan G Turner G Stephens D McKim-Smith 58% 74% 78% 76% 76% 77% 80% 87% 67% - - - 70% 68% 65% 72% 17% 26% 22% 24% 24% 24% 21% 13% 33% 25% - - - 24% 32% 34% 28% - - - - -1% -1% - - - - - 6% - 1% - 29 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)31 30 REMUNERATION REPORT (AUDITED) (continued) 6.3 Number of performance rights granted, vested and expired / forfeited in FY17 Name At 1 July 2016 Granted Vested Forfeited At 30 June 2017 Senior Executives D Lenz - 200,000 Former Senior Executives G Turner G Stephens 19,588 32,010 - - - - - - 200,000 (19,588) (32,010) - - 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. The Non-Executive Directors’ fees were reduced by 20% in FY15 and have not been increased in FY17. 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 FY11 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 FY17. 7.2 Directors’ FY17 Fee structure The following table outlines the main Board and Committee fees as at 30 June 2017. Board Audit and Risk Committee Remuneration and Nomination Committee Chair fee $ Member fee $ 160,000 16,000 16,000 80,000 8,000 Nil 30 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report30 31 REMUNERATION REPORT (AUDITED) (continued) 7.3 Non–Executive Directors’ remuneration details Non–Executive Directors J Hill-Ling F Bennett P Bullock AO1 K Dwyer2 I Elliot3 D Spence4 TOTAL Board and Committee fees $ Superannuation $ 146,119 146,119 87,671 87,671 94,050 82,507 63,056 - 49,905 80,366 17,928 85,096 458,729 481,759 13,881 13,881 8,329 8,329 8,935 8,312 5,990 - 4,741 7,634 1,703 8,084 43,579 46,241 Year 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Total $ 160,000 160,000 96,000 96,000 102,985 90,820 69,046 - 54,646 88,000 19,631 93,180 502,308 528,000 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. 1 P Bullock AO was appointed Chair of the Remuneration and Nominations Committee, effective September 2016. 2 K Dwyer was appointed as director, effective September 2016. 3 I Elliot retired as a director, effective November 2016. Following his retirement, Mr Elliot was retained on a consultancy basis until February 2017. 4 D Spence resigned as a director, effective September 2016. 31 Hills Limited Annual Report for the year ended 30 June 2017Directors’ reportHills limitedFor the year ended 30 June 2017 (continued)33 33 32 32 REMUNERATION REPORT (AUDITED) (continued) 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 2016 AGM, the Company has introduced a policy requiring directors to hold a minimum number of shares. Specifically, directors are required to hold a minimum of shares and are required to attain this shareholding within a 3-year period. 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 Ordinary shares Directors J Hill-Ling F Bennett P Bullock AO K Dwyer Former Directors I Elliot D Spence Former Senior Executives G Logan G Turner G Stephens 18,146,677 88,444 100,000 95,000 51,735 442,272 228,409 50,000 1,011,408 - - - - - - - - - - - - 105,000 18,146,677 88,444 100,000 200,000 - - - - - n/a1 n/a1 n/a1 n/a1 n/a1 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. 1 No longer a KMP at 30 June 2017. 32 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedDirectors’ report32 32 Directors’ report This report is made in accordance with a resolution of Directors. Jennifer Helen Hill-Ling Director Philip Bullock AO Director Sydney 29 August 2017 33 33 33 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Hills limited34 35 34 35 Hills Limited Annual Report for the year ended 30 June 201734 Hills limited Consolidated financial statements For the year ended 30 June 2017 Contents FINANCIAL STATEMENTS Consolidated statement of profit or loss 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 For the year ended 30 June 2017 (continued) Section A: About this report 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 SECTION B: BUSINESS PERFORMANCE SECTION C: OPERATING ASSETS & LIABILITIES 1 Segment information 2 Revenue 3 Other income 4 Expenses 5 Income tax 6 Loss per share Page 44 Page 47 Page 47 Page 48 Page 50 Page 54 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 SECTION D: CAPITAL AND FINANCING SECTION E: GROUP STRUCTURE 14 Contributed equity 15 Reserves 16 Dividends 17 Borrowings 18 Derivative financial instruments Page 68 Page 69 Page 70 Page 71 Page 72 19 Capital and financial risk management Page 74 20 Fair value measurements Page 80 21 Interests in other entities 22 Related party transactions 23 Parent entity financial information 24 Deed of cross guarantee SECTION F: UNRECOGNISED ITEMS SECTION G: OTHER 25 Contingencies 26 Commitments 27 Events after the reporting period Page 89 Page 89 Page 90 28 Share-based payments 29 Remuneration of auditors 30 Other accounting policies SIGNED REPORTS Directors’ declaration Independent auditor’s report ASX INFORMATION Shareholders information Corporate directory Page 57 Page 58 Page 60 Page 60 Page 61 Page 64 Page 66 Page 82 Page 83 Page 85 Page 86 Page 91 Page 93 Page 93 Page 95 Page 96 Page 100 Page 102 Hills Limited Annual Report for the year ended 30 June 2017 35 36 Consolidated statement of profit or loss Continuing operations Revenue Other income Expenses excluding net finance expenses Cost of goods sold (inventories) Direct costs of services provided Labour and related expenses Operational and equipment expenses Property expenses Depreciation and amortisation Other expenses Loss before net finance expense and income tax Finance income Finance expenses Net finance expenses Loss before income tax Income tax benefit / (expense) from continuing operations Loss from continuing operations Loss for the year, attributable to owners of Hills Limited NOTES 2017 $ ’000 2016 $ ’000 2 3 4b 4a 4 5 298,068 328,913 13,100 311,168 3,192 332,105 (172,095) (187,482) (38,205) (31,972) (68,430) (75,595) (7,867) (7,865) (7,072) (8,517) (8,172) (9,444) (14,348) (55,886) (4,714) (44,963) 66 305 (3,356) (3,659) (3,290) (3,354) (8,004) (48,317) 72 (19,988) (7,932) (68,305) (7,932) (68,305) Cents Cents Loss per share for loss from continuing operations attributable to the ordinary equity holders of the Company: Basic and diluted loss per share 6 (3.4) (29.4) The above consolidated statement of profit or loss should be read in conjunction with the accompanying notes. 36 37 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited36 Consolidated statement of comprehensive income Loss for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges Exchange differences on translation of foreign operations Income tax relating to components of other comprehensive income Other comprehensive (loss) / income for the year, net of tax NOTES 2017 $ ’000 2016 $ ’000 (7,932) (68,305) 15 15 5 (328) (20) 98 (250) (113) 945 34 866 Total comprehensive loss for the year, attributable to owners of Hills Limited (8,182) (67,439) The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 37 37 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Hills limited 38 Consolidated statement of financial position 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 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 2017 $ ’000 2016 $ ’000 7 8 9 5 18 8 11 12 5 10 17 13 18 17 13 14 15 8,651 59,489 46,460 229 - 3,994 69,346 55,617 183 103 114,829 129,243 - 2 534 2 16,600 19,948 2,578 10,917 753 10,808 30,097 32,045 144,926 161,288 40,266 50,400 295 10,556 287 472 12,512 - 51,404 63,384 28,395 4,196 32,591 83,995 60,931 25,130 3,697 28,827 92,211 69,077 278,439 278,439 11,035 11,249 (228,543) (220,611) 60,931 69,077 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 38 39 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited38 Consolidated statement of changes in equity Attributable to owners of Hills Limited Notes Contributed equity $'000 Reserves $'000 Accumulated losses $'000 Total $'000 Balance at 1 July 2015 278,439 10,467 (152,306) 136,600 Total comprehensive income / (loss) for the year Transactions with owners in their capacity as owners: Employee share schemes Balance at 30 June 2016 Balance at 1 July 2016 Total comprehensive (loss) for the year Transactions with owners in their capacity as owners: Employee share schemes Balance at 30 June 2017 - - 278,439 278,439 - - 866 (68,305) (67,439) (84) 11,249 11,249 (250) - (220,611) (220,611) (7,932) (84) 69,077 69,077 (8,182) 36 - 36 278,439 11,035 (228,543) 60,931 29 29 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 39 39 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Hills limited40 Consolidated statement of cash flows Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) 345,464 386,190 Payments to suppliers and employees (inclusive of goods and services tax) (343,007) (372,974) NOTES 2017 $ ’000 2016 $ ’000 Net finance costs paid Net income taxes received / (paid) Net cash flows (used in) / from operating activities Cash flows from investing activities Payments for acquisitions of subsidiaries / business operations, net of cash acquired Payments for property, plant and equipment Payments for intangible assets Proceeds from sale of property, plant and equipment and intangible assets Rent received 7 11 12 2,457 13,216 (3,255) (3,354) 13 (785) (486) 9,376 - (2,653) (1,507) (2,249) 6,701 4 (4,247) (3,244) 6,902 1,526 Net cash flows from / (used in) investing activities 2,949 (1,716) Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Net cash flows from financing activities Net increase / (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 8,004 46,510 (5,522) (69,175) 2,482 (22,665) 4,646 3,994 11 (15,005) 18,801 198 Cash and cash equivalents at end of the year 7 8,651 3,994 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 40 41 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited 40 41 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; • • unrecognised items at the end of the reporting period. structure, including related party transactions and parent entity information; and 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 29 August 2017. 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 financial instruments (derivatives) at fair value. The methods used to measure fair values are discussed further in note 20. 41 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited42 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: Note 2 Note 5 Recognition of revenue accounted for using the percentage of completion method Tax losses for which no deferred tax asset has been recognised Notes 11 and 12 Measurement of the useful lives of property, plant and equipment and intangible assets 43 Notes 13 and 25 Provisions and contingencies Note 20 Measurement of fair value Principles of consolidation Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2017 and the results of all subsidiaries for the year then ended. A list of subsidiaries is included in note 21. 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 was 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. 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 statement of profit or loss, 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. 42 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements42 43 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'). The Australian dollar is the Company's functional and presentation currency and the functional and presentation currency of the majority of the Group. 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. 43 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited45 44 Section B: Business performance This section contains information relevant to understanding the results and performance of the Group during the reporting period: 1. Segment information 2. Revenue 3. Other income 4. Expenses 5. Income Tax 6. Loss per share 1 SEGMENT INFORMATION During the year ended 30 June 2017, there were changes to elements of the business that led to a review of the Group’s reportable operating segments. These changes include: Lincor merger On 13 September 2016, Hills announced that it had entered into a conditional merger agreement to combine its Hills Health Solutions (HHS) business with international healthcare technology business, Lincor Solutions, to create a new ASX listed company, Lincor Limited. As announced, the conditional merger agreement was terminated in December 2016. Following the termination, management have integrated HHS into the operational activities of the remainder of the Group. Sale of Hills Home Living assets The Hills Home Living (HHL) business was operated by Woolworths Limited (Woolworths) under a licencing arrangement until October 2016, when the agreement was terminated after the decision by Woolworths to exit its home improvement business and close its Masters stores. In December 2016, Hills entered into an agreement with AMES Australasia (AMES) to take over the manufacture and sale of HHL products. The transaction with AMES involved the sale of tooling equipment and trademarks related to HHL products, which are no longer used by the continuing Hills business. No further revenue, expenses or profit is expected from this business. In light of the above changes, the Board of Directors (being the Chief Operating Decision Maker) consider that there is only one reportable segment for the year ended 30 June 2017. 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 most states and territories. Comprises sales offices and customers in New Zealand and customers in the Pacific Islands, the Middle East, Europe, Asia and North America. 44 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements44 (a) Information about reportable segments Reportable segment Hills Limited Total segment result2 (b) Other segment information Segment revenue Revenue EBITDA1 2017 $ ’000 2016 $ ’000 (restated) 2017 $ ’000 2016 $ ’000 (restated) 298,068 328,913 298,068 328,913 6,353 6,353 11,749 11,749 45 The revenue from external customers reported to the CODM is measured in a manner consistent with that in the consolidated income statement. There are no sales between segments. Segment revenue reconciles to total revenue per note 2. The Group derived revenue of $29.828 million from a single external customer during the period. The Group did not derive 10% or more of its revenues from any other single external customer. Segment EBITDA The CODM assesses performance based on a measure of 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 EBITDA reconciles to the loss before income tax as follows: Segment EBITDA Depreciation and amortisation Net finance expenses Net costs not considered part of segment EBITDA1 Loss before income tax from continuing operations NOTES 4 4 2017 $ ’000 6,353 (7,072) (3,290) 2016 $ ’000 11,749 (9,444) (3,354) (3,995) (47,268) (8,004) (48,317) 1 Earnings before interest, tax, depreciation, amortisation and impairment of intangible assets, goodwill and other receivables (EBITDA) is a non-IFRS measure not subject to audit or review. Segment EBITDA excludes the impact of costs associated with the proposed demerger of the Hills Health Solutions business and other net costs associated with structuring the Company in line with its future growth opportunities. This non-IFRS measure is relevant because it is consistent with the measures used internally by management and some in the investment community to assess the operating performance of the business. 2 Total segment revenue represents revenue from external customers. 45 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited47 46 Net costs not considered part of segment EBITDA comprise: Costs related to proposed demerger of business (Reversal of impairment) / impairment of property, plant and equipment Impairment of goodwill Impairment of intangible assets Impairment of other receivables 2017 $ ’000 2,207 (30) - - - Other net costs related to the Company’s restructure and transformation program 1,818 2016 $ ’000 - 3,786 26,435 12,685 2,900 1,462 Segment assets and liabilities The assets and liabilities of the reportable operating segment are as shown in the balance sheet. 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. 3,995 47,268 Australia Other countries Revenue Non-current assets 2017 $ ’000 2016 $ ’000 2017 $ ’000 2016 $ ’000 273,651 302,606 20,423 20,203 24,417 26,307 715 1,034 298,068 328,913 21,138 21,237 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. 46 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements46 2 REVENUE Sales revenue Sale of goods Services Other revenue Rents and sub-lease rentals Licence fee revenue Total revenue from continuing operations Recognition and measurement Revenue 47 2017 $ ’000 2016 $ ’000 231,154 264,169 66,410 61,218 297,564 325,387 4 500 1,526 2,000 298,068 328,913 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 non-current assets Other income 2017 $ ’000 6,435 6,665 13,100 2016 $ ’000 155 3,037 3,192 47 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited48 Net gain on disposal of non-current assets The net gain on disposal of non-current assets for the year ended 30 June 2017 includes a gain on the sale of Hills Home Living assets (comprising intellectual property of $4 million and tooling, goodwill and other assets of $2.4 million), to AMES Australasia. Other income Other income for the year ended 30 June 2017 includes income of $6 million received from Woolworths on termination of the licence arrangement in relation to Hills Home Living products. Deferred costs of $0.651 million have been reflected in operating expenses for the period. Other income in the prior year included income relating to the termination of Hills’ distribution agreement with Crestron, which ceased during the year ended 30 June 2016. 4 EXPENSES 49 (a) Loss before income tax includes the following specific expenses: Depreciation Plant and equipment Buildings Total depreciation Amortisation Software Development costs Customer contracts, relationships and brands Patents and trademarks Total amortisation Total depreciation and amortisation Employee benefits 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 Unwinding of discount on provisions Finance income Interest income Net finance costs expensed 48 2017 $ ’000 2016 $ ’000 5,889 - 5,889 1,144 39 - - 1,183 7,072 6,652 13 6,665 1,253 213 1,310 3 2,779 9,444 52,360 59,587 4,532 3,485 36 5,294 4,231 (84) 60,413 69,028 (3,321) (3,659) (35) - (3,356) (3,659) 66 66 305 305 (3,290) (3,354) Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements48 49 (b) Information on expenses Accounting standards require that an analysis of expenses is presented using a classification based on either their nature or their function. For the year ended 30 June 2017, the Group has presented expenses classified by nature in order to provide information that is more relevant and consistent with how management monitor business performance. Comparative information has been reclassified on the same basis (total expenses reported for the comparative period have not changed from the prior year). Further information on expenses as shown in the Consolidated statement of profit and loss is provided below: Cost of goods sold (inventories) Direct costs of services provided Labour and related expenses Operational and equipment expenses Cost of goods sold include expenses relating to the change in inventories of finished goods and work in progress, and raw materials used. Included in this balance for the year ended 30 June 2017 is an expense of $4.395 million relating to the impairment of inventory (comprising inventory purchased on signing a distribution agreement with Tyco in February 2015 of $3.461 million and other exited brands of $0.934 million). Direct costs of services provided include subcontractor costs, commissions and subscriptions payable, and other direct costs associated with provision of services by Group entities. This balance does not include internal labour costs related to carrying out services, which are included in Labour and related expenses. Labour and related expenses include employee benefits expenses of $60.413 million (as shown in note 4a above) and other labour and related expenses such as third party logistics, labour hire, employee training and recruitment. Operational and equipment expenses include costs of freight, consumables, motor vehicle and other equipment expenses, repairs and maintenance. Property expenses Property expenses include rent, rates, utilities, cleaning and security expenses related to properties leases by the Group. Other expenses Other expenses include overhead expenses (such as insurance, advertising and marketing, professional and consulting fees, telecommunications and information technology related expenses) and other net costs not considered part of segment EBITDA of $3.995 million (2016: $47.268 million) (as shown in note 1b). Recognition and measurement Depreciation and amortisation 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 in profit or loss as it accrues. 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. 49 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited51 50 5 INCOME TAX a) Income tax (benefit) / expense Current tax Deferred tax 2017 $ ’000 2016 $ ’000 (60) (12) (72) (100) 20,088 19,988 (b) Numerical reconciliation of income tax (benefit) / expense to prima facie tax payable Loss from continuing operations before income tax expense (8,004) (48,317) Tax at the Australian tax rate of 30% (2016: 30%) (2,401) (14,495) Tax effect of amounts which are not deductible / (taxable) in calculating taxable income: Goodwill and other intangible assets impairment Non-deductible expenses Acquisition costs Utilisation of previously unrecognised capital losses Capital losses for which no deferred tax asset is recognised (Recognition) / derecognition of deferred tax assets Tax losses for which no deferred tax asset is recognised Tax effect of prior year adjustments Difference in overseas tax rates Total income tax (benefit) / expense (c) Income tax expense 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 cash flow hedges Aggregate income tax benefit - 153 175 (1,464) - (5,289) 20,599 (11,850) (77) 5 (72) 7,930 223 (304) - 805 20,282 - 5,526 19,967 21 19,988 2017 $ ’000 2016 $ ’000 (98) (98) (34) (34) 50 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements50 (d) Tax losses At the end of the reporting period, the Group had unused tax losses in respect of revenue items of $194.3 million (2016: $125.6 million) and capital items of $49.5 million (2016: $54.4 million). Revenue Capital items 2017 $ ’000 2016 $ ’000 2017 $ ’000 2016 $ ’000 Unused losses for which no deferred tax asset has been recognised 194,276 125,613 49,522 54,398 Potential tax benefit 58,283 37,684 14,856 16,319 Revenue and capital tax losses do not expire under current legislation. Revenue losses Deferred tax assets have not been recognised in respect of revenue tax losses because the period over which the Group expects to utilise the benefits of these items extends beyond 3 years (the time horizon during which their recovery is considered probable). 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. (e) Current tax assets and liabilities The current tax asset for the Group of $0.229 million (2016: $0.183 million) represents the amount of income taxes refundable in respect of current and prior financial periods. 51 (f) Deferred tax The balance comprises temporary differences attributable to: Property, plant and equipment Inventories Employee benefits Receivables Provisions Other accruals Derivative financial instruments 2017 $ ’000 2016 $ ’000 450 5,614 2,054 178 2,039 515 67 149 9,009 1,283 16 16 366 (31) 10,917 10,808 51 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited53 52 Balance at 1 July $'000 Recognised in profit or loss $'000 Recognised in other compre- hensive income $'000 Balance at 30 June $'000 3,559 2,503 2,865 846 1,218 5,471 66 (65) 16,014 (2,327) 683 - (3,410) 6,506 (1,582) (830) (1,218) (5,455) 300 - (16,014) 2,327 (683) (29) 30,833 (20,088) 149 9,009 1,283 16 16 366 (31) - 10,808 301 (3,395) 771 162 2,023 149 - 1 12 - - - - - - - 34 - - - 29 63 - - - - - - 98 (1) 97 149 9,009 1,283 16 - 16 366 (31) - - - - 10,808 450 5,614 2,054 178 2,039 515 67 - 10,917 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 Movements 2017 Property, plant and equipment Inventories Employee benefits Receivables Provisions Other accruals Derivative financial instruments Exchange differences 52 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements52 53 (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. 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. 53 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited55 54 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. 6 LOSS PER SHARE (a) Basic and diluted loss per share 2017 Cents 2016 Cents From loss attributable to the ordinary equity holders of the Company (3.4) (29.4) (b) Reconciliation of earnings used in calculating loss per share Loss attributable to the ordinary equity holders of the Company used in calculating basic loss per share (c) Weighted average number of shares used as denominator Weighted average number of ordinary shares used as the denominator in calculating basic loss per share Effect of performance rights on issue Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted loss per share 2017 $ ’000 2016 $ ’000 (7,932) (68,305) 2017 Shares $ ’000 2016 Shares $ ’000 231,986 231,986 - - 231,986 231,986 Performance rights have not been included in the weighted average number of shares for diluted loss per share as no shares are expected to be issued to satisfy performance rights. 54 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements54 Recognition and measurement Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing: • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares • by the weighted average number of ordinary shares outstanding during the reporting period. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. 55 55 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited56 Section C: Operating assets and liabilities This section provides information on the operating assets used and the operating liabilities incurred by the Group: 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 57 56 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements56 57 7 CASH AND CASH EQUIVALENTS Cash at bank and in hand Deposits (a) Reconciliation of loss after income tax to net cash flow from operating activities Loss for the period Depreciation and amortisation Net gain on sale of non-current assets (Reversal of impairment) / impairment of property, plant and equipment Impairment of goodwill Impairment of other receivables Impairment of intangible assets Non-cash employee benefits expense / (credit) - share-based payments Rent received Fair value adjustment to derivatives Unwinding of discount on provisions Other non-cash items Change in operating assets and liabilities: Decrease in trade and other receivables Decrease in inventories Decrease in trade and other payables Decrease in provisions Increase in provision for income taxes receivable (Increase) / decrease in deferred tax assets Net cash flows from operating activities Recognition and measurement Cash and cash equivalents 2017 $ ’000 2016 $ ’000 5,360 3,291 8,651 3,994 - 3,994 (7,932) (68,305) 7,072 (6,435) (30) - - - 36 (4) 62 35 (7) 9,444 (141) 3,786 26,435 2,900 12,685 (84) (1,526) 82 - - 11,008 9,126 17,893 17,204 (9,900) (17,632) (3,756) (12,868) (48) (12) (593) 20,096 (785) 9,376 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. 57 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited59 58 8 TRADE AND OTHER RECEIVABLES Trade receivables Provision for impairment of receivables (a) Other receivables Prepayments 2017 Non- current $ ’000 - - - - - - Current $ ’000 52,914 (594) 52,320 5,271 1,898 59,489 Total $ ’000 Current $ ’000 52,914 (594) 61,319 (1,275) 52,320 60,044 5,271 1,898 6,573 2,729 2016 Non- current $ ’000 - - - 534 - Total $ ’000 61,319 (1,275) 60,044 7,107 2,729 59,489 69,346 534 69,880 Unamortised borrowing costs, which were included in prepayments in the prior year, have been reclassified to borrowings. The amount at 30 June 2016 of $2.565 million is shown in note 17. (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 2017 $ ’000 2016 $ ’000 36,781 11,441 3,307 1,385 39,462 13,819 5,610 2,428 52,914 61,319 1,275 283 (964) 594 1,481 389 (595) 1,275 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 $0.594 million (2016: $1.275 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. 58 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements58 59 (b) Transfer of trade receivables The Group has entered into a Receivables Purchase Facility, as described in note 17, under which trade receivables have been sold with recourse. These receivables have not been derecognised from the statement of financial position as the Group retains substantially all of the risks and rewards (primarily credit risk). The carrying amount of transferred trade receivables not derecognised is show below: Carrying amount of trade receivables transferred Carrying amount of associated liabilities (c) Financial risk 2017 $ ’000 2016 $ ’000 35,597 31,907 (30,353) (27,695) 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. 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. 59 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited60 9 INVENTORIES Raw materials and work in progress Finished goods Recognition and measurement Inventories 2017 $ ’000 2016 $ ’000 2,343 44,117 46,460 3,028 52,589 55,617 61 Raw materials, 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 inventory. 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 payables and accrued expenses 2017 $ ’000 2016 $ ’000 25,940 14,326 29,538 20,862 40,266 50,400 Other payables and accrued expenses include amounts payable in respect of employee benefits (including wages and salaries, superannuation / pension contributions, commissions and bonuses, payroll tax), Goods and Services Tax (GST), customer rebates and other sundry accrued expenses. 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. 60 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements60 61 11 PROPERTY, PLANT AND EQUIPMENT 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 Year ended 30 June 2017 Opening net book amount Exchange differences Additions Disposals Depreciation charge Impairment reversal Closing net book amount At 30 June 2017 Cost Accumulated depreciation and impairment Net book amount Land $ ’000 Buildings $ ’000 Plant & Equip- ment $ ’000 Total $ ’000 6,841 2,057 23,924 32,822 - - - - (5,625) (593) 100 4,247 (552) 100 4,247 (6,770) - (13) (6,652) (6,665) (1,216) (1,451) (1,119) (3,786) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 19,948 19,948 73,350 73,350 (53,402) (53,402) 19,948 19,948 19,948 19,948 (7) 2,770 (252) (7) 2,770 (252) (5,889) (5,889) 30 30 16,600 16,600 59,834 59,834 (43,234) (43,234) 16,600 16,600 Additions include an amount of $1.263 million (2016: nil) for the estimated costs to remove leasehold improvements from properties leased by the Group and restore the premises on which they are located. These estimated costs have been capitalised in accordance with AASB 116 Property, Plant and Equipment as an element of cost of the leasehold improvement assets. Payments for property, plant and equipment of $1.507 million as shown in the Consolidated statement of cash flows do not include these non-cash additions. During the year ended 30 June 2017, fully depreciated assets with a cost of $13.8 million were written off. 61 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited 63 62 (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 are in the course of construction: 2017 $ ’000 2016 $ ’000 Plant and equipment, leasehold improvements and software development 3,626 2,284 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. 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. 62 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements62 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 Impairment 2.5% 5.0% to 66.7% The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount. 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. 63 63 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited65 64 12 INTANGIBLE ASSETS 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 Net book amount Year ended 30 June 2017 Opening net book amount Exchange differences Additions Disposals Amortisation charge Closing net book amount At 30 June 2017 Cost Accumulated amortisation and impairment Patents, trademarks & other rights $ ’000 Distribution agreements, customer contracts & brands $ ’000 Goodwill $ ’000 Software1 $ ’000 Devel- opment costs $ ’000 Total $ ’000 26,280 155 - - - (26,435) - 146,131 (146,131) - - - - - - - 254 - - (208) (3) (43) - 58 (58) - - - - - - - 5,958 - - - 5,778 16 2,871 - 967 39,237 - 373 208 171 3,244 - (1,253) (1,310) (213) (2,779) (4,705) (6,723) (1,214) (39,120) - 632 121 753 15,125 23,234 1,779 186,327 (15,125) (22,602) (1,658) (185,574) - - - - - - - 632 121 753 632 - 2,874 (4) (1,144) 2,358 121 - 140 (2) 753 - 3,014 (6) (39) (1,183) 220 2,578 145,634 (145,634) 58 (58) 15,125 17,238 1,895 179,950 (15,125) (14,880) (1,675) (177,372) Net book amount - - - 2,358 220 2,578 Additions for the year include $0.765 million (2016: nil) incurred but not yet paid at the end of the period. Payments for intangible assets of $2.249 million as shown in the Consolidated statement of cash flows do not include these additions. During the year ended 30 June 2017, fully amortised or impaired intangible assets with a cost of $8.7 million were written off. Fully impaired goodwill of $0.497 million was derecognised on the deregistration of Audio Products Group Pty Limited (see note 21). 1 Software includes capitalised development costs, being an internally generated intangible asset 64 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements64 65 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. 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 IT development and software 10 to 20 years 2 to 5 years 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 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. 65 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited67 66 13 PROVISIONS Employee benefits Outstanding claims Restructuring costs Other provisions (a) Description of provisions 2017 Non- current $ ’000 695 660 802 Current $ ’000 6,170 866 2,336 1,184 2,039 Total $ ’000 Current $ ’000 6,865 1,526 3,138 3,223 7,040 2,188 3,200 84 2016 Non- current $ ’000 926 954 1,153 664 Total $ ’000 7,966 3,142 4,353 748 10,556 4,196 14,752 12,512 3,697 16,209 Employee benefits Provisions for employee benefits include liabilities for annual leave and long service leave. Outstanding claims The provision for claims comprises the amounts set aside for estimated warranty claims. In the prior year, it also included the estimated future liability of the Group’s self-insurance arrangements. Restructuring costs The restructuring costs provision comprises redundancy costs and other costs of closing and restructuring businesses (including onerous lease and make-good costs related to properties affected by restructure). Other provisions Other provisions comprise provisions for environmental monitoring of a site, make good obligations, onerous lease costs and other provisions as required. (b) Movements in provisions Movements in each class of provision during the reporting period, other than employee benefits, are set out below: Movements 2017 Carrying amount at the start of the year Additional provisions made during the period Amounts used (incurred or charged against provision) Unused amounts reversed during the period Unwinding of discount Carrying amount at the end of the year Outstanding claims $'000 Restructuring costs $'000 Other $'000 Total $'000 3,142 32 (684) (964) - 1,526 4,353 748 8,243 2,289 (3,482) (22) - 2,471 (31) - 35 4,792 (4,197) (986) 35 3,138 3,223 7,887 66 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements66 67 Recognition and measurement Provisions 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 benefits 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. 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. 67 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited69 68 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 measurements 14 CONTRIBUTED EQUITY (a) Share capital 2017 Shares 2016 Shares 2017 $ ’000 2016 $ ’000 Ordinary shares - fully paid 231,985,526 231,985,526 278,439 278,439 (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 28. 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. 68 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements68 15 RESERVES Hedging reserve - cash flow hedges Equity compensation reserve Foreign currency translation reserve Profits reserve (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 expense / (credit) 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 Closing balance 30 June 69 2017 $ ’000 2016 $ ’000 (158) 706 354 72 670 374 10,133 10,133 11,035 11,249 72 (328) 98 (158) 670 36 706 374 (20) 354 151 (113) 34 72 754 (84) 670 (571) 945 374 10,133 10,133 10,133 10,133 69 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited71 70 (b) Nature and purpose of reserves Hedging reserve – cash flow hedges The hedging reserve is used to record changes in the fair value of derivative financial instruments designated in a cash flow hedge relationship that are recognised in other comprehensive income. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss. Equity compensation reserve 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. 16 DIVIDENDS (a) Ordinary shares Year ended 30 June 2017 Year ended 30 June 2016 No dividends were paid during the year and no final dividend has been declared. No dividends were paid during the year and no final dividend has been declared. (b) Franked dividends Franking credits available for subsequent reporting periods based on a tax rate of 30% (2016: 30.0%) 2017 $ ’000 2016 $ ’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. 70 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements70 71 17 BORROWINGS Loans Transaction costs Total borrowings Current $ ’000 2017 Non- current $ ’000 Total $ ’000 Current $ ’000 2016 Non- current $ ’000 Total $ ’000 295 30,353 30,648 472 27,695 28,167 - (1,958) (1,958) - (2,565) (2,565) 295 28,395 28,690 472 25,130 25,602 Non-current borrowings include transactions costs directly attributable to the issue of the borrowings. At 30 June 2017, unamortised borrowing costs totalled $1.958 million (2016: $2.565 million). (a) Loans The Group has its financing facilities with Commonwealth Bank of Australia (CBA) through a Bilateral Facility and with Recfin Nominees Pty Ltd through a Receivables Purchase Facility. Bilateral Facility The CBA facility was amended in December 2016 and now comprises a facility for an overdraft and contingent liabilities (bank guarantees / letter of credit), with the following sub limits (denominated in AUD): • Overdraft: $3 million (nil drawn at 30 June 2017) • Contingent liabilities: $4.472 million. Interest is charged at prevailing market rates plus a fixed margin. CBA hold a fixed and floating charge over the assets of the Group (excluding Accounts Receivable). The facility expires on 13 November 2017. Receivables Purchase Facility The Recfin Nominees Pty Ltd facility totals $36 million (denominated in AUD), with funding provided based upon the Group’s accounts receivable book. The facility expires on 13 May 2021. The facility is secured on the Group’s Accounts Receivable book, with a second mortgage over the other assets of the Group. 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. An assessment of the contractual maturities of financial liabilities is provided in note 19, together with details of undrawn borrowing facilities at the period end. 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. 71 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited73 72 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 Total current derivative financial instrument assets Current liabilities Forward foreign exchange contracts - cash flow hedges Forward foreign exchange contracts – held for trading Total current derivative financial instrument liabilities Net derivative financial instrument assets / (liabilities) (a) Instruments used by the Group 2017 $ ’000 2016 $ ’000 - - (225) (62) (287) (287) 103 103 - - - 103 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. 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 2017, no gain or loss was recognised in profit or loss for the ineffective portion of these hedging contracts (2016: loss of $5,000). Forward exchange contracts: held-for-trading 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. 72 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements72 73 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. 73 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited75 74 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 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. The gearing ratio is calculated as: Net debt Net debt Total borrowings as shown in the consolidated statement of financial position less cash and cash equivalents net debt + total equity Total equity Equity as shown in the consolidated statement of financial position (including non-controlling interests) During 2017, 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 2017 and 30 June 2016 were as follows: Total borrowings Less: cash and cash equivalents Net debt Total equity Gearing ratio (b) Financial risk management Notes 2017 $ ’000 2016 $ ’000 17 7 28,690 25,602 (8,651) (3,994) 20,039 21,608 60,931 69,077 24.7% 23.8% Management manages the Group’s exposure to financial risks under policies approved by the Board. Management 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. 74 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements74 The Group holds the following financial instruments: Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Investments Financial liabilities Trade and other payables Borrowings Derivative financial instruments 75 2017 $ ’000 2016 $ ’000 8,651 57,591 - 2 3,994 67,151 103 2 66,244 71,250 40,266 50,400 28,690 25,602 287 - 69,243 76,002 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 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 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. 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. 75 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited77 76 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 2016 Cash at bank Trade receivables Trade payables Forward exchange contracts • buy foreign currency (cash flow hedges) • buy foreign currency (FVTPL ) 30 June 2017 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) - 129 823 - - - - - - - - (22,955) - 129 823 (5,518) (147) (11) (5,676) (14,612) (1,118) - - - - (14,612) (1,118) The Group’s financing arrangement is principally a Receivables Purchase Facility, where the balance outstanding changes daily. Accordingly, the Group does not use interest rate swaps to hedge cash flow interest rate risk. During 2017 and 2016, the Group's cash and 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 cash and borrowings outstanding: 2017 2016 Weighted average interest rate % Balance $ ’000 Weighted average interest rate % Balance $ ’000 5.46% (28,395) 5.71% (25,130) 1.16% 7.63% 8,651 (295) 0.67% 8.33% 3,994 (472) Bank overdrafts and loans Cash and cash equivalents Other loans 76 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements76 77 Sensitivity analysis Foreign exchange 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. Interest rates 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. The following table summarises the sensitivity of the Group's financial assets and financial liabilities to interest rate risk and foreign exchange risk. Interest rate risk Foreign exchange risk -100 bps +100 bps -10% +10% Carrying amount $'000 Profit $'000 Other equity $'000 Profit $'000 Other equity $'000 Profit $'000 Other equity $'000 Profit $'000 Other equity $'000 30 June 2016 Financial assets Cash and cash equivalents 3,994 (22) Trade and other receivables Derivatives - cash flow hedges 67,151 103 Total increase / (decrease) in financial assets Financial liabilities Trade & other payables Borrowings Total increase / (decrease) in financial liabilities Total increase / (decrease) (50,400) (25,602) - - (22) - 282 282 260 - - - - - - - - 44 - - 44 - (282) (282) (238) - - - - - - - - 78 125 - - (64) (102) - - - 2,601 - (2,045) 203 2,601 (166) (2,045) (1,039) - (1,039) - - - 850 - 850 - - - (836) 2,601 684 (2,045) 77 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited 79 78 The following table summarises the sensitivity of the Group's financial assets and financial liabilities to interest rate risk and foreign exchange risk. Interest rate risk Foreign exchange risk -100 bps +100 bps -10% +10% Carrying amount $'000 Profit $'000 Other equity $'000 Profit $'000 Other equity $'000 Profit $'000 Other equity $'000 Profit $'000 Other equity $'000 30 June 2016 Financial assets Cash and cash equivalents 8,651 (81) Trade and other receivables 57,591 - Total increase / (decrease) in financial assets Financial liabilities (81) Trade & other payables (40,266) - Borrowings (28,690) 306 Derivatives - cash flow hedges Derivatives - FVTPL Total increase / (decrease) in financial liabilities Total increase / (decrease) (225) (62) - - 306 225 - - - - - - - - - 110 - 110 - (306) - - (306) (196) - - - - - - - - - 14 91 105 (640) - - 68 - - - - - 1,253 (12) (75) (87) 524 - - - - - - - (1,631) - (147) - (572) 1,253 377 (1,631) (467) 1,253 290 (1,631) (ii) Credit risk Nature of the risk 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. Risk management 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. 78 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements 78 (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: 79 Floating rate - Expiring within one year (bank overdraft) - Expiring beyond one year (loans) 2017 $ ’000 2016 $ ’000 3,000 5,244 8,244 - 4,212 4,212 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. Less than 6 months $'000 6-12 months $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Total contractual cash flows $'000 Carrying amount liabilities $'000 At 30 June 2016 Trade and other payables Borrowings Total At 30 June 2017 Trade and other payables Borrowings Derivative financial instruments Total 50,400 810 51,210 40,266 1,025 383 42,674 - 1,282 1,282 - 948 - 948 - 1,581 1,581 - 50,400 50,400 32,187 32,187 35,860 86,260 25,602 76,002 - - 40,266 1,656 33,402 37,031 - - 383 40,266 28,690 287 1,656 33,402 77,680 69,243 79 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited81 80 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 derivative financial assets at fair value on a recurring basis. AASB 13 requires disclosure of fair value measurements by reference to the following fair value measurement hierarchy: Level 1 Level 2 Level 3 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). Inputs for the asset or liability that are not based on observable market data (unobservable inputs). The Group's financial assets and financial liabilities at fair value are as follows: Level 1 $'000 Level 2 $'000 Level 4 $'000 Total $'000 30 June 2016 Assets Derivatives financial instruments Total assets 30 June 2017 Liabilities Derivatives financial instruments Total liabilities - - - - 103 103 (287) (287) - - - - 103 103 (287) (287) 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 2017. 80 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements80 Section E: Group structure This section provides information on the Hills Limited Group structure, including business acquisitions and disposals, controlled entities and related parties: 21 Interests in other entities 22 Related party transactions 23 Parent entity financial information 24 Deed of cross guarantee 81 81 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited83 82 21 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 ● 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 ▲ Lincor Limited ◆ New Zealand Hills NZ Limited (formerly Hills Holdings NZ Limited) Audio Products Group Pty Limited ■ ▲ These entities are party to a Deed of Cross Guarantee – see note 24. ● 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. This is a dormant entity. ■ Audio Products Group Pty Limited was liquidated and removed from the Register of companies in New Zealand on 10 April 2017. ◆ Lincor Limited was incorporated on 29 August 2016 for the proposed merger of the Hill Health Solutions business with Lincor Solutions. 82 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements82 83 (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. 22 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 21. (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 benefits2 2017 $ 2016 $ 1,867,106 2,510,910 178,595 142,314 7,850 103,052 244,697 - Share-based payments (LTI expense and employee share bonus plan expense) 40,500 5,750 2,338,478 2,762,026 Detailed remuneration disclosures are provided in the Remuneration Report. (d) 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 2017 the Group current assets and liabilities that were eliminated totalled $32.651 million (2016: $37.355 million). (e) Transactions with other related parties The following transactions occurred with related parties: 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 Association Details CSG Limited Associated with P Bullock AO Goods and services purchased by the Group from CSG totalled $0.080 million (2016: $0.102 million) Vocus Communications Associated with D Spence Goods and services purchased by the Group from Vocus totalled $0.018 million (2016: nil). 2 Table footnote 83 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited84 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. Subsidiaries All transactions with partly owned controlled entities are on normal commercial terms and conditions. Transactions with controlled entities are determined on a cost basis. Sales of goods and services Sales of goods and services within the Group, that eliminated with cost of goods sold and services provided amounted to $3.767 million (2016: $13.757 million). Loans and borrowings 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 $0.013 million (2016: $0.152 million). Dividends Intragroup dividends paid and received during the year amounted to $1.278 million (2016: $3.837 million). 85 84 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements84 85 23 PARENT ENTITY FINANCIAL INFORMATION (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders' equity Contributed equity Reserves Hedging reserve - cash flow hedges Equity compensation reserve Profits reserve Retained earnings Loss for the year Total comprehensive income 2017 $ ’000 2016 $ ’000 96,410 42,496 107,667 44,816 138,906 152,483 66,809 32,388 57,486 28,827 99,197 86,313 39,709 66,170 278,439 278,439 (158) 706 72 670 32,859 32,859 (272,138) (245,870) 39,709 66,170 (26,268) (59,384) (26,498) (59,463) (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 $2.778 million (2016: $5.788 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 $81.480 million (2016: $89.741 million). No material deficiency in net tangible assets exists in these companies at reporting date with net tangible assets amounting to $41.435 million (2016: $49.551 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 2017, the Company had contractual commitments for the acquisition of plant, equipment or intangible assets totalling $2.000 million (2016: $0.426 million). These commitments are not recognised as liabilities as the relevant assets have not yet been received. 85 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited86 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. 24 DEED OF CROSS GUARANTEE The wholly owned subsidiaries identified with a ‘▲’ in note 21 are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and Directors’ reports, under ASIC Corporations (Wholly- owned Companies) Instrument 2016/785. 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 21 represent a ‘closed group' for the purposes of the ASIC Instrument, 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 2017 and a consolidated statement of financial position as at 30 June 2017 of the Company and controlled entities that are a party to the Deed, after eliminating all transactions between parties. 87 86 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements86 87 (a) Consolidated statement of profit or loss and other comprehensive income and summary of movements in consolidated retained earnings Consolidated statement of profit or loss and other comprehensive income Revenue from continuing operations Other income Finance costs Other expenses Loss before income tax Income tax expense Loss for the year Other comprehensive income Items that may be reclassified to profit or loss: Changes in the fair value of cash flow hedges Income tax relating to these items Other comprehensive loss for the period, net of tax Total comprehensive loss for the year 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 2017 $ ’000 2016 $ ’000 278,512 309,809 13,045 (3,295) 2,949 (3,514) (294,363) (348,003) (6,101) (38,759) - (20,282) (6,101) (59,041) (328) 98 (230) (113) 34 (79) (6,331) (59,120) (226,822) (167,781) (6,101) (59,041) (232,923) (226,822) 87 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited89 88 (b) Consolidated statement of financial position ASSETS 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 88 2017 $ ’000 2016 $ ’000 5,921 57,494 42,802 - 2,666 65,376 50,987 103 106,217 119,132 - 814 15,884 2,578 10,311 534 814 18,915 753 10,212 29,587 31,228 135,804 150,360 38,622 48,306 295 9,950 225 472 12,136 - 49,092 60,914 28,395 3,993 32,288 81,480 54,324 25,130 3,697 28,827 89,741 60,619 278,439 278,439 8,808 9,002 (232,923) (226,822) 54,324 60,619 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements88 89 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. 25 Contingencies 26 Commitments 27 Events after the reporting period 25 CONTINGENCIES (a) Contingent liabilities The Group had contingent liabilities at 30 June 2017 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 are deemed 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 outflow of economic benefits will be required. Guarantees Bank guarantees in favour of customers and suppliers totalling $2.778 million (2016: $5.788 million). The decrease from 30 June 2016 is due to bank guarantees no longer required being cancelled during the year ended 30 June 2017. 26 COMMITMENTS (a) Capital commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Plant, equipment and intangible assets (b) Lease commitments: Group as lessees Non-cancellable operating leases 2017 $ ’000 2,000 2016 $ ’000 426 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. The Group also leases motor vehicles and materials handling equipment under operating leases. 89 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited91 90 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 2017 $ ’000 2016 $ ’000 6,312 9,289 - 6,914 8,294 478 15,601 15,686 (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 2017 $ ’000 2016 $ ’000 104 78 182 375 - 375 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. 27 EVENTS AFTER THE REPORTING PERIOD There have been no events subsequent to balance date that would have a material effect on the Group’s financial statements at 30 June 2017. 90 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements 90 91 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: 28 Share-based payments 29 Remuneration of auditors 30 Other accounting policies 28 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: Expiry date Exercise price Balace 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 & exercis- able at the end of the year Number Number Number Number Number Number Grant date 2016 Performance Rights 27 Feb 2015 30 Jun 2017 - 122,012 Total 2017 Performance Rights 27 Feb 2015 30 Jun 2017 1 Sep 2016 1 Sep 2017 1 Sep 2016 1 Sep 2018 Total - - - Fair value of performance rights granted - - - 122,012 83,608 - - 100,000 100,000 83,608 200,000 - - - - - - (38,404) 83,608 (38,404) 83,608 (83,608) - - - 100,000 100,000 (83,608) 200,000 - - - - - - The fair value assessed in accordance with AASB 2 Share Based Payments at grant date of performance rights granted on 1 September 2016 was 34.0 cents per performance right, based on the quoted share price at grant. 91 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited 93 92 The fair value of performance rights granted on 27 Feb 2015 was assessed as 52.0 cents per performance right for the performance rights subject to market hurdles and 77.0 cents per performance right for the performance rights subject to non-market hurdles. The fair value at grant date was independently determined using a Black Scholes methodology for the non-market hurdles and a Monte Carlo valuation methodology for the market hurdles, that took into account the exercise price, the expected life and vesting period of the performance right, the share price at grant date and expected price volatility of the underlying shares, the expected dividend yield and the risk free interest rate for the term of the performance rights. The model inputs for the valuation of performance rights 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% (c) Expenses arising from share-based payment transactions Total expense / (credit) 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 2017 $ ’000 2016 $ ’000 36 (84) 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. 92 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements92 93 29 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 KPMG Australia – other assurance services 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 Other consulting services Total remuneration for other services 2017 $ ’000 2016 $ ’000 298,000 343,375 42,223 39,951 340,223 383,326 165,000 - 505,223 383,326 78,238 3,967 82,205 12,816 12,816 76,239 11,605 87,844 8,342 8,342 Total remuneration of KPMG 600,244 479,512 30 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 2017. (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 2017 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. 93 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited95 94 Title Effective date (reporting periods beginning on or after…) Details AASB 9 1 January 2018 Financial Instruments (early adoption permitted) Hills Group: Applicable for the year ending 30 June 2019 AASB 15 1 January 2018 Revenue from Contracts with Customers AASB 16 Leases 1 January 2018 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, with an increase in the provision for impairment against trade receivables expected under AASB 9. The Group does not expect to early adopt AASB 9. 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, with an increase in the provision for impairment against trade receivables expected under AASB 9. The Group does not expect to early adopt AASB 9. 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, with an increase in the provision for impairment against trade receivables expected under AASB 9. The Group does not expect to early adopt AASB 9. (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. 94 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements94 Directors' declaration 95 95 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Hills limited96 97 96 94 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements96 97 97 95 95 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited98 99 98 96 Hills Limited Annual Report for the year ended 30 June 201798 99 97 99 Hills Limited Annual Report for the year ended 30 June 2017101 100 Shareholder information The shareholder information set out below was applicable as at 25 July 2017. Distribution of equity securities Analysis of numbers of ordinary shareholders by size of holding: Size of holding 1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Number of holders 3,953 5,690 2,410 2,409 193 There were 7,248 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: Size of holding Number of holders % of shares issued Hills Associates Limited Poplar Pty Ltd Dimensional Fund Advisors Mr Peter J Roach McGrath Family Realindex Investments Mr Gregory V Shalit Greybox Holdings Pty Ltd Mr John R Homewood Hart Capital Partners Mr Brian S Blythe 16,768,441 16,550,845 6,950,000 6,891,872 5,968,699 4,877,837 4,676,510 4,550,042 2,800,000 2,662,949 2,280,000 Norges Bank Investment Mgt 2,193,901 AcomeA Mr Jack G Mordes & Ms Leanne J Howard 2,100,000 1,633,828 Mr Leonard A Milner 1,500,000 Mr Gregory V Shalit & Ms Miriam Faine 1,435,000 Mr & Mrs Donald P Cant 1,337,578 100 7.23 7.13 3.00 2.97 2.57 2.10 2.02 1.96 1.21 1.15 0.98 0.95 0.91 0.70 0.65 0.62 0.58 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limitedNotes to the consolidated financial statements100 101 Size of holding Number of holders % of shares issued Mr & Mrs Robert E Purves Mr John Gassner Mr & Mrs Joseph Zanca Poplar Pty Ltd3 Hills Associates Limited Voting rights 1,255,000 1,250,001 1,250,000 17,775,724 16,768,441 0.54 0.54 0.54 7.66 7.23 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 There is no current on-market buyback in place. 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 Sydney. 101 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017 (continued)Notes to the consolidated financial statementsHills limited102 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 David Lenz, Chief Executive Officer Chris Jacka , Chief Financial Officer Non–executive Directors Jennifer Helen Hill-Ling Fiona Rosalyn Vivienne Bennett Philip Bullock AO Kenneth James Dwyer Company secretary David Fox 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 102 103 Hills Limited Annual Report for the year ended 30 June 2017For the year ended 30 June 2017Hills limited102 103 Hills Limited Registered Office Level 7 130 Pitt Street Sydney NSW 2000 t + 61 2 9216 5510 f + 61 2 9216 5599 e info@hills.com.au w hills.com.au ABN 35 007 573 417 ABN 35 007 573 417 hills.com.au

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