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SKELLERUP HOLDINGS 2015 ANNUAL REPORT Skellerup Holdings Limited L3 205 Great South Road Greenlane Auckland 1051 New Zealand PO Box 74526 Greenlane Auckland 1546 New Zealand T 64 9 523 8240 E easkellerupgroup.co.nz W www.skellerupholdings.co.nz SKELLERUPHOLDINGS2015ANNUALREPORT 1 Contents BUSINESS REVIEW Highlights 2 Chairmans Report 4 Chief Executives Report 6 US Market Review 8 US Potable Water 10 Working with our Customers 12 Broadening the Skellerup Footprint 14 Project Viking 16 Board of Directors 18 Corporate Governance 20 FINANCIAL REPORT Independent Auditors Report 24 Directors Responsibility Statement 25 Income Statement 26 Statement of Comprehensive Income 27 Balance Sheet 28 Statement of Changes in Equity 29 Cashflow Statement 30 Notes to the Financial Statements 31 SHAREHOLDER INFORMATION Directors Disclosures 59 Shareholder Information 60 Corporate Directory 62 2 SKELLERUP HOLDINGS 2015 ANNUAL REPORT REVENUE Up 6.4m 203.0m Up 1.2m 21.9m Down 9.5m 17.8m Up 6 9.0cps NPAT OPERATING CASH FLOW DIVIDEND 24 New Zealand 2 Other5 Asia Europe 25 Australia North America 25 19 Up 6 11.4c EARNINGS PER SHARE Highlights Revenue by Region FY15 FINANCIAL STATEMENTS 3SKELLERUP 2015 HIGHLIGHTS Year-on-year comparative table NZ 000 Period Ending 30062015 30062014 30062013 30062012 30062011 Total Revenue 203011 196606 189496 207313 193593 EBIT before Canterbury EQs 31119 29935 27775 36594 32227 Finance Costs 163 733 1144 2101 2667 Profit before Tax and Canterbury EQs 30956 29202 26631 34493 29560 Canterbury EQs Pre-Tax Income 19844 401 Tax 9023 7952 7595 10229 9360 Net Profit After Tax 21933 41094 19036 24665 20200 EPS excluding Canterbury EQs Net Income c 11.4 10.8 9.9 12.6 10.5 Dividend c 9.0 8.5 8.0 8.0 6.0 Operating Cash Flow 17802 50976 26084 25330 31022 Cash Reserves Net Debt 830 16345 2166 4253 9080 Total Assets 211631 185624 184132 174762 173931 Total Liabilities 51971 40933 59459 53390 63606 Net Assets 159660 144961 124673 121372 110325 USA Chicago Illinois Falconer New York Lincoln Nebraska Charlotte North Carolina UNITED KINGDOM Witney Oxfordshire Nailsea Bristol ITALY Ala Trento VIETNAM Ho Chi Minh City CHINA Baochang Jiangsu Province AUSTRALIA Sydney New South Wales Melbourne Victoria NEW ZEALAND Auckland Wellington Christchurch Locations 4 SKELLERUP HOLDINGS 2015 ANNUAL REPORT General Overview Skellerup ended what was a challenging year with another solid lift in earnings. Positive contributions from both operating divisions translated into a six percent increase in group net profit after tax to 21.9 million. This was a satisfactory performance given the headwinds we faced. Our focus on international markets enabled the Agri Division to record an increase in earnings and overcome the impact of a reduced contribution from a New Zealand market buffeted by lower dairy pay-outs. Significant growth was achieved in the US China and South America. Although results in New Zealand were slightly softer than they were in the prior year sales of dairy rubberware during the winter peak when much of the on-farm and shed maintenance work is done were relatively solid. The performance of our Agri Division is once again testament to the value that dairy farmers place on maintaining high levels of animal health and milk quality. It is encouraging also to note the continuing strong demand for dairy products in developing countries. This performance underpins our very exciting development at Wigram where work is well under way on our state-of- the-art world-class Dairy Rubberware Development and Manufacturing facility. The move by Skellerups Industrial Division to expand its operations in the US is proving a success. Gulf Rubber which provides products for infrastructure and potable water applications performed particularly well building on strong work that has been carried out over a number of years. Deks plumbing and fastener products and Ultralon foam products used for the marine and construction industries also grew in this market and each is beginning to establish a strong presence in its respective sector. The performance of these businesses helped offset the impact of reduced sales into the Australian mining sector and flat sales of vacuum systems into the US as demand from the oil and gas sector reduced. Overall the Industrial Division is showing good promise. Our improved earnings helped contribute to the maintenance of a very healthy balance sheet closing the year with net cash of 0.8 million. The importance of having a strong balance sheet has not only supported our development at Wigram but also has provided a solid base from which to extend and develop our products. Dividends In light of the 2015 result and the Boards confidence in the Companys future Sir Selwyn Cushing SKELLERUP HOLDINGS LTD CHAIRMAN increased dividends earnings growth funds The importance of having a strong balance sheet has not only supported our development at Wigram but also provided a solid base from which to extend and develop our products. 5 the Directors have increased the final dividend to 5.5 cents per share fully imputed. This brings the total dividend pay-out for the financial year ending 30 June 2015 to 9.0 cents per share an increase of six percent over the prior year. Concluding Comments Having a strong balance sheet along with the ability to pay out healthy dividends has remained an underlying feature of Skellerup year in year out and the year under review is no exception. A highlight of the year is the excellent progress being made at our Wigram facility. This is by any measure a major project. I am pleased to be able to report that it is being built to budget and we are on track to move into the facility early next year. We have spent more than 15 million on the project in the year under review and we have an additional 25 million earmarked to complete the construction and fit-out. The progress of the project to date is due to the efforts of many including local management our contractors and our advisors. I am particularly pleased to have the wisdom and guidance provided by Sir Ron Carter who continues his excellent work in overseeing the project on our behalf. Sir Rons knowledge of regional and national infrastructure planning his experience in governance and in overseeing major infrastructure and industrial projects in New Zealand and throughout South-east Asia and his involvement with the Royal Commission of Inquiry into the Canterbury earthquakes make him ideally suited to this task and we are very grateful for the work he is doing. As shareholders will appreciate our Woolston factory has been the cornerstone of our Agri Division for some 75 years. The new facility sets us up to stay at the forefront of dairying best practice for the next 75 years SKELLERUP CHAIRMANS REPORT and beyond. It not only confirms our commitment to the dairy industry that is such a big part of New Zealands economy and of our Companys history it also reaffirms our commitment to Canterbury and will provide us with a world-class product development and production facility. It would be remiss of me not to welcome a new Director to our Board. John Strowger has extensive experience in the business world. His commercial acumen and legal skills have been recognised by his peers with numerous awards and commendations and he will be a great asset to Skellerup as we continue to grow and develop. Finally whilst the economic environment remains uncertain I am confident that our progress and plans mean we are well placed to deliver a further improvement in earnings in the 2016 financial year. Group net after tax profit NZm 21.9Up 6 on FY14 Excluding the 20.4 million Canterbury earthquakes insurance settlement gain 6 SKELLERUP HOLDINGS 2015 ANNUAL REPORT The Year in Review In the past couple of years Skellerup has focused on identifying markets that offer us the best potential for growth and on putting in place the people and the structures to capitalise on that potential in a cost-effective and strategic way. Identifying where to allocate our resources in order to achieve the best results for the business and for our shareholders involves continually reviewing our operations across both our Industrial and Agri Divisions and assessing individual markets to see where the best margins and the most sustainable growth prospects can be found. We do that by working closely with our existing customers so that we understand their businesses and how they work and also through our very capable people who are focussed on seeking out new opportunities and gaps in the market that we can fill. The United States US provides an excellent example of this strategy in action. While the headline news continues to focus on the financial sector the real economy has been performing strongly evidenced by the increased spend in areas such as housing development and major infrastructure projects. Moreover there is a continual shift towards more sustainable and environmentally friendly practices. Such change throws up challenges but it also provides us with significant opportunities to increase our share of the market be it through doing things smarter or by developing new products. The key to our successes here is to test out the market first so that we commit only a small amount of capital until the opportunity is proven. Over the years we have demonstrated a capability to work with Original Equipment Manufacturing OEM customers to solve problems by developing new technically demanding products quickly. Also we have adapted successfully a range of standard products for the market. In the past we have lacked distribution capability to capitalise fully on these products this issue is now resolved. Over recent years we have invested a great deal of time and energy in developing capability in the US and in executing a growth strategy. In the past year we have continued this work with the appointment of key sales and technical staff in our Masport Gulf Rubber Deks and Ultralon businesses. Also we have proven our strategy is working an example of this is our being selected as Partner of the Year to Moen the number-one tapware brand in North America and one of the most demanding customers. This recognition reflects well on our business and is leading to more opportunities with Moen and other targeted key customers. Two of the biggest stories in the US at the moment are the move away from coal towards clean energy and the increasing demand for and issues with the supply of potable water. Skellerups Industrial Division is already an important supplier to the gas production and water supply industries and we continue to work closely with our customers to ensure we can provide existing and new customers with the products they need. Alongside water supply sits the treatment and transportation of wastewater and other liquid wastes. As population density and environmental standards increase so do Skellerups business opportunities in these areas. Significant domestic and international opportunities also exist for the Agri Division. The demand for protein remains a key driver of the global dairy industry and that demand should continue for the medium term. While world prices for dairy commodities remain volatile and presently are below the levels of recent years long-term prospects for the industry are good. US milk production continues to increase as does the demand for dairy products in developing countries. Skellerups commitment to dairying best practice and our products proven ability to help farmers improve animal health and milk quality performance put us in an David Mair SKELLERUP HOLDINGS LTD CHIEF EXECUTIVE OFFICER Skellerup is in excellent shape. Product innovation and our ability to create cost effective ways to meet market demand will continue to drive the business forward. innovation quality emphasis on 7 excellent position to capitalise on these trends. The New Zealand dairy market is very important to Skellerup but also it is important to understand that we are a global player. Whilst lower forecast pay-outs for New Zealand dairy farmers led to a drop in local sales for the Agri Division this was counterbalanced by improved sales in international markets. These customers use us because we can supply reliable products of consistent quality. But it is also about building a relationship with each customer and having people on the ground who can identify new customers to drive sales. This does take time and there is a cost but the opportunities are there. Deregulation of the dairy market in Europe and the inevitable removal of the sanctions on Russia will provide new opportunities for growth. In addition many countries in South America are continuing to develop their dairy capability providing further opportunities for Skellerup. Our facility in Christchurch remains very important to us. It is where key people involved in our research manufacturing and sales teams for our Agri Business are housed. Having these key people on one site provides us with our most effective competitive advantage. We can react swiftly to changes in customer requirements thereby ensuring product development is customer driven. While we emphasise innovation and quality we also devote considerable time and attention both to continuous process improvement and to careful investment in capital equipment. Our focus on quality is not isolated to Christchurch. We have had some notable quality successes. One example is in our footwear manufacturing plant in Baochang China where we achieved a success rate of 99.7 percent in FY15. This is a tribute to the skill of our workforce and the quality of our processes. We are all very conscious of the need to look constantly to improve the way we work. Divisional Highlights The Industrial Division which manufactures products globally for customers in more than 30 countries reported earnings before interest and tax EBIT of 14.0 million up by four percent on the previous year on revenue of 123.0 million up by six percent. Of particular note Sales and earnings from North America increased as a result of investments in market and product development further growth is expected in FY16 Expansion into civil and underground products and increased foam sales offset reduced sales to the Australian mining sector. The Agri Division which manufactures dairy rubberware animal hygiene products and technical footwear for sale in various international markets recorded EBIT of 22.1 million up by two percent on flat revenue of 80.5 million. Contributing factors to the results were Increased sales of dairy rubberware in international markets including the US China and South America offsetting a softer year in New Zealand dairy despite solid off-season sales Improved returns from a larger range of footwear for specialist applications and industries including fire forestry and electrical. Overall Financial Performance Revenue of 203.0 million up by three percent resulted in improved earnings before interest and tax up four percent to 31.1 million and net profit after tax up six percent to 21.9 million excluding the effect of the 2014 settlement of insurance claims relating to the Canterbury earthquakes. Conclusion Skellerup remains in excellent shape. The business continues to be underpinned by a strong financial structure and an ethos to innovate and develop new products strategically in cost-effective ways to meet market demand be that for existing customers or new ones. It is about identifying and understanding the opportunities and then testing the market before overcommitting resources. Indeed our focus on expanding internationally in recent years enabled us to weather a significant drop in the dairy pay-out which impacted the Agri Divisions New Zealand operations. The US is another example where careful planning and scoping of opportunities are paying dividends for the likes of Gulf Rubber Deks and Ultralon which are expected to continue in the years ahead. We have dedicated significant space in this report to showcase Project Viking. We are proud of progress on this project and the efforts of all members of our team involved. It is our single largest investment and arguably our most important. Once up and running next year this world-class facility will allow us to extend our excellent reputation to deliver high-quality polymer solutions to the global community. I dont want to downplay the challenges ahead but certainly there is considerable reason to be optimistic. SKELLERUP CEO REPORT 8 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Skellerup has had a presence in the United States US for many years starting with subsidiary company Masport Inc. in 1977. Two years ago Skellerup significantly expanded the range of products available to its US customers and today the US market occupies a central place in the Companys growth plans. Chief Executive Officer David Mair says the decision to target the US is based on the growth potential in industries that are customers for Skellerup products. The oil and gas industry is one example. While the boom generated by the dramatic rise of the shale oil and gas industry a decade ago has subsided somewhat the future of the industry in the US remains promising according to Guy Meuli Vacuum Systems Group General Manager. Political and economic imperatives are driving a move towards greater energy self-sufficiency regulatory changes are pushing businesses from coal to gas and new techniques continue to open up previously inaccessible resources says Guy. For instance techniques used to exploit shale gas are being adapted now for shale oil extraction notably in North Dakotas Bakken Formation and the Eagle Ford Shale Formation in Texas. And where there are drilling operations there is a need for water on site and pumps and vacuum systems to move water to the drilling sites. Masport vacuum systems are in use in the Bakken Formation and Eagle Ford Shale Formation and in Marcellus in Pennsylvania which in a decade has grown from being a marginal producer to being the source of more than 20 per cent of the countrys total gas production. Theres a lot happening and a lot yet to happen says Guy. Its an exciting story unfolding our job is to make sure were part of it. To that end Guy recently appointed an in-market sales manager who is based in Ohio and is responsible for servicing the north-eastern states. Masports vacuum systems business is also a prime example of how the Company uses diversity to manage risk with the technology that is central to the oil-and-gas exploration industry also being used to transport another type of dirty water liquid waste. Guy Meuli VACUUM SYSTEMS GROUP GENERAL MANAGER theres a lot yet to happen for Skellerup in the growing US market 9SKELLERUP US MARKET REPORT While Skellerups Ultralon foam is a new player in the US market the business growth rate and future prospects are equally impressive. Two years ago Ultralon had no presence in the US says Foam Group General Manager Paul Goddard. Now our reputation and our brand is so strong customers want to use it in their own marketing. Skellerup began producing foam in the early 1970s. Its predominant use was in footwear liners and all manufacturing was carried out in Christchurch. The 2011 earthquakes prompted the company to move manufacturing to Vietnam and in 2014 the addition of Australian company Thermoplastic Foam Industries to the Ultralon Foam Group increased the range of products on offer and gave Ultralon a complementary manufacturing capability. While potential applications for Ultralon foams range from exercise mats to oyster farm floats Skellerup is targeting four key end-user groups in the US manufacturers of orthotic supports and prosthetics the marine industry sporting goods manufacturers and industrial users. As a result Ultralon foam is being used now by manufacturing companies from Tijuana a major industrial manufacturing hub for North America to Quebec where it goes into the skates and protective equipment used by ice hockey players. Paul says product quality is the foundation of the Ultralon brands success. Our manufacturing processes are tightly controlled our technical expertise technology and equipment are second to none and we use only the best raw materials he says. The structure of Ultralon foam makes it ideally suited for industrial use for example as an expansion joint filler in roading and bridge building or in construction as a former for concrete. As a result customers can rely on Ultralon to deliver. Its solid its stable and its durable. When it comes to building the business Paul says the people are as important as the product. Its about having the right people on the ground and the right partners he says. Earlier this year Ultralon signed a distribution agreement with Composites One North Americas leading composites distributor giving it access Our technical expertise technology and equipment are second to none and we only use the best raw materials. to major North American manufacturing companies working in a range of industries. Ultralon also has a relationship with Syntec Industries a leading supplier to the US marine and recreational vehicle industries where Ultralon products are in demand for use in boat and marina fenders furniture and decking. These partnerships are putting us in front of new customers across the US and beyond says Paul. That opportunity is all we need the quality of our product and our commitment to giving our customers the right solution does the rest. 10 SKELLERUP HOLDINGS 2015 ANNUAL REPORT If theres water flowing through it theres a good chance Gulf Rubber is part of the process. While the Skellerup subsidiarys North American client list encompasses the gas supply automotive parts and beverage industries 90 percent of its sales are to companies involved with the delivery and use of potable water from the reservoir to the tap to quote Gulf US President Michael Robins. US drinking-water standards are based not only on human health considerations but also on what water systems can achieve using the best available technology. Such a high hurdle makes quality control a major focus for Gulf this is why the US operation includes a laboratory. Everything that comes in from our manufacturing plant is rechecked and US potable water maintaining the flow of 11SKELLERUP US POTABLE WATER We have total confidence in our manufacturing team but if anything were to go wrong the buck stops with us so we check and then we check again. certified before it goes into stock says Michael. We have total confidence in our manufacturing team but if anything were to go wrong the buck stops with us so we check and then we check again. As testing apparatus becomes more sophisticated tolerance limits drop. What was once measured in parts per million is now measured in parts per billion so Gulfs systems and processes have evolved to keep pace. A further complication is that different countries have different quality standards and different treatment processes so products need to be tailored accordingly. Chemicals typically used in US water treatment systems are harder on rubber than are those used in Europe to take one example. You cant just take a product developed in another market and assume it will do the job here says Michael. The challenge is to develop a product that meets the relevant standards and has the necessary physical properties all at the right price. Success requires a combination of chemistry and engineering expertise. Its like baking a cake Michael explains. Take the base formulation or recipe. How can we modify it to suit a particular process or end use How will the elements react with each other and what by-products might be produced as a result Then how do we bake it Would a hotter oven or a larger mould generate efficiencies without compromising quality The key is to find the process limitation then stop just short of it. But public health and safety considerations are always to the fore. While our component might be one of 20 or 30 that make up the finished product and on average accounts for about one percent of the total cost the job it does is critical says Michael. Rubbers elasticity allows it to take up the tolerance issues from mating components in a system or product thats its job but if the rubber component fails the whole system fails and generally with pretty serious consequences. A failed rubber gasket in a supply network might result in a water or gas supplier having to dig up the main road. At the other end of the supply chain a poorly functioning safety valve in a Michael Robins GULF US PRESIDENT households hot-water system might mean a flooded house or a serious explosion. Gulf US was set up in 2012 as part of Skellerups drive to build its US business and has recorded strong year-on-year growth since its establishment. In June of this year it was named Partner of the Year by Moen North Americas number- one tapware brand. 12 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Skellerups approach to research and development is summed up best in one phrase its all about the Ds. The first D Demand. Its customer driven it has to be says Foam Group General Manager Paul Goddard. Its about getting alongside the customer understanding what their needs are then figuring out a way to meet those needs says Paul. Once you can do that and the customer sees you can do that you are on the way to integrating your business with theirs and ultimately to integrating our manufacturing capabilities into their production process. Thats where the second D comes in. The research and development process is really a development process says Chief Executive Officer David Mair. We do plenty of research but its not the sort of blue-sky thinking people might associate normally with the word. Our research involves assessing what our customer requires from there its about developing a solution. Its not about one cycle and trying to get it right first time. Its about coming up with something that works then testing it refining it improving it always validating with the customer that it solves their problems. Sometimes the process might involve identifying a need before the customer does. Vacuum Systems Group General Manager Guy Meuli says Skellerups vacuum systems business was formerly called the vacuum pump business because thats what it was. Essentially we were selling pumps maybe with a few ancillary components then moving on to the next transaction and leaving the customers to it he explains. So a customer with a liquid waste business may well have wound up with a fleet where no two trucks were set up quite the same. Thats a cost in terms of efficiency for them and a lost opportunity for us says Guy. One member of Guys team went out with a video camera and filmed how our pumps were being installed. By doing that we had a far better idea of how our products were being used. We saw opportunities to help speed up the Its about getting alongside the customer understanding what their needs are then figuring out a way to meet those needs. Paul Goddard FOAM GROUP GENERAL MANAGER Development spend 4.2mFY15 13SKELLERUP WORKING WITH OUR CUSTOMERS process and to make it easier for the installer by including more parts in our system pack and standardising fittings he says. Now increasingly rather than selling individual components were selling a system incorporating a series of components. It expands our involvement and it gives the customer a standard set- up thats easy to install and operate. And that standardisation also sets the base for new ways to customise the end product. Because were involved now in the whole end-to-end process we can work with the customer to give them what they want whether thats a specific technical capability or an easier installation process says Guy. customer driven development is 14 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Long known for its Red Band gumboot which is the parent of a product range that now includes gumboots for women and children socks and the increasingly popular Red Bandal Skellerup is applying its expertise to creating safety footwear for industrial users and consumers in New Zealand and overseas. Skellerup New Zealand Footwear and Dairy Manager Perry Davis says workwear needs to strike the right balance between protection and practicality. If youre a firefighter you need boots that are heat resistant and flame retardant obviously but also you need to be able to put them on in a hurry to run in them and to feel safe climbing a ladder. And you want them to look good as well says Perry. Skellerups long association with the New Zealand Fire Service has assisted with the development of the Fire Fighter Extreme high-performance boot which is also now being used in Western Australia and Britain. Footwear Group General Manager Paul Randall says the Extreme solves the argument over the merits of the protection especially against hazardous chemicals and durability of other rubber boots versus the comfort of leather. With the Extreme you have the best protection and comfort says Paul. Paul says the boots are making significant inroads into the British market and have the potential to do well in Europe and the United States as well. Almost all Britains emergency services providers source personal protective equipment PPE from one of two suppliers both of whom carry Skellerup Extreme boots he says. That combination of comfort safety and technical performance is also behind the success of Skellerups Quatro Dielectric boots worn for working on or around live power equipment. We go beyond the safety standard to consider the stability and comfort of the person wearing the boots says Paul. You wear Dielectric boots because there is a risk of electric shock so it is vital you are protected against that. But it is also important you can climb a ladder and stand and walk in them for long periods so we make sure there is good ankle support and that the boots are a comfortable fit. Perry says its the close connection between Skellerups Skellerup footprint broadening the Skellerups combination of technical and manufacturing know-how is opening up new opportunities for its specialist footwear products in markets around the world. 15SKELLERUP BROADENING THE FOOTPRINT laboratory and its factory that gives the company an edge in developing products that meet the needs of its customers. It all starts with the formulation. We have decades of experience in understanding how best to design a compound that meets a given set of criteria we also have some very clever chemists who constantly are coming up with new solutions to old and new issues. Equally important is that we have good manufacturing systems and processes and a highly skilled workforce. Because we do our own manufacturing we are able to tweak the process to suit a particular purpose. Perry adds that New Zealand has been an ideal proving ground for many of the products that now Skellerup is taking overseas. Forestry is a classic example. New Zealands environment and work practices are hard on footwear. Weve worked closely with the forestry industry to come up with innovative products like our spiked boots now were in a position to take that knowledge into markets like Chile and Canada. Paul says while Skellerups footwear range now includes products designed specifically for industries ranging from mining extra metatarsal protection and traction to food processing blue-coloured with an outsole designed for wet smooth surfaces and is moving beyond farm supply stores into hardware outlets the underlying philosophy that turned the Red Band into a New Zealand farming icon still holds true. Whatever industry our customers are in we want Skellerup footwear to set the standard for quality value and performance. We go beyond the safety standard to consider the stability and comfort of the person wearing the boots. 16 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Efficiency its a word that crops up regularly when Agri Division General Manager Guy Keogh talks about the new Dairy Rubberware Development and Manufacturing facility currently being built at Wigram. Weve had the oppportunity to lay out the ideal design for what we do and what we expect to be doing in the coming decades and put a wall round it says Guy. Guy says that even before the 2011 earthquakes hit Canterbury the current Woolston site was beginning to show its age. We have been manufacturing from the Woolston site for 76 years. Our business has changed significantly over that time and while weve continued to manipulate and adapt the current site for our needs a purpose-built facility is going to provide opportunities that will benefit our customers and our staff. Having all the team together in one building rather than spread across a campus of 20 buildings and different locations will enhance collaboration drive improvements in process flow and give us the scope we need to grow and develop says Guy. Guy says the new building reflects the Agri Divisions focus on being responsive to customers requirements through operational excellence. Our team members have accumulated a vast amount of knowledge and expertise about our products processes and equipment over many years. These same people are involved in determining the building design and layout. This means we will have a set-up that optimises the needs of our manufacturing processes our warehouse and distribution operations and the integration of our design and product development functions. And its not only space that has been saved. We have planned carefully to minimise our impact on the environment. The process cooling system uses 100 per cent recycled water for example for continuous operation. Guy says the facility is designed to be functional practical and sustainable. It also provides room for growth so we can continue to deliver high-quality food-grade dairy products to customers throughout the world. We are excited by the opportunity ahead and proud that soon we will have a world-class facility available to service the requirements of our local and global customers. Guy Keogh AGRI DIVISION GENERAL MANAGER WIGRAM BY THE NUMBERS Square metres of building 19000 Tonnes of steel in the super structure 60.7m3 467 Tonnes of in-situ concrete 4135.92m3 690 concrete truck loads 9926 Tonnes of precast concrete elements 1444.9m3 241 concrete truck loads 3612 The precast and in-situ concrete in total is equal to the volume of two Olympic size swimming pools. Scheduled operational start mid-2016. 17SKELLERUP PROJECT VIKING together at Wigram its all coming KEY STAGES OF CONSTRUCTION FEBRUARY TO JULY 2015 Project Viking Management Team. From left Jane George Beca Guy Keogh Skellerup Alan Clearwater Skellerup Ben Grant Calder Stewart Nick Steel Skellerup Geoff Harnett Skellerup. World-class business builds a facility to match Project Viking 18 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Skellerups balance sheet is in strong shape and construction of its new facility in Christchurch which is to underpin the future for its Agri Division is well under way. The diverse range of skills and experience across Skellerups Board ensures strategies and plans to grow the business capitalising on continuing demand for safe food and clean efficient energy are pursued with vigour and sound business discipline. Skellerup Holdings Limited Chairman Sir Selwyn Cushing has compiled a track record of outstanding commercial success over many years and in diverse industries. He has chaired major listed and privately held companies including Air New Zealand Brierley Investments Carter Holt Harvey and the Whitcoulls Group. Sir Selwyn also has long-standing involvement with various agribusiness enterprises this gives him strong links to and a sound understanding of the farming sector which remains one of Skellerups most important markets. Sir Selwyns appointment as Chairman in 2007 continued a connection with Skellerup that goes back some 30 years. Elizabeth Coutts governance skills are held in high regard by private and public sector organisations across the country. In a 20-year career as a professional director she has at various times served as Commissioner of both the Commerce Commission and the Earthquake Commission and as a director of Pharmac. She is a former member of the New Zealand Institute of Chartered Revenue NZm 203.0Up NZ6.4m 19SKELLERUP BOARD OF DIRECTORS Skellerups Board ensures strategies and plans to grow the business capitalising on continuing demand for safe food and clean efficient energy are pursued with vigour and sound business discipline. Accountants Financial Reporting Standards Board and the Reserve Banks Monetary Policy Committee. She is currently vice-president of the Institute of Directors chair of Oceania Healthcare Limited and a director of EBOS Group Limited. Liz also chairs Inland Revenues Risk and Assurance Committee. Liz has been a member of Skellerup Holdings Board since 2002. Ian Partons academic and professional background in geotechnical engineering has been of considerable value to Skellerup throughout the planning and construction of our new Agri Division hub at Wigram. A distinguished fellow and past president of the Institution of Professional Engineers New Zealand he received the 2007 William Pickering Award for Engineering Leadership. He is a former director of Watercare Services and Industrial Research. He currently serves on the board of Auckland Transport and Construction Techniques is Chairman of Aurora Energy and Delta Utility Services and is Chancellor of The University of Auckland. Ian joined Skellerup Holdings Board in May 2011. Appointed to the Skellerup Holdings Board in March this year John Strowger is a leading commercial lawyer who specialises in corporate contract and securities law and mergers and acquisitions. He was named NZ Dealmaker of the Year at the 2015 Australasian Law Awards and is a former member of the Financial Markets Authority. A partner at Chapman Tripp John co-heads that firms China desk which coordinates the work it undertakes pertaining to investment and trade between China and New Zealand. Throughout his management career Chief Executive Officer David Mair has demonstrated an ability to drive improvements in business processes that generate increased earnings and strong shareholder returns. He has wide-ranging experience in international operations management with a particular knowledge of Asia where he lived and worked for a number of years. A director of Skellerup Holdings since 2006 he was appointed Chief Executive Officer in August 2011. David is also an independent director of Fort Funds Management. strong shape the business is in 20 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Skellerups Board and management are committed to building long-term shareholder value. As a key element of building this value we maintain a framework to guide our people to act with integrity and in accordance with our practices and policies. Framework Skellerup is incorporated in New Zealand and listed on the New Zealand Stock Exchange NZX. The governance practices and policies we have adopted are consistent with the requirements of both of the following NZX Listing Rules and Corporate Governance Best Practice Code Financial Markets Authority FMA Corporate Governance in New Zealand Principles and Guidelines. The Board regularly reviews and assesses Skellerups governance policies procedures and practices to ensure they are appropriate and effective. Ethical Standards Skellerup Directors set high standards of ethical behaviour and require members of the management team to conduct themselves similarly they hold management accountable for delivering these standards throughout the organisation. Skellerups Code of Ethics provides a framework of ethical standards according to which Directors management and all employees of the Company are expected to conduct themselves. The Code of Ethics outlines the Companys expectations for all Company personnel and includes consideration of conflicts of interest conduct legislative compliance confidentiality and the use of the Companys assets and information. Skellerup communicates its Code of Ethics to Directors and employees explaining the Codes purpose and the mechanism for reporting any unethical behaviour. Skellerup has not received any reports of serious instances of unethical behaviour during the year. Skellerups Code of Ethics is published on its website at www.skellerupholdings.co.nz Board Composition and Performance The members of Skellerups Board collectively provide the broad range of strategic business commercial and financial skills and knowledge and the independence and experience required to lead and govern the Company effectively. The Board regularly reviews its performance and composition to ensure it has the range of capabilities required. As a result one new Director was appointed in March 2015. Currently the Board comprises three non-executive independent Directors one non-executive Director and one executive Director. The independence of Directors is reconsidered annually. See page 18 for more information on the skills and experience of Skellerups current Board. The independence status of each Director is noted also on page 59. Board procedures ensure that all Directors have the information needed to contribute to informed discussion and decisions on a consistent basis and to carry out their duties 21SKELLERUP CORPORATE GOVERNANCE effectively. Senior managers make direct presentations to the Board on a regular basis to give the Directors an understanding of management strategies priorities style and capabilities. Directors also visit operating facilities as part of their ongoing engagement to ensure they are familiar with the operating facilities of the Company. Board Committees The Board has appointed three Board committees to assist in carrying out its responsibilities effectively. The Board regularly reviews the performance of each standing committee against its specific written charter. The delegated responsibilities powers and authorities of these committees are described below. 1. Audit and Risk Management Committee This committee currently comprises four non-executive Directors one of whom is appointed as Chairperson. The Chief Executive Officer CEO and the Chief Financial Officer CFO attend as ex-officio members the external auditors attend by invitation of the Chairperson. This committee meets a minimum of four times each year. Its responsibilities are to Ensure that the Company has adequate risk management controls in place Advise the Board on accounting policies practices and disclosure Review the scope and outcome of the external audit Review the annual and half-yearly statements prior to approval by the Board Review the Companys compliance programme with respect to health and safety legislation. The Audit and Risk Management Committee reports the proceedings of each of its meetings to the full Board. The current composition of the committee is Elizabeth Coutts Chairperson Sir Selwyn Cushing Dr Ian Parton and John Strowger. 2. Remuneration Committee This committee comprises four non-executive Directors. It meets as required to Review the remuneration packages of the CEO and senior managers Make recommendations to shareholders in relation to non- executive Directors remuneration packages. Remuneration packages are reviewed annually. Independent external surveys are used as a basis for establishing competitive packages. The current composition of the Remuneration Committee is Sir Selwyn Cushing Chairperson Elizabeth Coutts Dr Ian Parton and John Strowger. 3. Board Nomination Committee This committee comprises two non-executive Directors. It meets as required to recommend new appointments to the Board. The current composition of the Board Nomination Committee is Sir Selwyn Cushing Chairperson and Elizabeth Coutts. Reporting and Disclosure The Board demands integrity in financial reporting and in the timeliness and balance of information disclosed. The financial progress of Skellerups two divisions is reported separately to the Board each month to enable divisional financial performance to be reviewed in the context of the Companys strategies and objectives. Monthly reporting also provides information on key opportunities personnel customers and risks facing the business and the steps being taken to optimise outcomes. The Audit and Risk Management Committee oversees the quality and integrity of external financial reporting including the accuracy completeness and timeliness of financial statements. The Company seeks to provide clear concise financial statements. Management accountability for the integrity of the Companys financial reporting is reinforced by certification of the CEO and CFO in writing that the financial statements fairly present the financial results and position of the Company. The Company has in place clear processes to ensure compliance with the continuous disclosure requirements that come with being a NZX-listed company. Remuneration The remuneration of Directors and executives is transparent fair and reasonable. The Boards Remuneration Committee is responsible for reviewing remuneration packages of the CEO and senior managers and making recommendations to shareholders in relation to non-executive Directors remuneration. The current approved pool of remuneration available for the payment of non-executive Directors is 475000. This was approved by shareholders at the Annual Meeting on 26 October 2011. Non-executive Directors are paid a fixed cash fee. Non-executive Directors are not part of any share scheme. In the year ended 30 June 2015 total fees paid to non- executive Directors amounted to 314000. Details are shown on page 59. Senior executives remuneration comprises a combination of fixed and at-risk components. Payment of the at-risk component is linked to exceeding previous best annual financial performance in the areas of the business for which each executive is responsible or in some circumstances the achievement of specific projects. A long-term share-based incentive scheme is in place for the CEO. This is described in Note 17 of the financial statements on page 49. Total remuneration paid to the CEO in the year ended 30 June 2015 is shown on page 59. 22 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Risk Management Each Director has a sound understanding of the key risks faced by Skellerup. The Board advised by the Audit and Risk Management Committee reviews the Companys Risk Management Report prepared by the CEO and management team on a semi-annual basis and specific items are monitored on a monthly basis. The Risk Management Report identifies key risks and strategies to manage these risks. The Board ensures that adequate external insurance cover is in place appropriate to the Companys size and risk profile. The Audit and Risk Management Committee monitors the Companys system of internal financial control with the aid of reviews and reports prepared by external providers and periodic certification by the CEO and CFO. This system includes clearly defined policies controlling treasury operations and capital expenditure authorisation. The CFO is responsible for ensuring that all operations within the Company adhere to the Board-approved financial control policies. The Company operates a comprehensive health and safety framework across all of its businesses to identify and address workplace hazards and to monitor and review compliance with health and safety policies and procedures. Board review of health and safety is a priority and is facilitated by the inclusion of a separate health and safety report at each Board meeting. Audit The Board ensures the quality and independence of the external audit process which culminates in the audit report issued in relation to the annual financial statements. To ensure independence of the Companys external auditor is maintained the Audit and Risk Management Committee approves any non-audit services that are provided by the external auditor. The Audit and Risk Management Committee meets regularly with the external auditors and management. Skellerups external auditor is Ernst Young EY and was reappointed by shareholders at the 2014 Annual Meeting in accordance with the Companies Act 1993. EY did not provide any non-audit services during the year ended 30 June 2015. The audit partner responsible for the Skellerup audit has been the lead audit partner for the past three years. The significant issues and judgements considered by the Audit and Risk Management Committee are disclosed in Note f on page 32 of the financial statements. Shareholder Relations The Board aims to ensure that shareholders are kept informed of developments affecting the Company and encourages shareholders to engage with the Company. Information is communicated to shareholders through the annual and interim reports and periodic and continuous disclosure to the NZX and at Annual Meetings. The Board encourages shareholders to attend and participate fully at Annual Meetings to ensure they exercise the opportunity to ask questions about the Company and its performance. The Company also maintains information for shareholders on its website www.skellerupholdings.co.nz. This includes a description of Skellerups business and structure copies of key corporate governance documents and all information released to the NZX. Stakeholder Relations The Board respects the interests of all stakeholders in the Company. Skellerup strives to manage its business in a manner that delivers long-term shareholder value by delivering consistent quality solutions for customers a work environment that is safe and delivers development opportunities for its employees and meets or exceeds the compliance requirements in the environments in which the Company operates. FINANCIAL STATEMENTS 23 Skellerup Holdings Limited Financial Statements for the year ended 30 June 2015 24 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Chartered Accountants Independent Auditors Report To the Shareholders of Skellerup Holdings Limited Report on the Financial Statements We have audited the group financial statements of Skellerup Holdings Limited and its subsidiaries the Group on pages 26 to 58 which comprise the balance sheet of the Group as at 30 June 2015 and the statement of comprehensive income income statement statement of changes in equity and statement of cash flows for the year then ended of the Group and a summary of significant accounting policies and other explanatory information. This report is made solely to the companys shareholders as a body in accordance with section 461G1 of the Financial Markets Conduct Act 2013. Our audit has been undertaken so that we might state to the companys shareholders those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law we do not accept or assume responsibility to anyone other than the company and the companys shareholders as a body for our audit work for this report or for the opinions we have formed. Directors Responsibility for the Financial Statements The directors are responsible for the preparation and fair presentation of the financial statements in accordance with generally accepted accounting practice in New Zealand and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing New Zealand. These auditing standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgement including the assessment of the risks of material misstatement of the financial statements whether due to fraud or error. In making those risk assessments we have considered the internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates as well as evaluating the overall presentation of the financial statements. We believe we have obtained sufficient and appropriate audit evidence to provide a basis for our audit opinion. Other than in our capacity as auditor we have no relationship with or interest in the Group. Partners and employees of our firm may deal with the Group on normal terms within the ordinary course of trading activities of the business of the Group. Opinion In our opinion the financial statements on pages 26 to 58 comply with generally accepted accounting practice in New Zealand comply with International Financial Reporting Standards and present fairly in all material respects the financial position of the Group as at 30 June 2015 and the financial performance and cash flows of the Group for the year then ended. 20 August 2015 Auckland FINANCIAL STATEMENTS 25 Directors Responsibility Statement for the year ended 30 June 2015 The Directors are responsible for the preparation in accordance with New Zealand law and generally accepted accounting practice of financial statements which give a true and fair view of the financial position of the Skellerup Holdings Limited Group as at 30 June 2015 and the results of their operations and cash flows for the year ended 30 June 2015. The Directors consider that the financial statements of the Group have been prepared using accounting policies appropriate to the Group circumstances consistently applied and supported by reasonable and prudent judgements and estimates and that all applicable New Zealand Equivalents to International Financial Reporting Standards have been followed. The Directors have responsibility for ensuring that proper accounting records have been kept which enable with reasonable accuracy the determination of the financial position of the Group and enable them to ensure that the financial statements comply with the Financial Reporting Act 1993. The Directors have responsibility for the maintenance of a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting. The Directors consider that adequate steps have been taken to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Directors are pleased to present the Group financial statements of Skellerup Holdings Limited for the year ended 30 June 2015. The Group financial statements are dated 20 August 2015 and are signed in accordance with a resolution of the Directors made pursuant to section 211 of the Companies Act 1993. For and on behalf of the Directors Sir SJ Cushing EM Coutts Chairman of the Board of Directors Director 26 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Income Statement for the year ended 30 June 2015 Note 2015 000 2014 000 Revenue 2 203011 196606 Cost of sales 122262 115549 Gross profit 80749 81057 Other income 4 1683 933 Total income 82432 81990 Distribution expenses 14168 13406 Marketing expenses 17410 17007 Administration expenses 19735 21642 Profit for the year before tax finance costs and earthquake insurance income 31119 29935 Finance costs 15 163 733 Profit for the year before tax and earthquake insurance income and expenditure 30956 29202 Income and expenditure related to Canterbury earthquakes Claims made against insurance policies 24963 Costs incurred 5119 Net income for the year before tax related to Canterbury earthquakes 19844 Profit for the year before tax 30956 49046 Income tax expense excluding Canterbury earthquakes related income tax 5 9023 8458 Income tax benefit related to Canterbury earthquakes 506 Income tax expense 9023 7952 Net after-tax profit for the year attributable to owners of the Parent 21933 41094 Earnings per share Basic and diluted earnings per share cents 18 11.38 21.31 Basic and diluted earnings per share excluding income and expenditure related to Canterbury earthquakes cents 18 11.38 10.76 The above Income Statement should be read in conjunction with the accompanying notes. FINANCIAL STATEMENTS 27 Statement of Comprehensive Income for the year ended 30 June 2015 Note 2015 000 2014 000 Net profit after tax for the year 21933 41094 Other comprehensive income Will be reclassified subsequently to profit or loss when specific conditions are met Net gainslosses on cash flow hedges 16 672 69 Income tax related to gainslosses on cash flow hedges 5 194 16 Not expected to be reclassified subsequently to profit or loss Foreign exchange movements on translation of foreign operations 16 10184 5510 Income tax related to gainslosses on foreign exchange movements of loans with overseas subsidiaries - Current year 5 388 291 - Prior year adjustments 5 372 Other comprehensive income net of tax 9318 4794 Total comprehensive income for the year attributable to equity holders of the Parent 31251 36300 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 28 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Balance Sheet as at 30 June 2015 Note 2015 000 2014 000 Current assets Cash and cash equivalents 6 11580 16369 Trade and other receivables 7 45102 38800 Inventories 8 41377 34535 Income tax receivable 5 419 73 Derivative financial assets 21 32 2 Total current assets 98510 89779 Non-current assets Property plant and equipment 9 60475 44787 Deferred tax assets 5 3569 3614 Goodwill 10 47276 45006 Intangible assets 10 1801 2438 Total non-current assets 113121 95845 Total assets 211631 185624 Current liabilities Trade and other payables 11 25042 25771 Provisions 12 8569 7320 Interest-bearing loans and borrowings 15 Income tax payable 5 2585 2227 Derivative financial liabilities 21 694 Total current liabilities 36890 35333 Non-current liabilities Provisions 12 2677 3636 Interest-bearing loans and borrowings 13 10750 9 Deferred tax liabilities 5 1654 1955 Total non-current liabilities 15081 5600 Total liabilities 51971 40933 Net assets 159660 144691 Equity Equity attributable to equity holders of the Parent Share capital 14 69732 69732 Reserves 16 4686 14110 Retained earnings 19 94614 89069 Total equity 159660 144691 The above Balance Sheet should be read in conjunction with the accompanying notes. For and on behalf of the Board which authorised these financial statements on 20 August 2015. Sir SJ Cushing EM Coutts Chairman of the Board of Directors Director FINANCIAL STATEMENTS 29 Statement of Changes in Equity for the year ended 30 June 2015 Fully Paid Ordinary Shares Cash Flow Hedge Reserve Foreign Currency Translation Reserve Employee Share Plan Reserve Retained Earnings Total Note 000 000 000 000 000 000 Balance 1 July 2013 69732 51 9567 196 64363 124673 Net profit after tax for the year ending 30 June 2014 41094 41094 Other comprehensive income 53 4847 4794 Total comprehensive income for the year 53 4847 41094 36300 Share incentive scheme 106 106 Dividends 16388 16388 Balance 30 June 2014 69732 2 14414 302 89069 144691 Net profit after tax for the year ending 30 June 2015 21933 21933 Other comprehensive income 16 478 9796 9318 Total comprehensive income for the year 478 9796 21933 31251 Share incentive scheme 17 106 106 Dividends 19 16388 16388 Balance 30 June 2015 69732 476 4618 408 94614 159660 The above Statement of Changes in Equity should be read in conjunction with the accompanying notes. 30 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Cash Flow Statement for the year ended 30 June 2015 Note 2015 000 2014 000 Cash flows from operating activities Receipts from customers 200073 195377 Interest received 68 143 Dividends received 1 Earthquake insurance receipts 23669 Payments to suppliers and employees 172257 158423 Income tax refundpaid 9667 9103 Interest and bank fees paid 416 687 Net cash flows fromused in operating activities 17802 50976 Cash flows from investing activities Proceeds from sale of property plant and equipment 61 80 Payments for property plant and equipment 17829 13229 Payments for intangible assets 291 1995 Net cash flows fromused in investing activities 18059 15144 Cash flows from financing activities Proceeds from loans and advances 10750 Repayment of borrowings 12921 Dividends paid to equity holders of Parent 16388 16388 Net cash flows fromused in financing activities 5638 29309 Net increasedecrease in cash and cash equivalents 5895 6523 Cash and cash equivalents at the beginning of the year 16369 10779 Effect of exchange rate fluctuations 1106 933 Cash and cash equivalents at the end of the year 6 11580 16369 The above Statement of Cash Flow should be read in conjunction with the accompanying notes Reconciliation of net profit after tax to net cash flow from operations 2015 000 2014 000 Net profit after tax 21933 41094 Adjustments for Depreciation 6402 6630 Amortisation 902 828 Loss on sale of assets 152 88 Foreign currency movements on translating foreign assets and liabilities 780 3674 Bad debts written off 49 8 Net increase in working capital 10758 1346 Net cash inflow from operating activities 17802 50976 FINANCIAL STATEMENTS 31 Reporting Entity Skellerup Holdings Limited the Company is a limited liability company incorporated and domiciled in New Zealand. It is registered under the Companies Act 1993 with its registered office at Level 3 205 Great South Road Greenlane Auckland. The Company is a Reporting Entity in terms of the Financial Markets Conduct Act 2013 and is listed on the New Zealand Exchange NZX Main Board with the ticker SKL. a Nature of operations The Skellerup Group of companies is a global solutions provider of technical polymerproducts for a variety of specialist industrial and agricultural applications. Skellerups operations are split into two units the Agri Division the worlds second- largest provider of rubber products including dairy liners tubing and filters and a world leader in providing animal health products to the global dairy industry and the Industrial Division a leader in technically demanding polymer products for the automotive mining environmental medical and construction industries. b Basis of preparation These financial statements of the Group a profit-oriented business are for the year ended 30 June 2015. c Statement of compliance The consolidated financial statements for the year ended 30 June 2015 have been prepared in accordance with New Zealand Generally Accepted Accounting Practices. For the purpose of complying with NZ GAAP the group is a for-profit entity. The financial statements comply with New Zealand equivalents to International Financial Reporting Standards NZ IFRS. The financial statements also comply with International Financial Reporting Standards IFRS. The financial statements are presented in New Zealand dollars NZD and all values are rounded to the nearest thousand dollars 000. The accounting principles recognised as appropriate for the measuring and reporting of profit and loss and financial position on an historical-cost basis have been applied except for derivative financial instruments which have been measured at fair value. The preparation of financial statements in accordance with NZ IFRS requires management to make judgements estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities income and expenses. Actual results may differ from these estimates. Critical accounting judgements estimates and assumptions are detailed in Note 1. d Basis of consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 30 June 2015. Control is achieved when the Group is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically the Group controls an investee if and only if the Group has Power over the investee i.e. existing rights that give it the current ability to direct the relevant activities of the investee Exposure or rights to variable returns from its involvement with the investee and The ability to use its power over the investee to affect its returns. Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value. Fair value is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group the liabilities incurred by the Group to former owners the equity issued by the Group and the amount of any non-controlling interest in the acquiree. For each business combination the Group measures the non- controlling interest in the acquiree either at fair value or at the proportionate share of the acquirees identifiable net assets. Acquisition-related costs are expensed as incurred. In preparing the consolidated financial statements all inter-company balances income and expense transactions and profit and losses resulting from intra-Group activities have been eliminated. e Foreign currency translation Functional and presentation currency Items included in the financial statements of each entity in the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity the functional currency. The consolidated financial statements are presented in New Zealand dollars the presentation currency which is the functional currency of the Parent. 32 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Transactions and balances Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to New Zealand dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement except when deferred in other comprehensive income as qualifying cash flow hedges. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to New Zealand dollars at foreign exchange rates ruling at the dates the fair value was determined. Group companies The assets and liabilities of all Group companies that have a functional currency that differs from the presentation currency including goodwill and fair value adjustments arising on consolidation are translated to New Zealand dollars at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of these foreign operations are translated to New Zealand dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Exchange differences arising from the translation of foreign operations are recognised in the foreign currency translation reserve. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the foreign exchange rates ruling at the balance sheet date. f Significant accounting judgements and assumptions In the process of applying the Groups accounting policies a number of judgements have been made and estimates of future events applied. Judgements and estimates which are material to the financial statements are found in the following notes. Note 10 Impairment of goodwill page 43 Note 12 Warranty provisions page 45 Note 8 Inventory obsolescence page 40 Note 9 Estimation of useful lives of assets page 41 Note 5 Recovery of deferred tax asset page 37 FINANCIAL STATEMENTS 33 1. Segment Information An operating segment is a distinguishable component of the entity which is reported as an organisational unit engages in business activities earns revenue and incurs expenses and whose operating results are reviewed regularly by the chief operating decision-maker to allocate resources and assess performance. The Groups operating segments are Agri Industrial and Corporate being the divisions reported to the executive management and Board of Directors to assess performance of the Group and allocate resources. The principal measure of performance for each segment is EBIT earnings before interest and tax. As a result finance costs and taxation have not been allocated to each segment. Agri Division The Agri Division manufactures and distributes dairy rubberware which includes milking liners tubing filters and feeding teats together with other related agricultural products and dairy vacuum pumps to global agricultural markets. Industrial Division The Industrial Division manufactures and distributes technical polymer products across a number of industrial markets including construction infrastructure automotive mining and general industrial together with industrial vacuum pump equipment for a variety of industrial applications worldwide. Corporate Division The Corporate Division includes the Parent company and other central administration expenses that have not been allocated to the Agri and Industrial Divisions. a Business segment analysis For the year ended 30 June 2015 Agri 000 Industrial 000 Corporate 000 Eliminations 000 Total 000 Revenue 80460 122969 17 435 203011 Segment EBIT 22145 14043 5067 2 31119 Profit before tax and finance costs 31119 Finance costs 163 Profit for the year before tax 30956 Income tax expense 9023 Net after-tax profit 21933 Assets and liabilities Segment assets 70486 106057 35088 211031 Segment liabilities 13693 19898 18380 51971 Net assets 56793 86159 16708 159660 Other segment information Capital expenditure 6170 3121 11149 20440 Cash flow Segment EBIT 22145 14043 5067 2 31119 Adjustments for - Depreciation and amortisation 3503 3753 48 7304 - Non-cash items 677 677 Movement in working capital 1187 7221 2343 7 10758 Segment cash flow 24461 10575 8039 9 26988 Finance and tax cash expense 10083 Movement in finance and tax accrual 897 Net cash flow from operating activities 17802 34 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 1. Segment Information continued For the year ended 30 June 2014 Agri 000 Industrial 000 Corporate 000 Eliminations 000 Total 000 Revenue 80196 116191 219 196606 Segment EBIT 21717 13529 5311 29935 Profit before tax finance costs and earthquake insurance income 29935 Finance costs 733 Profit for the year before tax and earthquake insurance income 29202 Net insurance income 19844 Profit for the year before tax 49046 Income tax expense 7952 Net after-tax profit 41094 Assets and liabilities Segment assets 60206 93468 31950 185624 Segment liabilities 9754 20072 11107 40933 Net assets 50452 73396 20843 144691 Other segment information Capital expenditure 4732 3121 1038 8891 Cash flow Segment EBIT 21717 13529 5311 29935 Adjustments for - Depreciation and amortisation 3128 3950 380 7458 - Non-cash items 3770 3770 Movement in working capital 2164 4810 3992 1346 Net income from insurance proceeds 19844 19844 Segment cash flow 22681 22289 14691 59661 Finance and tax cash expense 9790 Movement in finance and tax accrual 1105 Net cash flow from operating activities 50976 Major customers The Agri and Industrial Divisions generate revenue from a diverse number of customers. For the Agri Division the three largest customers account for 31.3 2014 33.5 of the Agri Division revenue. For the Industrial Division the three largest customers account for 8.7 2014 9.6 of the Industrial Division revenue. FINANCIAL STATEMENTS 35 1. Segment Information continued b Geographical revenue Revenue from external customers by geographical locations is detailed below. Revenue is attributed to each geographical location based on the location of the customers. Differences in foreign currency translation rates can impact comparisons between years. 2015 000 2014 000 New Zealand 48722 53950 Australia 50977 51514 North America 50384 41998 Europe 25700 24128 United Kingdom and Ireland 13332 13636 Asia 10408 7769 Other 3488 3611 Total revenue 203011 196606 c Assets by geographical location The non-current segment assets are scheduled by the geographical location in which the asset is held. The non-current assets which include property plant and equipment goodwill and intangible assets for each geographical location are as follows 2015 000 2014 000 New Zealand 67416 50180 Australia 13074 10160 Europe 12828 12577 United Kingdom and Ireland 10587 9572 Asia 3493 8510 North America 2154 1232 Non-current assets by geographical location 109552 92231 2. Operating Revenue Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be measured reliably. Revenue is recognised net of the amount of GSTVAT. The following specific recognition criteria must be met also before revenue is recognised Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably. The timing of when risks and rewards are considered passed to the buyer varies depending on the contractual terms of sale. Interest Revenue is recognised as the interest accrues using the effective interest method which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset. Dividends Revenue is recognised when the shareholders right to receive the payment is established. 36 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 3. Expenditure Included in Net Profit for the Year Net profit for the year has been arrived at after charging the items noted below. Where the GSTVAT incurred on a purchase of goods and services is not recoverable from the taxation authority the GSTVAT is recognised as part of the expense item as applicable. Note 2015 000 2014 000 Employee benefits expense Wages and salaries including annual leave long-service leave CEO share scheme and sick leave 45881 42270 Termination benefits 470 154 Defined contribution expense 2875 2430 Total employee benefit expense 49226 44854 Depreciation and amortisation expense Depreciation of property plant and equipment 9 6402 6630 Amortisation of intangible assets 10 902 828 Total depreciation and amortisation expense 7304 7458 Total loss on disposal of property plant and equipment 152 88 Total product development costs 4232 3537 Total rentals and operating lease costs 23 5615 5361 Remuneration of auditors Audit of the financial statements by Parent company auditors 381 292 Other services provided by Parent company auditors for assurance services related to the earthquake insurance claims 1 Other auditors fees for the audit of the financial statements in foreign jurisdictions 79 109 Total remuneration of auditors 460 402 Canterbury earthquakes expenses Business interruption material damage increased costs of working and make-good costs 5119 Total Canterbury earthquakes expenses 5119 4. Other Income 2015 000 2014 000 Interest income 68 143 Government grants received 33 116 Realised and unrealised foreign currency gains 558 93 Other sundry income 1024 581 Total other income 1683 933 Canterbury earthquakes insurance claims Recoveries under insurance policies for business interruption material damage and increased costs of working 24963 Total income from insurance claims 24963 Total other income including earthquake insurance claims 1683 25896 FINANCIAL STATEMENTS 37 5. Taxation Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current periods taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except For a deferred income tax liability arising from the initial recognition of goodwill or Where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction affects neither the accounting profit nor taxable profit or loss. Deferred income tax assets are recognised for all deductible temporary differences carry-forward of unused tax assets and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. a Income statement 2015 000 2014 000 Current income tax Current income tax chargecredit 9736 9485 Prior-year adjustments 270 243 Deferred income tax Temporary difference reversalorigination 367 1648 Due to change in tax rates 1 24 Prior-year adjustments 274 267 Effect of movements in foreign currencies 349 115 Income tax expense as per income statement 9023 7952 Income tax expense from trading 9023 8458 Income tax expensecredit from insurance 506 b Amounts charged to other comprehensive income Note 2015 000 2014 000 Reserves Deferred tax on forward exchange and interest rate swap derivatives taken to the cash flow hedge reserve 16 194 16 Tax on unrealised foreign exchange gainslosses in the year taken to foreign currency translation reserve 16 388 291 Prior-year adjustments - 372 Total income tax expensecredit relating to other comprehensive income 194 647 38 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 5. Taxation continued c Reconciliation 2015 000 2014 000 Profit for the year before tax 30956 29202 Net income from insurance proceeds 19844 Total profit before tax as reported 30956 49046 Less tax charge 9023 7952 Effective tax percentage 29.1 16.2 Net profit after tax 21933 41094 Tax percentage at Parent company rate 28 28 Tax at Parent company rate 8668 13733 Due to change in tax rates 1 24 Adjustments for prior years 4 38 Non-deductiblesnon-taxables 40 6075 Effect of different foreign tax rates 661 165 Effect of movements in foreign currencies 349 115 Income tax as per income statement 9023 7952 d Recognised current and deferred tax assets and liabilities Note 2015 Current Income Tax 000 2015 Deferred Income Tax 000 Opening balance 2154 1659 Charged to income Current-year charge 9736 367 Prior-year adjustments 270 274 Payments 9667 Effect of change in future tax rates 1 Charged to other comprehensive income Deferred tax on forward exchange and interest rate swap derivatives taken to the hedge reserve 194 Tax on unrealised foreign exchange gainslosses in the year taken to foreign currency translation reserve 16 388 Effect of movements in foreign currencies 175 32 Closing balance 2166 1915 Amounts recognised in the balance sheet Tax asset 419 3569 Tax liability 2585 1674 Net tax assetliability 2166 1915 FINANCIAL STATEMENTS 39 2015 Deferred Income Tax 000 2014 Deferred Income Tax 000 i Deferred tax liabilities Accelerated depreciation 1654 1955 Deferred tax liabilities 1654 1955 ii Deferred tax assets Inventory 580 578 Annual leave long-service leave incl. sick leave 1454 1448 Doubtful debts 57 115 Warranty 421 360 Unrealised profit on inter-company transactions 407 430 Expense accruals 402 683 Derivatives 194 - Loss available for future offset 54 - Deferred tax assets 3569 3614 The deferred tax assets and liabilities can be offset only if they occur in the same tax jurisdiction. Certain prior year balances have been restated to classify asset and liability balances on a consistent basis to the current year. e Imputation credit account Note 2015 000 2014 000 Balance at the beginning of the year 6239 6026 Attached to dividends paid 19 6298 6296 Income tax paid in New Zealand 5406 6597 Income tax to be paid in New Zealand estimate 1168 1787 Reversal of previous years estimate 1787 1875 Total imputation credits 4728 6239 6. Cash and Cash Equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the cash flow statement cash and cash equivalents consist of cash and cash equivalents as defined above net of outstanding bank overdrafts. Cash flows are included in the cash flow statement on a gross basis and the GSTVAT component of cash flows arising from investing and financing activities which is recoverable from or payable to the taxation authority is classified as operating cash flows. In New Zealand some Group companies operate bank accounts in overdraft. Under the Group bank facility overdrafts have a legal right of set-off against bank accounts in funds. Therefore only the net in funds position has been disclosed. Cash and cash equivalents at the end of the year as shown in the cash flow statement can be reconciled to the related items in the balance sheet as follows All cash is available and under the control of the Group and other than in China there are no restrictions relating to the use of the cash balances disclosed. 2015 000 2014 000 Cash and bank balances 11580 16369 Total cash and bank balances 11580 16369 5. Taxation continued 40 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 7. Trade and Other Receivables Trade receivables are recorded at fair value less an allowance for any uncollectable amounts. Collectability of trade debtors is reviewed on an ongoing basis and a provision for doubtful debts is made when there is objective evidence that the Group will not be able to collect the receivable. Any amount of provision recognised represents the difference between the carrying amount of these trade receivables and the expected recoverable amount. Bad debts are written off when identified. 2015 000 2014 000 Trade receivables 41534 34960 Less allowance for doubtful debts 216 412 41318 34548 GSTVat receivable 484 1395 Other 3300 2857 Total trade and other receivables 45102 38800 The average credit period for the sale of goods is 68 days 2014 59 days. The Group offers credit terms ranging from 30 to 120 days to those customers for whom the Group has been able to validate acceptable credit quality. The credit terms and limits are reviewed monthly. No interest is charged on the trade receivables. Of the trade receivables balance at the end of the year 6.50 million 2014 6.10 million representing 15.7 2014 17.5 of the trade receivables are due from the Groups three largest customers. The balances due from these customers are current and are considered to be a low credit risk to the Group. Ageing of past due but not impaired trade receivables 2015 000 2014 000 One to 30 days 7198 4129 31 to 60 days 2247 2375 61 days plus 731 871 Total past due trade receivables 10176 7375 Movement in the allowance for doubtful debts Balance at the beginning of the year 412 363 Impaired losses recognised 37 183 Amounts written off as uncollectable 167 56 Impairment losses reversed 100 58 Net foreign currency exchange differences 34 20 Balance at the end of the year 216 412 8. Inventories The Group applies an inventory valuation policy of valuing at the lower of original cost or net realisable value. Where inventory is written down below cost estimates are made of the realisable value less cost to sell to determine the net realisable value. Costs incurred in bringing each product to its present location and conditions are accounted for as follows Raw materials as the purchase cost on a first-in first-out basis Finished goods and work-in-progress as the cost of direct materials and labour and a proportion of manufacturing overheads based on normal operating capacity but excluding borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business less estimated costs of completion and the estimated costs necessary to make the sale. 2015 000 2014 000 Raw materials 8382 7518 Work-in-progress 2546 3182 Finished goods 30449 23835 Total inventories 41377 34535 The value of inventories is net of 2.5 million 2014 2.3 million in respect of write-downs across all categories of inventory to net realisable value. All inventory write-down movements are included in the cost of sales. Certain inventories are subject to retention of title clauses where the inventory has not been paid for. FINANCIAL STATEMENTS 41 9. Property Plant and Equipment All classes of property plant and equipment are recorded initially at cost including costs directly attributable in bringing the asset to the working condition and ready for its intended use. Subsequently property plant and equipment is measured at cost less accumulated depreciation and accumulated impairment. Depreciation of property plant and equipment other than freehold land which is carried at cost is calculated on a straight-line basis over the estimated useful life of the asset as follows Buildings 40 years Plant and equipment Two to 20 years Furniture fittings and other Five to 10 years The estimation of the useful lives of assets has been based on historical experience manufacturers warranties and managements judgement on the performance of the asset. Adjustments to useful lives are made when considered necessary. The depreciation charges are disclosed below. At each reporting date the Group assesses whether or not there is any indication that an asset may be impaired. Where an indicator of impairment exists the Group makes a formal estimate of the recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. An item of property plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset calculated as the difference between the net disposal proceeds and the carrying amount of the item is included in the income statement in the year in which the item is derecognised. Note Freehold Land 000 Freehold Buildings 000 Plant and Equipment 000 Furniture Fittings and Other 000 Total 000 Cost Balance 1 July 2013 7252 1682 69130 7143 85207 Additions 6 886 5507 476 6875 Disposals 1682 1017 300 2999 Net foreign currency exchange differences 2800 250 3050 Balance 30 June 2014 7258 886 70820 7069 86033 Additions 11059 8607 490 20156 Disposals 925 241 1166 Net foreign currency exchange differences 5003 581 5584 Balance 30 June 2015 7258 11945 83505 7899 110607 Accumulated depreciation and impairment Balance 1 July 2013 1682 32510 4714 38906 Depreciation expense 3 6203 427 6630 Disposals 1682 329 209 2220 Net foreign currency exchange differences 1882 188 2070 Balance 30 June 2014 36502 4744 41246 Depreciation expense 3 5767 635 6402 Disposals 722 230 952 Net foreign currency exchange differences 3106 330 3436 Balance 30 June 2015 44653 5479 50132 Carrying value As at 30 June 2014 7258 886 34318 2325 44787 As at 30 June 2015 7258 11945 38852 2420 60475 Certain prior year balances have been restated to classify cost and accumulated depreciation on a consistent basis to the current year. 42 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 9. Property Plant and Equipment continued The cost of work-in-progress included within Freehold Buildings and Plant and Equipment at 30 June 2015 is 23901000 2014 6569000. The majority of this amount relates to the cost of construction fit-out and new equipment for Skellerups new Dairy Rubberware Development and Manufacturing facility Project Viking at Wigram Christchurch New Zealand. Construction of the new facility began in November 2014 with completion scheduled for mid-2016. Capital expenditure commitments at 30 June 2015 are 27818000 2014 27356000. The majority of these commitments are associated with Project Viking including contractual arrangements for the construction and fit-out of the facility at Wigram. 10. Intangible Assets The Groups intangible assets consist mainly of goodwill software costs and land-use rights. Note Goodwill 000 Software 000 Other 000 Total 000 Cost Balance 1 July 2013 44540 8103 117 52760 Additions 1759 236 1995 Disposals Net foreign currency exchange differences 1293 10 1303 Balance 30 June 2014 45006 8329 117 53452 Additions 37 247 284 Disposals 92 92 Net foreign currency exchange differences 2233 18 25 2276 Balance 30 June 2015 47276 8502 142 55920 Accumulated amortisation Balance 1 July 2013 5063 117 5180 Disposals Amortisation expense 3 828 828 Balance 30 June 2014 5891 117 6008 Disposals 92 92 Amortisation expense 3 902 902 Net foreign currency exchange differences 25 25 Balance 30 June 2015 6701 142 6843 Carrying value of goodwill and intangible assets As at 30 June 2014 45006 2438 47444 As at 30 June 2015 47276 1801 49077 Goodwill Goodwill acquired in a business combination is measured initially at cost being the excess of the consideration transferred over the fair value of the Groups net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the subsidiary acquired the difference is recognised in the income statement. Separately recognised goodwill is tested annually for impairment and carried at cost less any accumulated impairment losses. Impairment losses on goodwill are not reversed. The Group determines whether or not goodwill associated with items with indefinite useful lives is impaired at least on an annual basis. This requires certain assumptions being made in determining the recoverable amount of the cash- generating units using a value-in-use discounted cash flow methodology to which the goodwill has been allocated. The assumptions used in determining the recoverable amount and the carrying amount of goodwill are detailed below. FINANCIAL STATEMENTS 43 10. Intangible Assets continued Software Identifiable intangible assets which are acquired separately or in a business combination are capitalised at cost at the date of acquisition and stated at cost less any accumulated amortisation and impairment losses. Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Software costs are recorded as intangible assets and amortised over a period of 10 years. Research and development costs Research costs are expensed as incurred. Development expenditure incurred on an individual project is carried forward when its future recoverability can be regarded reasonably as assured. Following the initial recognition of the development expenditure the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure carried forward is amortised over the period of expected future sales from the related project. The amortisation period and amortisation method for development costs is reviewed at each financial year-end. If the useful life or method of consumption is different from that of the previous assessment changes are made accordingly. Impairment tests for goodwill i Description of cash-generating units Goodwill acquired through business combinations has been allocated to the business units acquired. Subsequent business reorganisations within the Group have resulted in some original cash-generating units being combined with other Group businesses. In such circumstances the original goodwill has been allocated across the combined cash- generating unit to determine fairly the recoverable amount against the value in use. The goodwill allocated to each cash-generating unit is shown in the table below. The changes in goodwill recorded are attributable to exchange rate movements. The net present value of future estimated cash flows exceeds the recoverable amount of goodwill allocated to each cash- generating unit based on a value-in-use calculation. A pre-tax discount rate of 12.76 2014 14.19 has been applied to discount future estimated cash flows to their present values. Cash-generating unit 2015 000 2014 000 Gulf 31029 30431 Ambic 9296 7906 Deks 4040 3834 Thorndon 1751 1751 Stevens Filterite 431 431 Ultralon Australia 729 653 Total goodwill 47276 45006 ii Assumptions used to determine the recoverable amount The future cash flows generated have been determined from the business plans and detailed budgets prepared by management as part of the annual business planning that is reviewed and approved by the Board of Directors. Such forecasts analyse and quantify a range of growth objectives which form the basis for determining the business growth and direction over the next five years. For periods beyond 2015 the Group anticipates that business results will continue to improve due to new product developments the benefits of established customer relationships and expansion into new and existing niche markets. The cash flow in perpetuity is represented by the realisation value of the net assets at a terminal growth rate of 1.5 at the end of the fifth year. A number of attributes contribute to the overall growth of these businesses over the future five-year period under review. The revenue growth percentages range from 3 to 20 on average per annum over the five years across the individual cash-generating units. Key assumptions used in the value-in-use calculations are as follows 44 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 10. Intangible Assets continued Revenue assumptions Revenue has been forecast to increase moderately over the following five-year period in line with the Groups strategic business plans to develop and introduce new products in addition to continuing to support and grow the Groups existing global customer relationships. Discount rate assumptions The discount rate is intended to reflect the time value of money and the risks specific to each cash-generating unit achieving its forecast cash flows. In determining the appropriate discount rate regard has been given to the weighted average cost of capital of the Group which has been updated as at 30 June 2015 to reflect the current market interest rates and the additional cost of capital applicable in the current risk environment. Commodity cost pricing assumptions With the base raw material component being synthetic and natural rubbers sourced from Asia the pricing of these raw materials can fluctuate many of the synthetics are by-products of the petrochemical industry and natural rubbers are influenced by global supply and demand influences. Pricing assumptions have been made in the Group forecasts that any cost increases driven by commodity price changes will be passed through to customers. Market share assumptions In preparing forecasts the Groups business plans show no loss of market share. The Groups strategy is to continue to expand in global markets especially in North America and Europe. This is the case particularly for the Gulf cash- generating unit which has dedicated manufacturing and distribution capabilities established in these markets. Growth rate assumptions The growth rates have been based on business plan assumptions applied in the preparation of the annual budgets for the new financial year and the following four years. This process is based on key strategies that have been quantified at a product and customer level reviewed by senior management and signed off by the Board of Directors. iii Sensitivity to assumption changes Estimates made of future cash flows are based on current market conditions. With trading across a number of different products covering a wide industry base and through a number of international markets the risk of significant change to cash flow projections is mitigated. Any change in future cash flow projections which is influenced by price changes foreign currency movements and competitor activities is expected to have only minimal impact and is unlikely to cause an impairment risk to the goodwill allocated to the various cash-generating units particularly with the net present value of each cash-generating unit reported being significantly above the carrying value of the net assets including goodwill. 11. Trade and Other Payables Trade and other payables are carried at amortised cost and due to their short-term nature are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and paid usually within 30 to 60 days of recognition. The net amount of GSTVAT payable to the taxation authority is included as part of payables in the balance sheet. 2015 000 2014 000 Trade payables 10104 9876 Employee entitlements 2264 1904 ACC Partnership Programme accrual 181 192 Sundry payables and accruals 11554 12270 GST payable 939 1529 Total trade and other payables 25042 25771 The average credit period on purchases of all goods and services represents an average of 35 days credit 2014 33 days credit. The Group has financial risk management policies in place to ensure that all payables are met within acceptable terms and conditions of purchase. FINANCIAL STATEMENTS 45 12. Provisions Provisions are recognised when the Group has a present obligation legal or constructive as a result of a past event. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed for example under an insurance contract the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. Provisions are measured at the present value of managements best estimates of the expenditure required to settle the present obligation at the balance date. If the effect of the time value of money is material provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and where appropriate the risks specific to the liability. Where discounting is used the increase in the provision due to the passage of time is recognised as a finance cost. 2015 000 2014 000 Provisions Employee entitlements 6601 6501 Make-good 3191 3191 Warranties 1454 1264 Total provisions 11246 10956 Current 8569 7320 Non-current 2677 3636 Total provisions 11246 10956 Make- good 000 Warranties 000 Balance 1 July 2013 2893 Additional provisions recognised 3191 1018 Reductions arising from paymentssacrifices of economic benefits 1508 Reductions arising from remeasurement or settlement without cost 1088 Net foreign currency exchange differences 51 Balance 30 June 2014 3191 1264 Additional provisions recognised 1061 Reductions arising from paymentssacrifices of economic benefits 823 Reductions arising from remeasurement or settlement without cost 96 Net foreign currency exchange differences 48 Balance 30 June 2015 3191 1454 Employee entitlements i Wages salaries annual leave and sick leave Liabilities for wages and salaries including non-monetary benefits annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in respect of employees services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. ii Long-service leave The liability for long-service leave is recognised and measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using a probability calculation of the employee reaching the future service milestones. Consideration is given to expected future wage and salary levels experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date with terms to maturity and currencies that match as closely as possible the estimated future cash outflows. 46 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 12. Provisions continued iii Defined contribution scheme The Group contributes to post-employment schemes for its employees. Under these schemes the benefits received by the employee are determined by the amount of the contribution paid by the Group together with any investment returns and hence the actuarial and investment risk is borne entirely by the employee. Therefore because the Groups obligations are determined by the amount paid during each period no actuarial assumptions are required to measure the obligation or the expense. Make-good costs The provision for make-good costs represents the estimated future costs to the Group of relocating and recommissioning plant and equipment for its Dairy Rubber Development and Manufacturing activity to the new site at Wigram. Warranties In determining the level of provision required for warranties the Group has made judgements in respect of the expected performance of products and the costs of rectifying any products that do not meet the customers quality standards. The provision for warranty claims represents the present value of the Directors best judgement or estimate of the future outflow of economic benefits that will be required under the Groups various product warranty programmes. The estimate has been made on the basis of the expected performance of products historical warranty trends the costs of rectifying any products that do not meet the customers quality standards and insurance arrangements the Group has in place. The actual cost may vary as a result of new materials altered manufacturing processes or other events affecting product quality. 13. Interest-bearing Loans and Borrowings All loans and borrowings are recognised initially at the fair value of the consideration received less directly attributable transaction costs. After initial recognition interest-bearing loans and borrowings are measured subsequently at amortised cost using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Effective Interest Rate Carrying Amount 000 Balance 30 June 2015 Non-current liabilities Secured at amortised cost Bank loans - NZD term loan 4.69 10750 Total non-current liabilities 10750 The carrying amounts disclosed above approximate fair value. The bank loans are provided under a 40 million multi-currency facility agreement with ANZ Bank New Zealand Limited ANZ Bank which has a review date of 29 June 2018. Derivative financial instruments are used by the Group in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates. No such instruments were in place during the year or at year-end. Apart from the assets held by Skellerup Rubber Products Jiangsu Limited some of the assets held by Tumedei SpA and some other minor assets the carrying amount of tangible assets totalling 143.9 million is pledged as security to ANZ Bank to secure the above term loans. Borrowing costs directly attributable to the acquisition construction or production of a qualifying asset i.e. an asset which necessarily takes a substantial period of time to prepare for its intended use or sale are capitalised as part of the cost of that asset. All other borrowing costs are expensed in the period in which they occur. For the current year 252693 of interest costs were capitalised 2014 Nil. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. FINANCIAL STATEMENTS 47 14. Contributed Equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction net of tax from the proceeds. Number of Shares Value 000 Balance 1 July 2013 192805807 69732 Balance 30 June 2014 192805807 69732 Balance 30 June 2015 192805807 69732 All shares are fully paid and have no par value. Each ordinary share confers on the holder one vote at any shareholder meeting of the Company and carries the right to dividends. As at 30 June 2015 there are also 1947533 redeemable ordinary shares on issue 2014 1947533. These redeemable ordinary shares were issued by the Company on 26 October 2011 1947533 in support of the Chief Executive Officers Incentive Scheme which is described in Note 17. The Directors objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. The Directors aim to provide a capital structure which Provides an efficient and cost-effective source of funds Is balanced with external debt to provide a secure structure to support the short and long-term funding of the Group and Ensures that the ratio of funds sourced from shareholders and external debt is maintained proportionately at a level which does not create a credit and liquidity risk to the Group. The Company is listed on the New Zealand Exchange and is therefore subject to continuous disclosure obligations to inform shareholders and the market of any matters which affect the capital of the Company. This includes changes to the capital structure new share issues dividend payments and any other significant matter which affects the creditworthiness or liquidity of the Group. The Group is not subject to any externally imposed capital requirements. 15. Finance Costs 2015 000 2014 000 Interest on bank overdrafts and borrowings 293 260 Bank facility fees 123 473 Interest capitalised 253 Total finance costs in Income Statement 163 733 16. Reserves 2015 000 2014 000 Reserve balances Cash flow hedge reserve 476 2 Foreign currency translation reserve 4618 14414 Employee share plan reserve 408 302 Total reserves 4686 14110 48 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 16. Reserves continued The cash flow hedge reserve is intended to recognise the fair value movements of the effective derivatives held to hedge interest rate and foreign currency risk. A summary of movements is shown in the table below. Note 2015 000 2014 000 Cash flow hedge reserve Balance at the beginning of the year 2 51 Gainloss recognised on cash flow hedges Forward foreign exchange contracts 672 67 Interest rate swaps 2 Income tax related to gainslosses recognised in other comprehensive income 5 194 16 Movement for the year 478 53 Balance at the end of the year 476 2 Exchange differences relating to the translation of values from the functional currencies of the Groups foreign subsidiaries into New Zealand dollars are brought to account by entries made directly to the foreign currency translation reserve. Gains and losses on hedging instruments that are designated as hedges of net investments in foreign operations are included also in the foreign currency translation reserve. A summary of movements is shown in the table below. Note 2015 000 2014 000 Foreign currency translation reserve Balance at the beginning of the year 14414 9567 Gainloss recognition Foreign exchange movements on translation of foreign operations 10184 5510 Income tax related to gainslosses recognised in other comprehensive income 5 388 291 Prior-year adjustment for tax 372 Movement for the year 9796 4847 Balance at the end of the year 4618 14414 The employee share plan reserve is used to record the value of share-based payments provided to employees including key management personnel as part of their remuneration. A summary of movements is shown in the table below. Note 2015 000 2014 000 Employee share plan reserve Balance at the beginning of the year 302 196 Expense recognised for the year 17 106 106 Balance at the end of the year 408 302 17. Share-based Incentive Scheme The Group operates a share-based incentive scheme for the Chief Executive Officer whereby redeemable ordinary shares were issued on 26 October 2011 and held in trust under a Deed which allows for the shares to convert to ordinary shares if fully paid at the option of the Chief Executive Officer in a future period. The cost of the equity-settled transaction is recognised over the period in which the conditions are fulfilled. The cumulative expense recognised at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Groups best estimate of the number of equity instruments that will vest ultimately. The expense or credit for a period represents the movement in the cumulative expense recognised as at the beginning and end of that period. The cumulative expense over the vesting period is recognised through the employee share plan reserve in equity. FINANCIAL STATEMENTS 49 17. Share-based Incentive Scheme continued No expense is recognised for equity that does not vest. Where an equity award is cancelled it is treated as if it vested on the date of cancellation. No further expense is recognised and the cumulative balance in the employee share plan reserve transfers to retained earnings. Any cash contribution made towards the equity share scheme at the grant date has been offset against the initial recognised cost of the expired vesting period. The redeemable ordinary shares issued on grant date have been fair valued under the terms defined by New Zealand International Financial Reporting Standards NZ IFRS-2. The fair value determined is being recognised as an employee incentive scheme expense over the estimated vesting period. a Recognised share-based employee incentive scheme The expense recognised for the Chief Executive Officers incentive scheme is as follows 2015 000 2014 000 Amount at the beginning of the year 283 177 Share-based incentive scheme expensed during the year 106 106 Amount at the end of the year 389 283 b The share-based incentive scheme The scheme has the following attributes A total of 1947533 redeemable ordinary shares was issued to Skellerup Holdings Employee Trustee Company Limited the Trustee to hold on behalf of the Chief Executive Officer on 26 October 2011. The Trustee is a wholly owned subsidiary of Skellerup Holdings Limited and acts as a corporate trustee. The Trustee subscribed for the 1947533 redeemable ordinary shares at an issue price of 1.2534 being the volume- weighted average price for the 60 consecutive trading days prior to the date of issue. The redeemable ordinary shares have been paid to 1 cent. The redeemable ordinary shares carry only a fraction of the voting rights that would be exercised if the shares were fully paid ordinary shares. The fraction is equivalent to the proportion which is paid up to the total issue price. The redeemable ordinary shares are entitled to participate in any distribution of surplus assets on liquidation to the extent of the amount paid up on the shares. The redeemable ordinary shares are not eligible for dividends or other distributions until fully paid up and transferred from the Trustee to the Chief Executive Officer. The redeemable ordinary shares may be redeemed at the option of the Chief Executive Officer. The amount payable will be the balance of the issue price. Fifty percent of the shares vest on 26 October 2015 and a further fifty percent vest on 26 October 2016. The period in which the Chief Executive Officer can redeem the shares expires on 26 October 2018. When the redeemable ordinary shares have been fully paid and transferred to the Chief Executive Officer the shares shall convert to ordinary shares and rank in all respects equally with the Groups ordinary shares. c Pricing model The redeemable ordinary shares have been fair valued using the Black-Scholes formula. The fair value has been determined as 471000. 18. Earnings per Share Earnings per share is calculated as net profit attributable to members of the Parent adjusted to exclude any costs of servicing equity other than dividends divided by the weighted average number of ordinary shares. 2015 Cents per Share 2014 Cents per Share Basic and diluted earnings per share 11.38 21.31 Basic and diluted earnings per share excluding income and expenditure related to Canterbury earthquakes 11.38 10.76 Net tangible asset per share 56.70 49.58 50 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 18. Earnings per Share continued The earnings and weighted average number of ordinary shares used in the calculation of earnings per share are as follows 2015 000 2014 000 Net profit for the year attributable to trading 21933 20744 Net profit for the year attributable to insurance claims 20350 Earnings used in the calculation of earnings per share 21933 41094 2015 2014 Weighted average number of ordinary shares for the purposes of earnings per share 192805807 192805807 19. Retained Earnings 2015 000 2014 000 Balance at the beginning of the year 89069 64363 Net profit for the year 21933 41094 Payment of dividends 16388 16388 Balance at the end of the year 94614 89069 During the reported period a dividend of 5.0 cents per share was paid on 16 October 2014 and 3.5 cents per share on 26March 2015. All dividends paid were fully imputed with imputation tax credits totalling 6295510. 20. Financial Risk Management Objectives and Policies The Groups principal financial instruments comprise receivables payables bank loans and overdrafts cash and derivatives. Because of these financial instruments the principal financial risks to the Group are movements in foreign currency and interest rates. Credit risk and liquidity risk are considered also to be risk areas and are therefore closely managed. The Board reviews and agrees upon policies for managing financial risk. The Group enters into derivative transactions principally forward foreign currency contracts and interest rate swaps. The purpose is to manage the currency and interest rate risks arising from the Groups operations and its sources of finance. Credit risk is managed through regular review of aged analysis of receivable ledgers. The credit risk exposures are the receivables recorded in Note 7. Liquidity risk is monitored through the review of future rolling cash flow forecasts. These cash flow forecasts are updated on a weekly basis with particular emphasis placed on the prospective four-week period. These forecasts are monitored constantly against limitations of the entire debt facility. Risk exposures and responses i Interest rate risk The Groups exposure to market interest rates relates primarily to the Groups long-term debt obligations. The level of debt is disclosed in Note 13. A reasonable expected movement in the interest rate would not have a material impact on profit or equity. At balance date the Group had the following mix of financial assets and liabilities exposed to variable interest rates that are not designated in cash flow hedges 2015 000 2014 000 Financial assets Cash and cash equivalents 11580 16369 Financial liabilities Bank loans 10750 Net exposure 830 16369 FINANCIAL STATEMENTS 51 20. Financial Risk Management Objectives and Policies continued The Groups policy is to monitor its interest rate exposure and to hedge the volatility arising from interest rate changes by entering into interest rate swap contracts that cover a minimum of 50 of the core debt. Core debt is defined as debt in excess of 15 million that is not expected to be repaid from available cash flows within an 18-month time horizon. ii Foreign currency risk The Group imports raw materials and finished goods and exports finished goods to a number of foreign customers. The main foreign currencies traded are US dollars USD Euro dollars EUR Australian dollars AUD and British pounds GBP. The Group seeks to cover up to 100 of the net foreign currency cash flow forecast for the next 12-month period with foreign currency contracts. Where the foreign currency cash flows can be forecasted reliably beyond the future 12-month period such cash flows may also be covered by foreign currency contracts of up to 50 of the forecast cash flows. The Group also has translational currency exposures. Such exposures arise from subsidiary operating entities that transact in currencies other than the Groups functional currency. Currently the Group does not hedge these exposures. Foreign currency net monetary assets As at 30 June 2015 the Group has the following net monetary assets in foreign currency values which are in different currencies from the subsidiarys base currency and will revalue either through the income statement or the statement of comprehensive income Cash and Cash Equivalents 000 Receivables 000 Payables 000 Net Monetary Assets 000 30 June 2015 USD 664 4274 1342 3596 AUD 16 1761 312 1465 GBP 1 625 4 622 EUR 81 1280 34 1327 NZD 52 52 30 June 2014 USD 2201 8499 3813 6887 AUD 16 1631 195 1452 GBP 24 591 23 592 EUR 14 1091 146 959 NZD 271 271 The foreign-currency-denominated values as shown in the table above converted to New Zealand dollars as follows 2015 000 2014 000 Financial assets Cash and cash equivalents 1133 2601 Trade and other receivables 11869 14327 13002 16928 Financial liabilities Trade and other payables 2453 4627 Net exposure 10549 12301 52 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 20. Financial Risk Management Objectives and Policies continued Foreign currency sensitivity Net Profit after Tax Net Equity HigherLower 2015 000 2014 000 2015 000 2014 000 Foreign currency rates Increase 10 679 794 7502 6739 Decrease -5 393 460 4343 3902 Significant assumptions used in the foreign currency exposure sensitivity analysis are as follows a The range of possible foreign exchange rate movements was determined by a review of the last two years historical movements and economists views of future movements. b The Groups trend of trading in foreign currency values is not expected to change materially over future periods. c The Groups net exposure to foreign currency at balance date is representative of past periods and is expected to remain relatively consistent for the future 12-month period. d The price sensitivity of derivatives has been based on a reasonably possible movement of the spot rate applied at balance date. e The effect on other comprehensive income results from foreign currency revaluations through the cash flow hedge reserve and the foreign currency translation reserve. f The sensitivity analysis does not include financial instruments that are non-monetary items as these are not considered to give rise to a currency risk. iii Credit risk All customers who trade with any Group subsidiary on credit terms are subject to credit verification procedures including an assessment of their independent credit rating and financial position. Risk limits are set for individual customers according to the risk profile of each and where it is considered appropriate registrations are made to record a secured interest in the products supplied. Receivable balances are monitored on an ongoing basis with appropriate provisions held for doubtful debts. iv Liquidity risk The Group monitors its future cash inflows and outflows through rolling cash flow forecasts. At balance date the liquidity risk is considered to be low with the bank facility not fully drawn compliance with bank covenants and forecast cash flows reporting positive operating cash generation for the Group over the next financial year. The following maturity analysis shows the profile of future payment commitments of the Group. With the available bank facility and the ability for the business to generate future positive operating cash inflows the obligation to meet the forward commitments is considered to be a low risk. Maturity analysis of financial assets and liabilities The following table represents both the expected and contractual maturity and cash flows of receipts and payments. There is a further analysis of future operating lease commitments in Note 23 these are not included in this analysis. FINANCIAL STATEMENTS 53 20. Financial Risk Management Objectives and Policies continued Balance 30 June 2015 Zero to Six Months 000 Seven to 12 Months 000 One to Five Years 000 More than Five Years 000 Total 000 Financial assets Cash and cash equivalents 11580 11580 Trade and other receivables 44801 149 142 10 45102 Derivatives 32 32 56413 149 142 10 56714 Financial liabilities Trade and other payables 24581 327 122 12 25042 Interest-bearing loans 10750 10750 Derivatives 694 694 25275 327 10872 12 36486 Net total 31138 178 10730 2 20228 Balance 30 June 2014 Zero to Six Months 000 Seven to 12 Months 000 One to Five Years 000 More than Five Years 000 Total 000 Financial assets Cash and cash equivalents 16369 16369 Trade and other receivables 38261 539 38800 Derivatives 2 2 54632 539 55171 Financial liabilities Trade and other payables 24808 868 54 41 25771 Interest-bearing loans 15 9 24 Derivatives 24823 877 54 41 25795 Net total 29809 338 54 41 29376 Fair value The financial instruments that have been fair valued by the Group are detailed in Note 21 and have a fair value of 662000 2014 2000. Under the NZIFRS there are three methods available for estimating fair value of financial instruments. The methods are Level 1 the fair value is calculated using quoted prices in active markets. Level 2 the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the assets or liabilities either directly as prices or indirectly derived from prices. Level 3 the fair value is estimated using inputs for the asset or liability that are not based on observable market data. In determining the fair value of all financial instruments the Group has applied the Level 2 method of calculating fair value by using estimated inputs other than quoted prices that are observable for assets and liabilities either directly as prices or indirectly derived from prices. 21. Financial Instruments Financial assets in the scope of NZ IAS 39 Financial Instruments Recognition and Measurement are classified as either financial assets at fair value through profit or loss loans and receivables held-to-maturity investments or available- for-sale financial assets. When financial assets are recognised initially they are measured at fair value plus in the case of investments not at fair value through profit or loss directly attributable transaction costs. The Group determines the classification of its financial assets after initial recognition and when allowed and appropriate re-evaluates this designation at each financial year-end. 54 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 21. Financial Instruments continued Recognition and derecognition All regular purchases and sales of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase the asset. Regular purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Financial assets are derecognised when the Group no longer controls the contractual rights that comprise the financial instrument which is normally the case when the instrument is sold or all the cash flows attributable to the instrument are passed through to an independent third party. Gains and losses on financial assets are exclusive of interest and dividends which are recognised separately. i Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category financial assets at fair value through profit and loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Derivatives are classified also as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognised in the income statement. Detail of the Groups financial assets and liabilities are shown below. Significant accounting policies and methods adopted including the criteria for recognition the basis of measurement and the basis in which income and expenses are recognised in respect of each class of financial asset financial liability and equity instrument are disclosed in the preceding notes. Financial Assets Cash and Bank Balances 000 Trade and Other Receivables 000 Derivatives 000 Total Financial Assets 000 Balance 30 June 2015 Fair value through profit and loss 11580 11580 Loans and receivables 45102 45102 Hedge instruments 32 32 Total financial assets 11580 45102 32 56714 Balance 30 June 2014 Fair value through profit and loss 16369 16369 Loans and receivables 38800 38800 Hedge instruments 2 2 Total financial assets 16369 38800 2 55171 Financial Liabilities Trade and Other Payables Derivatives Borrowings Total Financial Liabilities 000 000 000 000 Balance 30 June 2015 Hedge instruments 694 694 Other financial liabilities 25042 10750 35792 Total financial liabilities 25042 694 10750 36486 Balance 30 June 2014 Hedge instruments Other financial liabilities 25771 24 25795 Total financial liabilities 25771 24 25795 Where the financial assets and financial liabilities are shown at amortised cost their cost approximates fair value. The Group uses derivative financial instruments such as forward currency contracts and interest rate swaps to hedge its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are recognised initially at fair value on the date on which a derivative contract is entered into and are remeasured subsequently to fair value. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. FINANCIAL STATEMENTS 55 21. Financial Instruments continued Any gains or losses arising from changes in the fair value of derivatives except for those that qualify as cash flows hedges are taken directly to profit or loss for the year. The fair values of forward currency contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair values of interest rate swap contracts are determined by reference to market values for similar instruments. For the purposes of hedge accounting hedges are classified as Fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability or Cash flow hedges when they hedge the exposure to variability in cash flows that is attributable either to a particular risk associated with a recognised asset or liability or to a forecast transaction. At the inception of a hedge relationship the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objectives and strategies for undertaking the hedge. The documentation includes identification of the hedging instrument the hedged item or transaction the nature of the risk being hedged and how the entity will assess the hedging instruments effectiveness in offsetting the exposure to changes in the hedged items fair values or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair values or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Hedges that meet the strict criteria for hedge accounting are accounted for as follows ii Cash flow hedges Cash flow hedges are hedges of the Groups exposure to variability in cash flows which is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in the statement of comprehensive income while the ineffective portion is recognised in the income statement. Amounts taken to the statement of comprehensive income are transferred out of the statement of comprehensive income and included in the measurement of the hedged transaction sales or inventory purchases when the forecast transaction occurs. If the forecast transaction is no longer expected to occur amounts previously recognised in the statement of comprehensive income are transferred to the income statement. If the hedging instrument expires or is sold terminated or exercised without replacement or rollover or if its designation as a hedge is revoked amounts previously recognised in the statement of comprehensive income remain in the statement of comprehensive income until the forecast transaction occurs. If the related transaction is not expected to occur the amount is recognised in the income statement. Derivative financial instruments Details of the derivatives held and their fair values at balance date were as follows 2015 000 2014 000 Current assets Forward currency contracts - cash flow hedge 32 2 Total assets 32 2 Current liabilities Forward currency contracts - cash flow hedge 694 Total liabilities 694 Net assetsliabilities 662 2 56 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 21. Financial Instruments continued Forward exchange contracts The Group imports a large proportion of its raw materials and finished goods and has export sales to a number of customers. As a result the Group has both inward and outward foreign currency cash flows. Both the inward cash flows and the outward cash flows are tested and hedged against highly probable forecasted sales and purchases. The main currency exposures are in US dollars Euro dollars Australian dollars and British pounds. At balance date details of outstanding foreign currency contracts are as follows Notional Amount Average Exchange Rates 2015 2014 2015 2014 000 000 Buy NZDSell EUR Maturing 2015 three to 12 months 2014 Nil 1382 0.6512 Buy NZDSell GBP Maturing 2015 three to 12 months 2014 Nil 1472 0.4722 Buy NZDSell USD Maturing 2015 three to 12 months 2014 Nil 3611 0.6980 Buy NZDSell AUD Maturing 2015 three to 12 months 2014 Nil 4721 0.9319 Buy GBPSell EUR Maturing 2015 Nil 2014 one to three months 676 39 1.3688 1.1751 The forward currency contracts are considered to be highly effective hedges as they are matched against forecast inventory purchases and export sales and any gain or loss on the contracts attributable to the hedge risk is taken directly to other comprehensive income. Amounts are transferred out of other comprehensive income and included in the measurement of the hedged transaction sales or purchases when the forecast transaction occurs. Movements in the cash flow hedge reserve are recorded in the Statement of Comprehensive Income. Credit risk Credit risk arises from potential failure of counterparties to meet their obligations at the maturity dates of contracts. Because the counterparty of the above financial derivatives is the ANZ Bank New Zealand Ltd there is minimal credit risk. FINANCIAL STATEMENTS 57 22. Related Parties The consolidated financial statements incorporate the following significant companies a Subsidiary companies Name of Entity Principal Activities Country of Incorporation Holding Balance Date2015 2014 Skellerup Industries Limited Manufacturing and Sales New Zealand 100 100 30 June Skellerup Growth Limited Property New Zealand 100 100 30 June Ambic Equipment Limited Manufacturing and Sales UK 100 100 30 June Deks Industries Pty Limited Manufacturing and Sales Australia 100 100 30 June Gulf Rubber Australia Pty Limited Manufacturing and Sales Australia 100 100 30 June Gulf US Incorporated Distribution USA 100 100 30 June Masport Incorporated Manufacturing and Sales USA 100 100 30 June Skellerup Rubber Products Jiangsu Limited Manufacturing and Sales China 100 100 31 December Tumedei SpA Manufacturing and Sales Italy 100 100 30 June Held indirectly by the Parent company through its direct subsidiaries. b Compensation of key management The remuneration of Directors and senior management personnel during the year was as follows 2015 000 2014 000 Short-term benefits Directors fees 314 291 Senior management personnels salaries and incentives 2212 2173 Contribution to defined contribution scheme for senior management personnel 85 96 Long-term benefits Share-based incentive scheme expensed during the year 106 106 Mr John Strowger was appointed a Director of Skellerup on 9 March 2015. Mr Strowger is a partner of Chapman Tripp the Groups legal advisors. Chapman Tripp has charged fees during the year amounting to 86948 excluding GST. The fees were charged on normal terms and conditions. There was 11714 excluding GST outstanding at balance date relating to these transactions. 23. Lease Commitments The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether or not the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether or not the arrangement conveys a right to use the asset. Operating leases The Group has entered into commercial leases on properties motor vehicles and plant. 2015 000 2014 000 Payments recognised as an expense - Minimum lease payments 5615 5361 Non-cancellable operating lease commitments - Within one year 5063 4893 - After one year but not more than five years 10915 10221 - After more than five years 3691 2382 Total minimum lease payments 19669 17496 58 SKELLERUP HOLDINGS 2015 ANNUAL REPORT 24. Contingent Liabilities 2015 000 2014 000 Bank guarantee provided to the New Zealand Exchange 75 75 The Group receives claims from time to time in relation to products supplied. Where the Group expects to incur a cost to replace or repair the product supplied and can reliably measure that cost that cost is recognised. The Group has general liability and professional indemnity insurance in the event that there are warranty claims. 25. Significant Events after Balance Date The Directors have agreed to pay a final dividend fully imputed of 5.5 cents per share on 15 October 2015 to shareholders on the register at 5.00pm on 2 October 2015. This dividend is not recorded in the financial statements. There are no other events subsequent to balance date that require additional disclosure. 26. New Accounting Standards Amendments and Interpretations and IFRIC Interpretations There is no new standard amendment or interpretation which has been issued and is effective that has a significant impact on the Group.We have not yet completed a formal assessment of new standards amendments and interpretations that have been issued and are not yet effective. These are not expected to have a material impact on the Groups financial statements. FINANCIAL STATEMENTS 59 Directors a Directors holding office during the year Sir Selwyn Cushing Non-Executive Elizabeth Coutts Independent Dr Ian Parton Independent John Strowger from 9 March 2015 Independent David Mair Chief Executive b Directors remuneration and other benefits Directors remuneration and other benefits required to be disclosed pursuant to section 2111 of the Companies Act 1993 for the year ended 30 June 2015 were as follows Group 2015 000 2014 000 Sir Selwyn Cushing 140 140 Elizabeth Coutts 81 81 Dr Ian Parton 70 70 John Strowger 23 David Mair Total Directors fees 314 291 David Mair remuneration as CEO Base salary 542 542 Short term incentive Total cash remuneration 542 542 KiwiSaver company contribution 16 16 Long-term incentive share scheme expense 106 106 Other remuneration 122 122 Total remuneration 664 664 Directors Interests Pursuant to section 1402 of the Companies Act 1993 and section 299 of the Financial Markets Conduct Act 2013 the Directors named below have made a general disclosure of interest during the period 1 July 2014 to 14 August 2015 by a general notice disclosed to the Board and entered in the Companys Interest Register. Liz Coutts Retired as Director of Ravensdown Fertiliser Co-operative Limited on 31 July 2014 Appointed Chair of Oceania Healthcare Limited on 5 November 2014 Interest in 601960 shares held by Como Nominees Limited following purchase of 20000 shares on 20 February 2015 Appointed Vice President of Institute of Directors in New Zealand Inc on 15 June 2015 John Strowger Interest in 42320 shares held by FNZ Custodians Limited purchased on 9 March 2015 David Mair Interest in 2527506 shares held by family trust following purchase of 100000 shares on 20 February 2015 Retired as Director of The a2 Milk Company Limited on 30 March 2015 Non beneficial interest as part owner of Fund Manager holding 2046444 shares held by Public Trust Fort Nominees Limited following purchase of various parcels in the period 8 September 2014 to 10 August 2015 OTHER ANNUAL REPORT DISCLOSURES 60 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Directors Shareholdings Directors held interests in the following shares in the Company as at 30 June 2015. Held with Non-beneficial Interest Held by Associated Persons Sir Selwyn Cushing 1400000 12173826 Elizabeth Coutts 581960 David Mair 1826444 2527506 Dr Ian Parton 100000 John Strowger 42320 Employee Remuneration The number of employees whose remuneration and benefits are within defined bands are as follows Remuneration Range 000 No. of Employees Remuneration Range 000 No. of Employees Remuneration Range 000 No. of Employees 100-110 12 190-200 6 340-350 1 110-120 7 200-210 1 420-430 2 120-130 5 210-220 4 440-450 1 130-140 11 220-230 5 460-470 1 140-150 3 230-240 1 550-560 1 150-160 10 260-270 2 160-170 6 270-280 2 170-180 4 310-320 2 180-190 4 320-330 1 Remuneration includes salary performance bonuses employers contributions to superannuation health and insurance plans motor vehicle and other sundry benefits received in their capacity as employees. Gender and Diversity as at 30 June 2015 Directors Officers 2015 2014 2015 2014 Male 4 3 2 2 Female 1 1 0 0 Total 5 4 2 2 Distribution of Ordinary Shares and Shareholders as at 14 August 2015 Size of shareholding Number of shareholders of shareholders Number of shares of Shares 1 - 4999 1959 35.70 5103653 2.65 5000 - 9999 1353 24.66 9048123 4.69 10000 - 49999 1850 33.72 35636952 18.48 50000 - 99999 183 3.34 12045894 6.25 100000 - 499999 118 2.15 18567516 9.63 500000 - 999999 10 0.18 7457779 3.87 1000000 and over 14 0.26 104945890 54.43 Totals 5487 100.00 192805807 100.00 FINANCIAL STATEMENTS 61 Substantial Security Holders Pursuant to the Financial Markets Conduct Act 1993 the substantial security holders as at 14 August 2015 that they were substantial security holders in the Company and held a substantial holding in the number of ordinary shares shown below Number of Shares Accident Compensation Corporation 15483642 8.03 New Zealand Superannuation Fund Nominees Limited 13644282 7.08 Sir Selwyn Cushing 12173826 6.31 AMP Capital Investors Limited 11358818 5.89 Twenty Largest Shareholders as at 14 August 2015 Number of Shares 1 Accident Compensation Corporation 19081450 9.89 2 New Zealand Superannuation Fund Nominees Limited 13392793 6.94 3 H G Limited 10616169 5.50 4 BNP Paribas Nominees Nz Limited 9564795 4.96 5 National Nominees New Zealand Limited 6205816 3.21 6 Forsyth Barr Custodians Limited 5791005 3.00 7 Custodial Services Limited 3250244 1.68 8 Superlife Trustee Nominees Limited 3199314 1.65 9 Citibank Nominees New Zealand Limited 3132947 1.62 10 FNZ Custodians Limited 2628100 1.36 11 Forsyth Barr Custodians Limited 2615629 1.35 12 David William Mair John Gordon Phipps 2527506 1.31 13 New Zealand Permanent Trustees Limited 2380000 1.23 14 Maxima Investments Limited 2371300 1.22 15 Tasman Equity Holdings Limited 2340000 1.21 16 Public Trust Forte Nominees Limited 2046444 1.06 17 BNP Paribas Nominees Nz Limited 1942338 1.00 18 Tea Custodians Limited 1614279 0.83 19 Forsyth Barr Custodians Limited 1533506 0.79 20 JP morgan Chase Bank NA 1486084 0.77 OTHER ANNUAL REPORT DISCLOSURES 62 SKELLERUP HOLDINGS 2015 ANNUAL REPORT Directors Sir SJ Cushing KNZM CMG Chairman EM Coutts BMS CA DW Mair BE MBA IM Parton BE Hons Ph.D DistFIPENZ FIoD WJ Strowger LLB Hons Officers DW Mair BE MBA Chief Executive Officer GR Leaming BCom CA Chief Financial Officer Registered Office L3 205 Great South Road Greenlane Auckland 1051 New Zealand PO Box 74526 Greenlane Auckland 1546 New Zealand Telephone 64 9 523 8240 Email easkellerupgroup.com Website www.skellerupholdings.co.nz Corporate Directory Legal Advisors Chapman Tripp 23 29 Albert Street Auckland 1010 New Zealand Bankers ANZ Bank New Zealand Limited 23 29 Albert Street Auckland 1010 New Zealand Auditors Ernst Young 2 Takutai Square Britomart Auckland 1010 New Zealand Share Registrar Computershare Investor Services Limited Private Bag 92119 Auckland 1142 New Zealand 159 Hurstmere Road Takapuna Auckland 0622 New Zealand FINANCIAL STATEMENTS 63 Managing your shareholding online To change your address update your payment instructions and to view your investment portfolio including transactions please visit www.computershare.co.nzinvestorcentre General enquiries can be directed to enquirycomputershare.co.nz Private Bag 92119 Auckland 1142 New Zealand Telephone 64 9 488 8777 Facsimile 64 9 488 8787 Please assist our registrar by quoting your CSN or shareholder number. SKELLERUP HOLDINGS 2015 ANNUAL REPORT Skellerup Holdings Limited L3 205 Great South Road Greenlane Auckland 1051 New Zealand PO Box 74526 Greenlane Auckland 1546 New Zealand T 64 9 523 8240 E easkellerupgroup.com W www.skellerupholdings.co.nz SKELLERUPHOLDINGS2015ANNUALREPORT