FY18 Full Year Result Announcement
Kathmandu Holdings Limited
223 Tuam Street, Christchurch 8011 249 Park Street, South Melbourne, Victoria 3205
PO Box 1234, Christchurch 8140, New Zealand PO Box 984, South Melbourne, Victoria 3205, Australia
Phone: +64 3 373 6110 Fax: +64 3 373 6116 Phone: +61 3 9267 9999 Fax: +61 3 9267 9933
kathmanduholdings.com
kathmandu.co.nz kathmandu.com.au
Kathmandu Holdings Limited
New Zealand Stock Exchange Listing Rules
Disclosure
Full Year Report
For the year ending 31 July 2018
Contents
Appendix 1
Media Announcement
Financial Statements
Auditors’ Report
Kathmandu Holdings Limited
223 Tuam Street, Christchurch 8011 249 Park Street, South Melbourne, Victoria 3205
PO Box 1234, Christchurch 8140, New Zealand PO Box 984, South Melbourne, Victoria 3205, Australia
Phone: +64 3 373 6110 Fax: +64 3 373 6116 Phone: +61 3 9267 9999 Fax: +61 3 9267 9933
kathmanduholdings.com
kathmandu.co.nz kathmandu.com.au
Appendix 1
Kathmandu Holdings Limited
Results for announcement to the market
Reporting Period: 12 months ending 31 July 2018
Previous Reporting Period: 12 months ending 31 July 2017
Amount (000’s) Percentage change
Revenues from ordinary activities $NZ 497,437 11.7%
Profit from ordinary activities after tax
attributable to security holder
$NZ 50,532 32.8%
Net profit attributable to security holders $NZ 50,532 32.8%
For commentary on the results please refer to the Media Announcement attached.
Dividends
(NZ $)
Amount per
security
Imputed amount per
security
Interim Dividend (paid 22 June 2018) $NZ 0.04 -
Final Dividend $NZ 0.11 $NZ 0.04277778
Record Date for Final Dividend 19 November 2018
Payment date for Final Dividend 30 November 2018
Financial Information
The Appendix 1 should be read in conjunction with the consolidated financial
statements for the year ended 31 July 2018.
2018
$
2017
$
Net tangible assets per security 0.13 0.24
Accounting Standards
These financial statements have been prepared in accordance with Generally
Accepted Accounting Practice in New Zealand. They comply with the New Zealand
Equivalents to International Financial Reporting Standards (NZ IFRS) and other
applicable Financial Reporting Standards, as appropriate for profit-oriented entities.
The financial statements also comply with International Financial Reporting
Standards (IFRS).
Information on Audit or Review
The report is based on financial statements which have been audited. The audit
report, which is unqualified, is on page 45 of the financial statements.
Loss/Gain of Control over Entities having Material Effect
Kathmandu Holdings Limited does not have any interests in entities which are not
controlled entities, nor does it have any interests in associate or joint venture entities.
Control has been gained over Kathmandu US Holdings LLC (20 March 2018) and
Oboz Footwear LLC (4 April 2018). Further information is available on page 35 and
36 of the consolidated financial statements.
---
Kathmandu Holdings Limited
FY2018 full year results
Record year for sales, profit, operating cash flow and full-year dividend payout
Sales increased by 11.7% to NZ$497.4m
Gross profit increased by 14.2% to NZ$315.5m
EBIT increased by 30.9% to NZ$74.6m
NPAT increased by 32.9% to NZ$50.5m
Obōz acquisition successful
$1,000 one-off bonus to all Kathmandu permanent team members
Kathmandu Holdings Limited (ASX/NZX: KMD) today announced net profit after tax (NPAT) of
NZ$50.5 million for the year ended 31 July 2018, an increase of NZ$12.5 million compared with
the prior year. Earnings before interest and tax (EBIT) increased by 30.9% to NZ$74.6 million for
the same period. A final dividend of NZ 11.0 cents per share will be paid, bringing the full year
payout to a record NZ 15.0 cents per share.
Summary of Results
NZD $m Change
FY2018 FY2017 NZD $m %
Sales 497.4 445.3 52.1 11.7%
Gross Profit 315.5 276.2 39.3 14.2%
EBITDA 89.8 70.8 19.0 26.8%
EBIT 74.6 57.0 17.6 30.9%
NPAT 50.5 38.0 12.5 32.9%
Chief Executive Xavier Simonet commented:
“We were delighted to achieve record profits this year as we balanced sales growth with gross
margin improvement. Sales growth was supported by the success of our key product groups,
improved promotional execution, inspiring digital content, and an enhanced in-store customer
experience. Top line growth combined with a focus on cost control, resulted in excellent profit
growth.”
Obōz acquisition
During the year we acquired Obōz, a premium US based outdoor footwear brand.
Chief Executive Xavier Simonet commented:
“The Obōz acquisition provides us with the opportunity to accelerate our international growth,
and diversify our product mix, geography, and channels to market. Kathmandu and Obōz are
well aligned in core principles of brand development, innovation, quality, customer service, and
sustainability.
As we grow our Kathmandu wholesale business, we welcome Obōz, an outdoor footwear
wholesaler with a customer base primarily in North America. We are excited by the
opportunity to develop complementary international wholesale channels for both the Obōz
and Kathmandu brands.”
Sales, Gross Margin and Inventory
Sales
Sales grew by 9.6% in Australia, our largest market. First half New Zealand sales were impacted
by lower levels of clearance stock, however this was more than offset by gross margin
improvement, with New Zealand gross profit 2% above FY2017. Online sales now comprise
9.4% of Kathmandu sales.
Sales Growth
1H FY2018
Same stores
2H FY2018
Same stores
FY2018
Same stores
FY2018
Total sales
Australia (AUD) 1.9% 11.6% 7.5% 9.6%
New Zealand (NZD) -6.3% 1.2% -2.4% -2.3%
Kathmandu Group (excl. Obōz)
(constant exchange rates)
-0.8% 8.5% 4.4% 6.1%
Note: Same store sales are for the 52 weeks ending 29 July 2018
Gross Margin
Gross margin increased 1.4% points from 62.0% in FY2017 to 63.4% in FY2018, which sits above
the long-term target range 61% to 63%. Increased full price sell through and higher average
selling prices contributed to the improvement.
Inventory
Total inventory levels increased by NZ$22.7m this year to NZ$111.9m. Included in this balance
is NZ$17.9m to support Kathmandu international and Obōz.
FY2018
NZD $m
FY2017
NZD $m
Change
NZD $m
Change
%
Inventory
111.9
89.2
22.7
25.4%
Operating Expenses
Operating expenses decreased by 0.7% as a percentage of sales compared to FY2017. They
include NZ$2.0m transaction costs for the Obōz acquisition, plus NZ$2.0m for an exceptional
bonus to Kathmandu employees who are not already on a bonus scheme.
Xavier Simonet commented: “We are delighted to pay out an exceptional $1,000 one-off bonus
to all Kathmandu permanent team members who are not part of an incentive program. This is
an acknowledgement of the contribution of all Kathmandu team members to the continued
performance and success of our company over the last three years. FY18 is a record year in
terms of sales, profit, and operating cash flow and we believe it is important to recognise the
role our team has played.”
Efficiencies were achieved in distribution labour following last year’s automation investment in
Australia, targeted promotional spend, and improved retail labour productivity.
Rent increased by NZ$5.2m. Excluding NZ$1.4m year-on-year exchange rate translation
movement, the constant currency rent increase was 6.1%.
Operating expenses (excluding depreciation)
FY2018
NZD $m
FY2017
NZD $m
Rent 67.4 62.2
% of Sales
13.6% 14.0%
Other operating expenses 158.3 143.2
% of Sales
31.8% 32.1%
Total operating expenses 225.7 205.4
% of Sales 45.4% 46.1%
Other Financial Information
We generated record operating cash flow of NZ$75.6m this year, and invested NZ$16.7m in
capital projects, primarily in expanding and updating our store network.
Net debt was NZ$31.4m at year end, following NZ$60m additional bank funding for the Obōz
acquisition in April 2018.
FY2018
NZD $m
FY2017
NZD $m
Capital Expenditure 16.7 13.3
Operating Cash Flow 75.6 67.3
Net Debt 31.4 6.9
Net Debt to Equity 6.9% 2.1%
Final Dividend
A final dividend of NZ 11.0 cents per share will be paid to shareholders on the register as at 19
November 2018. This brings the full year dividend to NZ 15.0 cents per share, a 15.4% increase
on the prior year. The dividend will be fully franked for Australian shareholders and fully
imputed for New Zealand shareholders.
Outlook
Chief Executive Xavier Simonet commented:
“It is highly motivating for our team to have achieved three years of strong profit growth in our
core Australasian business. Our customers have reacted positively to innovative products and
engaging brand content. Being an inspiring brand and bringing to market original, sustainable,
engineered and adaptive products represent Kathmandu’s company ethos. Continuing to drive
sales growth in our core market remains a key management focus.
It’s an exciting time for the business as we welcome Obōz to the Group and accelerate our
international growth. In Kathmandu and Obōz, we have two great brands with significant
growth potential in North America and Europe.”
ENDS
Media:
Helen McCombie
Citadel-MAGNUS
Tel: + 61 2 8234 0103
Investors:
Reuben Casey
Chief Operating and Financial Officer
Tel: +64 3 968 6166
---
Kathmandu Holdings Limited
FINANCIAL STATEMENTS
31 July 2018
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
2
Introduction and Table of Contents
Directors’ Approval of Consolidated Financial Statements 3
Consolidated Statement of Comprehensive Income 4
Consolidated Statement of Changes in Equity 5
Consolidated Balance Sheet 6
Consolidated Statement of Cash Flows 7
Notes to the Financial Statements 9
Section 1: Basis of Preparation 9
Section 2: Results for the Year 11
Section 3: Operating Assets and Liabilities 18
Section 4: Capital Structure and Financing Costs 26
Section 5: Group Structure 35
Section 6: Other Notes 37
Auditors’ Report 45
In this section ...
The financial statements have been presented in a style which attempts to make them less complex
and more relevant to shareholders. We have grouped the note disclosures into six sections: ‘Basis of
Preparation’, ‘Results for the Year’, ‘Operating Assets and Liabilities’, ‘Capital Structure and Financing
Costs’, ‘Group Structure’ and ‘Other Notes’. Each section sets out the accounting policies applied in
producing the relevant notes. The purpose of this format is to provide readers with a clearer
understanding of what drives financial performance of the Group. The aim of the text boxes is to
provide commentary on each section, or note, in plain English.
Keeping it simple ...
Notes to the financial statements provide information required by accounting standards or Listing Rules
to explain a particular feature of the financial statements. The notes which follow will also provide
explanations and additional disclosure to assist readers’ understanding and interpretation of the annual
report and the financial statements.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
3
Directors’ Approval of Consolidated Financial Statements
For the Year Ended 31 July 2018
Authorisation for Issue
The Board of Directors authorised the issue of these Consolidated Financial Statements on 18 September 2018.
Approval by Directors
The Directors are pleased to present the Consolidated Financial Statements of Kathmandu Holdings Limited for the year
ended 31 July 2018 on pages 4 to 44.
18 September 2018
David Kirk Date
18 September 2018
Xavier Simonet Date
For and on behalf of the Board of Directors
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
4
Consolidated Statement of Comprehensive Income
For the Year Ended 31 July 2018
Section 2018 2017
NZ$’000 NZ$’000
Sales 497,437 445,348
Cost of sales (181,961) (169,165)
Gross profit 315,476 276,183
Selling expenses (155,677) (143,740)
Administration and general expenses (70,038) (61,613)
(225,715) (205,353)
Earnings before interest, tax, depreciation and
amortisation 89,761 70,830
Depreciation and amortisation 3.2/3.3
(15,151) (13,826)
Earnings before interest and tax 74,610 57,004
Finance income 47 28
Finance expenses (1,106) (2,058)
Finance costs - net 4.1.1 (1,059) (2,030)
Profit before income tax
73,551 54,974
Income tax expense 2.3 (23,019) (16,935)
Profit after income tax
50,532 38,039
Other comprehensive income that may be recycled
through profit or loss:
Movement in cash flow hedge reserve 4.3.2 8,820 209
Movement in foreign currency translation reserve 4.3.2 10,518 209
Other comprehensive income for the year, net of tax
19,338 418
Total comprehensive income for the year attributable to
shareholders
69,870 38,457
Basic earnings per share
2.4 23.9cps 18.7cps
Diluted earnings per share
2.4 23.7cps 18.5cps
Weighted average basic ordinary shares outstanding
(‘000)
2.4 211,261 203,587
Weighted average diluted ordinary shares outstanding
(‘000)
2.4 213,187 205,409
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
5
Consolidated Statement of Changes in Equity
For the Year Ended 31 July 2018
Share
Capital
Cash Flow
Hedge
Reserve
Foreign
Currency
Translation
Reserve
Share
Based
Payments
Reserve
Retained
Earnings
Total
Equity
NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000
Balance as at 31 July 2016 200,191 (5,531) (19,702) 692 136,033 311,683
Profit after tax
- - - - 38,039 38,039
Other comprehensive income
- 209 209 - - 418
Dividends paid
- - - - (24,179) (24,179)
Issue of share capital
18 - - (18) - -
Share based payment expense
- - - 1,139 - 1,139
Balance as at 31 July 2017 200,209 (5,322) (19,493) 1,813 149,893 327,100
Profit after tax
- - - - 50,532 50,532
Other comprehensive income
- 8,820 10,518 - - 19,338
Dividends paid
- - - - (27,208) (27,208)
Issue of share capital
49,673 - - (971) - 48,702
Share based payment expense
- - - 1,489 - 1,489
Deferred tax on share-based payment
transactions
- - - 429 - 429
Balance as at 31 July 2018 249,882 3,498 (8,975) 2,760 173,217 420,382
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
6
Consolidated Balance Sheet
As At 31 July 2018
Section 2018 2017
NZ$’000 NZ$’000
ASSETS
Current assets
Cash and cash equivalents 3.1.2 8,146 3,537
Trade and other receivables 3.1.3 13,453 6,284
Inventories 3.1.1 111,929 89,206
Derivative financial instruments 4.2 5,076 -
Other financial assets 3.1.4 22,180 -
Total current assets
160,784 99,027
Non-current assets
Property, plant and equipment 3.2 63,514 61,026
Intangible assets 3.3 390,319 279,014
Total non-current assets 453,833 340,040
Total assets 614,617 439,067
LIABILITIES
Current liabilities
Trade and other payables 3.1.5 72,770 56,735
Derivative financial instruments 4.2 156 7,034
Current tax liabilities 9,968 3,475
Other financial liabilities 3.1.6 21,994 -
Total current liabilities 104,888 67,244
Non-current liabilities
Derivative financial instruments 4.2 62 265
Interest bearing liabilities 4.1 39,500 10,431
Deferred tax 2.3 49,785 34,027
Total non-current liabilities
89,347 44,723
Total liabilities
194,235 111,967
Net assets
420,382 327,100
EQUITY
Contributed equity - ordinary shares 4.3.1 249,882 200,209
Reserves 4.3.2 (2,717) (23,002)
Retained earnings 173,217 149,893
Total equity
420,382 327,100
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
7
Consolidated Statement of Cash Flows
For the Year Ended 31 July 2018
Section 2018 2017
NZ$’000 NZ$’000
Cash flows from operating activities
Cash was provided from:
Receipts from customers 502,703 444,100
Income tax received 156 -
Interest received 47 28
502,906 444,128
Cash was applied to:
Payments to suppliers and employees
406,508 360,122
Income tax paid
18,710 14,571
Interest paid
2,087 2,162
427,305 376,855
Net cash inflow from operating activities
75,601 67,273
Cash flows from investing activities
Cash was provided from:
Proceeds from sale of property, plant and equipment
- 1
- 1
Cash was applied to:
Purchase of property, plant and equipment 3.2
14,300 11,419
Purchase of intangibles 3.3
2,394 1,857
Acquisition of subsidiaries 5.1
82,746 -
Investments in other financial assets 3.1.4
22,180 -
121,620 13,276
Net cash outflow from investing activities
(121,620) (13,275)
Cash flows from financing activities
Cash was provided from:
Proceeds of loan advances
148,815 90,330
Proceeds from share issues
48,702 -
197,517 90,330
Cash was applied to:
Dividends paid
27,208 24,179
Repayment of loan advances
119,907 123,533
147,115 147,712
Net cash inflow / (outflow) from financing
activities
50,402 (57,382)
Net increase / (decrease) in cash held
4,383 (3,384)
Opening cash and cash equivalents
3,537 6,891
Effect of foreign exchange rates
226 30
Closing cash and cash equivalents
3.1.2
8,146 3,537
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
8
Reconciliation of net profit after taxation with cash inflow from operating activities
2018 2017
Section NZ$’000 NZ$’000
Profit after taxation
50,532 38,039
Movement in working capital:
(Increase) / decrease in trade and other receivables 5,272 (1,249)
(Increase) / decrease in inventories (13,873) 6,283
Increase / (decrease) in trade and other payables 10,884 5,596
Increase / (decrease) in tax liability 6,405 2,257
8,688 12,887
Add non cash items:
Depreciation 3.2 11,576 10,630
Amortisation of intangibles 3.3 3,575 3,196
Foreign currency translation of working capital balances (431) (816)
Increase / (decrease) in deferred taxation (1,944) 733
Employee share based remuneration 6.4 1,489 1,139
Loss on sale of property, plant and equipment 3.2 2,116 1,465
16,381 16,347
Cash inflow from operating activities
75,601 67,273
Reconciliation of movement in term loans
Balance 31 July 2017
10,431
Net cash flow movement 28,908
Foreign exchange movement 161
Balance 31 July 2018
39,500
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
9
Notes to the Financial Statements
Section 1: Basis of Preparation
1.1 General information
Kathmandu Holdings Limited (the Company) and its subsidiaries (together the Group) is a designer, marketer, retailer
and wholesaler of clothing, footwear and equipment for travel and adventure. It operates in New Zealand, Australia,
United Kingdom and the USA.
The Company is a limited liability company incorporated and domiciled in New Zealand. Kathmandu Holdings Limited is
a company registered under the Companies Act 1993 and is a FMC reporting entity under Part 7 of the Financial Markets
Conduct Act 2013. The address of its registered office is 223 Tuam Street, Central Christchurch, Christchurch.
The Company is listed on the NZX and ASX.
The financial statements of the Group have been prepared in accordance with the requirements of Part 7 of the Financial
Markets Conduct Act 2013 and the NZX Listing Rules.
These audited consolidated financial statements have been approved for issue by the Board of Directors on 18
September 2018.
1.2 Summary of significant accounting policies
These financial statements have been prepared in accordance with Generally Accepted Accounting Practice. They
comply with the New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable
Financial Reporting Standards, as appropriate for profit-oriented entities. The financial statements also comply with
International Financial Reporting Standards (IFRS).
The financial statements are presented in New Zealand dollars, which is the Company’s functional currency and Group’s
presentation currency.
1.2.1 Basis of preparation
The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies
have been consistently applied to all periods presented, unless otherwise stated.
Basis of Consolidation
The financial statements reported are for the consolidated “Group” which is the economic entity comprising Kathmandu
Holdings Limited and its subsidiaries.
The Group is designated as a for profit entity for financial reporting purposes.
Subsidiaries are consolidated from the date on which control is obtained to the date on which control is lost.
In preparing the Group financial statements, all material intra-group transactions, balances and unrealised gains on
transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary,
amounts reported by subsidiaries have been adjusted to conform to the Group’s accounting policies.
Historical cost convention
These financial statements have been prepared under the historical cost convention, as modified by the revaluation of
certain assets as identified in specific accounting policies below.
Critical accounting estimates
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by
definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing
a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
Estimates and judgements are continually evaluated and are based on historical experience as adjusted for current
market conditions and other factors, including expectations of future events that are believed to be reasonable under the
circumstances.
In this section ...
This section sets out the Group’s accounting policies that relate to the financial statements as a whole.
Where an accounting policy is specific to one note, the policy is described in the note to which it relates.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
10
Further explanation as to estimates and assumptions made by the Group can be found in the following notes to the
financial statements:
Area of Estimation
Section
Business Combinations – provisional purchase price allocation
5.1
Goodwill – assumptions underlying recoverable value
3.3
Inventory – estimates of obsolescence
3.1.1
Fair value of derivatives – assumptions underlying fair value 4.2
Foreign currency translation
The results and financial position of all the Group entities (none of which has the currency of a hyper-inflationary
economy) that have a functional currency different from the presentation currency are translated into the presentation
currency as follows:
Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
Income and expenses for each statement of comprehensive income are translated at average exchange rates (unless
this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in
which case income and expenses are translated at the rate on the dates of the transactions); and
All resulting exchange differences are recognised in other comprehensive income.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of
borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
11
Section 2: Results for the Year
2.1 Segment information
An operating segment is a component of an entity that engages in business activities which earns revenue and incurs
expenses and where the chief decision maker reviews the operating results on a regular basis and makes decisions on
resource allocation. The Group is organised into four operating segments, depicting the four geographical regions the
Group operates in. The New Zealand segment has been represented to exclude holding company balances. Other
represents holding companies and consolidation eliminations.
The Group operates in four geographical areas: New Zealand, Australia, North America and Rest of World. The North
American segment was established during the financial year upon acquisition of Oboz Footwear LLC.
31 July 2018 Australia
New
Zealand
North
America Rest of World Other Total
NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000
Total segment sales 335,876 143,167 16,785 6,932 - 502,760
Inter-segment sales (2,193) (190) (666) (2,274) - (5,323)
Sales from external customers
333,683 142,977 16,119 4,658 - 497,437
EBITDA 57,744 35,154 2,768 (685) (5,220) 89,761
Depreciation and software amortisation 8,687 6,125 309 30 - 15,151
EBIT 49,057 29,029 2,459 (715) (5,220) 74,610
Income tax expense 14,566 8,129 707 (225) (158) 23,019
Total segment assets 246,178 297,700 127,373 8,591 (65,225) 614,617
Total assets includes:
Non-current assets 177,540 23,943 103,325 - 149,025 453,833
Additions to non-current assets 11,298 5,352 103,314 - - 119,964
Total segment liabilities 82,916 59,060 27,975 21,227 3,057 194,235
31 July 2017 Australia
New
Zealand
North
America Rest of World Other Total
NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000
Total segment sales 298,013 146,779 - 3,338 - 448,130
Inter-segment sales (1,581) (407) - (794) - (2,782)
Sales from external customers
296,432 146,372 - 2,544 - 445,348
EBITDA 39,317 36,001 - (713) (3,775) 70,830
Depreciation and software amortisation 7,783 6,039 - 3 1 13,826
EBIT 31,534 29,962 - (716) (3,776) 57,004
Income tax expense 8,792 8,595 - (225) (227) 16,935
Total segment assets 233,082 235,834 - 849 (30,698) 439,067
Total assets includes:
Non-current assets 171,273 25,529 - 1 143,237 340,040
Additions to non-current assets 9,662 3,614 - - - 13,276
Total segment liabilities 150,209 22,097 - 12,356 (72,695) 111,967
In this section ...
This section focuses on the results and performance of the Group. On the following pages you will find
disclosures explaining the Group’s results for the year, segmental information, taxation and earnings per
share.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
12
EBITDA represents earnings before income taxes (a non-GAAP measure), excluding interest income, interest expense,
depreciation and amortisation, as reported in the financial statements. EBIT represents EBITDA less depreciation and
amortisation. EBITDA and EBIT are key measurement criteria on which operating segments are reviewed by the Chief
Operating Decision Maker (the Executive Management Team).
The Group operates in one industry being the sale of outdoor clothing, footwear and equipment.
Revenue is allocated based on the country in which the customer is located. The Group has no reliance on any single
major customer.
Costs recharged between Group companies are calculated on normal commercial terms. The default basis of allocation
is % of revenue with other bases being used where appropriate.
Assets / liabilities are allocated based on where the assets / liabilities are located.
2.2 Profit before tax
Accounting policies
Revenue recognition
Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services,
excluding Goods and Services Tax, rebates and discounts and after eliminating sales within the Group. Revenue is
recognised as follows:
(i) Sale of goods
Sale of goods are recognised at point of sale for retail customers and when product is dispatched to the customer for
online and wholesale sales. Retail sales are usually in cash or by credit card. The recorded revenue is the gross amount
of the sale (excluding GST).
Operating expenses
Employee entitlements
2018 2017
NZ$’000 NZ$’000
Wages, salaries and other short term benefits 90,024 82,935
Employee share based remuneration 1,489 1,139
The number of full-time equivalent employees (excluding short-term contractors), as at 31 July was:
2018 2017
Australia 762 762
New Zealand 468 506
United Kingdom 5 5
United States of America 21 -
(i) Wages and salaries, annual leave and sick leave
Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12
months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date
and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating
sick leave are recognised when the leave is taken and measured at the rates paid or payable. The liability for employee
entitlements is carried at the present value of the estimated future cash flows.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
13
Rental and operating leases
The Group is a Lessee. Leases in which a significant portion of the risks and rewards of ownership are retained by the
lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from
the lessor) are charged to the statement of comprehensive income on a straight-line basis over the period of the lease.
2018 2017
NZ$’000 NZ$’000
Rental and operating lease expenses 67,429 62,205
Rent expenses reported in these financial statements relate to non-cancellable operating leases. The future
commitments on these leases are as follows:
2018 2017
NZ$’000 NZ$’000
Due within 1 year 55,707 50,496
Due within 1-2 years 45,728 44,055
Due within 2-5 years 86,729 81,146
Due after 5 years 35,013 45,808
223,177 221,505
Some of the existing lease agreements have right of renewal options for varying terms. The Group leases various
properties under non-cancellable lease agreements. These leases are generally between 1 - 10 years.
2.3 Taxation
Accounting policies
Current and deferred income tax
The tax expense for the period comprises current and deferred tax. Tax is recognised in the statement of comprehensive
income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this
case, the tax is also recognised in other comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance
sheet date in the countries where the Company and Company’s subsidiaries operate and generate taxable income.
Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax
regulations are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected
to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between tax bases of
assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income
tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business
combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax
liability is not recognised if it arises from the initial recognition of goodwill. Deferred income tax is determined using tax
rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply
when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Keeping it simple ...
This section lays out the tax accounting policies, the current and deferred tax charges or credits in the year
(which together make up the total tax charge or credit in the statement of comprehensive income), a
reconciliation of profit before tax to the tax charge and the movements in deferred tax assets and liabilities.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
14
Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available
against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing
of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will
not reverse in the foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets
against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by
the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to
settle the balances on a net basis.
Goods and Services Tax (GST)
The statement of comprehensive income and the cash flow statement have been prepared so that all components are
stated exclusive of GST. All items in the balance sheet are stated net of GST, with the exception of receivables and
payables, which include GST invoiced.
Taxation – Statement of comprehensive income
The total taxation charge in the income statement is analysed as follows:
2018 2017
NZ$’000 NZ$’000
Current income tax charge 24,964 16,829
Deferred income tax charge / (credit) (1,945) 106
Income tax charge reported in statement of comprehensive
income
23,019 16,935
In order to understand how, in the statement of comprehensive income, a tax charge of $23,019,193 (2017:
$16,934,513) arises on profit before income tax of $73,550,592 (2017: $54,973,991), the taxation charge that would arise
at the standard rate of New Zealand corporate tax is reconciled to the actual tax charge as follows:
2018 2017
NZ$’000 NZ$’000
Profit before income tax 73,551 54,974
Income tax calculated at 28% 20,594 15,393
Adjustments to taxation:
Adjustments due to different rate in different jurisdictions 1,011 578
Non-taxable income (246) (16)
Expenses not deductible for tax purposes 725 1,064
Tax legislation enacted for employee share schemes (87) -
Utilisation of tax losses by group companies (26) -
Tax expense transferred to foreign currency translation reserve 1,173 (164)
Adjustments in respect of prior years (125) 80
Income tax charge reported in statement of comprehensive
income
23,019 16,935
Adjustments for prior periods primarily arise where an outcome is obtained on certain tax matters which differs from
expectations held when the related provision was made. Where the outcome is more favourable than the provision
made, the difference is released, lowering the current year tax charge. Where the outcome is less favourable than the
provision, an additional charge to the current year tax will occur.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
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The tax charge / (credit) relating to components of other comprehensive income is as follows:
2018 2017
NZ$’000 NZ$’000
Movement in cash flow hedge reserve before tax 12,180 837
Tax impact relating to cash flow hedge reserve (3,360) (628)
Movement in cash flow hedge reserve after tax 8,820 209
Foreign currency translation reserve before tax 10,518 209
Tax credit / (charge) relating to foreign currency translation
reserve
- -
Movement in foreign currency translation reserve after tax 10,518 209
Total other comprehensive income before tax 22,698 1,046
Total tax credit / (charge) on other comprehensive income (3,360) (628)
Total other comprehensive income after tax 19,338 418
Current tax - -
Deferred tax (3,360) (628)
Total tax credit / (charge) on other comprehensive income (3,360) (628)
Unrecognised tax losses
The Group has estimated tax losses to carry forward from Kathmandu (U.K.) Limited of £10,172,139 (NZ$19,561,807)
(2017: £11,177,874 (NZ$19,854,128)) which can be carried forward to be offset against future profits generated within
the UK. These losses do not expire and no benefit has been recognised in respect to these losses.
Imputation credits
2018 2017
NZ$’000 NZ$’000
Imputation credits available for use in subsequent reporting
periods based on a tax rate of 28%
4,424 3,602
The above amounts represent the balance of the imputation account as at the end of July 2018, adjusted for:
Imputation credits that will arise from the payment of the amount of the provision for income tax;
Imputation debits that will arise from the payment of dividends recognised as a liability at the reporting date; and
Imputation credits that will arise from the receipt of dividends recognised as receivables at the reporting date.
The balance of Australian franking credits able to be used by the Group in subsequent periods as at 31 July 2018 is
A$3,891,706 (2017: A$4,501,155).
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
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Taxation – Balance sheet
The following are the major deferred taxation liabilities and assets recognised by the Group and movements thereon
during the current and prior year:
Tax
depreciation
Employee
obligations Brand
Foreign
exchange
Other
temporary
differences Reserves Total
NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000
As at 31 July 2016 (161) 1,370 (43,518) 749 5,928 2,385 (33,247)
Recognised in the statement of
comprehensive income
209 349 - (931) 267 - (106)
Recognised in other
comprehensive income
- - - - - (628) (628)
Exchange differences
- 3 (62) (3) 16 - (46)
As at 31 July 2017
48 1,722 (43,580) (185) 6,211 1,757 (34,027)
Recognised in the statement of
comprehensive income
157 942 71 (212) 987 - 1,945
Recognised in other
comprehensive income
- - - - - (3,360) (3,360)
Recognised directly in equity
- 429 - - - - 429
Exchange differences
- 30 (1,612) (5) 169 - (1,418)
Deferred tax on business
combinations (5.1)
- - (13,354) - - - (13,354)
As at 31 July 2018 205 3,123 (58,475) (402) 7,367 (1,603) (49,785)
The deferred tax balance relates to:
Property, plant and equipment temporary differences arising on differences in accounting and tax depreciation
rates
Employee benefit accruals
Kathmandu brand and Oboz brand and customer relationship
Unrealised foreign exchange gain/loss on intercompany loan (Kathmandu Pty Ltd)
Realised gain/loss on foreign exchange contracts not yet charged in the statement of comprehensive income
Inventory provisioning
Temporary differences arising from landlord contributions and rent free periods
Temporary differences on the unrealised gain/loss in hedge reserve
Employee share schemes
Other temporary differences on miscellaneous items
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
17
2.4 Earnings per share
2018
Restated
2017
’000 ’000
Weighted average number of shares in issue
211,261 203,587
Adjustment for:
- Share options / performance rights
1,926 1,822
213,187 205,409
The Group has restated the prior year basic and diluted EPS to reflect the impact of the implied bonus element on shares
issued from the institutional share placement on 26 March 2018 and share purchase plan on 20 April 2018 (Note 4.3.1).
Shares were issued at an issue price of NZ$2.16, representing a 10% discount to the closing price on the NZX of
NZ$2.40 on 19 March 2018.
Keeping it simple ...
Earnings per share (‘EPS’) is the amount of post-tax profit attributable to each share.
Basic EPS is calculated by dividing the profit after tax attributable to equity holders of the Company of
$50,531,599 (2017: $38,039,478) by the weighted average number of ordinary shares in issue during
the year of 211,260,697 (2017: 203,587,322).
Diluted EPS reflects any commitments the Group has to issue shares in the future that would decrease
EPS. In 2018, these are in the form of share options / performance rights. To calculate the impact it is
assumed that all share options are exercised / performance rights taken, and therefore, adjusting the
weighted average number of shares.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
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Section 3: Operating Assets and Liabilities
3.1 Working capital
3.1.1 Inventory
Accounting policies
Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average cost
method and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and
condition. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable
selling expenses. Inventory is considered in transit when the risk and rewards of ownership have transferred to the
Group.
The Group assesses the likely residual value of inventory. Stock provisions are recognised for inventory which is
expected to sell for less than cost and also for the value of inventory likely to have been lost to the business through
shrinkage between the date of the last applicable stocktake and balance sheet date. In recognising the provision for
inventory, judgement has been applied by considering a range of factors including historical results, stock shrinkage
trends and product lifecycle.
Inventory is broken down into trading stock and goods in transit below:
2018 2017
NZ$’000 NZ$’000
Trading stock 89,802 76,678
Goods in transit 22,127 12,528
111,929 89,206
Inventory has been reviewed for obsolescence and a provision of $627,362 (2017: $337,970) has been made.
3.1.2 Cash and cash equivalents
2018 2017
NZ$’000 NZ$’000
Cash on hand 178 172
Cash at bank 7,951 3,352
Short term deposits 17 13
8,146 3,537
The carrying amount of the Group's cash and cash equivalents are denominated in the following currencies:
NZD 298 996
AUD 1,931 2,096
GBP 789 205
USD 4,905 163
EUR 223 77
8,146 3,537
Keeping it simple ...
Working capital represents the assets and liabilities the Group generates through its trading activity. The
Group therefore defines working capital as inventory, cash, trade and other receivables, other financial
assets, trade and other payables and other financial liabilities.
In this section ...
This section shows the assets used to generate the Group’s trading performance and the liabilities
incurred as a result. Liabilities relating to the Group’s financing activities are addressed in Section 4.
Deferred tax assets and liabilities are shown in note 2.3.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
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3.1.3 Trade and other receivables
Accounting policies
Trade receivables are recognised initially at the value of the invoice sent to the customer and subsequently at the
amounts considered recoverable (amortised cost). The collectability of trade receivables is reviewed on an on-going
basis. Debts, which are known to be uncollectible, are written off. A provision for doubtful receivables is established when
there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of
receivables. The provision currently held is $212,610 (2017: nil).
2018 2017
NZ$’000 NZ$’000
Trade receivables 8,251 240
Other receivables and prepayments 5,202 6,044
13,453 6,284
Other receivables and prepayments includes balances in relation to landlord incentives.
The carrying amount of the Group’s trade and other receivables are denominated in the following currencies:
NZD 1,959 3,176
AUD 2,918 2,933
USD 8,488 -
GBP 88 175
13,453 6,284
3.1.4 Other financial assets
2018 2017
NZ$’000 NZ$’000
Other financial assets 22,180 -
Other financial assets relates to the USD $15,000,000 million term deposit and associated earned interest held in escrow
in relation to the Oboz acquisition (Note 5.1).
3.1.5 Trade and other payables due within one year
Accounting policies
Trade payables are recognised at the value of the invoice received from a supplier. The carrying value of trade payables
is considered to approximate fair value as amounts are unsecured and are usually paid by the 30th of the month
following recognition.
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
2018 2017
NZ$’000 NZ$’000
Trade payables 24,001 14,402
Employee entitlements 13,957 10,315
Sundry creditors and accruals 33,659 31,401
Provisions 1,153 617
72,770 56,735
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
20
The carrying amount of the Group's trade and other payables are denominated in the following currencies:
2018 2017
NZ$’000 NZ$’000
NZD 12,648 11,129
AUD 45,419 38,968
GBP 925 624
EUR 32 5
USD 13,746 6,009
72,770 56,735
Provisions primarily relate to the restoration of leased properties. These provisions are expected to be fully utilised within
the next 12 months.
3.1.6 Other financial liabilities
2018 2017
NZ$’000 NZ$’000
Other financial liabilities 21,994 -
Other financial liabilities relates to the fair value of the USD$15,000,000 million contingent earn out in relation to the
Oboz acquisition (Note 5.1).
3.1.7 Credit risk
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its
contractual obligations.
Risk Exposure arising from Monitoring Management
Credit risk Cash and cash equivalents
Trade and other receivables
Other financial assets
Credit ratings, aging
analysis and review
of exposure within
regular terms of
trade
Credit is given to customers following
obtaining credit rating information,
confirming references and setting
appropriate credit limits
Concentration of credit risk is within the geographic segment of North America, where the 5 largest customers represent
54% of trade receivables.
Exposure to credit risk
The below balances are recorded at their carrying amount after any provision for loss on these financial instruments. The
maximum exposure to credit risk at reporting date was (carrying amount):
2018 2017
NZ$’000 NZ$’000
Cash and cash equivalents
8,146 3,537
Trade receivables 8,251 240
Sundry debtors 2,255 3,098
Other financial assets 22,180 -
40,832 6,875
As at balance sheet date the carrying amount is also considered to approximate fair value for each of the financial
instruments. There are no impaired balances.
The credit quality of cash and cash equivalents can be assessed by reference to external credit ratings (if available) or to
historical information about counterparty default rates:
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
21
2018 2017
NZ$’000 NZ$’000
Cash and cash equivalents:
Standard & Poors - AA- 2,580 3,272
Standard & Poors - A+ 4,571 -
Standard & Poors - BBB+ 995 265
Total cash and cash equivalents 8,146 3,537
Past due but not impaired
As at balance sheet date, trade receivables of $1,411,000 were past due but not impaired. These relate to wholesale
customers following the acquisition of Oboz, and where there is no history of default. The ageing analysis of these trade
receivables are as follows:
2018 2017
NZ$’000 NZ$’000
0 to 30 days
883 -
30 to 60 days 297 -
60 to 90 days 134 -
90 days and over 127 -
1,441 -
3.2 Property, plant and equipment
Accounting policies
Property, plant and equipment
All property, plant and equipment are stated at historical cost less depreciation and impairment. Historical cost includes
expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any
gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment.
The assets’ residual value and useful lives are reviewed and adjusted if appropriate at each balance sheet date.
Capital work in progress is not depreciated until available for use.
An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is
greater than its estimated recoverable amount.
Depreciation
Depreciation of property, plant and equipment is calculated using straight line and diminishing value methods so as to
expense the cost of the assets over their useful lives. The rates are as follows:
Leasehold improvements 5 – 50 %
Office, plant and equipment 8 – 50 %
Furniture and fittings 10 – 50 %
Computer equipment 10 – 60 %
Impairment of assets
Property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying
amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of
disposal and value in use.
Keeping it simple ...
The following section shows the physical assets used by the Group to operate the business, generating
revenues and profits. These assets include store and office fit-out, as well as equipment used in sales
and support activities.
Assets are recognised only when it is probable that future economic benefits associated with the item
will flow to the Group and the cost of the item can be measured reliably.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
22
Property, plant and equipment can be analysed as follows:
Leasehold
improvement
Office, plant
& equipment
Furniture &
fittings
Computer
equipment Total
$’000 $’000 $’000 $’000 $’000
Year ended 31 July 2017
Opening net book value 40,113 1,775 17,496 2,225 61,609
Additions 7,139 47 3,700 533 11,419
Disposals (962) (12) (486) (6) (1,466)
Depreciation charge (6,350) (278) (3,347) (655) (10,630)
Exchange differences 63 1 29 1 94
Closing net book value 40,003 1,533 17,392 2,098 61,026
As at 31 July 2017
Cost 73,794 5,418 34,385 8,580 122,177
Accumulated depreciation (33,791) (3,885) (16,993) (6,482) (61,151)
Closing net book value 40,003 1,533 17,392 2,098 61,026
Year ended 31 July 2018
Opening net book value 40,003 1,533 17,392 2,098 61,026
Additions 7,897 149 5,772 482 14,300
Acquisition of businesses (Note 5.1) 132 441 - 90 663
Disposals (1,370) (10) (655) (3) (2,038)
Depreciation charge (7,006) (266) (3,745) (559) (11,576)
Exchange differences 736 42 337 24 1,139
Closing net book value 40,392 1,889 19,101 2,132 63,514
As at 31 July 2018
Cost 78,824 6,263 39,640 9,243 133,970
Accumulated depreciation (38,432) (4,374) (20,539) (7,111) (70,456)
Closing net book value 40,392 1,889 19,101 2,132 63,514
Depreciation
2018 2017
NZ$’000 NZ$’000
Leasehold improvement 7,006 6,350
Office, plant and equipment 266 278
Furniture and fittings 3,745 3,347
Computer equipment 559 655
Total depreciation 11,576 10,630
Depreciation expenditure is excluded from administration and general expenses in the statement of comprehensive
income.
Sale of property, plant and equipment
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the
statement of comprehensive income.
2018 2017
NZ$’000 NZ$’000
Loss/(gain) on sale of property, plant and equipment 2,116 1,465
Capital commitments
Capital commitments contracted for at balance sheet date include property, plant and equipment of $2,461,029 (2017:
$2,093,450).
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
23
3.3 Intangible assets
Accounting policies
Goodwill
Goodwill arises on the acquisition of subsidiaries. Goodwill represents the excess of the cost of the acquisition over the
Group’s interest in the net fair value of the assets and liabilities of the acquiree. Separately recognised goodwill is tested
annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. It is
carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those
cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in
which the goodwill arose.
Brand
Acquired brands are carried at original cost based on independent valuation obtained at the date of acquisition. The
brand represents the price paid to acquire the rights to use the Kathmandu or Oboz brand. The brand is not amortised.
Instead the brand is tested for impairment annually or more frequently if events or changes in circumstances indicate that
it might be impaired, and is carried at cost less accumulated impairment losses.
Customer Relationship
Acquired customer relationships are carried at original cost based on independent valuation obtained at the date of
acquisition less accumulated amortisation. They are amortised on a straight line basis over a useful life of 18 years. The
estimated useful life and amortisation period is reviewed at the end of each annual reporting period.
Software costs
Software costs have a finite useful life. Software costs are capitalised and written off over the useful economic life.
Costs associated with developing or maintaining computer software programs are recognised as an expense when
incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by
the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as
intangible assets. Direct costs include the costs of software development employees.
Software is amortised using straight line and diminishing value methods at rates of 20-67%.
Impairment
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. Intangible assets that have an indefinite useful life, including goodwill, are not subject to amortisation
and are tested annually for impairment irrespective of whether any circumstances identifying a possible impairment have
been identified. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its
recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in
use.
For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately
identifiable cash flows e.g. cash generating units.
Keeping it simple ...
The following section shows the non-physical assets used by the Group to operate the business,
generating revenues and profits. These assets include brands, customer relationship, software
development and goodwill.
This section explains the accounting policies applied and the specific judgements and estimates made
by the Directors in arriving at the net book value of these assets.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
24
Intangible assets
Goodwill Brand
Customer
Relationship Software Total
NZ$’000 NZ$’000 NZ$’000 NZ$’000 NZ$’000
Year ended 31 July 2017
Opening net book value 121,474 148,457 - 10,152 280,083
Additions - - - 1,857 1,857
Amortisation - - - (3,196) (3,196)
Exchange differences 62 207 - 1 270
Closing net book value 121,536 148,664 - 8,814 279,014
As at 31 July 2017
Cost 122,807 148,664 - 26,573 298,044
Accumulated amortisation/impairment (1,271) - - (17,759) (19,030)
Closing net book value 121,536 148,664 - 8,814 279,014
Year ended 31 July 2018
Opening net book value 121,536 148,664 - 8,814 279,014
Additions - - - 2,394 2,394
Acquisition of businesses (Note 5.1) 54,849 34,541 13,125 92 102,607
Disposals - - - (78) (78)
Amortisation - - (253) (3,322) (3,575)
Exchange differences 4,352 4,723 859 23 9,957
Closing net book value 180,737 187,928 13,731 7,923 390,319
As at 31 July 2018
Cost 182,008 187,928 13,984 29,109 413,029
Accumulated amortisation/impairment (1,271) - (253) (21,186) (22,710)
Closing net book value 180,737 187,928 13,731 7,923 390,319
Impairment tests for Kathmandu goodwill and brand
The aggregate carrying amounts of Kathmandu goodwill and brand allocated to each unit for impairment testing are as
follows:
Group
Goodwill Brand
2018 2017 2018 2017
NZ$’000 NZ$’000 NZ$’000 NZ$’000
New Zealand 45,484 45,484 51,000 51,000
Australia 76,785 76,052 100,108 97,664
122,269 121,536 151,108 148,664
For the purposes of Kathmandu goodwill and brand impairment testing, the Group operates as two groups of cash
generating units, New Zealand and Australia. The recoverable amount of the cash generating units has been determined
based on value in use.
The discounted cash flow valuations were calculated using projected five-year future cash flows based on Board
approved business plans. Business plans are modelled assuming like for like sales growth based on historical
performance taking into account changing market conditions and the continuation of the store rollout programme. The
key assumptions used for the value in use calculation are as follows:
2018 2017
Terminal growth rate 1.0% 1.0%
New Zealand CGU pre-tax discount rate 12.4% 12.5%
Australia CGU pre-tax discount rate 12.2% 12.1%
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
25
The terminal growth rate assumption is based on a conservative estimate considering the current inflationary
environment. Pre-tax discount rates are calculated based on a market participants expected capital structure and cost of
debt to derive a weighted average cost of capital.
The calculations confirmed that there was no impairment of Kathmandu goodwill and brand during the year (2017: nil).
The Board believes that any reasonably possible change in the key assumptions used in the calculations would not
cause the carrying amount to exceed its recoverable amount.
The expected continued promotion and marketing of the Kathmandu brand support the assumption that the brand has an
indefinite life.
Oboz goodwill and brand
The purchase price allocation of goodwill of $58,468,000 and brand of $36,820,000 relating to the acquisition of Oboz is
provisional at balance sheet date. There have been no indicators of impairment identified following acquisition therefore
no impairment test has been performed. Refer to 5.1 for disclosures in relation to the purchase price allocation.
The expected continued promotion and marketing of the Oboz brand support the assumption that the brand has an
indefinite life.
Capital commitments
Capital commitments contracted for at balance sheet date include intangible assets of $748,139 (2017: $850,000).
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
26
Section 4: Capital Structure and Financing Costs
4.1 Interest bearing liabilities
Accounting policies
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured
at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is
recognised in the statement of comprehensive income over the period of the borrowings using the effective interest
method.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the
liability for at least 12 months after the balance sheet date.
The table below separates borrowings into current and non-current liabilities:
2018 2017
NZ$’000 NZ$’000
Current portion - -
Non-current portion 39,500 10,431
Total term loans 39,500 10,431
The Group has a multi-option facility agreement with Commonwealth Bank of Australia and ASB Bank Limited, with A$60
million repayable in full on 1 August 2019, and a multi-option facility agreement with Bank of New Zealand with $40
million and $30 million repayable in full on 21 March 2020 and 21 March 2021, respectively.
Interest is payable based on the BKBM rate (NZD borrowings), the BBSY rate (AUD borrowings), or the applicable short
term rate for interest periods less than 30 days, plus a margin of up to 1.30%. There are no assets pledged as security in
relation to the unsecured debt in the 2018 financial year (2017: nil).
The covenants entered into by the Group require specified calculations of Group earnings before interest, tax,
depreciation and amortisation (EBITDA) plus lease rental costs to exceed total fixed charges (net interest expense and
lease rental costs) at the end of each half during the financial year. Similarly EBITDA must be no less than a specified
proportion of total net debt at the end of each six month interim period. The calculations of these covenants are specified
in the bank facility agreements of 19 December 2011 and have been complied with at 31 July 2018.
The current interest rates, prior to hedging, on the term loans ranged between 2.60% - 3.17% (2017: 2.24% - 2.52%).
In this section ...
This section outlines how the Group manages its capital structure and related financing costs, including
its balance sheet liquidity and access to capital markets.
Capital structure is how a company finances its overall operations and growth by using different
sources of funds. The Directors determine and monitor the appropriate capital structure of Kathmandu,
specifically how much is raised from shareholders (equity) and how much is borrowed from financial
institutions (debt) in order to finance the Group’s activities both now and in the future.
The Directors consider the Group’s capital structure and dividend policy at least twice a year ahead of
announcing results and do so in the context of its ability to continue as a going concern, to execute
strategy and to deliver its business plan.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
27
2018 2017
NZ$’000 NZ$’000
The principal of interest bearing liabilities is:
Payable within 1 year - -
Payable 1 to 2 years 39,500 10,431
Payable 2 to 3 years - -
Payable 3 to 4 years - -
39,500 10,431
4.1.1 Finance costs
2018 2017
NZ$’000 NZ$’000
Interest income (47) (28)
Interest expense 1,389 1,887
Other finance costs 652 360
Net exchange loss/(gain) on foreign currency
borrowings (935) (189)
1,059 2,030
Other finance costs relates to facility fees on banking arrangements.
4.1.2 Cash flow and fair value interest rate risk
Interest rate risk is the risk that fluctuations in interest rates impact the Group’s financial performance.
Risk Exposure arising from Monitoring Management
Interest rate risk Interest bearing liabilities
at floating rates
Cash flow forecasting
Sensitivity analysis
Interest rate swaps
Refer to section 4.2 for notional principal amounts and valuations of interest rate swaps outstanding at balance sheet
date. A sensitivity analysis of interest rate risk on the Group’s financial assets and liabilities is provided in the table
below.
At the reporting date the interest rate profile of the Group's banking facilities was (carrying amount):
2018 2017
NZ$’000 NZ$’000
Total secured loans 39,500 10,431
less Principal covered by interest rate swaps (37,587) (37,724)
Net Principal subject to floating interest rates
1
1,913 (27,293)
1. Debt levels fluctuate throughout the year and as at 31 July, are at a cyclical low. Forecast debt levels are expected to remain
in excess of the interest rate swaps for a significant majority of the year.
Interest rate swaps have the economic effect of converting borrowings from floating to fixed rates. The cash flow hedge
(gain)/loss on interest rate swaps at balance sheet date was $117,340 (2017: $330,041).
Summarised sensitivity analysis
The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk.
A sensitivity of 1% (2017: 1%) has been selected for interest rate risk. The 1% is based on reasonably possible changes
over a financial year, using the observed range of historical data for the preceding five year period.
Amounts are shown net of income tax. All variables other than applicable interest rates are held constant. The impact on
equity is presented exclusive of the impact on retained earnings.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
28
-1% +1%
31 July 2018
Carrying
amount
$’000
Profit
$’000
Equity
$’000
Profit
$’000
Equity
$’000
Derivative financial instruments (asset) / liability
(4,858) (376) 323 376 (312)
Financial assets
Cash 8,146 (59) - 59 -
(59) - 59 -
Financial liabilities
Borrowings 39,500 395 - (395) -
395 - (395) -
Total increase / (decrease)
(40) 323 40 (312)
-1% +1%
31 July 2017
Carrying
amount
$’000
Profit
$’000
Equity
$’000
Profit
$’000
Equity
$’000
Derivative financial instruments (asset) / liability
7,299 (377) 497 377 (479)
Financial assets
Cash 3,537 (25) - 25 -
(25) - 25 -
Financial liabilities
Borrowings 10,431 104 - (104) -
104 - (104) -
Total increase / (decrease)
(298) 497 298 (479)
4.1.3 Liquidity Risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due.
Risk Exposure arising from Monitoring Management
Liquidity risk Interest bearing and other
liabilities
Forecast and actual cash
flows
Active working capital
management and flexibility
in funding arrangements
The Group has borrowing facilities of NZD $140,729,053 / AUD $129,330,000 (2017: NZD $116,772,823 / AUD
$110,000,000 AUD) and operates well within this facility. This includes short term bank overdraft requirements, and at
balance sheet date no bank accounts were in overdraft.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
29
Less than
1 year
Between
1 and 2
years
Between
2 and 5
years
Over
5 years
NZ$’000 NZ$’000 NZ$’000 NZ$’000
Group 2018
Trade and other payables 72,770 - - -
Other financial liabilities 21,994 - - -
Borrowings 1,116 40,619 - -
95,880 40,619 - -
Group 2017
Trade and other payables 56,735 - - -
Other financial liabilities - - - -
Borrowings 242 10,653 - -
56,977 10,653 - -
The Group enters into forward exchange contracts to manage the risks associated with the purchase of foreign currency
denominated products.
The table below analyses the Group’s derivative financial instruments that will be settled on a gross basis into relevant
maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The
amounts disclosed in the table are the contractual undiscounted cash flows. They are expected to occur and affect the
profit or loss at various dates between balance sheet dates and the following five years.
Less than
1 year
NZ$’000
Between
1 and 2
years
NZ$’000
Between
2 and 5
years
NZ$’000
At 31 July 2018
Forward foreign exchange contracts
- Inflow 147,505 - -
- Outflow (142,530) - -
Net Inflow / (Outflow)
4,975 - -
Net settled derivatives – interest rate swaps
Net Inflow / (Outflow)
(81) (24) -
At 31 July 2017
Forward foreign exchange contracts
- Inflow 123,172 - -
- Outflow (130,141) - -
Net Inflow / (Outflow)
(6,969) - -
Net settled derivatives – interest rate swaps
Net Inflow / (Outflow)
(248) (99) (24)
Keeping it simple ...
The table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities
into relevant maturity groupings based on the remaining period at the balance sheet date to the
contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash
flows, so will not always reconcile with the amounts disclosed on the balance sheet.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
30
4.2 Derivative financial instruments
Accounting policies
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-
measured to their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is
designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain
derivatives as hedges of highly probable forecast transactions (cash flow hedges).
The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged
items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also
documents its assessment, both at hedge inception and on an on-going basis, of whether the derivatives that are used in
hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows
of hedged items.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is
recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately
in the statement of comprehensive income. Amounts accumulated in equity are recycled in the statement of
comprehensive income in the periods when the hedged item will affect profit or loss. However, when the forecast
transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial
liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement
of the initial cost or carrying amount of the asset or liability.
When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge
accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the
forecast transaction is ultimately recognised in the statement of comprehensive income. When a forecast transaction is
no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the
statement of comprehensive income.
Foreign currency translation
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates
of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the
translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are
recognised in the statement of comprehensive income, except when deferred in other comprehensive income.
Translation differences on monetary financial assets and liabilities are reported as part of the fair value gain or loss.
Keeping it simple ...
A derivative is a type of financial instrument typically used to manage risk. A derivative’s value
changes over time in response to underlying variables such as exchange rates or interest rates and is
entered into for a fixed period. A hedge is where a derivative is used to manage an underlying
exposure.
The Group is exposed to changes in interest rates on its borrowings and to changes in foreign
exchange rates on its foreign currency (largely USD) purchases. The Group uses derivatives to hedge
these underlying exposures.
Derivative financial instruments are initially included in the balance sheet at their fair value, either as
assets or liabilities, and are subsequently re-measured at fair value at each reporting date.
An interest rate swap is an instrument to exchange a fixed rate of interest for a floating rate, or vice
versa, or one type of floating rate for another.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
31
Derivative financial instruments
2018 2017
NZ$’000 NZ$’000
Foreign exchange contracts
Current asset
5,076 -
Current liability
(101) (6,969)
Net foreign change contracts – cash flow hedge
(asset / (liability)) 4,975 (6,969)
Interest rate swaps
Non-current asset - -
Current liability
(55) (65)
Non-current liability
(62) (265)
Net interest rate swaps – cash flow hedge (asset /
(liability)) (117) (330)
Total derivative financial instruments 4,858 (7,299)
The above table shows the Group’s financial derivative holdings at year end.
Interest rate swaps - cash flow hedge
Interest rate swaps are to exchange a floating rate of interest for a fixed rate of interest. The objective of the transaction
is to hedge the core floating rate borrowings of the business to minimise the impact of interest rate volatility within
acceptable levels of risk thereby limiting the volatility on the Group's financial results. The notional amount of interest rate
swaps at balance sheet date was $37,586,507 (2017: $37,723,992). The fixed interest rates range between 2.12% and
3.05% (2017: 2.13% and 3.52%). Refer section 4.1.3 for timing of contractual cash flows relating to interest rate swaps.
Foreign exchange contracts - cash flow hedge
The objective of these contracts is to hedge highly probable anticipated foreign currency purchases against currency
fluctuations. These contracts are timed to mature when import purchases are scheduled for payment. The notional
amount of foreign exchange contracts amount to US$102,300,000, NZ$144,562,936 (2017: US$92,450,000,
NZ$130,140,594).
No material hedge ineffectiveness for interest rate swaps or foreign exchange contracts exists as at balance sheet date
(2017: nil).
Refer to section 4.2.1 for a sensitivity analysis of foreign exchange risk associated with derivative financial instruments.
4.2.1 Foreign exchange risk
Foreign exchange risk is the risk that fluctuations in exchange rates will impact the Group’s financial performance. The
Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures,
primarily with respect to the AUD, USD and the GBP.
Risk Exposure arising from Monitoring Management
Foreign exchange risk Foreign currency
purchases – over 90% of
purchases are in USD
Forecast purchases
Reviewing exchange rate
movements
USD foreign exchange
derivatives
The Group is exposed to currency risk on any cash remitted between Australia, the United Kingdom, USA and New
Zealand. The Group does not hedge for such remittances. Interest on borrowings is denominated in either New Zealand
dollars or Australian dollars, and is paid for out of surplus operating cashflows generated in New Zealand or Australia.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
32
Summarised sensitivity analysis
The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to foreign exchange
risk.
A sensitivity of -10% / +10% (2017: -10% / +10%) for foreign exchange risk has been selected. While it is unlikely that an
equal movement of the New Zealand dollar would be observed against all currencies, an overall sensitivity of -10% /
+10% (2017: -10% / +10%) is reasonable given the exchange rate volatility observed on a historic basis for the preceding
five year period and market expectation for potential future movements.
Amounts are shown net of income tax. All variables other than applicable exchange rates are held constant. The impact
on equity is presented exclusive of the impact on retained earnings.
-10% +10%
31 July 2018
Carrying
amount
$’000
Profit
$’000
Equity
$’000
Profit
$’000
Equity
$’000
Derivative financial instruments (asset) / liability
(4,858) - (16,456)
- 13,464
Financial assets
Cash 8,146 628 - (514) -
Trade receivables and sundry debtors 10,506 (802) - 656 -
Other financial assets 22,180 (1,774) - 1,452 -
(1,948) - 1,594 -
Financial liabilities
Trade payables 72,770 (4,810) - 3,935 -
Other financial liabilities 21,994 (1,760) - 1,440 -
Borrowings 39,500 - - - -
(6,570) - 5,375 -
Total increase / (decrease)
(8,518) (16,456) 6,969 13,464
-10% +10%
31 July 2017
Carrying
amount
$’000
Profit
$’000
Equity
$’000
Profit
$’000
Equity
$’000
Derivative financial instruments (asset) / liability
7,299 - (13,549)
- 11,086
Financial assets
Cash 3,537 203 - (166) -
Trade receivables and sundry debtors 3,338 (129) - 105 -
Other financial assets - - - - -
74 - (61) -
Financial liabilities
Trade payables 56,735 (3,648) - 2,985 -
Other financial liabilities - - - - -
Borrowings 10,431 - (594) - 486
(3,648) (594) 2,985 486
Total increase / (decrease)
(3,574) (14,143) 2,924 11,572
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
33
4.3 Equity
Accounting policies
Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in
equity as a deduction, net of tax, from the proceeds.
Dividends
Dividends are recognised through equity following the approval by the Company’s directors.
4.3.1 Contributed equity - ordinary shares
2018 2017
NZ$’000 NZ$’000
Ordinary shares fully paid ($)
249,882 200,209
Balance at beginning of year 200,209 200,191
Issue of shares under Executive and Senior
Management Long Term Incentive Plan
971 18
Shares issued under share placement and share
purchase plan
48,702 -
Balance at end of year 249,882 200,209
Number of issued shares
2018 2017
’000 ’000
Ordinary shares issued at beginning of the year 201,497 201,484
Shares issued under Executive and Senior
Management Long Term Incentive Plan
670 13
Shares issued under share placement and share
purchase plan
23,148 -
Ordinary shares issued at end of the year 225,315 201,497
As at 31 July 2018 there were 225,314,819 ordinary issued shares in Kathmandu Holdings Limited and these are
classified as equity.
669,669 shares (2017: 12,537) were issued under the “Executive and Senior Management Long Term Incentive Plan 24
November 2010” during the year.
During the year 18,518,519 shares were issued in relation to the share placement and 4,629,511 were issued in relation
to the share purchase plan. Total capital raised of $48,702,000 is net of directly attributable share issue costs of
$1,298,000.
All ordinary shares carry equal rights in respect of voting and the receipt of dividends. Ordinary shares do not have a par
value.
Refer to section 6.4 for Employee share based remuneration plans.
4.3.2 Reserves and retained earnings
Cash flow hedging reserve
The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised
directly in other comprehensive income, as described in the accounting policy in section 4.2. The amounts are
recognised in profit or loss when the associated hedged transaction affects profit or loss.
Keeping it simple ...
This section explains material movements recorded in shareholders’ equity that are not explained
elsewhere in the financial statements. The movements in equity and the balance at 31 July 2018 are
presented in the statement of changes in equity.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
34
Foreign currency translation reserve
The FCTR is used to record foreign currency translation differences arising on the translation of the Group entities results
and financial position. The amounts are accumulated in other comprehensive income and recognised in profit or loss
when the foreign operation is partially disposed of or sold.
Share based payments reserve
The share based payments reserve is used to recognise the fair value of share options and performance rights granted
but not exercised or lapsed. Amounts are transferred to share capital when vested options are exercised by the
employee or performance rights are vested.
Reserves
2018 2017
NZ$’000 NZ$’000
(i) Cash flow hedging reserve
Opening balance (5,322) (5,531)
Revaluation - gross 13,865 8,142
Deferred taxation on revaluation 2.3 (3,360) (628)
Transfer to hedged asset (1,757) (7,171)
Transfer to net profit - gross 72 (134)
Closing balance 3,498 (5,322)
(ii) Foreign currency translation reserve
Opening balance (19,493) (19,702)
Currency translation differences – Gross 10,518 209
Currency translation differences – Taxation 2.3 - -
Closing balance (8,975) (19,493)
(iii) Share based payments reserve
Opening balance
1,813 692
Current year amortisation
1,489 1,139
Deferred taxation on share options
2.3
429 -
Transfer to Share Capital on vesting of shares to
Employees
(971) (18)
Closing balance 2,760 1,813
Total Reserves (2,717) (23,002)
4.3.3 Dividends
2018 2017
NZ$’000 NZ$’000
Prior year final dividend paid 18,195 16,119
Current year interim dividend paid 9,013 8,060
Dividends paid ($0.13 per share (2017: $0.12)) 27,208 24,179
4.3.4 Capital risk management
The Group’s capital includes contributed equity, reserves and retained earnings.
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in
order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure
to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders,
return capital to shareholders, issue new shares or sell assets to reduce debt or draw down more debt.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
35
Section 5: Group Structure
5.1 Acquisition of Oboz Footwear LLC
On 4 April 2018 Kathmandu Holdings Limited through its wholly-owned subsidiary Kathmandu US Holdings LLC acquired
100% of the equity interests in Oboz Footwear LLC based out of Bozeman, Montana. The total purchase price was USD
$60,000,000 plus a proportionate contingent earn out of up to USD $15,000,000.
Oboz designs and sells outdoor footwear through a wholesale model with distribution to leading outdoor retailers
primarily in North America. It was acquired as part of Kathmandu’s continued international growth strategy due to its
wholesale business model, complementary product offering and shared common values.
At the time the financial statements were authorised for issue, the Group had not yet finalised the purchase price
allocation for the acquisition of Oboz. Fair values of the assets and liabilities disclosed below, including goodwill, are
determined provisionally as management is in process of reviewing the details of independent valuations. In segment
information (Note 2.1), management temporarily allocates related assets and liabilities of the acquired business in the
"North America" segment. The Group expects to finalise the purchase price allocation in the next few months and will
record any allocation adjustments in next financial period.
Provisional Purchase Price Allocation
NZD$’000
Purchase price
103,164
Less indebtedness settled on acquisition (8,510)
Plus settlement adjustments 2,176
Total net consideration
96,830
Recognised amounts of identifiable assets acquired and liabilities assumed;
Current assets
Cash and cash equivalents 600
Trade and other receivables 11,682
Inventories 6,786
Non-current assets
Property, plant and equipment 663
Intangible assets 92
Customer relationships 13,125
Brand 34,541
Current liabilities
Trade and other payables (5,239)
Non-current liabilities
Interest bearing liabilities (6,915)
Deferred tax (13,354)
Net assets acquired
41,981
Goodwill on acquisition 54,849
Total net consideration
96,830
Less cash and cash equivalents acquired (600)
Less contingent consideration (21,994)
Plus indebtedness settled on acquisition 8,510
Net cash outflow on acquisition
82,746
Keeping it simple ...
This section provides information about the entities that make up the Kathmandu Group and how they
affect the financial performance and position of the Group.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
36
Under the sale and purchase agreement, the Group is required to pay a proportionate contingent earn out of up to USD
$15,000,000 (NZD $21,994,000) based on an EBITDA target for the year ending 31 December 2018. $21,994,000
represents the estimated fair value of this obligation at the acquisition date and this remains unchanged at balance sheet
date.
Acquisition related costs of $1,990,000 have been excluded from the consideration transferred and are included in
administration and general expenses in the statement of comprehensive income and in operating cash flows in the
statement of cash flows in the current year.
Goodwill arising on acquisition
Goodwill arose on the acquisition of Oboz because of the established workforce and control premiums paid. This is not
recognised separately from goodwill as the expected future economic benefits arising cannot be reliably measured and
they do not meet the definition of identifiable intangible assets.
None of the goodwill arising on this acquisition is expected to be deductible for tax purposes.
Impact of the acquisition on the results of the Group
Oboz contributed $1,922,000 to the group profit for the year. Group revenue for the year includes $16,548,000 in respect
of Oboz. Had the Oboz acquisition been effective from 1 August 2017, the unaudited revenue of the Group would have
been $529,179,000 and the unaudited profit for the year would have been $54,637,000.
5.2 Subsidiary Companies
Subsidiaries are all entities over which the Group has control. Control is achieved when the Group
has power over the entity;
is exposed to, or has rights to, variable returns from its involvement with the entity; and
has the ability to use its power to affect returns.
Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group
loses control of the subsidiary.
Holding
Subsidiary Companies: Principal Activity
Country of
Incorporation
2018 2017
Balance
Sheet Date
Milford Group Holdings Limited Holding company New Zealand 100% 100% 31 July
Kathmandu Limited Outdoor retailer New Zealand 100% 100% 31 July
Kathmandu Pty Limited Outdoor retailer Australia 100% 100% 31 July
Kathmandu (U.K.) Limited Outdoor retailer United Kingdom 100% 100% 31 July
Kathmandu US Holdings LLC Holding company USA 100% N/A 31 July
Oboz Footwear LLC Footwear wholesaler USA 100% N/A 31 December
Kathmandu US Holdings LLC was incorporated on 20 March 2018.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
37
Section 6: Other Notes
6.1 Related parties
During the year, operating lease costs of $89,263 (2017: $223,258) were paid to Chalmers Properties Limited, a
subsidiary of Port Otago Limited. John Harvey retired as a Director of both of these companies on 8 December 2017.
All transactions with related parties were in the normal course of business and provided on commercial terms.
Key Management Personnel
2018 2017
NZ$’000 NZ$’000
Salaries 3,031 2,778
Other short-term employee benefits 1,195 987
Post-employment benefits 111 104
Employee performance rights 929 675
5,266 4,544
Key management personnel include the following employees:
Executive Directors:
Chief Executive Officer
Senior Managers:
Chief Operating and Financial Officer
Other Key Management Personnel:
General Manager, Product
General Manager, Marketing, Online and International
General Manager, Supply Chain
General Manager, Human Resources
Chief Information Officer
General Manager, Retail Stores and Operations
General Manager Merchandising
Remuneration Detail – refer to section 6.3.
6.2 Fair values
The following methods and assumptions were used to estimate the fair values for each class of financial instrument:
Trade debtors, trade creditors and bank balances
The carrying value of these items is equivalent to their fair value.
Term liabilities
The fair value of the Group's term liabilities is estimated based on current market rates available to the Group for debt of
similar maturity. The fair value of term liabilities equates to their current carrying value.
Foreign exchange contracts and interest rate swaps
The fair value of these instruments is determined by using valuation techniques (as they are not traded in an active
market). These valuation techniques maximise the use of observable market data where it is available and rely as little
as possible on entity specific estimates.
Specific valuation techniques used to value financial instruments include the fair value of interest rate swaps calculated
as the present value of the estimated future cash flows based on observable yield curves and the fair value of forward
foreign exchange contracts determined using forward exchange rates at the balance sheet date, with the resulting value
discounted back to present value.
These derivatives have all been determined to be within level 2 (for the purposes of NZ IFRS 13) of the fair value
hierarchy as all significant inputs required to ascertain the fair value of these derivatives are observable.
Guarantees and overdraft facilities
The fair value of these instruments is estimated on the basis that management do not expect settlement at face value to
arise. The carrying value and fair value of these instruments are approximately nil. All guarantees are payable on
demand.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
38
6.3 Remuneration Detail
2018 Short-Term Benefits
Post-
employment
benefits
Share based payments
Name
Cash
Salary and
fees
$
Cash
bonus
$
Non-
Monetary
benefits
$
Super-
annuation
$
Performance
Rights
1
$
Equity
related
%
Total
$
Performance
related
%
Non-Executive Directors
David Kirk 241,302 - - - - 0.0% 241,302 0.0%
John Harvey 126,236 - - - - 0.0% 126,236 0.0%
Sandra McPhee 126,236 - - - - 0.0% 126,236 0.0%
Philip Bowman 105,197 - - - - 0.0% 105,197 0.0%
Brent Scrimshaw 105,197 - - - - 0.0% 105,197 0.0%
John Holland 21,039 - - - - 0.0% 21,039 0.0%
Christine Cross 21,039 - - - - 0.0% 21,039 0.0%
746,246 - - - - 0.0% 746,246 0.0%
Executive Directors
Xavier Simonet 858,480 528,091 - 21,744 398,637 22.1% 1,806,952 51.3%
858,480 528,091 - 21,744 398,637 22.1% 1,806,952 51.3%
Senior Managers and Other Key Management Personnel
Reuben Casey 394,810 136,500 2,791 11,841 166,055 23.3% 711,997 42.5%
Other Management 1,777,855 519,977 8,072 77,685 364,065 13.3% 2,747,654 32.2%
Total 3,777,391 1,184,568 10,863 111,270 928,757 15.5% 6,012,849 35.2%
1. This represents the accounting expense of amortising the value of performance rights during the year (refer to note 6.4). 173,271 performance rights were vested and issued to
key management personnel during FY2018 of which 59,167 related to Reuben Casey and nil related to Xavier Simonet.
2017 Short-Term Benefits
Post-
employment
benefits
Share based payments
Name
Cash
Salary and
fees
$
Cash
bonus
$
Non-
Monetary
benefits
$
Super-
annuation
$
Performance
Rights
1
$
Equity
related
%
Total
$
Performance
related
%
Non-Executive Directors
David Kirk 236,428 - - - - 0.0% 236,428 0.0%
John Harvey 123,687 - - - - 0.0% 123,687 0.0%
John Holland 123,687 - - - - 0.0% 123,687 0.0%
Sandra McPhee 123,687 - - - - 0.0% 123,687 0.0%
Christine Cross 123,687 - - - - 0.0% 123,687 0.0%
731,176 - - - - 0.0% 731,176 0.0%
Executive Directors
Xavier Simonet 821,965 446,891 - 21,170 203,866 13.6% 1,493,892 43.6%
821,965 446,891 - 21,170 203,866 13.6% 1,493,892 43.6%
Senior Managers and Other Key Management Personnel
Reuben Casey 366,651 116,033 3,123 11,000 121,992 19.7% 618,799 38.5%
Other Management 1,589,914 411,520 9,031 71,879 349,281 14.4% 2,431,625 31.3%
Total 3,509,706 974,444 12,154 104,049 675,139 12.8% 5,275,492 31.3%
1. No performance rights were vested and issued to key management personnel during 2017, this represents the accounting expense of amortising the value of performance rights
during the year (refer to note 6.4).
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
39
6.4 Employee Share Based Remuneration
Accounting policy
Equity settled long term incentive plan
The Executive and Senior Management Long Term Incentive plan grants Group employees performance rights subject to
performance hurdles being met. The fair value of rights granted is recognised as an employee expense in the Statement
of comprehensive income with a corresponding increase in the employee share based payments reserve. The fair value
is measured at grant date and amortised over the vesting periods. The fair value of the rights granted is measured using
the Kathmandu Holdings Limited share price as at the grant date less the present value of the dividends forecast to be
paid prior to each vesting date. When performance rights vest, the amount in the share based payments reserve relating
to those rights are transferred to share capital. When any vested performance rights lapse upon employee termination,
the amount in the share based payments reserve relating to those rights is transferred to retained earnings.
Executive and Senior Management Long Term Incentive Plan
On 20 November 2013, shareholders approved at the Annual General Meeting the continuation of an Employee Long
Term Incentive Plan (LTI) (previously established 24 November 2010) to grant performance rights to Executive Directors,
Senior Managers, Other Key Management Personnel and Wider Leadership Management.
Executive Directors and Senior Managers
Performance rights granted to Executive Directors and Senior Managers are summarised below:
Grant Date Balance at
start of year
number
Granted
during the
year
number
Vested during
the year
number
Lapsed
during the
year
number
Balance at the
end of year
number
20 Dec 2017 - 374,437 - - 374,437
19 Dec 2016 375,810 - - - 375,810
16 Dec 2015 407,463 - - - 407,463
783,273 374,437 - - 1,157,710
The performance rights granted on 20 December 2017 are Long Term Incentive components only.
Long Term Incentive performance rights vest in equal tranches. In each tranche the rights are subject to a combination of
a relative Total Shareholder Return (TSR) hurdle and/or an EPS growth hurdle. The relative weighting and number of
tranches for each grant date are shown in the table below:
Grant Date Tranches EPS Weighting TSR Weighting
20 Dec 2017 1 50% 50%
19 Dec 2016 1 50% 50%
16 Dec 2015 1 50% 50%
The proportion of rights subject to the relative TSR hurdle is dependent on Kathmandu Holdings Limited’s TSR
performance relative to a defined comparable group of companies in New Zealand and Australia listed on either the ASX
or NZX. The percentage of TSR related rights vest according to the following performance criteria:
Kathmandu Holdings Limited relative TSR ranking % Vesting
Below the 50
th
percentile 0%
50
th
percentile 50%
51
st
– 74
th
percentile 50% + 2% for each percentile above the 50
th
75
th
percentile or above 100%
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
40
The TSR performance is calculated for the following performance periods:
Tranche 2018 2017
Tranche 1 36 months to 1 December 2020 36 months to 1 December 2019
The fair value of the TSR rights have been valued under a Monte Carlo simulation approach predicting Kathmandu
Holdings Limited’s TSR relative to the comparable group of companies at the respective vesting dates for each tranche.
The fair value of TSR rights, along with the assumptions used to simulate the future share prices using a random-walk
process are shown below:
2018 2017
Fair value of TSR rights $208,920 $167,054
Current price at grant date $2.42 $1.96
Risk free interest rate 2.06% 2.40%
Expected life (years) 3 3
Expected share volatility 43.0% 44.3%
The estimated fair value for each tranche of rights issued is amortised over the vesting period from the grant date.
The proportion of rights subject to the EPS growth hurdle is dependent on the compound average annual growth in
Kathmandu Holdings Limited’s EPS relative to the year ending 31 July 2017. The applicable performance periods are:
Tranche 2018 Performance Period 2017 Performance Period
Tranche 1 FY20 EPS relative to FY17 EPS FY19 EPS relative to FY16 EPS
The percentage of the 2018 EPS growth related rights scales according to the compound average annual EPS growth
achieved as follows:
EPS Growth 2018 % Rights
Vesting
EPS Growth 2017 % Rights
Vesting
< 7% 0% < 10% 0%
>=7%, < 8% 50% >=10%, < 11% 50%
>=8%, < 9% 60% >=11%, < 12% 60%
>=9%, < 10% 70% >=12%, < 13% 70%
>=10%, < 11% 80% >=13%, < 14% 80%
>=11%, < 12% 90% >=14%, < 15% 90%
>=12% 100% >=15% 100%
The fair value of the EPS rights have been assessed as the Kathmandu Holdings Limited share price as at the grant date
less the present value of the dividends forecast to be paid prior to each vesting date. The estimated fair value for each
tranche of options issued is amortised over the vesting period from the grant date.
Vesting of Long Term Incentive performance rights also require remaining in employment with the Company during the
performance period.
Other Key Management Personnel and Wider Leadership Management
Performance rights granted to Other Key Management Personnel and Wider Leadership Management, all Short Term
Incentives under the shareholder approved Employee Long Term Incentive Plan are summarised below:
Grant Date Balance at
start of year
number
Granted
during the
year
number
Vested during
the year
number
Lapsed
during the
year
number
Balance at the
end of year
number
11 Dec 2017 - 591,932 - (22,991) 568,941
07 Dec 2016 510,322 - - (44,073) 466,249
1
18 Dec 2015 669,669 - (669,669)
- -
1
Remaining performance rights on vesting date 31 July 2018, which were subsequently issued on 10 August 2018.
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
41
Short Term Incentive performance rights vest:
upon the Company achieving non-market performance hurdles; and
the employee remaining in employment with the Company until the vesting date.
The performance period and vesting dates are summarised below:
2018 2017
Grant Date 11 Dec 2017 7 Dec 2016
Performance period (year ending) 31 Jul 2018 31 Jul 2017
Vesting Date – Other Key Management
Personnel and Wider Leadership Management
31 Jul 2019 31 Jul 2018
The fair value of the rights were assessed as the Kathmandu Holdings Limited share price as at the grant date less the
present value of the dividends forecast to be paid prior to the vesting date. The fair value of each right has been
calculated to be NZ$2.14 per right (2017: NZ$1.71).
The non-market performance hurdles set for the year ending 31 July 2018 were met and accordingly an expense has
been recognised in the Statement of Comprehensive Income.
Expenses arising from equity settled share based payments transactions
2018 2017
NZ$’000 NZ$’000
Executive Director 399 204
Key Management Personnel and Wider Leadership
Management
1,090 935
1,489 1,139
6.5 Contingent liabilities
There are no contingent liabilities in 2018 (2017: nil).
6.6 Contingent assets
There are no contingent assets in 2018 (2017: nil).
6.7 Events occurring after the balance sheet date
There are no events after balance sheet date which materially affect the information within the financial statements.
6.8 Supplementary Information
Directors fees
2018 2017
NZ$’000 NZ$’000
Directors' fees 746 731
Directors fees for the Parent company were paid to the following:
David Kirk (Chairman)
Sandra McPhee
John Harvey
Philip Bowman
Brent Scrimshaw
John Holland
Christine Cross
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
42
Audit fees
During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its
related practices and other network audit firms:
2018 2017
NZ$’000 NZ$’000
Audit services - PricewaterhouseCoopers
Statutory audit 175 133
Half year review 33 32
Other assurance services
*
18 19
Total remuneration for audit services 226 184
* Other assurance services relate the preparation of revenue certificates, and banking compliance certificates and a treasury review in
the previous year.
6.9 New Accounting Standards
New standards first applied in the year
There are no standards or amendments adopted by the Group since 1 August 2017 that have a significant impact on the
Group.
Standards, interpretations and amendments to published standards that are not yet effective
New
Accounting
Standard
Effective
Date
Applicable to
the Group
Summary of Changes Group Impact
NZ IFRS 9
Financial
Instruments
1 August 2018 Addresses the classification,
measurement and de-
recognition of financial assets
and financial liabilities and
new rules for hedge
accounting.
The Group has reviewed its financial assets and
liabilities and noted no material impact from the
adoption of NZ IFRS 9.
The Group currently has financial assets classified
as fair value through profit or loss, and loans and
receivables. NZ IFRS 9 does not impact the
measurement of the Group’s financial assets
classified as fair value through profit or loss. The
financial assets currently classified as loans and
receivables will fall into the amortised cost
category under NZ IFRS 9.
The financial assets classified in the amortised
cost category will be subject to the new
impairment model which requires the recognition
of impairment provisions based on expected credit
losses (ECL). Under NZ IAS 39 an incurred credit
loss model was applied. Based on the Group’s
assessment of historical provision rates and
forward-looking analysis, there is no material
financial impact on the impairment provisions in
the year of adoption.
The Group currently has financial liabilities
classified as fair value through profit or loss and
amortised cost. NZ IFRS 9 does not impact the
classification or measurement of the Group’s
financial liabilities.
The new hedge accounting rules will align the
accounting for hedging instruments more closely
with the group’s risk management practices. The
Group has confirmed that its current hedge
relationships would qualify as continuing hedges
upon the adoption of NZ IFRS 9. Accordingly,
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
43
there is no significant impact on the accounting
treatment for the Group’s hedging relationships.
The nature and extent of the Group’s disclosure
note in relation to its hedging relationships will
change in the consolidated financial statements
for the period ending 31 July 2019.
NZ IFRS 15
Revenue from
Contracts with
Customers
1 August 2018 Establishes the reporting
principles relating to the
nature, amount, timing and
uncertainty of revenue and
cash flows arising from a
contract with a customer.
During the financial year, the Group assessed the
potential impact of IFRS 15. Work focused on
segregating the different revenue streams that
exist within the business. The majority of revenue
is made up of in store transactions with less than
14% earned through online and wholesale sales.
The following matters are relevant to the Group
under NZ IFRS 15:
- A customers’ right of return in
determining revenue to be recognised
and how it should be accounted for
- For online sales and wholesale sales,
whether arranging the delivery of goods
is a separate performance obligation as it
may impact the timing, measurement and
classification of revenue recognised.
There is no material impact from the adoption of
NZ IFRS 15 in relation to the above matters.
NZ IFRS 16
Leases
1 August 2019 Introduces a single lessee
accounting model requiring a
lessee to recognise assets
and liabilities for all leases
with a term of more than 12
months where they are not
considered low value. A right-
of-use asset will be
recognised representing the
right to use the underlying
leased asset and a lease
liability representing the
obligations to make lease
payments. As a
consequence, a lessee
recognises depreciation of the
right-of-use asset and interest
on the lease liability.
This standard will materially impact the Group’s
consolidated financial statements at transition and
in future years, as the Group’s operating leases
(primarily in relation to store, distribution centre
and office leases) are recognised on balance
sheet.
During the financial year, the implementation plan
for the new leases standard has commenced in a
number of areas including;
- Identification of leases and contracts that
could be determined to include a lease;
- Collation of lease data required for the
calculation of the impact assessment;
- Identification of areas of complexity and
judgement to the Group; and
- Identification of necessary changes to
systems and processes required to
enable reporting and accounting in
accordance with the new standard.
Note 2.2 reflects that as at 31 July 2018 the
Group had lease commitments for operating
leases of $223 million. A preliminary assessment
indicates that lease arrangements will meet the
definition of a lease under NZ IFRS 16, and hence
the group will recognise a right-of-use asset and a
corresponding liability in respect of all these
leases unless they qualify for low value short-term
leases upon the application of NZ IFRS 16.
A reliable estimate of the financial impact on the
group is dependent on the finalisation of a number
of areas, including;
- Choice of transition method;
- Selection of discount rates;
KATHMANDU HOLDINGS LIMITED – ANNUAL REPORT 2018
44
- Estimates of lease-term for leases with
options; and
- Assessment of completeness of data.
The financial impact is dependent on the
composition of the lease portfolio at the time
of transition. Therefore it is not yet practical to
determine a reliable estimate of the financial
impact on the group.
---
PricewaterhouseCoopers, PwC Centre, Level 4, 60 Cashel Street, Christchurch Central, PO Box 13244,
Christchurch 8141, New Zealand
T: +64 3 374 3000, F: +64 3 374 3001, pwc.co.nz
Independent auditor’s report
To the shareholders of Kathmandu Holdings Limited
The consolidated financial statements comprise:
the consolidated balance sheet as at 31 July 2018;
the consolidated statement of comprehensive income for the year then ended;
the consolidated statement of changes in equity for the year then ended;
the consolidated statement of cash flows for the year then ended; and
the notes to the consolidated financial statements, which include a summary of significant
accounting policies.
Our opinion
In our opinion, the consolidated financial statements of Kathmandu Holdings Limited (the Company),
including its subsidiaries (the Group), present fairly, in all material respects, the financial position of
the Group as at 31 July 2018, its financial performance and its cash flows for the year then ended in
accordance with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS)
and International Financial Reporting Standards (IFRS).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand)
(ISAs NZ) and International Standards on Auditing (ISAs). Our responsibilities under those standards
are further described in theAuditor’s responsibilities for the audit of the consolidated financial
statementssection of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised)
Code of Ethics for Assurance Practitioners(PES 1) issued by the New Zealand Auditing and Assurance
Standards Board and the International Ethics Standards Board for Accountants’Code of Ethics for
Professional Accountants(IESBA Code), and we have fulfilled our other ethical responsibilities in
accordance with these requirements.
Our firm carries out other services for the Group in the areas of covenant compliance and agreed upon
procedures for store turnover certificates. The provision of these other services has not impaired our
independence as auditor of the Group.
PwC46
Our audit approach
Overview
An audit is designed to obtain reasonable assurance whether the financial
statements are free from material misstatement.
Overall Group materiality: $3.65 million, which represents approximately 5%
of profit before tax.
We chose profit before tax as the benchmark because, in our view, it is the
benchmark against which the performance of the Group is most commonly
measured by users, and is a generally accepted benchmark.
We agreed with the Audit and Risk Committee that we would report to them
misstatements identified during the audit above $365,000.
We have determined that there are two key audit matters:
Identification and valuation of intangible assets arising from the
acquisition of Oboz Footwear LLC (Oboz)
Inventory valuation and existence
Materiality
The scope of our audit was influenced by our application of materiality.
Based on our professional judgement, we determined certain quantitative thresholds for materiality,
including the overall Group materiality for the consolidated financial statements as a whole as set out
above. These, together with qualitative considerations, helped us to determine the scope of our audit,
the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both
individually and in aggregate on the consolidated financial statements as a whole.
Audit scope
We designed our audit by assessing the risks of material misstatement in the consolidated financial
statements and our application of materiality. As in all of our audits, we also addressed the risk of
management override of internal controls including among other matters, consideration of whether
there was evidence of bias that represented a risk of material misstatement due to fraud.
We tailored the scope of our audit in order to perform sufficient work to enable us to provide an
opinion on the consolidated financial statements as a whole, taking into account the structure of the
Group, the accounting processes and controls, and the industries in which the Group operates.
The accounting function for the Company is maintained in New Zealand, the Oboz accounting function
is located in the USA. The Group audit was conducted by a New Zealand based team.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in
our audit of the consolidated financial statements of the current year. These matters were addressed in
the context of our audit of the consolidated financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on these matters.
PwC47
Key audit matterHow our audit addressed the key audit matter
Identification and valuation of intangible
assets arising from the acquisition of
Oboz Footwear LLC.
As disclosed in note 5.1 of the financial
statements, the Group acquired 100% of
the shares of Oboz Footwear LLC (Oboz),
on 4 April 2018, for consideration of
$103.1 million of which $22.0 million is
contingent on an EBITDA target being
met for the year ending 31 December
2018.
The purchase price included identifiable
tangible and intangible assets acquired
and liabilities assumed.
Management engaged a third party
(management expert) to assist in a
process to identify and determine the fair
value of these assets and liabilities.
In addition to Goodwill of $54.8 million
management have provisionally identified
intangible assets relating to Brand and
Customer Relationships held by Oboz
valued at $34.5 million and $13.1 million
respectively.
Our audit focused on this area because
significant judgement and estimates are
involved in identifying and determining
the fair value of the intangible assets
acquired.
In responding to the significant judgements involved in
identifying and valuing the intangible assets acquired we:
Reviewed the sale and purchase agreement and other
documents related to the acquisition to obtain an
understanding of the transaction and to confirm the
consideration;
Reviewed the year to date trading of Oboz against the
EBITDA earn out target to confirm the recognition
and valuation of the deferred consideration is
appropriate;
Met with Group and Oboz management to obtain an
understanding of the business process undertaken to
identify and value the assets acquired and liabilities
assumed;
Considered whether identification and recognition of
intangible assets was consistent with the
requirements of the accounting standards;
We engaged our internal valuation specialist to assess
the appropriateness of assets identified and the
valuation methodology applied by managements
expert; and
Considered whether the relevant disclosures were
appropriate in the consolidated financial statements.
From the procedures performed we have no matters to
report.
Inventory valuation and existence
At 31 July 2018, the Group held
inventories of $111.9 million. Inventory
valuation and existence was an audit
focus area because of the number of
stores/locations that inventory was held
at, and the judgement applied in the
valuation of inventory to incorporate
inventory shrinkage.
As described in note 3.1.1 of the financial
statements, inventories are carried at the
lower of cost and net realisable value on a
weighted average basis.
We performed a number of audit procedures over
inventory existence and valuation. We
Observed the stocktake process at selected store
locations near period end and undertook our own
test counts;
Attended the year end Oboz distribution centre
count and performed independent test counts;
Validated all stores had been counted twice in the
year by selecting a sample of locations not visited
by us and inspected results of stock counts held
and confirmed variances were correctly accounted
for and approved by head office management;
PwC48
Key audit matterHow our audit addressed the key audit matter
The Group has systems and processes
including a barcode inventory
management system to accurately record
inventory movements.
Management engage an independent
third party to complete full stock takes at
each store twice a year. This process is
managed centrally by head office for
consistency. Daily cycle counts are
performed at the New Zealand and
Australian distribution centres. A full
inventory count was performed at the US
Oboz distribution centre at year end.
There are judgements applied in
assessing the level of provision for
inventory shrinkage. Management
provide for shrinkage each month on a
location by location basis. The level of
provision is based on historical inventory
counts and stocktake shrinkage trends.
Observed the daily stocktake process at the
Christchurch and Melbourne distribution centres
near period end and undertook our own test
counts. We also validated that daily counts
occurred by selecting a sample of days for each
location and inspected the count records for those
days;
Assessed the inventory shrinkage provision by
reviewing the level of inventory write downs during
the period. We tested the shrinkage rate used to
calculate the provision for each store since the last
stocktake by comparing it to the actual shrinkage
rate in prior periods;
Assessed store inventory counts performed post
year end to ensure the actual level of shrinkage was
consistent with the year-end provisioning;
Held discussions with management, including
merchandising personnel, to understand and
corroborate the assumptions applied in estimating
inventory provisions;
Evaluated key assumption made by management
that current shrinkage levels were consistent with
historical levels through an analysis of inventory
items by category and age and the level of inventory
write-downs in these categories during the period
compared to prior periods; and
Tested that inventory on hand at the end of the
period was recorded at the lower of cost and net
realisable value by testing a sample of inventory
items to the most recent retail price.
From the procedures performed we have no matters to
report.
Information other than the financial statements and auditor’s report
The Directors are responsible for the annual report. Our opinion on the consolidated financial
statements does not cover the other information included in the annual report and we do not, and will
not express any form of assurance conclusion on the other information.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information and, in doing so, consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated. If, based on the work we have performed on the other information
that we obtained prior to the date of this auditor’s report, we conclude that there is a material
misstatement of this other information, we are required to report that fact. We have nothing to report
in this regard.
PwC49
Responsibilities of the Directors for the consolidated financial statements
The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of
the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such internal
control as the Directors determine is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, the Directors are responsible for assessing the
Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the Directors either intend to liquidate
the Group or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements, as a whole, are free from material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs NZ and ISAs will always detect
a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these consolidated financial statements.
A further description of our responsibilities for the audit of the financial statements is located at the
External Reporting Board’s website at:
https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-
report-1/
This description forms part of our auditor’s report.
Who we report to
This report is made solely to the Company’s shareholders, as a body. Our audit work has been
undertaken so that we might state those matters which we are required to state to them in an auditor’s
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 Company’s shareholders, as a body, for our
audit work, for this report or for the opinions we have formed.
The engagement partner on the audit resulting in this independent auditor’s report is Leopino Foliaki.
For and on behalf of:
Chartered Accountants
18 September 2018
Christchurch
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.