korvest
Annual Report 2017

Plain-text annual report

2017 ANNUAL REPORT 2017Korvest Ltd ABN: 20 007 698 106 Annual Report, 30 June 2017 44 content DIRECTORS’ REPORT 6 REMUNERATION REPORT - AUDITED 10 5 YEAR SUMMARY 20 FINANCIAL STATEMENTS 23 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 24 CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT LEAD AUDITOR’S INDEPENDENCE DECLARATION 25 26 27 28 55 56 61 ASX ADDITIONAL INFORMATION 62 KORVEST LTD: A MARKET LEADING INFRASTRUCTURE PROVIDER Since 1970, Korvest Ltd has grown to become Australia’s largest manufacturers and suppliers of cable and pipe support systems trading as EzyStrut. EzyStrut produces a range of standard, customised and innovative products. Queensland based Power Step and Titan Technologies design and assemble access systems for large mobile equipment as well as bolting solutions. Korvest Galvanisers operates a hot dip galvanising business in South Australia servicing a range of local and national customers. Korvest’s workforce of around 170 employees is multi-skilled, and lead by a central management team. The EzyStrut manufacturing plant and national distribution centre are in Adelaide servicing sales offices and warehouses in Adelaide, Melbourne, Sydney, Brisbane and Perth, and distributors in Darwin, Townsville, Hobart and New Zealand. AUSTRALIA’S LEADING RANGE OF CABLE AND PIPE SUPPORT SYSTEMS EzyStrut manufactures one of the most diverse ranges of cable and pipe support solutions in the industry, suitable for almost any application and in a variety of finishes. EzyStrut’s products are found in numerous iconic Australian locations, including commercial constructions, wharfs, mine sites, tunnels, power stations and more. A contributing factor to EzyStrut’s continued success is the ability to deliver customised cable and pipe support solutions at competitive prices while maintaining an extensive shelf range. EzyStrut remains the largest Australian manufacturer of cable and pipe supports. SAFETY ACCESS SYSTEMS FOR ALL LARGE MOBILE EQUIPMENT All access systems supplied by Power Step are designed and manufactured in Australia and offer access solutions for equipment in the mining, rail, marine and aviation industries. Power Step exports its products to Indonesia, Papua New Guinea, New Zealand, New Caledonia and beyond. Since its inception, Power Step has manufactured and sold over 800 access systems. Power Step has designed access systems for all major OEMs. All access systems designed by Power Step comply with the relevant Australian Standards (AS1657/ AS3868/SAE J185). www.ezystrut.com.au www.powerstep.com.au 2 SUPERIOR AND COMPLETE BOLTING SOLUTIONS FOR ANY INDUSTRY Titan Technologies (SE Asia) Pty Ltd sells international brands of Titan Hydraulic Torque Wrenches, Electric/ Hydraulic PT Pumps, Air/ Hydraulic PT Pumps, and related accessories. Offering sales, hire and service, Titan Technologies has serviced job sites of all sizes across Australia and the Asia-Pacific region. QUICK TURNAROUND GALVANISING OF THE LARGEST, SMALLEST, AND MOST COMPLEX CONSTRUCTION INFRASTRUCTURE A member of the Galvanizing Association of Australia (GAA), Korvest operates 2 galvanising kettles in SA: a state-of-the-art ceramic kettle for high temperature spin galvanising of small products and a large hot dip galvanising bath allowing single dipping of structural members up to 13.5m in length. All work is finished to AS/NZS4680:2006 with stringent quality control throughout the process. www.titantools.com.au www.korvestgalvanisers.com.au 3 4 5 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT DIRECTORS’ REPORT THE DIRECTORS PRESENT THEIR REPORT TOGETHER WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE GROUP COMPRISING OF KORVEST LTD (‘THE COMPANY’) AND ITS SUBSIDIARIES FOR THE FINANCIAL YEAR ENDED 30 JUNE 2017 AND THE AUDITOR’S REPORT THEREON. DIRECTORS The directors of the Company at any time during or since the end of the financial year are: Graeme Billings Chairman BCom, FCA, MAICD Appointed Chairman 18 September 2014 A Director since May 2013 Mr Billings retired from PricewaterhouseCoopers in 2011 after 34 years where he was a senior partner in the Assurance practice Director G.U.D. Holdings Limited Director Clover Corporation Limited Chairman Azure Healthcare Ltd Director DomaCom Ltd Director Escala Partners Ltd Age 61 Alexander Kachellek Managing Director BSc.CEng, MIET, FAICD A Director since June 2007 Mr Kachellek has experience in a number of industries including Data Communications and Automotive, Lean Operations Consultancy and Manufacturing Director Austmine Ltd Age 64 6 Gerard Hutchinson Independent Non-Executive Director MBA, MBL, MSc(IS), BEc, MA (Research), FCA, FAICD, FAIM A Director since November 2014 Chairman of Audit Committee Steven McGregor Finance Director BA(Acc), CA, AGIA, ACIS Company Secretary since April 2008 Appointed as Finance Director 1 January 2009 Age 45 Former Director Peter Brodribb Non-Independent Non-Executive Director F.I.E (Aust) A Director since 1984 Appointed Non-Executive Director in January 2005 after retiring from the position of Managing Director that he had held since 1984 Retired 28 July 2016 Age 72 Former Managing Director AusGroup Limited Age 49 Gary Francis Independent Non-Executive Director BSc. Hon. (Civil), MAICD A Director since February 2014 Chairman of Remuneration Committee Mr Francis has worked in the construction industry at Senior Manager or Director level in Australia and Asia Director ZKP Group Ltd Director CTL Australia Group Ltd Age 62 Andrew Stobart Independent Non-Executive Director B. Eng (Hons), Grad Dip Bus Admin, GAICD Appointed 1 August 2016 Executive Chairman Nexans Olex Australia & New Zealand Age 62 COMPANY SECRETARY Mr Steven J W McGregor CA, AGIA, ACIS, BA(Acc) was appointed to the position of company secretary in April 2008. Mr McGregor previously held the role of chief operating officer and company secretary with an unlisted public company for seven years. RETIREMENT AND RE-ELECTIONS In accordance with the Constitution, Gary Francis and Steven McGregor retire from the Board at the forthcoming Annual General Meeting on 27 October 2017. Both are eligible for re-election at that meeting and offer themselves accordingly. DIRECTORS’ MEETINGS The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are: DIRECTOR Mr A Kachellek Mr S McGregor Mr G Billings Mr G Francis Mr G Hutchinson Mr A Stobart Mr P Brodribb BOARD MEETINGS AUDIT COMMITTEE MEETINGS REMUNERATION COMMITTEE MEETINGS A 14 14 14 14 14 12 1 B 14 14 14 14 14 13 1 A - - 4 4 4 2 1 B - - 4 4 4 3 1 A - - 2 2 2 2 - B - - 2 2 2 2 - A Number of meetings attended B Total Number of meetings available for attendance FINANCIAL RESULTS The revenue from trading activities for the year under review was $44.7m, down 18.6% on the previous year. The Group incurred a loss after tax of $1.6m compared to a profit after tax of $1.0m in the previous year. The FY17 result was adversely impacted by the lack of significant project work. In addition, margins have reduced as a result of surplus capacity in the cable support market as well as rising steel, zinc and energy costs. DIVIDENDS The directors announced a fully franked dividend of 3.0 cents per share compared to 10.0 cents per share last year and 10.0 cents at the half year. The Dividend Reinvestment Plan (DRP) will be suspended for the final dividend. The dividend will be paid on 8 September 2017 with a record date of 25 August 2017. A summary of dividends paid or declared by the Company to members since the end of the previous financial year were: CENTS PER SHARE TOTAL AMOUNT $’000 FRANKED/ UNFRANKED DATE OF PAYMENT Declared and paid during the year 2017 Interim 2017 ordinary Final 2016 ordinary Total amount 10.0 10.0 1,098 1,094 2,192 Fully franked Fully franked 10 March 2017 9 September 2016 7 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT Franked dividends declared and paid during the year were franked at the rate of 30 per cent. Declared after end of year After the reporting date the following dividends were proposed by the directors. The dividends have not been provided for and there are no income tax consequences to the Company. Final ordinary Total amount 3.0 333 333 Fully franked 8 September 2017 The financial effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2017 and will be recognised in subsequent financial reports. Dividends have been dealt with in the financial report as: Dividends Dividends subsequent to 30 June 2017 STRATEGY AND FUTURE PERFORMANCE Note 19 19 TOTAL AMOUNT $’000 2,192 333 Korvest’s businesses service a number of major markets including infrastructure, commercial, utilities, mining, food processing, oil & gas, power stations, health and industrial. During the year Korvest took a lower cost approach to the pursuit of opportunities in South East Asia than had been the case for the past few years. This was achieved by the removal of the resources dedicated to that region. The focus of the business is now primarily on the domestic market which has been soft in overall terms since the end of the mining construction boom. Pricing pressures have impacted margins in recent years and as a consequence Korvest is focusing on investment in new production processes with a view to reducing the cost of production as well as improving manufacturing efficiency to underpin customer service. All aspects of the supply chain are being closely examined to ensure that Korvest’s product costs remain competitive. Korvest has a long history of paying franked dividends. The target dividend payout ratio range is 65-90% of after tax profits. Despite the current year loss a final dividend was declared as the Board recognises the benefit to shareholders in maximising the distribution of the Company’s franking credits. PRINCIPAL ACTIVITIES AND REVIEW OF OPERATIONS The principal continuing activities of the Group consist of hot dip galvanising, sheet metal fabrication, manufacture of cable and pipe support systems and fittings, design and assembly of access systems for large mobile equipment and sale, repair and rental of high torque tools. The Group is comprised of the Industrial Products Group which includes the EzyStrut, Power Step and Titan Technologies and the Production Group which includes the Korvest Galvanisers business. Industrial Products In the Industrial Products group the EzyStrut cable and pipe support business supplies products for major infrastructure developments and also supplies products to contractors for small industrial developments. During FY17 there was no significant project work undertaken. Day-to-day work and small projects did show some signs of recovery with revenue from these sources improving in 2H FY17. However, margins in the business declined due to rising input costs and competitive pricing due to the surplus capacity in the market. The regions that had not benefited over recent years from LNG work did show improvement in FY17 with the NSW market the most improved. Power Step designs and assembles access systems for large mobile equipment. Titan Technologies supplies specialised tools in the form of torque wrenches, hydraulic pumps and related accessories. The combined performance of the businesses improved in FY17 primarily as a result of a large order supplied by Power Step in the first half. Late in the year the cost base of these businesses was reduced further with the closure of the WA site and the centralisation of some administrative functions to head office. Production In the Production group the Galvanising business volumes improved for the first time since FY14. External tonnes improved as some larger South Australian customers secured sizable projects. Some new business was also secured which contributed to the improved result. Over the full year the volume of internal work processed for EzyStrut diminished, however there was a marked improvement in the second half volumes. Like many other manufacturing businesses Korvest experienced significant increases in energy costs during the year as new contracts became effective for the second half. The impact was an increase in energy costs of $120k in the second half compared to the first. The majority of this increase is allocated to the Production segment. 8 Risk The Board and Management periodically review and update risk reviews that identify and assess the risks faced by the business and the controls that are in place to mitigate those risks. General Managers report to the board monthly on any changes to the risk profile of their business unit. There have been few if any changes to the risk environment faced by Korvest over the past year. Operational risks relate principally to continuity of supply and continuity of production. To ensure continuity of supply Korvest monitors the performance of key suppliers and establishes more than one supply source for key products. For many bought in finished goods the ability for the product to also be manufactured in-house mitigates the risk. Korvest’s in-house engineering and maintenance department is responsible for preventative maintenance programmes to ensure a high level of plant reliability and low down time. FY17 again showed the value of this in-house resource as the plant down time was again extremely low. Financial risks faced by the business are typical of those faced by most businesses and centre around management of working capital. In particular trade receivables and inventory levels are constantly reviewed and performance is monitored with key performance indicators on an ongoing basis. SIGNIFICANT CHANGES In the opinion of the directors there were no significant changes in the state of affairs of the Group that occurred during the financial year under review. EVENTS SUBSEQUENT TO REPORTING DATE At the date of this report there is no matter or circumstance that has arisen since 30 June 2017, that has significantly affected, or may significantly affect: i. ii. iii. the operations of the Group; the results of those operations; or the state of affairs of the Group; in the financial years subsequent to 30 June 2017. LIKELY DEVELOPMENTS The key focus for the next financial year will be to improve the performance in the domestic market by lowering the cost of manufacture and improving the overall supply chain and overseas sourcing. Investment in improved machinery in the Kilburn factory will improve the production rate and labour usage associated with production of some major product lines. Korvest’s in-house engineering and design team will continue to drive product innovation. Working capital management will play a key role in the year with an emphasis on inventory reduction. This process has already begun with a number of initiatives in place to optimise the holdings of inventory at the various Korvest locations. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. DIRECTORS AND OFFICERS INSURANCE Since the end of the previous financial year the Company has paid insurance premiums in respect of directors’ and officers’ liability and legal expenses insurance contracts, for current and former directors and officers of the Company and related entities. The insurance premiums relate to: a. a. costs and expenses incurred by the relevant officers in defending proceedings, whether civil or criminal and whatever their outcome; and other liabilities that may arise from their position, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain a personal advantage. The premiums were paid in respect of all of the directors and officers of the Company. The directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability and legal expenses insurance contracts, as such disclosure is prohibited under the terms of the contract. 9 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT REMUNERATION REPORT AUDITED Principles of compensation Remuneration is referred to as compensation throughout this report. Key Management Personnel (KMP) have authority and responsibility for planning, directing and controlling the activities of the Group, including directors of the Company and other executives. KMP comprise the directors and senior executives of the Group. Compensation levels for KMP are competitively set to attract and retain appropriately qualified and experienced directors and executives. The compensation structures explained below are designed to attract suitably qualified candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. The compensation structures take into account: a. b. c. the capability and experience of the KMP; the KMP’s ability to control performance; and the Group’s performance including the Group’s earnings. Fixed compensation Fixed compensation consists of base compensation (which is calculated on a total cost basis), as well as employer contributions to superannuation funds. Compensation levels are reviewed annually by the remuneration committee. Performance linked compensation Performance linked compensation includes both short-term and long-term incentives, and is designed to reward KMP for meeting or exceeding their financial and personal objectives. The short-term incentive (STI) is an ‘at risk’ cash bonus, while the long-term incentive (LTI) is provided as performance rights under the rules of the Korvest Performance Rights Plan. Consequences of performance on shareholder wealth In considering the Group’s performance and benefits for shareholder wealth, the remuneration committee have regard to the indices set out in the 5 Year Summary on page 20. Short-term incentive bonus The key performance indicators (KPIs) for the KMP are set annually. The KPIs include measures relating to financial and operating performance, safety, strategy and risk measures. The KPIs are chosen to directly align the individual’s reward to the KPIs of the Group and to its strategy and performance. The non- financial objectives vary with position and responsibility and include measures such as achieving strategic outcomes, safety and environmental performance. The financial objectives relate to earnings before interest and tax (EBIT) for various parts of the business depending on the KMP. The table below summarises the nature and weighting of the KPIs included in the STIs. MANAGING DIRECTOR OTHER KMP* International growth (50%) Financial performance Financial performance (30%) Process improvement Group reorganisation (10%) Working Capital Cost reduction (10%) Strategy implementation Group reorganisation Cost reductions *Each KMP have different KPIs and weightings. Some individual’s STI structures do not include all KPI categories listed. Long-term incentive bonus Performance rights are issued under the Korvest Performance Rights Plan to employees (including KMP) as determined by the remuneration committee. Performance rights become vested performance rights if the Group achieves its performance hurdles. If rights become vested performance rights and do not lapse, the holder is able to acquire ordinary shares in the Company for no cash payment. For performance rights issued during the year two performance hurdles were applied. Half of the rights issued will be tested against each of the two performance hurdles. The first performance hurdle relates to growth in basic earnings per share (EPS). EPS performance is measured in total over a three year period. The performance hurdle is tested once at the completion of the three year 10 vesting period. The % growth is based on a base EPS which was calculated as the average of the statutory EPS for the prior three years. For the most recent issue of Performance Rights the table below sets out the % of rights that vest depending on the level of EPS growth achieved. COMPOUND ANNUAL EPS GROWTH OVER 3 YEAR VESTING PERIOD % OF RIGHTS THAT VEST Less than 5% 5% Between 5% - 15% 15% or greater Nil 25% Pro rata between 25% – 100% 100% The EPS objective was chosen because it is a good indicator of the Group’s earnings growth and is aligned to shareholder wealth objectives. The second performance hurdle relates to Relative Total Shareholder Return (RTSR). The RTSR is a ranking of Korvest’s total shareholder return compared to a comparative group of 20 companies over the three year performance period. Total shareholder return is calculated as the growth in share price plus dividends and any capital returns to shareholders to produce the total return to each shareholder expressed as a percentage. The comparator group of companies was selected by the Board as a group that has a spread and size of operations similar to Korvest and also are impacted by economic and cyclical factors in a manner similar to Korvest. At the end of the three year performance period Korvest’s performance will be assessed against the comparator group and the % of rights that will vest will be determined in accordance with the following table. KORVEST’S TSR AGAINST TSR OF THE COMPARATOR GROUP % OF RIGHTS THAT VEST Below the 51st percentile At the 51st percentile Nil 50% Above the 51st percentile but below the 75th percentile Between 50% and 100% using a straight line analysis At or above the 75th percentile 100% Notwithstanding Korvest performance relative to the comparator group, no performance rights will vest if Korvest’s TSR over the performance period if less than zero. The Company’s securities trading policy prohibits those that are granted share-based payments as part of their remuneration from entering into other arrangements that limit their exposure to losses that would result from share price decreases. Entering into such arrangements has been prohibited by law since 1 July 2011. Service contracts It is the Group’s policy that service contracts for all KMP are unlimited in term but capable of termination by providing 1 to 6 months’ notice depending on the KMP, and that the Group retains the right to terminate the contract immediately by making payment in lieu of notice. The Group has entered into a service contract with each executive KMP. On termination of employment the KMP are also entitled to receive their statutory entitlements and accrued annual leave and long service leave, as well as any entitlement to incentive payments and superannuation benefits. Services from remuneration consultants No remuneration consultants were used during the year. Non-executive directors Non-executive directors receive a fixed fee. The total remuneration for all non-executive directors was last voted upon by shareholders at the AGM held on 25 October 2013 and is not to exceed $450,000. The current base fees became effective on 1 July 2016 and are: Chairman Director $125,454 $62,727 The Chairman of a Board Committee receives a further $10,455 p.a. Superannuation is added to these fees where appropriate. Non-executive directors do not receive performance-related compensation. 11 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT REMUNERATION REPORT - AUDITED (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2017 Directors and Executive Remuneration Details of the nature and amount of each major element of remuneration of each director of the Company, and other KMP of the Group are: NAME DIRECTORS G Billings Non-executive (Chairman) G Francis Non-executive (Director) G Hutchinson Non-executive (Director) A Stobart (appointed 1 August 2016) Non-executive (Director) A Kachellek Executive (Managing Director) S McGregor Executive (Finance Director) P Brodribb (retired 28 July 2016) Non-executive (Director) EXECUTIVES/OTHER KMP C Hartwig Executive General Manager Sales & Marketing G Christie (became KMP 18 January 2016) General Manager Operations P Assaf General Manager Power Step & Titan Technologies FORMER EXECUTIVE S Evans (ceased 18 January 2016) General Manager Galvanising 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 SHORT TERM POST EMPLOYMENT SHARE BASED PAYMENTS SALARY & FEES $ BONUS $ SUPERANNUATION BENEFITS $ TERMINATION PAYMENT OTHER LONG TERM – LONG SERVICE LEAVE $ * SHARES $ OPTIONS & RIGHTS $ TOTAL $ PROPORTION OF REMUNERATION PERFORMANCE RELATED % 125,454 123,600 80,136 78,948 73,182 72,100 57,500 - 313,635 309,000 277,800 272,950 5,227 61,800 270,903 261,900 180,000 61,880 216,300 216,300 - 114,031 - - - - - - - - - 62,502 - 2,000 - - - 59,700 - 23,800 - - - - 11,918 11,742 - - 6,952 6,849 5,462 - 35,733 30,874 26,581 26,903 497 5,871 34,533 31,970 19,361 5,879 20,549 20,549 - 16,365 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 11,877 6,794 10,265 6,140 (1,898) 13,585 15,712 3,005 4,670 2,639 115,646 (28,083) - - - - - - - - - - - - - - 998 998 998 499 998 998 - 499 - - - - - - - - - - - - - - - - - - 4,575 4,275 3,450 1,875 137,372 135,342 80,136 78,948 80,134 78,949 62,962 - 365,820 409,170 318,921 307,993 5,724 67,671 307,986 368,153 217,946 95,063 242,517 240,486 - 218,458 - - - - - - - - - - - - - 1.3 15.3 1.3 0.6 1.1 16.2 0.9 25.0 * This represents the accounting expense relating to the change in the provision for long service leave. It does not represent cash payments or statutory obligations. The proportion of performance related remuneration is bonuses and share based payments divided by total remuneration. 12 NAME DIRECTORS G Billings Non-executive (Chairman) G Francis Non-executive (Director) G Hutchinson Non-executive (Director) A Stobart (appointed 1 August 2016) Non-executive (Director) A Kachellek Executive (Managing Director) S McGregor Executive (Finance Director) P Brodribb (retired 28 July 2016) Non-executive (Director) EXECUTIVES/OTHER KMP C Hartwig Executive General Manager Sales & Marketing G Christie (became KMP 18 January 2016) General Manager Operations P Assaf General Manager Power Step & Titan Technologies FORMER EXECUTIVE S Evans (ceased 18 January 2016) General Manager Galvanising 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 125,454 123,600 80,136 78,948 73,182 72,100 57,500 - 313,635 309,000 277,800 272,950 5,227 61,800 270,903 261,900 180,000 61,880 216,300 216,300 - 114,031 - - - - - - - - - - - - - - - - - - 62,502 2,000 59,700 23,800 11,918 11,742 - - - 6,952 6,849 5,462 35,733 30,874 26,581 26,903 497 5,871 34,533 31,970 19,361 5,879 20,549 20,549 - 16,365 SHORT TERM POST EMPLOYMENT SHARE BASED PAYMENTS SALARY & FEES $ BONUS $ SUPERANNUATION BENEFITS $ TERMINATION PAYMENT OTHER LONG TERM – LONG SERVICE LEAVE $ * SHARES $ OPTIONS & RIGHTS $ TOTAL $ PROPORTION OF REMUNERATION PERFORMANCE RELATED % - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 11,877 6,794 10,265 6,140 - - (1,898) 13,585 15,712 3,005 4,670 2,639 - 115,646 (28,083) - - - - - - - - - - - - - - 998 998 998 499 998 998 - 499 - - - - - - - - 4,575 - 4,275 - - - 3,450 - 1,875 - - - - - 137,372 135,342 80,136 78,948 80,134 78,949 62,962 - 365,820 409,170 318,921 307,993 5,724 67,671 307,986 368,153 217,946 95,063 242,517 240,486 - 218,458 - - - - - - - 1.3 15.3 1.3 0.6 - - 1.1 16.2 0.9 25.0 - - - - 13 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT REMUNERATION REPORT - AUDITED (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2017 Options and rights over equity instruments granted as compensation during the reporting period Details on performance rights that were granted as compensation to each KMP during the reporting period are as follows: NUMBER OF PERFORMANCE RIGHTS GRANTED DURING THE YEAR GRANT DATE FAIR VALUE PER OPTION AT GRANT DATE ($) EXPIRY DATE DIRECTORS A Kachellek S McGregor EXECUTIVES C Hartwig G Christie 30,500 28,500 23,000 12,500 17 Nov 2016 17 Nov 2016 $1.74/$0.90 $1.74/$0.90 30 June 2019 30 June 2019 17 Nov 2016 17 Nov 2016 $1.74/$0.90 $1.74/$0.90 30 June 2019 30 June 2019 Half of the performance rights issued to each KMP will be tested against an EPS hurdle with the other half being tested against a Relative Total Shareholder Return (RTSR) hurdle. The fair value of the EPS hurdle rights is $1.74. The fair value of the RTSR hurdle rights is $0.90. All performance rights have a nil exercise price. All performance rights expire on the earlier of their expiry date or termination of the individual’s employment. The performance rights are exercisable for one year after the conclusion of the vesting period. In addition to the continuing employment service condition, the ability to exercise performance rights is conditional on the Group achieving performance hurdles. Details of the performance criteria are included in the long-term incentives discussion on page 10. No equity-settled share-based payment transaction terms (including performance rights granted as compensation to KMP) have been altered or modified by the Group during the reporting period or the prior period. Exercise of options granted as compensation No shares were issued on the exercise of performance rights previously granted as compensation during the reporting period. 14 Analysis of options and rights over equity instruments granted as compensation Details of vesting profiles of the options granted as remuneration to each director and key executive of the Company are detailed below: OPTIONS GRANTED NUMBER DATE % VESTED IN CURRENT YEAR % FORFEITED OR LAPSED IN CURRENT YEAR YEAR IN WHICH GRANT VESTS DIRECTORS A Kachellek S McGregor EXECUTIVES C Hartwig G Christie P Assaf 24,000 36,400 30,500 19,000 28,800 28,500 10,000* 14,000 21,200 23,000 5,000 5,000 12,500 5,000 Nov 14 Nov 15 Nov 16 Nov 14 Nov 15 Nov 16 Mar 09 Nov 14 Nov 15 Nov 16 Nov 14 Nov 15 Nov 16 Nov 14 -% -% -% -% -% -% -% -% -% -% -% -% -% -% 100% -% -% 100% -% -% -% 100% -% -% 100% -% -% -% 30 Jun 17 30 Jun 18 30 Jun 19 30 Jun 17 30 Jun 18 30 Jun 19 30 Jun 11 30 Jun 17 30 Jun 18 30 Jun 19 30 Jun 17 30 Jun 18 30 Jun 19 30 Jun 17 * - These options were issued under the previous Korvest Ltd Executive Share Plan. They vested during the year ended 30 June 2011 and were exercised in January 2011. Restricted ordinary shares were issued at an exercise price of $3.79 per share. Under the terms of the previous Korvest Ltd Executive Share Plan upon exercise of the options the individual must pay the exercise price over a maximum term of 20 years. Dividends, after deduction of an amount intended for the participant’s tax, are applied in payment of the exercise price. The arrangement to pay the exercise price over 20 years is interest free and without personal recourse to the participants (recourse is limited to the shares themselves). As a result of these arrangements, under Australian Accounting standards, the instruments are treated as options until such time as the associated non-recourse loan is fully repaid. The shares remain restricted until such time as the loan is fully paid. Analysis of movements in options and rights granted as compensation The movement during the reporting period, by value, of options over ordinary shares in the Company held by each company director and KMP are detailed below: DIRECTORS A Kachellek S McGregor EXECUTIVES C Hartwig G Christie VALUE OF RIGHTS/OPTIONS GRANTED IN YEAR $ (A) EXERCISED IN YEAR $ (B) 40,260 37,620 30,360 16,500 - - - - (A) The value of performance rights granted in the year is the fair value of the options calculated at grant date using the Black Scholes option-pricing model for the EPS hurdle performance rights and a Monte Carlo simulation for the RTSR hurdle performance rights. The total value of the options granted is included in the table above. This amount will be allocated to remuneration over the vesting period (i.e. in years 1 July 2016 to 30 June 2019) subject to meeting the associated performance conditions. (B) The value of the options exercised during the year is calculated as the market price of shares as at the close of trading on the date the options were exercised after deducting the price to exercise the option. Further details regarding options granted to executives under the Executive Share Plan are in Note 10 to the financial statements. 15 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT REMUNERATION REPORT - AUDITED (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2017 Options and rights over equity instruments The movement during the reporting period in the number of options over ordinary shares in Korvest Ltd held, directly, indirectly or benefi- cially, by each KMP, including their related parties, is as follows: HELD AT 1 JULY 2016 IFRS GRANTED AS COMPENSATION EXERCISED LAPSED HELD AT 30 JUNE 2017 IFRS HELD AT 30 JUNE 2017 ASX VESTED DURING THE YEAR DIRECTORS A Kachellek S McGregor EXECUTIVES C Hartwig G Christie P Assaf 60,400 47,800 45,200 10,000 5,000 30,500 28,500 23,000 12,500 - - - - - - (24,000) (19,000) (14,000) (5,000) (5,000) 66,900 57,300 54,200 17,500 - 66,900 57,300 44,200 17,500 - No options held by KMP are vested but not exercisable. HELD AT 1 JULY 2015 IFRS GRANTED AS COMPENSATION EXERCISED LAPSED HELD AT 30 JUNE 2016 IFRS HELD AT 30 JUNE 2016 ASX VESTED DURING THE YEAR DIRECTORS A Kachellek S McGregor EXECUTIVES C Hartwig S Evans G Christie* P Assaf 48,000 38,000 37,000 18,000 N/A 10,000 36,400 28,800 21,200 18,400 N/A - - - - - - - (24,000) (19,000) (13,000) (36,400) - (5,000) 60,400 47,800 60,400 47,800 45,200 35,200 - 10,000 5,000 - 10,000 5,000 No options held by KMP are vested but not exercisable. * Holding has been noted as N/A where the person was not a member of KMP at that date. Transactions have only been recorded where they occurred whilst the person was a member of KMP. - - - - - - - - - - - 16 Movements in shares The movement during the reporting period in the number of ordinary shares in Korvest Ltd held, directly, indirectly or beneficially, by each KMP, including their related parties, is as follows: HELD AT 1 JULY 2016 PURCHASES ALLOCATED UNDER EMPLOYEE/ EXEC SHARE PLAN ALLOCATED UNDER DRP HELD AT 30 JUNE 2017 SHARES HELD SUBJECT TO NON-RECOURSE LOANS DIRECTORS G Billings P Brodribb * S McGregor A Kachellek G Francis G Hutchinson A Stobart * EXECUTIVES C Hartwig G Christie P Assaf 642 26,755 30,769 56,335 6,029 500 N/A 12,844 1,271 759 - - - - - - 500 - - - - - - - - - - 393 393 393 25 N/A 1,235 775 242 - - 523 - - 667 N/A 32,004 57,110 6,271 500 500 13,760 1,664 1,152 - - - - - - - 10,000 - - No shares were granted to KMP during the reporting period as compensation other than those provided under the employee share plan on the same terms and conditions as for all employees. HELD AT 1 JULY 2015 PURCHASES ALLOCATED UNDER EMPLOYEE/ EXEC SHARE PLAN ALLOCATED UNDER DRP HELD AT 30 JUNE 2016 SHARES HELD SUBJECT TO NON-RECOURSE LOANS DIRECTORS G Billings P Brodribb S McGregor A Kachellek G Francis G Hutchinson EXECUTIVES C Hartwig S Evans * G Christie * P Assaf 590 24,559 28,243 53,408 5,534 500 11,437 4,704 N/A 381 - - - - - - - - - - - - - - - - 378 154 224 378 52 2,196 2,526 2,927 495 - 1,029 27 - - 642 26,755 30,769 56,335 6,029 500 12,844 N/A 1,271 759 - - - - - - 10,000 - - - No shares were granted to KMP during the reporting period as compensation other than those provided under the employee share plan on the same terms and conditions as for all employees. * Shareholding has been noted as N/A where the person was not a member of KMP at that date. Purchase and sale transactions have only been recorded where they occurred whilst the person was a member of KMP. 17 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT REMUNERATION REPORT - AUDITED (CONTINUED) FOR THE YEAR ENDED 30 JUNE 2017 Analysis of bonuses included in remuneration Executive bonuses are paid on the achievement of specified performance targets. Those targets vary for each executive and are aligned to each executive’s role and responsibilities. The targets relate to financial, operational, strategic and safety measures. Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to each director of the Company, and to other key management personnel are detailed below. MAXIMUM POSSIBLE STI INCLUDED IN REMUNERATION $ (A) % VESTED IN YEAR % FORFEITED IN YEAR (B) SHORT-TERM INCENTIVE BONUS DIRECTORS A Kachellek S McGregor C Hartwig G Christie P Assaf 141,136 41,670 113,779 20,000 43,260 - - - - - - - - - - 100 100 100 100 100 (A) Amounts included in remuneration for the financial year represent the amount related to the financial year based on the achievement of specified performance criteria. No STI bonuses vested during the year. (B) The amounts forfeited are due to the performance criteria not being met in relation to the current financial year. DIRECTORS’ INTERESTS The relevant interest of each director over the shares and rights over such instruments issued by the Company and other related bodies corporate as notified by the directors to the Australian Securities Exchange in accordance with S250G(1) of the Corporations Act 2001, at the date of this report is as follows: KORVEST LTD ORDINARY SHARES KORVEST LTD PERFORMANCE RIGHTS UNVESTED A Kachellek G Billings S McGregor G Francis G Hutchinson A Stobart NON-AUDIT SERVICES 54,513 667 32,004 6,271 500 500 90,900 - 76,300 - - - During the year KPMG, the Group’s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit Committee, is satisfied that the provision of these services did not compromise the auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • • all non-audit services were subject to the corporate governance procedures adopted by the Group; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing risk and rewards. For details of non-audit services fees charged refer to Note 5 to the financial statements. 18 LEAD AUDITOR’S INDEPENDENCE DECLARATION The lead auditor’s independence declaration is set out on page 61 and forms part of the Directors’ report for the financial year ended 30 June 2017. ROUNDING OFF The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and in accordance with that Instrument, amounts in the Financial report and Directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. CORPORATE GOVERNANCE The Company’s Corporate Governance Statement can be found on the Korvest website at http://www.korvest.com.au/assets/downloads/Korvest-Corporate-Governance-2017.pdf Signed at Adelaide this Thursday 27th of July 2017 in accordance with a resolution of the directors. G A BILLINGS, Director A H W KACHELLEK, Director 19 INDEPENDENT AUDITOR’S REPORTDIRECTORS’ REPORT 5 YEAR SUMMARY SALES REVENUE ($'000) 44,731 54,981 63,025 73,756 61,723 2017 2016 2015 2014 2013 PROFIT / (LOSS) AFTER TAX ($'000) (1,578) 950 1,455 5,603 3,825 DEPRECIATION/AMORTISATION ($'000) 1,710 1,716 1,642 1,774 1,652 CASH FLOW FROM OPERATIONS ($'000) (384) 7,432 5,115 4,228 7,524 PROFIT / (LOSS) FROM ORDINARY ACTIVITIES - As % of Shareholders’ Equity - As % of Sales Revenue DIVIDEND - Total amount paid - Per issued share - Times covered by profit from ordinary activities (5.4%) (3.5%) 2.9% 1.7% 4.4% 2.3% 15.1% 7.6% 10.8% 6.2% ($'000) 2,192 20.0c - 2,328 22.0c 0.4 5,032 48.0c 0.3 12,830 146.0c 0.4 4,863 56.0c 0.8 EARNINGS PER SHARE (14.4c) 8.9c 13.9c 64.1c 44.0c NUMBER OF EMPLOYEES 171 193 225 242 217 SHAREHOLDERS - Number at year end 1,813 1,882 2,029 2,034 1,627 NET ASSETS PER ISSUED ORDINARY SHARE NET TANGIBLE ASSETS PER ISSUED ORDINARY SHARE $2.63 $2.63 $2.97 $2.97 $3.13 $3.13 $3.501 $3.332 $4.01 $3.77 SHARE PRICE AS AT 30 JUNE $2.36 $2.19 $3.55 $5.60 $5.80 1 Net assets per issued ordinary share figure was impacted by the issue of 1,607,000 new shares in June 2014 in relation to the Special dividend and Dividend Reinvestment Plan. Had these not been issued, the figure would have been $4.14. 2 Net tangible assets per issued ordinary share figure was impacted by the issue of 1,607,000 new shares in June 2014 in relation to Special dividend and Dividend Reinvestment Plan. Had these not been issued, the figure would have been $3.94. 20 21 FINANCIAL STATEMENTS22 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY NOTES TO THE FINANCIAL STATEMENTS BASIS OF PREPARATION RESULTS FOR THE YEAR 1. 2. 3. 4. 5. 6. REVENUE AND OTHER INCOME EXPENSES NET FINANCE INCOME EARNINGS PER SHARE AUDITOR’S REMUNERATION SEGMENT REPORTING WORKING CAPITAL 7. 8. 9. TRADE AND OTHER RECEIVABLES INVENTORIES TRADE AND OTHER PAYABLES 10. EMPLOYEE BENEFITS 11. PROVISIONS TANGIBLE AND INTANGIBLE ASSETS 12. INTANGIBLE ASSETS 13. TANGIBLE ASSETS 14. IMPAIRMENT TESTING 15. COMMITMENTS FOR EXPENDITURE CAPITAL STRUCTURE 16. CASH AND CASH EQUIVALENTS / (BANK OVERDRAFT) 17. FINANCIAL INSTRUMENTS 18. CAPITAL AND RESERVES 19. DIVIDENDS TAXATION 20. CURRENT AND DEFERRED TAXES BUSINESS COMBINATIONS 21. INVESTMENT IN SUBSIDIARIES OTHER NOTES 22. KEY MANAGEMENT PERSONNEL 23. PARENT ENTITY DISCLOSURES 24. SUBSEQUENT EVENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT LEAD AUDITOR’S INDEPENDENT DECLARATION ASX ADDITIONAL INFORMATION SHAREHOLDINGS (AS AT 25 JULY 2017) VOTING RIGHTS TWENTY LARGEST SHAREHOLDERS OFFICES AND OFFICERS 43 43 44 48 48 49 49 51 51 52 52 53 53 55 56 61 62 62 62 63 63 24 25 26 27 28 28 30 30 30 31 32 32 32 34 34 35 35 36 38 39 39 40 42 43 23 FINANCIAL STATEMENTSCONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2017 CONTINUING OPERATIONS Sales revenue Other income Expenses, excluding net finance costs PROFIT/ (LOSS) BEFORE FINANCING COSTS Finance income Finance expenses NET FINANCE INCOME PROFIT/ (LOSS) BEFORE INCOME TAX Income tax expense PROFIT/ (LOSS) FROM CONTINUING OPERATIONS PROFIT/ (LOSS) FOR THE YEAR OTHER COMPREHENSIVE INCOME Revaluation of property plant and equipment Related tax TOTAL COMPREHENSIVE INCOME FOR THE PERIOD ATTRIBUTABLE TO: Equity holders of the Company TOTAL COMPREHENSIVE INCOME FOR THE PERIOD EARNINGS PER SHARE ATTRIBUTABLE TO THE ORDINARY EQUITY HOLDERS OF THE COMPANY: Basic earnings per share from continuing operations Diluted earnings per share from continuing operations Note 2017 $’000 2016 $’000 1 1 2 3 3 20 4 4 44,731 54,981 - 10 44,731 54,991 (47,022) (53,688) (2,291) 1,303 54 - 54 42 (3) 39 (2,237) 1,342 659 (1,578) (1,578) 214 (64) (1,428) (1,428) (1,428) CENTS (14.4) (14.4) (392) 950 950 - - 950 950 950 CENTS 8.9 8.9 The notes on pages 28-53 are an integral part of these consolidated financial statements. 24 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017 ASSETS Cash and cash equivalents Investment Trade and other receivables Inventories Tax receivable TOTAL CURRENT ASSETS Property, plant and equipment Intangible assets Deferred tax asset TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES Trade and other payables Employee benefits Provisions TOTAL CURRENT LIABILITIES Employee benefits Deferred tax liability Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained earnings TOTAL EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY TOTAL EQUITY Note 16 16 7 8 13 12 20 9 10 11 10 20 11 18 18 2017 $’000 1,694 275 9,498 10,733 107 22,307 13,725 8 82 13,815 36,122 3,950 2,216 38 6,204 319 - 433 752 6,956 29,166 14,039 16,705 (1,578) 29,166 29,166 2016 $’000 5,088 - 8,238 11,492 971 25,789 14,631 17 - 14,648 40,437 4,224 2,340 26 6,590 372 513 433 1,318 7,908 32,529 13,798 18,731 - 32,529 32,529 The notes on pages 28-53 are an integral part of these consolidated financial statements. 25 FINANCIAL STATEMENTSNote 2017 $’000 2016 $’000 47,863 65,592 (49,165) (57,576) 3 16 (1,302) 54 864 (384) 10 (275) (745) (1,010) (5) (1,995) (2,000) (3,394) 5,088 1,694 8,016 39 (623) 7,432 47 - (481) (434) (5) (1,405) (1,410) 5,588 (500) 5,088 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2017 CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Cash paid to suppliers and employees Cash generated from operations Interest received Income tax refunds (taxes paid) NET CASH FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of property, plant and equipment and assets held for sale Investments and term deposits Acquisition of property, plant and equipment and intangible assets 12,13 NET CASH FROM INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Transaction costs related to issue of share capital Dividends paid NET CASH FROM FINANCING ACTIVITIES Net increase/ (decrease) in cash and cash equivalents Cash and cash equivalents/ (bank overdrafts) at 1 July CASH AND CASH EQUIVALENTS AT 30 JUNE 16 The notes on pages 28-53 are an integral part of these consolidated financial statements. 26 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2017 Balance at 1 July 2016 TOTAL COMPREHENSIVE INCOME FOR THE YEAR Loss Other comprehensive income TOTAL COMPREHENSIVE INCOME FOR THE YEAR TRANSACTIONS WITH OWNERS OF THE COMPANY RECOGNISED DIRECTLY IN EQUITY CONTRIBUTIONS BY AND DISTRIBUTIONS TO OWNERS OF THE COMPANY Shares issued under the Share Plans Issue of ordinary shares Dividends to shareholders Total contributions by and distributions to owners of the Company BALANCE AT 30 JUNE 2017 SHARE CAPITAL $’000 13,798 - - - 56 185 - 241 14,039 EQUITY COMPENSATION RESERVE ASSET REVALUATION RESERVE PROFITS RESERVE RETAINED EARNINGS $’000 $’000 TOTAL $’000 14,935 - 32,529 - - - - (2,192) (2,192) (1,578) (1,578) - 150 (1,578) (1,428) - - - - 72 185 (2,192) (1,935) $’000 3,585 - 150 150 - - - - 3,735 12,743 (1,578) 29,166 $’000 211 - - - 16 - - 16 227 Balance at 1 July 2015 12,833 211 3,585 16,313 - 32,942 TOTAL COMPREHENSIVE INCOME FOR THE YEAR Profit Total comprehensive income for the year TRANSACTIONS WITH OWNERS OF THE COMPANY RECOGNISED DIRECTLY IN EQUITY CONTRIBUTIONS BY AND DISTRIBUTIONS TO OWNERS OF THE COMPANY Shares issued under the Share Plans Issue of ordinary shares Dividends to shareholders Total contributions by and distributions to owners of the Company Transfer to profits reserve BALANCE AT 30 JUNE 2016 - - 60 905 - 965 - - - - - - - - - - - - - - - - - - - (2,328) (2,328) 950 950 950 950 - - - - 60 905 (2,328) (1,363) 950 (950) - 13,798 211 3,585 14,935 - 32,529 The notes on pages 28-53 are an integral part of these consolidated financial statements. 27 FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 BASIS OF PREPARATION Reporting entity Korvest Ltd (the ‘Company’) is a company domiciled in Australia. The address of the Company’s registered office is 580 Prospect Road, Kilburn SA 5084. The consolidated financial statements of the Company as at and for the year ended 30 June 2017 comprise the Com- pany and its subsidiaries (together referred to as the ‘Group’ and individually as ‘Group entities’). The Group is a for-profit entity and is primarily involved in manufacturing businesses as detailed in the Segment Reporting (Note 6). Basis of accounting Statement of compliance The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRSs) adopted by the International Account- ing Standards Board (IASB). The consolidated financial statements were approved by the Board of Directors on 27th July 2017. Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for land and buildings, which are measured at fair value. Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. Use of estimates and judgements The preparation of the consolidated financial statements in conformity with AASBs and IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: • • • • Note 7 – Trade and other receivables Note 8 – Inventories Note 11 – Provisions Note 13 – Tangible assets Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the functional currencies of the Group at exchange rates at the dates of transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities that are measured at fair value in a foreign currency 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 based on historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency differences are generally recognised in profit or loss. 28 New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 July 2017, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these standards early, and continues to assess the impact on the entity. NEW OR AMENDED STANDARD SUMMARY OF REQUIREMENTS POSSIBLE IMPACT ON CONSOLIDATED FINANCIAL STATEMENTS IFRS 9 Financial Instruments IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial instru- ments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting require- ments. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. IFRS 15 establishes a comprehensive frame- work for determining whether, how much, and when revenue is recognised. It replaces exist- ing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. IFRS 16 introduces a single lessee account- ing model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. AASB 16 substantially carries forward the lessor accounting require- ments in IFRS 117 Leases. IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019. The standard is not expected to have a significant impact on the Group’s consolidated financial statements. The Group is assessing the potential impact on its consolidated financial statements resulting from application of IFRS 15. The Group is assessing the potential impact on its consolidated financial statements resulting from application of IFRS 16. 29 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 RESULTS FOR THE YEAR This section focuses on the Group’s performance. Disclosures in this section include analysis of the Group’s profit before tax by reference to the activities performed by the Group and analysis of key revenues and operating costs, segmental information, net finance costs and earnings per share. Underlying earnings before interest, tax (“EBIT”) and before exceptional items remain the Group’s key profit indicator. This reflects how the business is managed and how the Directors assess the performance of the Group. 1. REVENUE AND OTHER INCOME Accounting policies Sale of goods Revenue from the sale of goods in the ordinary course of business is measured at the fair value of the consideration received or receiv- able, net of returns, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the customer, 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 the revenue can be measured reliably. Transfer of risks and rewards vary according to the terms of individual sale contracts. Transfer usually occurs when the product is received by the customer or upon completion when the customer requests delayed delivery. Good and services tax Revenues are recognised net of amount of goods and services tax (GST). SALES REVENUE Sales of goods OTHER INCOME Profit on sale of fixed assets 2. EXPENSES 2017 2016 $’000 $‘000 44,731 54,981 44,731 54,981 - - 10 10 Accounting policies Depreciation Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is completed and ready for use. Depreciation is calculated to write off the carrying value of property, plant and equipment less the estimated residual values using the straight-line basis over their estimated useful lives. Depreciation is generally recognised in profit or loss, unless the amount is included in the carrying amount of another asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative years of significant items of property, plant and equipment are as follows: Buildings Plant and equipment 40 years 3-12 years Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Amortisation Except for goodwill, intangible assets are amortised on a straight-line basis in profit or loss over their estimated useful lives, from the date that they are available for use. The estimated useful life of patents and trademarks for the current and comparative years is 5 years. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Good and services tax Expenses are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the expense. 30 Expenses by nature Cost of goods sold Sales, marketing and warehousing expenses Administration expenses Distribution expenses Other expenses PROFIT / (LOSS) BEFORE INCOME TAX HAS BEEN ARRIVED AT AFTER CHARGING / (CREDITING) THE FOLLOWING EXPENSES: DEPRECIATION AND AMORTISATION: Depreciation of buildings Depreciation of plant and equipment Amortisation EMPLOYEE BENEFITS: Wages and salaries Other associated personnel expenses Contributions to defined contribution superannuation funds Expense relating to annual and long service leave Termination benefits Employee share bonus plan expense OTHER: Bad debts written off Change in allowance for impairment of receivables Loss on disposal of property, plant and equipment Research and development expense NOTE 13 13 12 7 7 2017 $’000 29,919 11,275 2,242 3,498 88 2016 $‘000 34,037 12,585 3,494 3,572 - 47,022 53,688 39 39 1,659 1,659 12 18 12,425 13,330 1,883 1,113 1,080 160 51 73 (88) 88 29 2,099 1,314 1,052 624 61 247 (50) - 4 3. NET FINANCE INCOME Accounting policies Finance income Finance income comprises interest income on funds invested. Interest income is recognised as it accrues, using the effective interest rate method. Finance costs Finance costs are comprised of interest expense on borrowings. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. Interest income on bank deposits held Interest expense from bank overdrafts Net financing income 2017 2016 $’000 $‘000 54 - 54 42 (3) 39 31 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 4. EARNINGS PER SHARE The Company presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees. Basic and diluted earnings per share The calculation of basic earnings per share at 30 June 2017 was based on the net loss attributable to ordinary shareholders of $1,577,891 (2016: Profit $949,674) and a weighted average number of ordinary shares outstanding during the financial year ended 30 June 2017 of 10,992,738 (2016: 10,719,520). The calculation of diluted earnings per share at 30 June 2017 was based on the loss at- tributable to ordinary shareholders of $1,577,891 (2016: Profit $949,674) and a weighted average number of ordinary shares outstanding during the financial year ended 30 June 2017 of 10,992,738 (2016: 10,719,520). Weighted average number of ordinary shares (basic) 2017 2016 Shares ‘000 Shares ‘000 Issued ordinary shares at 1 July Effect of shares issued during year Weighted average number of ordinary shares at 30 June Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares (basic) Effect of Executive Share Plan Weighted average number of ordinary shares at 30 June Basic and diluted earnings per share Basic earnings per share from continuing operations Diluted earnings per share from continuing operations 5. AUDITOR’S REMUNERATION AUDIT SERVICES: Auditors of the Group (KPMG Australia) – audit and review of financial statements OTHER SERVICES: Auditors of the Group (KPMG Australia) -other taxation, consulting and due diligence services 6. SEGMENT REPORTING 10,940 53 10,993 10,993 - 10,993 10,507 213 10,720 10,720 - 10,720 Cents per share Cents per share (14.4) (14.4) $ 93,970 93,970 7,585 7,585 8.9 8.9 $ 87,350 87,350 191,557 191,557 Segment results that are reported to the Group’s Managing Director (the chief operating decision maker) include items directly attribut- able to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, head office expenses, and income tax assets and liabilities. Business segments The Group has two reportable segments. The business is organised based on products and services. The following summary describes the operations in each of the Company’s reportable segments. Industrial Products Industrial Products segment includes the manufacture of electrical and cable support systems, steel fabrication and access systems. It also includes the sale, hire and repair of high torque tools. It includes the businesses trading under the EzyStrut, Power Step and Titan Technologies names. 32 Production Production segment represents the Korvest Galvanising business, which provides hot dip galvanising services. Both reportable segments consist of the aggregation of a number of operating segments in accordance with AASB 8 Operating Segments. Geographical segments The Group operates in Australia. Customers There was no individually significant customer that would represent more than 10% of total revenues in the current financial year. Last year one customer of the Group’s Industrial Products segment represented $13,910,000 of the Group’s total revenues. Information regarding the operations of each reportable segment is included below in the manner reported to the chief operating decision maker as defined in AASB 8. Performance is measured based on segment profit before tax (PBT). Inter-segment transactions are not recorded as revenue. Instead a cost allocation relating to the transactions is made based on negotiated rates. BUSINESS SEGMENTS INDUSTRIAL PRODUCTS PRODUCTION TOTAL Sales revenue Depreciation and amortisation Reportable segment profit / (loss) before tax Reportable segment assets Capital expenditure 2017 $’000 40,269 1,041 (1,633) 20,984 465 2016 $’000 50,701 1,143 2,989 21,470 182 2017 $’000 4,462 278 (301) 3,720 222 2016 $’000 4,280 278 (48) 3,519 102 Reconciliation of reportable segment profit, assets and other material items PROFIT/(LOSS) Total profit / (loss) for reportable segments Unallocated amounts – other corporate expenses (net of corporate income) Profit / (loss) before income tax ASSETS Total assets for reportable segments Land and buildings Cash and cash equivalents Other unallocated amounts Total assets CAPITAL EXPENDITURE Capital expenditure for reportable segments Other corporate capital expenditure Total capital expenditure OTHER MATERIAL ITEMS Depreciation and amortisation for reportable segments Unallocated amounts – corporate depreciation Total 2017 $’000 44,731 1,319 (1,934) 24,704 687 2017 $‘000 (1,934) (303) (2,237) 2016 $’000 54,981 1,421 2,941 24,990 284 2016 $‘000 2,941 (1,599) 1,342 24,704 24,990 7,382 1,969 2,067 7,207 5,088 3,152 36,122 40,437 687 58 745 1,319 391 1,710 284 197 481 1,421 295 1,716 33 FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 WORKING CAPITAL Working capital represents the assets and liabilities the Group generates through its trading activity. The Group therefore defines working capital as inventory, trade and other receivables, trade and other payables and provisions. Careful management of working capital ensures that the Group can meet its trading and financing obligations within its ordinary operating cycle. This section provides further information regarding working capital management and analysis of the elements of working capital. 7. TRADE AND OTHER RECEIVABLES Accounting policies Trade receivables Trade receivables are non-derivative financial instruments that are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method, less any identified impairment losses. The fair values of trade and other receivables are estimated as the present value of future cash flows, discounted at the market rate of interest at the measurement date. Short-term receivables with no stated interest rate are measured at the original invoice amount if the effect of discounting is immaterial. Fair value is determined at initial recognition and, for disclosure purposes, at each annual reporting date. Goods and services tax Trade receivables are recognised inclusive of the amount of goods and services tax (GST) which is payable to taxation authorities. The net amount of GST payable to the taxation authority is included as part of receivables or payables. CURRENT Trade receivables Less: Allowance for impairment Net trade receivables Other receivables and prepayments 2017 $’000 9,860 (582) 9,278 220 9,498 2016 $‘000 8,594 (567) 8,027 211 8,238 Impairment Debtors are assessed at each reporting date to determine whether there is any objective evidence that they are impaired. An allowance for impairment is recognised if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that the loss event(s) had an impact on the estimated future cash flows of the asset that can be estimated reliably. Objective evidence that financial assets are impaired includes default or delinquency by a debtor or indications that a debtor will enter administration. MOVEMENT IN ALLOWANCE FOR IMPAIRMENT Balance at 1 July Amounts written off against allowance Impairment loss recognised Balance at 30 June 2017 $’000 (567) 73 (88) (582) 2016 $‘000 (627) 247 (187) (567) The impairment loss at 30 June 2017 relates to a number of customers where an assessment has been made that the amounts are likely to be uncollectable. The Group sells to a variety of customers including wholesalers and end users and does not have a concentration of credit risk in any one sector. Based on the Group’s monitoring of customer credit risk, the Group believes that, except as indicated above, no impairment allowance is necessary in respect of trade receivables not past due. 34 The ageing of the trade receivables at the reporting date that were not impaired was as follows: GROSS AMOUNTS Not past due nor impaired Past due 0-30 days Past due 31-90 days More than 91 days 8. INVENTORIES 2017 $’000 6,299 2,829 150 - 2016 $‘000 5,499 2,054 474 - 9,278 8,027 Accounting policies Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on average cost and includes expenditure incurred in acquiring the inventories, production and conversion costs, and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and 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. Goods and services tax Non-financial assets such as inventories are recognised net of amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from taxation authority, it is recognised as part of the cost of acquisition of the asset. CURRENT Raw materials and consumables Work in progress Finished goods 2017 2016 $’000 $‘000 2,142 2,045 441 222 8,150 9,225 10,733 11,492 Finished goods are shown net of an impairment provision amounting to $1,409,000 (2016: $1,449,000) arising from the likely inability to sell a product range at or equal to the cost of inventory. 9. TRADE AND OTHER PAYABLES Accounting policies Payables Trade and other accounts payable are non-derivative financial instruments measured at cost. Goods and services tax Trade payables are recognised inclusive of the amount of goods and services tax (GST) which is recoverable from taxation authorities. The net amount of GST recoverable from the taxation authority is included as part of receivables or payables. 2017 2016 $’000 $‘000 CURRENT Trade payables and accrued expenses 2,226 2,074 Non-trade payables and accrued expenses 1,724 2,150 3,950 4,224 35 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 10. EMPLOYEE BENEFITS Accounting policies Short-term benefits Short-term employee benefit obligations are expensed as the related service is provided. A liability is recognised for the amount expected to be paid 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. Long-term benefits The Group’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates, including related on-costs and expected settlement dates, and is discounted using the rates attached to high quality corporate bonds at the reporting date which have maturity dates approximating to the terms of the Company’s obligations. CURRENT Liability for annual leave Liability for long service leave NON-CURRENT Liability for long service leave Total employee benefits 2017 2016 $’000 $‘000 940 1,018 1,276 1,322 2,216 2,340 319 372 2,535 2,712 Accrued wages and salaries are included in accrued expenses in note 9. Defined contribution superannuation funds A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution superannuation funds are recognised as an employee benefit expense in profit or loss in the periods during which related services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Share based payments The grant-date fair value of share-based payment awards granted to employees is recognised as an employee expense with a corresponding increase in equity over the period that the employees become unconditionally entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. The fair value of the performance rights with only non-market performance conditions is measured using the Black-Scholes formula. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility of the Company’s share prices, adjusted for changes expected due to publicly available information), weighted average expected life of the instruments, expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. The fair value of performance rights with market related performance conditions is measured using a Monte Carlo simulation. Employee Share Bonus Plan The Employee Share Bonus Plan allows Group employees to receive shares of the Company. Shares are allotted to employees who have served a qualifying period. Up to $1,000 per year in shares is allotted to each qualifying employee. The fair value of shares issued is recognised as an employee expense with a corresponding increase in equity. The fair value of the shares granted is measured using a present value method. Executive Share Plan The Executive Share Plan and the Performance Rights Plan allow Group employees to receive shares of the Company. The fair value of options or rights granted is recognised as an employee expense with a corresponding increase in equity. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options/right. 36 Executive Share Plan (ESP) – discontinued In March 2005, the Group established a share option plan that entitled selected senior executives to acquire shares in the entity subject to the successful achievement of performance targets related to improvements in total shareholder returns over a two-year option period. The plan was discontinued in 2010 with no new issues made under the plan since that time. The plan remains in operation for those employees granted options under that plan prior to 2010. The options were exercisable if the total shareholder return (measured as share price growth plus dividends paid) over a two-year period from the grant date exceeded ten per cent plus CPI per annum. The shares issued pursuant to these options are financed by an interest free loan from the Company repayable within twenty years from the proceeds of dividends declared by the Company. These loans are of a non-recourse nature. For accounting purposes these 20-year loans are treated as part of the options to purchase shares, until the loan is extinguished at which point the shares are recognised. The options were offered only to selected senior executives. Details of the options are below: Korvest Performance Rights Plan (KPRP) In August 2011 the Company established a performance rights plan to replace the ESP. In November 2011 the first performance rights were granted under the plan and further issues have been granted annually since. The plan is designed to provide long term incentives to eligible senior employees of the Group and entitles them to acquire shares in the Company, subject to the successful achievement of performance hurdles. For issues made between November 2011 and November 2015 only one performance hurdle related to earnings per share (EPS) was used. For the November 2016 issue a second hurdle related to Relative Total Shareholder Return (RTSR) was introduced. Under the plan, eligible employees are offered Performance Rights, which enables the employee to acquire one fully paid ordinary share in the Company for no monetary consideration, once the Performance Rights vest. The conditions attached to the Performance Rights are measured over the three year period commencing at the beginning of the financial year in which the Performance Rights are granted. If the performance conditions at the end of the three year period are met, in whole or in part, all or the relevant percentage of the Performance Rights will vest. GRANT DATE March 2005 March 2009 November 2015 November 2016 PLAN ESP ESP KPRP KPRP TOTAL SHARE OPTIONS / PERFORMANCE RIGHTS NUMBER OF OPTIONS / RIGHTS INITIALLY GRANTED NUMBER OUTSTANDING AT BALANCE DATE AASBS NUMBER OUTSTANDING AT BALANCE DATE ASX 60,000 85,000 142,400 117,000 404,400 15,000 10,000 104,000 104,500 233,500 - - 104,000 104,500 208,500 Options subject to a non-recourse loan for the purchase of shares are not recognised as exercised by International Financial Reporting Standards, until the loan is extinguished at which point the shares are recognised. Measurement of fair values The fair value of the rights granted through the KPRP with an EPS hurdle was measured based on the Black-Scholes formula. The fair value of the rights granted through the KPRP from 2016 with an RTSR hurdle was measured using a Monte Carlo simulation. Expected volatility is estimated by considering historic share price volatility over the twelve months prior to grant date. The inputs used in the measurement of the fair value at grant date of the KPRP were as follows: Fair value at grant date Share price at grant date Exercise price Share price volatility Dividend yield Risk free interest rate Life of options Advised restriction period (after vesting) 2017 RTSR HURDLE EPS HURDLE $0.90 $2.00 - 29.4% 6.0% 1.9% 3 yrs 2 yrs $1.74 $2.00 - 29.4% 6.0% 1.9% 3 yrs 2 yrs 2016 $2.29 $3.05 - 28.0% 9.51% 2.90% 3 yrs 2 yrs 37 FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 10. EMPLOYEE BENEFITS (CONTINUED) Reconciliation of outstanding share options/rights NUMBER OF OPTIONS/ RIGHTS AT BEGINNING OF YEAR RIGHTS GRANTED LAPSED FORFEITED EXERCISED NUMBER OF OPTIONS AT END OF YEAR ON ISSUE EXERCISABLE AT 30 JUNE GRANT DATE EXERCISE DATE EXPIRY DATE EXERCISE PRICE 2017 PREVIOUS PLAN Mar 05 Jan 07 Jan 27 $4.36 Mar 09 Jan 11 Jan 31 $3.79 Weighted average exercise price CURRENT PLAN Nov 14 Jul 17 Nov 15 Jul 18 Nov 16 Jul 19 Jun 17 Jun 18 Jun 19 - - - 15,000 10,000 25,000 $4.13 85,000 114,000 - - - - - - 117,000 - - - - - - (77,000) (8,000) - - (10,000) (12,500) Weighted average exercise price $Nil $Nil $Nil $Nil 199,000 117,000 (77,000) (30,500) 2016 PREVIOUS PLAN Mar 05 Jan 07 Jan 27 $4.36 Mar 09 Jan 11 Jan 31 $3.79 Weighted average exercise price CURRENT PLAN Nov 13 Jul 16 Nov 14 Jul 17 Nov 15 Jul 18 Jun 16 Jun 17 Jun 18 - - - 15,000 10,000 25,000 $4.13 79,500 99,000 - - - - - - 142,400 - - - - - - (70,500) (9,000) - - (14,000) (28,400) Weighted average exercise price $Nil $Nil $Nil $Nil 178,500 142,400 (70,500) (51,400) - - - - - - - - - - - - - - 15,000 10,000 25,000 $4.13 - 104,000 104,500 208,500 $Nil 15,000 10,000 25,000 $4.13 - 85,000 114,000 199,000 $Nil - - - - - - - - - - - - - 11. PROVISIONS Accounting policies A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting risk adjusted future expected cash flows at a pre-tax discount rate that reflects the time value of money. The unwinding of the discount is recognised as a finance cost. Warranties A provision for warranties is recognised when the underlying products or services are sold. The provision is based on historical warranty data and a weighting of all possible outcomes against their associated probabilities. Power Step assemblies are sold with a warranty period of 12 months from installation date or 18 months from invoice date, whichever occurs first. The provision is based on estimates made from historical warranty data associated with similar products. The entire warranty provision has been treated as current. Site restoration and safety A provision of $433,000 (2016: $433,000) is held in respect of the Company’s obligation to rectify potential environmental damage at the main site premises in Kilburn. The provision is reassessed annually and is based on an estimate of the current day cost to rectify the site. It has been assumed that the rectification would occur in 15 years (2016: 15 years). Provisions are determined by discounting risk adjusted future expected cash flows at a pre-tax discount rate that reflects the time value of money. A discount rate of 3.0% (2016: 3.0%) and an inflation rate of 2.0% (2016: 2.0%) have been used for the calculation at 30 June 2017. 38 CURRENT Warranties NON-CURRENT Site restoration 2017 $’000 2016 $‘000 38 26 433 471 433 459 TANGIBLE AND INTANGIBLE ASSETS The following section shows the physical tangible and non-physical intangible assets used by the Group to operate the business, generating revenues and profits. Intangible assets include patents, trademarks and goodwill. This section explains the accounting policies applied and specific judgments and estimates made by the Directors in arriving at the net book value of these assets. 12. INTANGIBLE ASSETS Accounting policies Goodwill Goodwill that arises upon the acquisition of subsidiaries is presented with intangible assets. Goodwill is measured at cost less accumulated impairment losses. Other intangible assets Other intangible assets that are required by the Group and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific assets to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. COST Balance at 1 July 2015 Acquisitions Balance at 30 June 2016 Balance at 1 July 2016 Acquisitions Balance at 30 June 2017 ACCUMULATED AMORTISATION AND IMPAIRMENT LOSSES Balance at 1 July 2015 Amortisation for the year Balance at 30 June 2016 Balance at 1 July 2016 Amortisation for the year Balance at 30 June 2017 CARRYING AMOUNTS At 1 July 2015 At 30 June 2016 At 30 June 2017 PATENTS & TRADEMARKS $’000 59 10 69 69 3 72 34 18 52 52 12 64 25 17 8 Amortisation is recognised as an expense in Note 2. 39 FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 13. TANGIBLE ASSETS Accounting policies Recognition and measurement Items of plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Land and buildings is measured at fair value. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the following: The cost of materials and direct labour; Any costs directly attributable to bringing the assets to a working condition for their intended use; • • • When the Group has an obligation to remove the assets or restore the site, as estimate of the costs of dismantling and removing the items and restoring the site on which they are located; and • Capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. 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. Any gain or loss on disposal of an item of property, plant and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised in profit or loss. Fair value measurement The fair value of property, plant and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably. The fair value of items of plant, equipment, fixtures and fittings is based on the market approach and cost approaches using quoted market prices for similar items when available and depreciated replacement cost when appropriate. Depreciated replacement cost reflects adjustments for physical deterioration as well as functional and economic obsolescence. Land and buildings are valued by an independent valuer every three years. In the intervening years between independent valuations the directors make an assessment of the value of the land and buildings having regard for the most recent independent valuation. Subsequent expenditure Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Group. On-going repairs and maintenance are expensed as incurred. 40 COST Balance at 1 July 2015 Acquisitions Disposals Transfer of equipment to inventory Balance at 30 June 2016 Balance at 1 July 2016 Acquisitions Revaluation Disposals and write-offs Transfer of equipment to inventory Balance at 30 June 2017 ACCUMULATED DEPRECIATION AND IMPAIRMENT LOSSES Balance at 1 July 2015 Depreciation charge for the year Disposals Transfer of equipment to inventory Balance at 30 June 2016 Balance at 1 July 2016 Depreciation charge for the year Revaluation Disposals Transfer of equipment to inventory Balance at 30 June 2017 CARRYING AMOUNTS At 1 July 2015 At 30 June 2016 At 30 June 2017 Depreciation is recognised as an expense in Note 2. LAND & BUILDINGS (FAIR VALUE) PLANT & EQUIPMENT (COST) $’000 7,282 - - - 7,282 7,282 - 100 - - $’000 19,964 471 (226) (14) TOTAL $’000 27,246 471 (226) (14) 20,195 27,477 20,195 27,477 742 - (390) (15) 742 100 (390) (15) 7,382 20,532 27,914 36 39 - - 75 75 39 (114) - - - 7,246 7,207 7,382 11,303 1,659 (189) (2) 12,771 12,771 1,659 - (237) (4) 11,339 1,698 (189) (2) 12,846 12,846 1,698 (114) (237) (4) 14,189 14,189 8,661 7,424 6,343 15,907 14,631 13,725 41 FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 13. TANGIBLE ASSETS (CONTINUED) Fair value hierarchy of land and buildings At least every three years the directors obtain an independent valuation to support the fair value of Land and Buildings. This valuation is used by the directors as a guide in determining the directors’ valuation for the Land and Buildings. An independent valuation of Land and Buildings was carried out in March 2017 by Mr Mark Klenke, AAPI MRICS FFIN of AON Valuation Services on the basis of the open market value of the properties concerned in their highest and best use and was used as a reference for director’s valuation as at 30 June 2017. The carrying amount of the Land and Buildings at cost at 30 June 2017 if not revalued would be $1,109,869 (2016:$1,163,449). The following table shows a reconciliation from the opening balances to the closing balances for Land and Buildings being based on Level 3 fair values: Balance at 1 July 2015 Acquisitions Depreciation charge for the year Balance at 30 June 2016 Balance at 1 July 2016 Revaluation Depreciation charge for the year Balance at 30 June 2017 $’000 7,246 - (39) 7,207 7,207 214 (39) 7,382 Valuation technique and significant unobservable inputs The following table shows the valuation technique used in measuring the fair value of Land and Buildings, as well as the significant unobservable inputs used. VALUATION TECHNIQUE SIGNIFICANT UNOBSERVABLE INPUTS Market yield - 9.25% Potential rental rate - $53/m2 Land value for vacant land - $150/m2 Capitalised income approach: the valuation model applies a yield to the property’s value to assess its value less any required capital expenditure. The yield applied to the poten- tial rental return from the property is based on recent sales and has been calculated by dividing the estimated rental return from com- parable sales to derive a fair market sales price. Capitalised value has been increased by value of a vacant land as the property has below average site coverage indicating further capacity for development. 14. IMPAIRMENT TESTING INTER-RELATIONSHIP BETWEEN KEY UNOBSERVABLE INPUTS AND FAIR VALUE MEASUREMENT The estimated market value would increase if: • Market yields were higher • • Potential rental return was higher Land value was higher Accounting policies The carrying amounts of the Group’s tangible and intangible assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. Goodwill is tested annually for impairment. An impairment loss is recognised if the carrying amount of an asset or cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For impairment testing assets are grouped together into the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Subject to an operating segment ceiling test, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amount of the other assets in the CGU (group of CGUs) on a pro rata basis. 42 Any impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amounts does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Results Neither assets or CGU’s were tested for impairment as there were no impairment indicators at 30 June 2017 or 30 June 2016. 15. COMMITMENTS FOR EXPENDITURE Operating leases Operating lease payments are recognised as an expense on a straight-line basis over the lease term. Lease incentives received are rec- ognised as an integral part of the total lease expense, over the term of the lease. Leases as lessee At the end of the reporting period, the future minimum lease payments under non-cancellable operating leases are payable as follows: Less than one year Between one and five years More than five years 2017 $’000 801 974 - 1,775 2016 $‘000 987 1,832 - 2,819 The Group leases a number of warehouse and factory facilities under operating leases. The leases typically run for a period of five years, with an option to renew the lease after that date. Lease payments are increased periodically to reflect market rentals. None of the leases includes contingent rentals. Rentals are increased by CPI or similar each year. During the financial year ended 30 June 2017 $893,204 was recognised as an expense in the Statement of profit or loss and comprehen- sive income in respect of operating leases (2016: $930,154). CAPITAL STRUCTURE This section outlines how the Group manages its capital structure, including its balance sheet liquidity and access to capital markets. The directors determine the appropriate capital structure of the Group, specifically how much is realised from shareholders and how much is borrowed from the financial institutions to finance the Group’s activities now and in the future. 16. CASH AND CASH EQUIVALENTS / (BANK OVERDRAFT) Accounting policies Cash and cash equivalents comprise cash balances and call deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value and are used by the Company in the management of its short-term commitments. Investments and term deposits comprise deposits with maturities greater than three months at acquisition date. Goods and services tax Cash flows are included in the Statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. Cash in hand Bank balances Call deposits Cash and cash equivalents in the statement of cash flows Investments and term deposits 2017 $’000 1 1,156 537 1,694 275 2016 $‘000 1 317 4,770 5,088 - 43 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 16. CASH AND CASH EQUIVALENTS / (BANK OVERDRAFT) (CONTINUED) Reconciliation of cash flows from operating activities CASH FLOWS FROM OPERATING ACTIVITIES (Loss) / Profit for the period Adjustment for: Depreciation and amortisation Impairment of trade receivables Impairment of inventories Increase in provision for site rectification Disposal of property, plant and equipment including transfer to inventory and write-offs Equity-settled share-based payment expense Changes in: Trade and other receivables Inventories Trade and other payables Deferred tax Income taxes payable Provisions and employee benefits NET CASH FROM OPERATING ACTIVITIES 17. FINANCIAL INSTRUMENTS 2017 $’000 2016 $‘000 (1,578) 950 1,710 1,716 88 (40) - 154 72 406 (1,343) 800 (287) (659) 864 (165) (384) 196 558 100 2 60 3,582 5,151 1,561 (2,142) 462 (697) (485) 7,432 Accounting policies A number of the Group’s accounting policies and disclosures require measurement of fair values, for both financial and non-financial assets and liabilities. The Group applies IFRS 13 Fair Value Measurement, which establishes a single framework for measuring fair value and making disclosures about fair value measurements when such measurements are required or permitted by other IFRSs. It unifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It replaces and expands the disclosure requirements about fair value measurements in other IFRSs. As a result, the Group has applied additional disclosures in this regard within Notes 7 and 17. The Group has an established control framework with respect to the measurement of fair values. The Finance Director has overall responsibility for all significant fair value measurements, including Level 3 fair values. The Finance Director regularly reviews significant unobservable inputs and valuation adjustments. If third party information is used to measure fair values, the Finance Director assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of AASB, including the level in the fair value hierarchy in which such valuations should be classified. Significant valuation issues are reported to the Audit Committee. When measuring the fair value of an asset or liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on inputs used in the valuation techniques as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices) • Level 3: inputs for asset or liability that are not based on observable market data (unobservable inputs). 44 If inputs used to measure fair value of an asset or liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Non-derivative financial assets The Group initially recognises loans and receivables on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date, which is the date that the Group becomes a party to the contractual provision of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or if it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in such transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. The Group classifies non-derivative financial assets into the following categories: financial assets at fair value through the profit or loss, held to maturity financial assets, loans and receivables and available-for-sale financial assets. Non-derivative financial liabilities The Group initially recognises financial liabilities on the trade date, which is the date that the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The Group classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. Other financial liabilities comprise loans and other borrowings, bank overdrafts, and trade and other payables. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the statement of cash flows. Other non-derivative financial liabilities are measured at fair value, at initial recognition and for disclosure purposes, at each annual reporting date. Fair value is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the measurement date. For finance leases the market rate of interest is determined by reference to similar lease agreements. Financial risk management Overview The Group has exposure to the following risks from their use of financial instruments: credit risk; liquidity risk; and • • • market risk. The board of directors has overall responsibility for the establishment and oversight of the risk management framework. Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. The Audit Committee oversees how management monitors compliance with the risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Credit 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 receivables from customers. 45 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 17. FINANCIAL INSTRUMENTS (CONTINUED) Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date is summarised below: Cash, cash equivalents and Investments Trade and other receivables 2017 $’000 1,969 9,498 2016 $‘000 5,088 8,238 Cash and cash equivalents The cash, cash equivalents and investments are held with major Australian banks. Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Group’s customer base, including the default risk of the industry and country in which customers operate, as these factors may have an influence on credit risk, particularly in the current deteriorating economic circumstances. There is an established credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings and trade references when applicable and available. Purchase limits are established for each customer, which represent the maximum open amount without requiring further approval. These limits are subject to on-going review. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. Goods are sold subject to retention of title clauses, so that in the event of non-payment the Group may have a secured claim. The Group otherwise does not require collateral in respect of trade and other receivables. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The maximum exposure to credit risk for trade and other receivables at the end of the reporting period by geographic region was as follows: CARRYING VALUES Australia South East Asia Other 2017 $’000 2016 $‘000 9,377 7,905 81 40 203 130 9,498 8,238 At 30 June 2017, the Group’s most significant customer, located in Australia, accounted for $1,588,100 of the trade and other receiva- bles carrying amount (2016: $1,739,600). Impairment losses The ageing of the trade and other receivables at the reporting date that were not impaired is set out in note 7. GROSS Not past due nor impaired Past due 0-30 days Past due 31-90 days More than 91 days 46 2017 $’000 6,519 2,829 150 - 2016 $‘000 5,710 2,054 474 - 9,498 8,238 Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group monitors the level of expected cash inflows on trade and other receivables together with expected cash outflows on trade and other payables. The following are the remaining contractual maturities at the end of the reporting period of financial liabilities, including estimated interest payments. The amounts disclosed are the contractual undiscounted cash flows (inflows shown as positive, outflows as negative). 2017 2016 CARRYING AMOUNT CONTRACTUAL CASH FLOWS 6 MTHS OR LESS 6 – 12 MNTHS CARRYING AMOUNT CONTRACTUAL CASH FLOWS 6 MTHS OR LESS 6 – 12 MNTHS $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 NON-DERIVATIVE FINANCIAL LIABILITIES Trade and other payables 3,950 3,950 (3,950) (3,950) (3,950) (3,950) - - 4,224 4,224 (4,224) (4,224) (4,224) (4,224) - - Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Currency risk The Group is exposed to currency risk on sales and purchases that are denominated in a currency other than the Australian dollar (AUD). The currency in which these transactions primarily are denominated is US dollars (USD). Exposure to currency risk The Group did not have any material exposure to foreign currency risk and as a result movements in the Australian dollar against other currencies will not have a material impact on the Group’s profit or equity. Interest rate risk The Group is not currently exposed in any material way to interest rate risk. The risk is limited to the re-pricing of short term deposits utilised for surplus funds. Such deposits generally re-price approximately every 30 days. Exposure to interest rate risk Movements in interest rates will not have a material impact on the Group’s profit or equity. Other market price risk The Group has no material financial instrument exposure to other market price risk as it is not exposed to either commodity price risk or equity securities price risk. The Group does not enter into commodity contracts other than to meet the Group’s expected usage requirements. Capital management The Group’s objectives when managing capital (net debt and equity) are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. During the year the Group was not subject to externally imposed capital requirements. There were no changes in the Group’s approach to capital management during the year. Accounting classifications and fair values The carrying amounts of the Group’s financial assets and liabilities are considered to be a reasonable approximation of their fair values. 47 FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 18. CAPITAL AND RESERVES Accounting policies Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Asset revaluation reserve The revaluation reserve relates to land and buildings measured at fair value in accordance with Australian Accounting Standards. Profits reserve The profits reserve represents current year and accumulated profits transferred to a reserve to preserve the characteristic as a profit and not appropriate against prior year accumulated losses. Such profits are available to enable payment of franked dividends in the future. Equity compensation reserve The Equity compensation reserve represents the accumulated expense recognised for share-based payments granted by the Company to date. This reserve will be reversed against share capital or retained earnings when the underlying shares vest in the employee. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments. Share capital ORDINARY SHARES On issue at 1 July Issued under the Employee Share Bonus Plan Issued under Dividend Reinvestment Plan On issue at 30 June – fully paid 2017 2016 Shares ’000 Shares ‘000 10,940 10,507 57 76 59 373 11,073 10,940 The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. 19. DIVIDENDS Accounting policies Dividends paid are classified as distribution of profit consistent with the balance sheet classification of the related debt or equity instrument. Recognised amounts 2017 Interim 2017 ordinary Final 2016 ordinary Total amount 2016 Interim 2016 ordinary Final 2015 ordinary Total amount CENTS PER SHARE TOTAL AMOUNT $’000 PERCENTAGE FRANKED TAX RATE DATE OF PAYMENT 10.0 10.0 10.0 12.0 1,098 1,094 2,192 1,066 1,262 2,328 100% 100% 100% 100% 30% 30% 30% 30% 10 March 2017 9 September 2016 11 March 2016 4 September 2015 Unrecognised amounts After the balance sheet date the following dividends were proposed by the directors. The dividends have not been provided. CENTS PER SHARE TOTAL AMOUNT $’000 PERCENTAGE FRANKED TAX RATE DATE OF PAYMENT 2017 Final 2017 ordinary 3.0 333 100% 30% 8 September 2017 The financial effect of these dividends have not been brought to account in the financial statements for the financial year ended 30 June 2017 and will be recognised in subsequent financial reports. 48 Dividend franking account 30% franking credits available to shareholders of Korvest Ltd for subsequent financial years 2017 $’000 7,761 2016 $‘000 9,567 The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: a. b. c. d. franking credits that will arise from the payment of the current tax liabilities; franking debits that will arise from the payment of dividends recognised as a liability at the year-end; franking credits that will arise from the receipt of dividends recognised as receivables by the tax consolidated group at the year-end; and franking credits that the entity may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon being able to declare dividends. The impact on the dividend franking account of dividends proposed after the reporting date but not recognised as a liability is to reduce it by $142,688 (2016: reduce by $469,918). TAXATION This section outlines the tax accounting policies, current and deferred tax impacts, a reconciliation of profit before tax to the tax charge and the movement in deferred tax assets and liabilities. 20. CURRENT AND DEFERRED TAXES Accounting policies Tax expense comprises current and deferred tax. Current and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax payable also includes any tax liability arising from the declaration of dividends. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: • • • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss temporary differences related to investments in subsidiaries, associates and jointly controlled entities to the extent that the group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Tax consolidation The Company and the wholly owned Australian subsidiaries set out in Note 21 are part of a tax-consolidated group with Korvest Ltd as the head entity. The implementation date of the tax consolidation system for the tax-consolidated group was 1 March 2013. Current tax expense (income), deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are allocated to the Company and recognised using a ‘group allocation’ approach. Deferred tax assets and deferred tax liabilities are measured by reference to the carrying amounts of the assets and liabilities in the Company’s balance sheet and their tax values applying under tax consolidation. 49 FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 20. CURRENT AND DEFERRED TAXES (CONTINUED) Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of a member of the tax consolidation group are assumed by the head entity of the tax-consolidated group and are recognised as amounts payable (receivable) to other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts. Any difference between these amounts is recognised by the member of the tax consolidated group as an equity contribution from or distribution to the head entity. Income tax recognised in the income statement CURRENT TAX EXPENSE Current year Adjustments for prior year DEFERRED TAX EXPENSE Origination and reversal of temporary differences -relating to current year -relating to prior year TOTAL INCOME TAX EXPENSE IN STATEMENT OF PROFIT OR LOSS AND COMPREHENSIVE INCOME Numerical reconciliation between tax expense and pre-tax net profit (Loss) / Profit before tax Income tax using the domestic corporation tax rate of 30% (2016:30%) Adjustments relating to prior years Non-deductible expenses Income tax expense on pre-tax net profit Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: 2017 $’000 (701) - (701) 42 - 42 (659) 2017 $’000 (2,237) (671) - 12 (659) Property, plant and equipment Inventories Provisions / accruals Other items Tax loss carried forward Tax (assets) / liabilities Set off of tax NET TAX (ASSETS) / LIABILITIES ASSETS LIABILITIES NET 2017 ‘000 - (423) (945) (194) (952) (2,514) 2,432 (82) 2016 ‘000 - (435) (995) (212) (250) (1,892) 1,892 - 2017 ‘000 1,960 470 - 2 - 2,432 (2,432) - 2016 ‘000 1,932 471 - 2 - 2,405 (1,892) 513 2017 ‘000 1,960 47 (945) (192) (952) (82) - (82) 2016 $‘000 291 (361) (70) 103 359 462 392 2016 $‘000 1,342 403 (3) (8) 392 2016 ‘000 1,932 36 (995) (210) (250) 513 - 513 50 Movement in deferred tax balances during the year Property, plant and equipment Inventories Provisions / accruals Other items Tax loss carried forward Property, plant and equipment Inventories Provisions / accruals Other items Tax loss carried forward BALANCE 30 JUNE 16 $’000 (1,932) (36) 995 210 250 (513) RECOGNISED IN PROFIT RECOGNISED DIRECTLY IN EQUITY $’000 36 (11) (50) (18) 702 659 $’000 (64) - - - - (64) RECOGNISED IN PROFIT BALANCE 30 JUNE 15 RELATING TO CURRENT YEAR ADJUSTMENT RELATING TO PRIOR YEAR $’000 (1,552) (184) 1,119 316 250 (51) $’000 (32) 148 (124) (95) - (103) $’000 (348) - - (11) - (359) BALANCE 30 JUNE 2017 $’000 (1,960) (47) 945 192 952 82 BALANCE 30 JUNE 16 $’000 (1,932) (36) 995 210 250 (513) BUSINESS COMBINATIONS This section outlines the Group’s structure and changes thereto. 21. INVESTMENT IN SUBSIDIARIES Accounting policies Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date – i.e. when control is transferred to the Group. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The Group measures goodwill at acquisition date as: • • • • The fair value of the consideration transferred; plus The recognised amount of any non-controlling interests in the acquiree; plus If the business combination is achieved in stages , the fair value of the existing equity interest in the acquiree; less The net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. The fair value of contingent consideration arising in a business combination is calculated using the income approach based on the expected payment amounts and their associated probabilities (i.e. probability-weighted). Since the contingent consideration is long-term in nature, it is discounted to present value. There were no business combinations in the current or prior years. 51 FINANCIAL STATEMENTSNOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017 21. INVESTMENT IN SUBSIDIARIES (CONTINUED) Basis of consolidation These financial statements are the financial statements for all the entities that comprise the Group, being the Company and its subsidiaries as defined in Accounting Standard AASB10 Consolidated financial statements. Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its investment with the entity and has the ability affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Group entities PARENT ENTITY Korvest Ltd SUBSIDIARIES Power Step (Australia) Pty Ltd Power Step (Chile) SpA Titan Technologies (SE Asia) Pty Ltd EzyStrut Pte. Ltd OTHER NOTES 22. KEY MANAGEMENT PERSONNEL COUNTRY OF INCORPORATION OWNERSHIP INTEREST 2017 % 2016 % 100 100 100 100 100 100 100 100 Australia Australia Chile Australia Singapore The following were key management personnel of the Company at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period: Non-executive Directors • Graeme Billings (Chairman) • Peter Brodribb (Retired 28 July 2016) • Gary Francis • Gerard Hutchinson • Andrew Stobart (Appointed 1 August 2016) Executive Directors • • Alexander Kachellek (Managing Director) Steven McGregor (Finance Director and Company Secretary) Executives • Chris Hartwig (Executive General Manager, Sales & Marketing) • Gavin Christie (General Manager, Operations) – became a • • member of KMP on 18 January 2016 Paul Assaf (General Manager, Power Step & Titan Technologies) Steven Evans (General Manager, Korvest Galvanisers) – ceased as a member of KMP on 18 January 2016 Key management personnel compensation policy Apart from the details disclosed in this note, no director has entered into a material contract with the Company since the end of the previous financial year and there were no material contracts involving directors’ interests existing at year-end. Key management personnel compensation The key management personnel compensation comprised: Short-term employee benefits 1,600,137 1,720,511 2017 $ 2016 $ Post-employment benefits Termination payments Long term benefits Share based payments 52 161,586 - 40,626 17,170 157,002 115,646 4,080 2,995 1,819,519 2,000,234 Individual directors and executives compensation disclosures Information regarding individual directors’ and executives’ compensation and some equity instrument disclosure as permitted by Corporations Regulations 2M.3 is provided in the remuneration report section of the Directors’ report. Apart from the details disclosed in this note, no director has entered into a material contract with the Company since the end of the previous year and there were no material contracts involving directors’ interests existing at year-end. Other key management personnel transactions with the Group From time to time, key management personnel of the Group, or their related entities, may purchase goods from the Group. These purchases are on the same terms and conditions as those entered into by other Group employees or customers and are trivial or domestic in nature. 23. PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 30 June 2017 the parent entity of the Group was Korvest Ltd. Result of parent entity Profit / (Loss) for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current Assets Total Assets Current Liabilities Total liabilities Share capital Reserves Retained earnings Total Equity 2017 $’000 2016 $’000 (1,617) 150 (1,467) 233 - 233 21,361 25,338 35,598 42,208 5,400 6,318 6,349 9,525 14,039 13,798 16,858 18,885 (1,617) - 29,280 32,683 Guarantees entered into by the Company Bank guarantees given by the Company in favour of customers amounted to $156,468 (2016: $66,109). Contingent liabilities of the Company The Company does not have any contingent liabilities other than the guarantees disclosed above. Parent entity capital commitments for acquisition of property, plant and equipment At 30 June 2017, the Company had contractual commitments for the acquisition of property, plant and equipment of $214,000 (2016: $nil). 24. SUBSEQUENT EVENTS There has not arisen between the end of the year and the date of this report any item, transaction or event of a material nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group in subsequent financial periods. 53 FINANCIAL STATEMENTS 54 DIRECTORS’ DECLARATION 1. In the opinion of the Directors of Korvest Ltd (the Company): a. the consolidated financial statements and notes that are set out on pages 24 to 53 and the Remuneration report in the Directors’ report, set out on pages 10 to 18, are in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its performance for the financial year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 30 June 2017. The Directors draw attention to the Basis of preparation note on page 28, which includes a statement of compliance with International Financial Reporting Standards. 2. 3. Dated at Adelaide this 27th July 2017 Signed in accordance with resolution of directors: GRAEME BILLINGS DIRECTOR 55 Independent Auditor’s Report To the shareholders of Korvest Ltd Report on the audit of the Financial Report Opinion We have audited the Financial Report of Korvest Ltd (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: (cid:120) (cid:120) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: (cid:120) Consolidated statement of financial position as at 30 June 2017 (cid:120) Consolidated statement of profit or loss and other comprehensive income, Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year then ended (cid:120) Notes including a summary of significant accounting policies (cid:120) Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 56 Key Audit Matters The Key Audit Matter we identified is: (cid:120) Valuation of inventories Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Valuation of inventories ($10.7m) Refer to Note 8 to the Financial Report. The key audit matter How the matter was addressed in our audit The valuation of inventories is a key audit matter because of its highly specialised nature which results in the Group holding various inventory types that can be unique to the equipment they are manufactured for. This adds complexity to our evaluation of the Group’s assessment of obsolescence and net realisable value (NRV) of inventories. We particularly focused on those estimates listed below which significantly impact the valuation: 1. Expected selling price of inventory. Our procedures included: (cid:120) We tested the controls relevant to management’s valuation of inventories, including authorisation of key inputs such as inventory cost, expected selling price of inventory and inventory purchased and sold during the year. (cid:120) We analysed the future selling price and resulting gross margin for each product to identify evidence of negative gross margin and compared this to the inventory obsolescence provision. 2. Ageing of aged inventory. (cid:120) We obtained management’s calculation 3. Future inventory usage estimates. In assessing this key audit matter, we used senior team members who understand the Group’s business, industry and the relevant economic environment. for the inventory obsolescence provision, including the ageing of inventory, and considered it against the Group’s accounting policies, historic sales trends, analysis of slow moving inventory and future usage estimates. 57 INDEPENDENT AUDITOR’S REPORT Other Information Other Information is financial and non-financial information in Korvest’s annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Directors’ Report, the Remuneration Report included within the Directors’ Report and the ASX Additional Information. There were no reports expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: (cid:120) preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 (cid:120) (cid:120) implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: (cid:120) (cid:120) to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. 58 This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Korvest Ltd for the year ended 30 June 2017 complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in the Directors’ report for the year ended 30 June 2017. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PM_INI_01 PAR_SIG_01 KPMG PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 Scott Fleming Partner Adelaide 27 July 2017 59 INDEPENDENT AUDITOR’S REPORT 60 LEAD AUDITOR’S INDEPENDENT DECLARATION Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Korvest Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Korvest Limited for the financial year ended 30 June 2017 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPM_INI_01 PAR_SIG_01 KPMG PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 Scott Fleming Partner Adelaide 27 July 2017 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 61 ASX ADDITIONAL INFORMATION Additional information required by the Australian Securities Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. SHAREHOLDINGS (AS AT 25 JULY 2017) Substantial shareholders The number of shares held by substantial shareholders and their associates are set out below: 10.37% 8.98% 5.51% NUMBER 1,150,462 997,060 611,759 SHAREHOLDER Colonial First State Asset Management (Australia) Limited Perpetual Limited Donald Cant Pty Ltd VOTING RIGHTS Ordinary shares Refer to note 18 in the financial statements. Options Refer to note 10 in the financial statements. Distribution of equity security holders CATEGORY 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over NUMBER OF EQUITY SECURITY HOLDERS TOTAL HOLDERS 790 701 173 138 9 1,811 UNITS 298,700 1,775,204 1,279,101 3,399,453 4,345,514 11,097,972 % ISSUED CAPITAL 2.69 16.00 11.53 30.63 39.15 100 The number of shareholders holding less than a marketable parcel of ordinary shares is 203. Securities Exchange The Company is listed on the Australian Securities Exchange. The Home exchange is Adelaide. Other information Korvest Ltd, incorporated and domiciled in Australia, is a publicly listed company limited by shares. On Market Buy Back There is no current on-market buy back. 62 NUMBER OF ORDINARY SHARES HELD PERCENTAGE OF CAPITAL HELD 1,179,789 10.63 999,713 611,759 514,003 348,638 237,058 180,000 150,000 124,554 96,689 90,000 90,000 89,626 89,358 84,327 82,122 66,633 65,000 64,213 60,720 9.01 5.51 4.63 3.14 2.14 1.62 1.35 1.12 0.87 0.81 0.81 0.81 0.81 0.76 0.74 0.60 0.59 0.58 0.55 5,224,202 47.08 TWENTY LARGEST SHAREHOLDERS NAME Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Donald Cant Pty Ltd J P Morgan Nominees Australia Limited De Bruin Securities Pty Ltd Brazil Farming Pty Ltd Ace Property Holdings Pty Ltd Angueline Capital Pty Limited Brazil Farming Pty Ltd National Nominees Limited Creative Living (Qld) Pty Ltd South Hong Nominees Pty Ltd Allegro Two Super Fund Pty Ltd Rathvale Pty Limited Gotterdamerung Pty Limited M&R Byrne & Associates Pty Ltd Mrs Helen Elizabeth Rollinson Mr David Philip Rickards + Mrs Kerry Anne Rickards Mr William Francis Cannon Ms Nina Tschernykow OFFICES AND OFFICERS Company Secretary Steven John William McGregor BA(Acc), CA, AGIA, ACIS Principal Registered Office Korvest Ltd 580 Prospect Road Kilburn, South Australia, 5084 Ph: (08) 8360 4500 Fax: (08) 8360 4599 Locations of Share Registry Adelaide Computershare Investor Services Pty Ltd Level 5 115 Grenfell Street Adelaide, South Australia, 5000 Ph: 1300 556 161 (within Australia) or +61 3 9415 4000 (outside Australia) 63 ASX ADDITIONAL INFORMATION64 ASX ADDITIONAL INFORMATION Korvest Ltd, 580 Prospect Road, Kilburn, SA 5084 T: 61 8 8360 4500 | F: 61 8 8360 4599 | E: korvest@korvest.com.au www.korvest.com.au www.ezystrut.com.au www.powerstep.com.au www.titantools.com.au www.korvestgalvanisers.com.au 66 

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