Scott Technology Limited - Annual Report 2017

SCOTT TECHNOLOGY LIMITED ANNUAL REPORT 2017

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CONTENTS

01 HIGHLIGHTS

02 GLOBAL PRESENCE

04 FIVE YEAR TREND

05 CHAIRMAN & MANAGING DIRECTOR’S COMMENTARY 14 CORPORATE GOVERNANCE 22 FINANCIAL STATEMENTS 66 AUDIT REPORT

IBC DIRECTORY

HIGHLIGHTS

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$14.9M
$133M 75
NET SURPLUS
REVENUE COUNTRIES
BEFORE TAX
An increase of 18 % An increase of 36 %
Products exported to
on the prior year on the prior year
ANNUAL ACQUISITION OF
DIVIDEND INCREASED TO 423 BLADESTOP
EMPLOYEES TECHNOLOGY
10 CENTS
Which reduces the risks
of serious injury in the
Per share fully imputed Across eight countries
meat processing industry
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DIVIDEND

Final dividend: 6.0 cents per share, fully imputed.

Record date: 21 November 2017.

Payment date: 28 November 2017.

ANNUAL MEETING

Thursday 30 November 2017 at 2:00pm at Scott Technology Limited, 630 Kaikorai Valley Road, Dunedin.

Proxies close Tuesday, 28 November 2017 at 2:00pm.

Dividend reinvestment plan applies to this payment for shareholders who re-elect to receive shares in lieu of a cash dividend.

GLOBAL PRESENCE & MARKETS

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4%
RUSSIA
10%
EUROPE 12%
52
ASIA
1 Qingdao, China
26
Shanghai, China 1
2%
AFRICA
37%
AUSTRALIA
Brisbane, Australia
10
Sydney, Australia
47
Perth, Australia
2
Melbourne, Australia
25
KEY
MARKETS ACTIVITY AGENTS
$133m 2017 Revenue 423 Number of Staff
Kürnbach, Germany
Milan, Italy
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27%
NORTH AMERICA
Marion, Ohio, USA
39
Dallas, Texas, USA
1
Vancouver, Canada
1
2%
SOUTH AMERICA
Santiago, Chile
3
6%
NEW ZEALAND
Auckland, New Zealand
41
Wellington, New Zealand
12
Christchurch, New Zealand
75
Dunedin, New Zealand
87
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FIVE YEAR TREND

	2013 $’000s 2014 $’000s 2015 $’000s 2016 $’000s 2017 $’000s
Total revenue Net surplus before tax Cash flow from operating activities Net cash /(overdraft) Bank term loans Total assets Shareholders’ equity Dividends(Cents Per Share) Interim Final Special(Centenary) Total Employees(Number) New Zealand Australia Asia Americas Europe Total	60,034 60,316 72,298 112,044 132,631 7,146 4,231 8,102 10,965 14,913 (1,933) 121 9,987 16,108 13,407 1,327 (4,888) 1,285 34,244 26,670 - 8,424 17,369 - - 58,158 77,026 84,445 113,811 126,181 43,752 47,265 50,618 94,600 97,156 2.5 2.5 2.5 4.0 4.0 5.5 5.5 5.5 5.5 6.0 2.0 - - - -
	10.0 8.0 8.0 9.5 10.0
	212 221 194 197 215 4 17 70 80 84 50 51 52 33 27 1 34 45 50 44 1 1 1 40 53
	268 324 362 400 423

Geographical Revenue

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Geographical Revenue Revenue by Industry
2017 2017
6% New Zealand 30% Meat processing
27% North America 29% Industrial automation
& robotics
37% Australia
20% Appliances
2% South America
20% Mining
12% Asia
1% Superconductors
4% Russia & former states
2% Africa & Middle East
10% Other Europe
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Total Revenue
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140
120
100
80
60
40
20
0
2013 2014 2015 2016 2017
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Total Employees

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450
400
350
300
250
200
150
100
50
0
2013 2014 2015 2016 2017
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CHAIRMAN & MANAGING DIRECTOR’S COMMENTARY

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STUART
McLAUCHLAN
Chairman
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CHRIS
HOPKINS
Managing Director & CEO
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Another Year of Achievement

This year at Scott we continued the step change that started in 2016 as we look to build scale and technical capability across the Group. In 2016 we saw a lift in revenues beyond $100m and a successful rights issue and capital raising which introduced JBS Australia Pty Ltd as a 50.1% shareholder, while in 2017 we have increased revenues to over $130m and gained efficiencies from resource and knowledge sharing amongst the Group.

Scott continues to build a strong business that operates in diversified end markets. The strength of the Company is underpinned by diversification in geographic markets and in the range of industries we apply our expertise and skills to.

The year to 31 August 2017 included a full 12 months activity from our German facility. Sales of Bladestop technology also provided an additional boost during the year, as did increased demand for general industrial automation solutions.

Financial Performance

For the year ended 31 August 2017 the Company produced a record surplus before tax of $14.9m, an increase of 36% on the prior year surplus before tax of $11.0m. This was achieved on total revenues of $132.6m, which is an 18% increase on prior year. This record result produced operating cash flows of $13.4m which helped maintain a strong balance sheet. At balance date the Company had $26.7m of cash in the bank with no debt and total shareholder funds of $97.2m. This compares

to $94.6m of shareholder funds in 2016. During the year the Company finalised and completed the purchase of the Bladestop technology which has performed well for the Company over the last 18 months – initially under licence and recently under full ownership. A strong balance sheet and operating performance provides the Company confidence to search for suitable acquisitions that will add to our technology portfolio or geographic reach.

Dividend

The Directors have declared an increased final dividend of 6.0 cents per share for the year ended 31 August 2017, payable on 28 November 2017.

When added to the interim dividend of 4.0 cents per share paid in April 2017, the total dividend for the year is 10.0 cents per share, an increase of 0.5 cents from the 9.5 cents in the prior year. This dividend amount reflects the Directors’ confidence in the future performance of the Company. The final dividend will be fully imputed.

The Directors have reinstated the Dividend Reinvestment Plan and shareholders can make new election notices for this dividend.

In late 2015 the Directors decided to suspend the Dividend Reinvestment Plan due to the impending Scheme of Arrangement with JBS Australia Pty Limited and the resultant rights issue and share placement. The Dividend Reinvestment Plan has been amended to reflect the implementation of the Financial Markets Conduct Act 2013.

CHAIRMAN & MANAGING DIRECTOR’S COMMENTARY (cont.)

Board

Last year we welcomed three new Directors to the Board who were initially appointed by JBS Australia and subsequently elected by shareholders at the 2016 Annual Meeting. The new Directors have quickly established themselves as valuable contributors to Board activities and have brought fresh perspectives and drive behind the Company’s strategic intent.

Health & Safety

The Company is committed to maintaining the health and safety of our employees as they carry out their business around the world, as well as those of our visitors while they are on our sites.

With operations in several geographies our goal is to implement the highest standard across all our facilities. The benchmark we set is best practice regardless of the country in which we operate.

Our health and safety systems continue to be effective across all areas of the business and underpin our objective of zero harm. Each and every day we want our employees and visitors to be safe in every Scott environment, and return home safely to their families.

Our Customer and Market Focus

In all Scott’s key markets there is strong interest in automation and robotics. Our customers are looking for ways to increase productivity, improve quality or reduce costs. In many countries there is a shortage of suitable workers and introducing automation and robotics is high on the agenda for most of our customers, although many are struggling with how and when to implement. The key challenge for Scott is to help guide our customers through the growing number of technologies and options now available. The Company continues to build on our vision and sensing technology capability and we see this as a key platform from which we can deliver smart automation and mobile robotics.

Revenues from Industrial Automation showed the largest sector increase during the year. This was underpinned by a global increase in the search for automation to improve throughput, productivity and quality, and this was particularly evident by customers’ activity in our North American and Australian markets.

Revenues from Appliance Industry customers increased as a result of a full year of production from our German operation and a lift in New Zealand based manufacturing output which delivered projects into the USA, China and Australia.

We saw a gradual upswing in the Mining industry sector which produced an increase in revenues of 18% from 2016.

Large long term capital projects accounted for 60% of total revenues with the balance being product sales and recurring revenues. The product sales include standalone equipment that is sold from stock, spare parts and wear parts (particularly for the Mining sector) and service and upgrade work. With more equipment established in the market, an increase in technology provided, and the ongoing challenge faced by our customers globally in maintaining trained automation and robotics technicians, we expect service, maintenance and spare parts to be an area of growth for Scott.

Operations

Growth needs to be supported by infrastructure and facilities and the Company has been addressing this in areas where potential constraints exist.

During the year we moved into larger premises in Sydney. The distance may have been short, but the impact has been significant. We are now operating under one roof with substantial floor space, enabling us to lay out projects and to develop our expanding range of technologies. The surplus space has been sublet on a short term basis enabling us to have room for future expansion.

The Company also recently committed to expanding the facilities in Dunedin, with additional floor space designed to enable us to complete multiple builds at one time and increased space for additional engineering skills, as well as a research and training facility.

Our machining capability is being enhanced with new machine tools in Christchurch; while our facilities in Ohio, USA have been refreshed. Our strategy requires an expanded presence in North America with long term planning underway to ensure we add the right infrastructure in the best location.

The acquisition of the business assets of DC Ross presented an opportunity to expand our workforce and the available range of machine tools. The business also opens up a small stream of recurring revenues from fine blanking presses supplying precision metal formed parts. The DC Ross tool room and tool design capability has already enabled us to undertake significant work for an appliance manufacturer in Australia.

Within our Americas manufacturing segment, RobotWorx sold 256 robots during the year, up from 235 robots in the prior year, reflecting the increased interest in automation.

With our German operations now well established and operating as part of the Group, we have a strong presence in each of our key target markets. Our primary manufacturing base is New Zealand and Australia which is now well supported by manufacturing in the USA, China and Germany. This provides us flexibility to increase in-market manufacturing, shortening lead times and provides our customers with the confidence that we can better meet their needs for local service and support.

During the year, we completed our first large logistics and distribution system utilising smart vision systems and automated guided vehicles. The system has already proved a valuable showcase for the technology which we expect to play an increasing role in our growth.

Scott is also working closely with the Australian industry as it determines the best way to implement a planned rollout of DEXA x-ray technology to approximately 80 Ausmeat accredited meat processing facilities. The total project is expected to be rolled out over the next three years and opens the possibility to utilise the x-ray rooms to drive Scott’s meat processing automation.

We continue to focus on streamlining the business. We have consolidated subsidiaries and wound up joint ventures and partnerships where they have moved past their useful life. In most cases the activities have been absorbed within Scott’s normal trading activities.

Our milking robots project is an area of long term research and development and Scott is currently

working with an international engineering and technology provider to take the product to market.

Following the purchase of the Bladestop bandsaw safety mechanism technology which we were previously operating under licence, the Bladestop product is now well established in Australia and New Zealand and our sales network is being expanded to encompass North America and Europe. Manufacturing for Bladestop is currently concentrated in Australia and we are looking to expand our supply chain and evaluating manufacturing options in America and Europe to shorten delivery times and meet customers’ service and maintenance requirements.

Research and Development

The Company’s commitment to research and development remains strong with a focus on extending our capability and range of technologies, in addition to developing new applications. With leading edge technologies, a formal process for our developments, and an extensive reach into our key industries, Scott is recognised as a leader and provider of advanced technologies to industrial companies worldwide.

Dedicated staff have been appointed to manage our development activities, including management of our growing portfolio of Intellectual Property which now consists of 29 inventions with 55 patents granted and a further 48 patents pending and 8 brands trademarked with 48 registered or pending trademarks, as well as copyright in our designs.

CHAIRMAN & MANAGING DIRECTOR’S COMMENTARY (cont.)

To complement organic growth, the Company is actively seeking suitable acquisitions. A team has been assessing a range of opportunities but the Company will only progress where strategic alignment is strong and the technology adds to Scott’s current capability.

People and Process

We have introduced company values into everyday activities and these are shown below. All staff are encouraged to live and by, and demonstrate, our values.

The labour market is rapidly changing and recruiting the right staff is an ongoing challenge. However, with good growth prospects, interesting and challenging work, and a focus on training and development, Scott is moving toward its goal of becoming an employer of choice.

On behalf of the Company and our colleagues, we thank the Board for their valuable support and encouragement throughout the year. We also thank the people at Scott for their commitment to, and efforts towards, achieving our mission and we thank all shareholders and other stakeholders for their support over many years which has helped place Scott in the strong position it is in today.

Outlook

Forward project work of approximately ten months and a substantial pipeline of interesting sales prospects, positions the Company well for further growth. With most project durations less than twelve months, ten months represents a higher than normal workload. The forward work and sales prospects are spread across our target industries and geographies.

Stuart J McLauchlan Chairman

Chris C Hopkins Managing Director

Our diversification strategy which is well advanced, not only reduces the risk associated with an industry downturn in any one area, but also drives organic growth.

Build trust and confidence with our internal and external customers, in the way we listen, engage and respond to their needs.

OUR VALUES

WHO WE ARE AND WHO WE WANT ON OUR TEAM

CUSTOMER FOCUS Add value and Innovate, be understand our creative and think customers’ lean and efficient. perspectives and expectations.

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Persist. Have Continually evaluate
strength and act and measure
with urgency. progress and take
Do what action.
you say you will, RESULTS Be accountable
respect, support for your actions,
others and always give MATTER be positive, flexible
your best. and open minded.
TEAMS ATTITUDE
Take part and share
WHO the celebration of AND
TRUST change and INTEGRITY
success.
All actions and Empower, share Take care of the Act with
communications information and be company and our honour in
support ONE Team, accountable. customers like they everything
ONE Company. were one’s own. you do.
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ROBOTWORX CELEBRATES 25 YEARS

On August 4th, 1992 Keith Wanner started living the American Dream. He combined his passion for robotics with his vision for necessary industry improvements to establish RobotWorx, an industrial robotic integrator.

Initially a single-man operation which Keith Wanner ran out of his home, RobotWorx rapidly grew to over 40 employees. Quickly realising they needed more space for their expanding inventory and application options, RobotWorx moved into a larger building at their current location in Marion, Ohio in 2005. In 2014, Scott Technology Limited purchased the RobotWorx business providing Scott with a strategic base in its key North American market.

Over the years, RobotWorx has played a vital role in developing educational programmes and forming partnerships with local schools and universities,

understanding that investing in the community is investing in our future.

Recently, on August 4th 2017, RobotWorx celebrated 25 years of business. The momentous occasion was celebrated by hosting an open day allowing for the local community to join in the celebration. Marion Mayor Scott Schertzer also attended, with both the County Commissioners and the Marion Township declaring August 4th, 2017 RobotWorx Day.

Also, to mark this occasion, RobotWorx has placed a 25 year old robot that was signed by all current employees on permanent display at the RobotWorx facility. The displayed robot will continue to serve as a reminder that hard work, dedication and customer service pay off to create a successful automation company. These are values shared by all parts of the Scott Group.

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DUAL CARTON INFEED CONVEYORS

30 cartons per minute, frozen or chilled

ONE OF FOUR CARTON PALLETISING ROBOTS

4 pallet positions per robot
Total of 16 pallet postions
3 cartons per pick & place cycle

RAISED FULL SYSTEM MAINTENANCE ACCESS PLATFORMS

CENTRALISED ROBOTIC PALLETISING SYSTEM USING AGVs

Automated Guided Vehicles (AGVs) provide a cost effective automated materials handling solution to transport pallets, cartons and products throughout a warehouse or manufacturing facility. AGVs can be installed into an existing facility and are a safe and reliable automation option. AGV automation can complete tasks such as pallet loading and handling, transportation of goods, pallet wrapping, tracking of cartons and products, barcode scanning, right through to container loading.

Features of an integrated AGV system include:

Fully automated and integrated pallet handling solution direct from the palletising room and delivery of completed pallets to individual cold storage locations.
Ability to meet production rates with multiple SKUs simultaneously.

4 AGV - AUTOMATED GUIDED VEHICLE SYSTEM

Empty pallet distribution to robot
Full pallet handling through scanning & wrapping
Full pallet distribution to store
Multi-pallet type handling (wooden/plastic)
Minimises manual forklift movements.
Can operate using either standard wooden pallets or plastic/metal pallets.
Minimises forklift movements which are labour intensive and which create safety concerns due to the number of forklift movements required.
Delivers stacked pallets without manual intervention to different locations for chilled/ frozen cold storage.
Ability to process only pallets that require wrapping through the high speed stretch wrapping system, bypassing when not required.
Scans each carton barcode on pallet logging and cross checking with the inventory management system prior to a pallet label being applied and the pallet leaving the palletising room.
Pallet label confirmation of stack contents with the inventory management system prior to the pallet leaving the palletising room.
Ability to handle manually assembled pallets automatically through barcode scanning, wrapping and barcode labelling.
Provides improved traceability of carton movements.
Minimises carton damage.
Minimises building and equipment damage often caused by forklift movements.
Open plan layout allows easier and safer cell access for operations and maintenance.

1111

OUR BRANDS

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Scott is a New Zealand Stock Exchange listed robotics and automation company, established in 1913, with corporate headquarters in Dunedin, New Zealand. Over the years, Scott has expanded its business and market reach both organically and through acquisition, which has enabled the Scott Group to be actively involved in a wide range of industries and apply our expertise to many unique projects. Today, Scott specialises in the design and manufacture of automated and robotic production and process machinery. We have offshore manufacturing facilities in China, Germany, Australia and the U.S, as well as sales offices in Australia, China, Germany, Italy, Canada, Chile and the U.S. Scott operates in five key markets, all with the common theme of high quality, Automation and Robotics.

Rocklabs was established in 1969 and delivers world leading sample preparation equipment to mining customers, commercial laboratories and research institutions. Rocklabs supplies specialised equipment including crushers, pulverisers and sample dividers for the mining of gold, silver, platinum and palladium, and was acquired by Scott in 2008.

Rocklabs equipment has been exported to over 100 countries and is also a world-leading producer of high-quality Certified Reference Materials.

HTS-110 became part of the Scott Group in 2011, and is a worldleading producer of innovative magnetic solutions. HTS-110 designs and manufactures cryogen-free electromagnetic products using high temperature superconducting (HTS) wire. In addition, HTS-110 also manufactures and sells HTS Coils and CryoSaver Current Leads.

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RobotWorx was acquired by Scott in 2014 and celebrated 25 years in business in 2017. Specialising in the refurbishment and integration of new and used industrial robots, parts and robotic systems, RobotWorx’ custom integration expertise has firmly established the business as a leader in the industrial robotics field.

RobotWorx specialises in developing custom work cells to match customer specific application criteria, often requiring the integration of multiple manufacturers’ robots with both new and reconditioned options. RobotWorx has completed thousands of successful robotic installations for applications ranging from welding to palletising since its establishment in 1992.

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BladeStop is the market leader in safety band saws and a fast growing part of the Scott Group. BladeStop will stop the blade within 9 milliseconds, significantly reducing operator injury, especially when combined with its GloveCheck capabilities. There is an ever increasing focus on safety in the meat processing industry and BladeStop is able to offer peace of mind to all processors and their operators.

BladeStop was fully commercialised in 2015 and has continually improved its technology while expanding its range. BladeStop now offers a range of band saw sizes to suit almost all meat processing applications, from small scale butcheries and supermarkets to large scale heavy carcass processing.

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DC Ross is the latest addition to the Scott Group and are world leaders in fine blanking technology, specialising in creating fully customised, premium quality precision parts for customers all around the globe. Acquired by Scott in June 2017, DC Ross is well positioned to provide a strategic advantage to the Scott Group with its renowned fine blanking technology and high production capacity, as well as its existing customer base.

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CORPORATE GOVERNANCE

BOARD OF DIRECTORS

STUART McLAUCHLAN Chairman and Independent Director

BCom, FCA(PP), CF Inst D Dunedin Appointed Director 2007

Stuart McLauchlan is a Senior Partner of GS McLauchlan & Co, Business Advisors and Accountants, a prominent businessman and company director. Stuart McLauchlan is a Director of Scenic Circle Hotels Ltd, Dunedin Casinos Ltd, AD Instruments Pty Ltd, Ngai Tahu Tourism Ltd and several other companies. He is also Chairman of the NZ Sports Hall of Fame, Chairman of Dunedin International Airport Ltd, Chairman of Pharmac, Chairman of UDC Finance Ltd, Chairman of Otago Community Hospice and a Council Member of the University of Otago.

MARK BCom, FACA, FNZIM WALLER Christchurch Appointed Director 2004 Independent Director

Mark Waller was Chief Executive and Managing Director of EBOS Group Limited from 1987 to 30 June 2014, and was appointed Chairman of that company in October 2015. Mark Waller was the recipient of the Leadership Award in the 2014 INFINZ Industry Awards and the Chief Executive of the Year Award at the Deloitte Top 200 Business Awards in 2011.

CHRIS HOPKINS Managing Director and CEO

BCom, CA, CF Inst D Dunedin Appointed Director 2001

Chris Hopkins joined the Donaghys Group, which included Scott Technology Ltd, in 1994 as Corporate Services Manager. In 1996, he assumed responsibility for finance and administration for Scott Technology Ltd and oversaw the transition to a public listed company in 1997. He was appointed a Director of Scott Technology Ltd in August 2001 and Managing Director in 2006. Chris Hopkins is also an independent Director of Oakwood Group Limited.

CHRISTOPHER BSc STAYNES Dunedin Appointed Director 2007 Independent Director

Chris Staynes commenced his career in 1973, gaining experience in product design and production engineering. He advanced his career from senior product design engineer, to product engineering manager and lastly to General Manager for a local appliance manufacturer from 1980 until his retirement in 2006. Chris Staynes is also a Councillor and Deputy Mayor of Dunedin City.

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ANDRE Greeley, Colorado, USA,
NOGUEIRA Appointed Director 2016
Director
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Andre Nogueira is President and Chief Executive Officer of JBS USA, the North American and Australian subsidiary of JBS SA, and the second largest global food company, being appointed on 1 January 2013. JBS USA also holds a majority interest in Pilgrim’s Pride, the second largest poultry company in the U.S. Andre Nogueira began his career with JBS in 2007, serving as Chief Financial Officer through 2011. He then served as CEO of JBS Australia throughout 2012. Prior to working for JBS, Andre Nogueira worked for Banco do Brasil in corporate banking positions in the U.S. and Brazil. Andre Nogueira currently serves on the Pilgrim’s Pride Corporation Board of Directors, the North American Meat Institute (NAMI) Board of Directors, the NAMI Executive Committee and Rabobank’s North American Agribusiness Advisory Board. He has an MBA from Funcado Don Cabral, a Master’s in Economics from Brasilia University, a B.A. in Economics from Federal Fluminese University, and has completed the Chicago Booth Advanced Management Program.

BRENT Brisbane, Australia EASTWOOD Appointed Director 2016 Director

Brent Eastwood was appointed Chief Executive Officer of JBS Australia in September 2012. Prior to this he was Chief Operating Officer for JBS Australia (Northern). Brent Eastwood has extensive international experience in business leadership, and the sales and marketing of animal protein. He has worked in executive roles within JBS USA including Head of JBS Trading Worldwide, Vice-President Beef Sales USA and President of JBS Carriers USA. His prior experience in Australia included time with JBS’ predecessor company, Australia Meat Holdings, as General Manager of AMH Trading Division for five years, eight years in meat trading with the DR Johnson Group and three years as CEO of the ConAgra Trade Group in Sydney. Brent Eastwood entered the meat industry in New Zealand in 1984 and spent five years in management roles including Production, Quality Assurance, Cold Storage, Operations and Payroll.

EDISON Brisbane, Australia ALVARES Appointed Director 2016 Director

Edison Alvares has over 20 years experience in major companies within Brazil and on a global scale. He holds an Economics degree and Business Administration degree, and concluded his Executive Master of Business Administration (EMBA) in 2015 at Queensland University of Technology (QUT). His area of expertise is Finance and Controlling. For the past nine years Edison Alvares has led the Finance and Administration team of JBS Australia, from the first stages of JBS’ ownership and expansion in 2007, through to the consolidated business today of over 13,000 employees and revenue in excess of AU$7b. Prior to joining JBS in 2005 in Brazil, he was employed in finance and controlling roles within the telecommunications and capital goods sectors.

JOHN BERRY Brisbane, Australia Appointed Alternate Alternate Director for Director 2017 Andre Nogueira, Brent Eastwood & Edison Alvares

John Berry is a Director and Head of Corporate and Regulatory Affairs, of JBS Australia Pty Limited. John Berry has been involved in the Australian Meat Industry for over 18 years, and has responsibility for industry, government and corporate relations activities within the JBS Australia business. He has also had responsibility for mergers, legals and environmental operations. He possesses a Bachelor of Business Finance and Masters of Business Administration.

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CORPORATE GOVERNANCE (cont.)

The corporate governance processes set out in this statement do not materially differ from the principles set out in the NZSX Corporate Governance Best Practice Code. This statement follows the nine principles published by the Securities Commission and reports on how Scott Technology Limited seeks to comply with these principles.

management. The Directors formally meet a minimum of six times throughout the year, plus additional meetings as required, and oversee all matters of corporate governance, development of long term strategic plans, financial management, reporting to shareholders and regulatory compliance. Continuing professional development is encouraged for all Directors.

1. ETHICAL STANDARDS

The Board has developed and implemented a code of conduct which contains expectations and policies for Directors and employees carrying out their duties.

The code of conduct covers such matters as:

Obeying the applicable laws and regulations governing our business conducted worldwide;

3. BOARD COMMITTEES

The Board has formally constituted committees, being the Audit, Remuneration and Nomination, and Treasury committees. These committees enhance its effectiveness in key areas whilst still retaining Board responsibility.

Audit Committee

Being honest, fair and trustworthy in all activities and relationships;
Avoiding all conflicts of interest between work and personal affairs;
Striving to create a safe workplace and to protect the environment;
Through leadership at all levels, sustain a culture where ethical conduct is recognised, valued and exemplified by all employees; and
Details raising integrity concerns and the procedure for dealing with these.

The code of conduct was approved by the Board at its June 2004 meeting and has been made available to all staff. The Board monitors compliance with the code of conduct on a regular basis.

2. BOARD COMPOSITION AND ROLE

The Board is elected by the Shareholders of Scott Technology Limited. At each annual meeting at least one third of the Directors retire by rotation. The process for the appointment of Directors is detailed in the Company’s constitution. The Board currently comprises three non-executive independent Directors (Stuart McLauchlan (Chair), Mark Waller, and Chris Staynes), three Directors representing JBS Australia Pty Limited (Andre Nogueira, Brent Eastwood and Edison Alvares) who are not independent Directors and one Executive Director (Chris Hopkins) who is not an independent Director. John Berry is an Alternate Director for Andre Nogueira, Brent Eastwood and Edison Alvares. Each of the Directors brings a broad range of skills, knowledge and experience to the Board. Responsibility for the day to day management of the Company has been delegated to the Managing Director/Chief Executive and his management team.

The Board of Directors maintains effective control over the Company, as well as monitoring executive

The Audit Committee overviews internal controls and financial reporting and reviews the Company’s financial accounts, in conjunction with the Company’s auditors. It reviews the annual and interim reports prior to approval by the Board and deals with the appointment of external auditors. The Audit Committee comprises Mark Waller (Chair), Stuart McLauchlan, Chris Staynes, Edison Alvares and Chris Hopkins. Other Directors are welcome to attend Audit Committee meetings.

Remuneration and Nomination Committee

The Remuneration and Nomination Committee is comprised of the independent non-executive Directors, with Stuart McLauchlan as its Chair. The purpose of the committee is to ensure that the Company’s Directors and senior executives are fairly rewarded for their individual contributions to the Company’s overall performance. Due to the size and level of activity of this committee, it also includes the role of recommending Director appointments to the Board.

Treasury Committee

The Treasury Committee overviews the Company’s treasury practices, including foreign exchange cover and short term cash investments. The Treasury Committee comprises Stuart McLauchlan (Chair), Chris Hopkins, Edison Alvares and Greg Chiles, the Group’s Chief Financial Officer.

4. REPORTING AND DISCLOSURE

Numerous safeguards are in place to ensure the integrity and quality of financial statements given to Directors. This includes an effective system of internal controls to ensure reliable financial reporting.

The Board Audit Committee and external auditors have a pivotal role in ensuring the integrity of the publicly released financial documents.

In addition to the annual report and interim results, continuous disclosure to the New Zealand Stock Exchange forms part of the reporting and disclosure of the Group. As part of these continuous disclosure obligations, there are formal procedures, including the Chairman’s approval for the public release of Company information.

5. REMUNERATION

The Remuneration and Nomination Committee sets the remuneration of Directors, both Executive and Non-Executive. Remuneration and other benefits paid to Directors are disclosed on page 21.

The Company recognises the need to provide competitive remuneration to attract and retain high calibre executives and Directors.

6. RISK MANAGEMENT

The Board is responsible for the Company’s system of internal controls. A review of potential risks is carried out annually to determine a risk profile and to approve an appropriate response. The Board also considers the recommendations made by external auditors and acts on these accordingly. Processes are in place to identify, monitor and manage risks.

five years. Audit fees and other services, primarily tax advice and other assurance services, performed by Deloitte are disclosed in Note A1 of the financial statements.

8. SHAREHOLDER RELATIONS

The Company maintains an up to date website (scottautomation.com) providing a description of its business and financial statements for previous years. It also distributes or makes available the half yearly and annual reports to all shareholders and interested parties. All shareholders are encouraged to attend the annual meeting. The Company’s auditors, along with the Board, attend the annual meeting for formal and informal interaction with shareholders.

9. STAKEHOLDER INTERESTS

Staff are recognised as a key stakeholder in the Group. The Company seeks to create and maintain a positive supporting environment for them to work in. The Directors have established an employee share purchase scheme which operates periodically to encourage staff to participate in the ownership of the Company. Customers’ interests are catered for by sharing customer specific information via a private login to the Scott website.

7. AUDIT

The Board, through the Audit Committee, ensures the quality and independence of the external audit process is maintained. To maintain auditor independence, the audit partner will be rotated at intervals not exceeding

ATTENDANCE

The following table shows attendances at the Board and committee meetings during the year ended 31 August 2017.

Board
Health and Safety
Committee
Audit Committee
Remuneration
Committee
Eligible to
Attend
Attended
Eligible to
Attend
Attended
Eligible to
Attend
Attended
Eligible to
Attend
Attended
S McLauchlan
6
6
6
6
2
2
1
1
M Waller
6
5
6
5
2
2
1
1
C Staynes
6
5
6
5
2
2
1
1
C Hopkins
6
6
6
6
2
2
-
-
A Nogueira
6
2
6
2
-
-
-
-
B Eastwood
6
5
6
5
1
1
-
-
E Alvares
6
5
6
5
2
1
-
-
J Berry(alternate)
2
2
2
2
1
1
-
-

DIRECTORS’ INTERESTS

FOR THE YEAR ENDED 31 AUGUST 2017

Directors’ Shareholding as at 31 August 2017

	Beneficially Owned Held by associated persons Non-beneficially *held (jointly) 2017 2016 2017 2016 2017 2016**
C C Hopkins** S J McLauchlan M B Waller C J Staynes A Nogueira B Eastwood E Alvares J Berry(alternate)	54,526 127,761 5,609,410 5,534,410 17,779 17,779 375,096 375,096 - - 17,779 17,779 90,562 90,562 - - - - 228,375 228,375 - - - - - - - - 37,415,058 37,415,058 - - - - 37,415,058 37,415,058 - - - - 37,415,058 37,415,058 - - - - 37,415,058 - 748,559 821,794 5,609,410 5,534,410

The non-beneficially held shares that are held jointly by C C Hopkins and S J McLauchlan are in their capacity as trustees for the Scott Technology Employee Share Purchase Scheme. The non-beneficially held shares that are jointly attributed to A Nogueira, B Eastwood, E Alvares and J Berry are in their capacity as Directors representing JBS Australia Pty Limited.
** 5,500,000 associated persons shares are in C C Hopkins’ capacity as a Director of Oakwood Group Limited

Directors’ Share Dealings

The details of disclosures by Directors of acquisitions or disposals of shares Directors held a relevant interest in were:

interest in were:
	Number of Shares		Consideration Paid
	Acquired/(Disposed)	Date	$’000s
C C Hopkins(beneficially)	1,765	12Dec2016	4
C C Hopkins(beneficially)	(75,000)	13Apr2017	-
C C Hopkins(associated person)	75,000	13Apr2017	-

Use of Company Information

There were no notices from Directors regarding the use of Company information.

DIRECTORS’ INTERESTS

FOR THE YEAR ENDED 31 AUGUST 2017

Disclosures of Interest by Directors

The following are general disclosures of interest given by Directors of the Company under section 140 of the Companies Act 1993:

C J Staynes		A Nogueira
Councillor	Dunedin City Council	Chief Executive	JBS USA
Chairman	Cargill Enterprises	Director	Cattle Production Systems Inc
Director	Cancer Society Otago & Southland	Director	Gold’N Plump Farms, LLC
	Branch	Director	Gold’N Plump Poultry, LLC
Director	Otago Chamber of Commerce &	Director	JBS Canada Partners, Inc
	Industry	Director	JBS Carriers, Inc
Director	Wine Freedom Ltd	Director	JBS Finco, Inc
Trustee	4Trades Apprenticeship Training	Director	JBS Green Bay, Inc
	Trust	Director	JBS Live Prok, LLC
Trustee	OSMA Trust	Director	JBS Packerland, Inc
Trustee	Otago Museum Trust Board	Director	JBS Plainwell, Inc
		Director	JBS Souderton, Inc
		Director	JBS Tolleson, Inc
C C Hopkins		Director	JBS USA Finance, Inc
Chairman	Robotic Technologies Ltd	Director	JBS USA Food Company
Chairman	NS Innovations Pty Ltd	Director	JBS USA Food Company Holdings
Director	Applied Sorting Technologies Pty	Director	JBS USA Leather, Inc
	Ltd	Director	JFC LLC
Director	Oakwood Group Ltd	Director	Miller Bros Co, Inc
Director	QMT General Partner Ltd	Director	Mopac of Virginia, Inc
Director	QMT Machinery Technology	Director	Pilgrim’s Pride Corporation
	(Qingdao)Co Ltd	Director	Pilgrim’s Pride, LLC
Director	Rocklabs Ltd	Director	Poppsa3, LLC
Director	Rocklabs Automation Canada Ltd	Director	Poppsa4, LLC
Director	Scott Automation Ltd	Director	S&C Resale Company
Director	Scott Automation & Robotics Pty	Director	Skippack Creek Corporation
	Ltd	Director	Swift & Company International
Director	Scott LED Ltd		Sales Corporation
Director	Scott Separation Technology Ltd	Director	Swift Beef Company
Director	Scott Systems International Inc	Director	Swift Brands Company
Director	Scott Systems(Qingdao)Co Ltd	Director	Swift Pork Company
Director	Scott Technology Australia Pty Ltd	Director	JBS Food Canada ULC
Director	Scott Technology Euro Ltd	Director	TO-RICOS Distribution Ltd
Director	Scott Technology NZ Ltd	Director	TO-RICOS Ltd
Director	Scott Technology USA Ltd	Director	North American Meat Institute
Trustee	Scott Technology Employee Share	Member	Rabobank’s North American
	Purchase Scheme		Agribusiness Advisory Board
Shareholder	Penfold Transmission Ltd

DIRECTORS’ INTERESTS

FOR THE YEAR ENDED 31 AUGUST 2017

S J McLauchlan

M B Waller

S J McLauchlan		M B Waller
Chairman	Compass Agribusiness	Chairman	Ebos Group Ltd & Associated
	Management Ltd	& Director	Companies
Chairman	Dunedin International Airport Ltd
Chairman	Otago Community Hospice	E Alvares
Chairman	Pharmac	Director	JBS Australia Pty Ltd & Associated
Chairman	UDC Finance Limited		Companies
Chairman	University of Otago Foundation	Director	Andrews Meat Industries Pty Ltd
	Studies Ltd	Director	J & F Australia Pty Ltd
Council Member	University of Otago	Director	JBS(Bejing)Co Ltd
Partner /		Director	JBS Holdings Hong Kong Co Ltd
Director	GS McLauchlan & Co Ltd	Director	Premier Beehive NZ
Director	Analogue Digital Instruments Group
Director	BPAC Clinical Solutions	B Eastwood
	Management Ltd	Chief Executive	JBS Australia Pty Ltd and
Director	Cargill Hotel2002Ltd	& Director	Associated Companies
Director	Dunedin Casinos Ltd	Director	Afoofa Development Pty Ltd
Director	Dunedin City Council Subsidiaries	Director	Andrews Meat Industries Pty Ltd
Director	Energy Link Limited	Director	Enunga Enterprises Pty Ltd
Director	Extra Eight Ltd	Director	J & F Australia Pty Ltd
Director	Ngai Tahu Tourism Ltd	Director	JBS Holdings Hong Kong Co Ltd
Director	QMT Machinery Technology	Director	Premier Beehive NZ
	(Qingdao)Co Ltd	Director	Primo Moraitis Fresh Pty Ltd
Director	Scenic Circle Hotels & Subsidiaries	Director	SPM Fresh2013Pty Ltd
Director	Scott Technology NZ Ltd	Director	SPM Fresh Holdings Pty Ltd
Director	University of Otago Holdings Ltd	Member	Business Council of Australia
Board Member	Otago Southland Employers	Member	Minister Ciobo(The Australian
	Association		Federal Government Trade, Foreign
Board Member	NZ On Air		Investment and Tourism Minister)
Trustee	Scott Technology Employee Share		Advisory Board
	Purchase Scheme	Member	Rabobank Australia Agribusiness
			Advisory Board

J K Berry

(alternate for A Nogueira, B Eastwood & E Alvares) Director JBS Australia Pty Ltd & Associated Companies Director Andrews Meat Industries Pty Ltd Director Australian Meat Processor Corporation Director Premier Beehive NZ

FOR THE YEAR ENDED 31 AUGUST 2017

DIRECTORS’ INTERESTS

Remuneration of Directors

During the year ended 31 August 2017, the total remuneration and other benefits attributed to the Directors of the Company were as follows:

			Other	Other
			Remuneration	Remuneration
		Directors’	& Benefits	& Benefits
	Directors’ Fees	Salary	(Short Term)	(Long Term)
	$’000s	$’000s	$’000s	$’000s
C C Hopkins*	-	380	328	284
S J McLauchlan	92	-	-	-
M B Waller	55	-	-	-
C J Staynes	46	-	-	-
A Nogueira**	-	-	-	-
B Eastwood**	-	-	-	-
E Alvares**	-	-	-	-
J Berry(alternate)**	-	-	-	-

Denotes an Executive Director who receives a salary

** Remuneration and meeting costs of Directors representing JBS Australia Pty Limited are paid directly by the JBS Group of Companies.

Directors’ Indemnity & Insurance

The Company has made insurance arrangements covering risks arising out of acts or omissions of Directors and officers in their capacity as such.

Gender Composition

The gender composition of the Directors, Officers and Senior Management of the Company as at 31 August was:

	2017 Male 2017 Female 2016 Male 2016 Female
Directors(excluding alternate) Executive Officers Senior Management	7 - 7 - 8 2 7 2 9 3 9 3
	24 5 23 5

Donations

The Company made donations of less than $1,000 during the year (2016: $11,000).

DIRECTORS’ RESPONSIBILITY STATEMENT

The Directors are responsible for the preparation, in accordance with New Zealand law and generally accepted accounting practice, of financial statements which present fairly, in all material respects, the consolidated financial position of Scott Technology Limited and its subsidiaries (“the Group”) as at 31 August 2017 and the results of their operations and cash flows for the year ended 31 August 2017.

The Directors consider that the financial statements of the Group have been prepared using accounting policies appropriate to the Group circumstances, consistently applied and supported by reasonable and prudent judgments and estimates, and that all applicable New Zealand equivalents to International Financial Reporting Standards have been followed.

The Directors have responsibility for ensuring that proper accounting records have been kept which enable them to ensure that the financial statements comply with the Companies Act 1993 and the Financial Markets Conduct Act 2013.

The Directors have responsibility for the maintenance of a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting. The Directors consider that adequate steps have been taken to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors present the financial statements of Scott Technology Limited for the year ended 31 August 2017.

These financial statements are dated 12 October 2017 and are signed in accordance with a resolution of the Directors made pursuant to section 461(1)(b) of the Financial Markets Conduct Act 2013.

For and behalf of the Directors

==> picture [114 x 32] intentionally omitted <==

Stuart J McLauchlan Chairman

Chris C Hopkins Managing Director

FINANCIAL REPORT

Statement of Comprehensive Income	24
Statement of Changes in Equity	25
Balance Sheet	26
Statement of Cash flows	27
Notes to the Financial Statements	28
Summary of Accounting Policies	28
A. Financial Performance	30
A1. Income and Operating Expenses	30
A2. Income Taxes	31
A3. Segment Information	33
B. Assets	36
B1. Trade Debtors	36
B2. Inventories	37
B3. Contract Work In Progress	37
B4. Property, Plant and Equipment	38
B5. Goodwill	39
B6. Intangible Assets	41
B7. Research and Development Costs	42
B8. Commitments for Expenditure	42
C. Capital & Funding	43
C1. Share Capital	43
C2. Earnings & Net Tangible Assets Per Share	43
C3. Bank Facilities	44

C4. Trade Creditors & Accruals	45
C5. Leases	45
C6. Derivatives	46
C7. Employee Benefits	48
C8. Provision for Warranty	48
C9. Share Based Payment Arrangements	48
D. Risk Management	49
D1. Financial Instruments	49
E. Group Structure & Subsidiaries	56
E1. Acquisition of Business	56
E2. Subsidiaries	57
E3. Investments Accounted for
Using the Equity Method	59
E4. Related Party Transactions	61
F. Other Disclosures	62
F1. Notes to the Cash Flow Statement	62
F2. Contingent Liabilities	64
F3. Key Management Personnel Compensation	64
F4. Subsequent Events	64
Additional Stock Exchange Information	65
Audit Report	66

KEY

Key judgements and other judgements made Accounting Policy

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 AUGUST 2017

	Note	2017 $’000s 2016 $’000s 132,631 112,044 2,599 2,471 220 378 (77,340) (66,579) (40,143) (34,920) (2,987) (1,744) (67) (685) 14,913 10,965 (4,648) (2,831) 10,265 8,134 (607) (201) 9,658 7,933 9,890 7,485 375 649 10,265 8,134 9,283 7,284 375 649 9,658 7,933 2017 Cents Per Share 2016 Cents Per Share 13.2 13.3 13.2 13.3 73.5 82.2 73.5 82.2
	Revenue A1 Other income A1 Share of joint ventures’ net surplus E3 Raw materials, consumables used & other expenses Employee benefits expense Depreciation & amortisation B4, B6 Finance costs NET SURPLUS BEFORE TAXATION A1 Taxation expense A2 NET SURPLUS FOR THE YEAR AFTER TAX Other Comprehensive Income/(Deficit) Items that may be reclassified to profit or loss: Translation of foreign operations TOTAL COMPREHENSIVE INCOME FOR THE YEAR NET OF TAX Net surplus for the year after tax is attributable to: Members of the parent entity(used in the calculation of earnings per share) Non controlling interests Total comprehensive income is attributable to: Members of the parent entity Non controlling interests Earnings per share(weighted average shares on issue): Basic C2 Diluted C2 Net tangible assets per ordinary share(at year end): Basic C2 Diluted C2

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 AUGUST 2017

	Note	Fully Paid Ordinary Shares $’000s Retained Earnings $’000s Foreign Currency Translation Reserve $’000s Non Controlling Interests $’000s Total $’000s 30,943 21,114 (1,459) 20 50,618 - 7,485 - 649 8,134 - - (201) - (201) - (4,320) - - (4,320) 40,597 - - - 40,597 (228) - - - (228) 71,312 24,279 (1,660) 669 94,600 - 9,890 - 375 10,265 - - (607) - (607) - (7,095) - - (7,095) - 990 - (997) (7) 71,312 28,064 (2,267) 47 97,156
	Balance at31 August2015 Net surplus for the year after tax Other comprehensive income for the year net of tax Dividends paid(9.50cents per share) Issue of ordinary shares under JBS Australia Pty Ltd Scheme of Arrangement C1 Share issue costs C1 Balance at31 August2016 Net surplus for the year after tax Other comprehensive income for the year net of tax Dividends paid(9.50cents per share) Acquisition of minority interest in subsidiary Balance at31 August2017

BALANCE SHEET

AS AT 31 AUGUST 2017

	Note	2017 $’000s 2016 $’000s 26,670 34,244 17,833 15,833 144 1,377 947 1,125 16,272 12,343 4,108 - 1,909 1,393 345 - 68,228 66,315 14,249 12,831 319 - 1,118 923 - 99 29,987 29,911 969 1,603 11,311 1,698 - 431 57,953 47,496 126,181 113,811 16,590 8,364 30 32 1 521 4,272 4,006 1,300 1,100 3,691 1,912 547 346 - 1,137 26,431 17,418 - 99 2,568 1,639 26 55 2,594 1,793 71,312 71,312 28,064 24,279 (2,267) (1,660) 97,109 93,931 47 669 97,156 94,600 126,181 113,811
	CURRENT ASSETS Cash and cash equivalents Trade debtors B1 Other financial assets C6 Sundry debtors Inventories B2 Contract work in progress B3 Receivable from joint ventures E4 Plant and equipment held for sale NON CURRENT ASSETS Property, plant and equipment B4 Capital work in progress Investment in joint ventures E3 Other financial assets C6 Goodwill B5 Deferred tax asset A2 Intangible assets B6 Receivable from joint ventures E4 TOTAL ASSETS CURRENT LIABILITIES Trade creditors and accruals C4 Finance lease liabilities C5 Other financial liabilities C6 Employee entitlements C7 Provision for warranty C8 Taxation payable Payable to joint ventures E4 Contract work in progress B3 NON CURRENT LIABILITIES Other financial liabilities C6 Employee entitlements C7, C9 Finance lease liabilities C5 EQUITY Share capital C1 Retained earnings Foreign currency translation reserve Equity attributable to equity holders of the parent Non controlling interests TOTAL EQUITY TOTAL LIABILITIES & EQUITY

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 AUGUST 2017

	Note	2017 $’000s 2016 $’000s 126,908 118,880 664 299 (65) (372) (111,365) (100,463) (67) (773) (2,668) (1,463) 13,407 16,108 (550) - (12,976) (2,984) 337 481 (293) 1,593 (375) (880) 2 2 (13,855) (1,788) (31) (17,410) (7,095) (4,320) - 40,369 (7,126) 18,639 (7,574) 32,959 34,244 1,285 26,670 34,244 26,670 34,244
	CASH FLOWS FROM OPERATING ACTIVITIES Cash was provided from /(applied to): Receipts from operations Interest received Net GST paid Payments to suppliers and employees Interest paid Taxation paid Net cash inflow from operating activities F1 CASH FLOWS FROM INVESTING ACTIVITIES Cash was provided from /(applied to): Purchase of non controlling interest in subsidiary Purchase of property, plant, equipment and intangible assets Sale of property, plant and equipment Net advances from/(to)joint ventures Purchase of business Repayment of advance to Employee Share Purchase Scheme Net cash outflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Cash was provided from /(applied to): Repayment of borrowings Dividends paid Issue of share capital, net of issue costs Net cash inflow/(outflow) from financing activities Net increase/(decrease)in cash held Add cash and cash equivalents at start of period Balance at end of period Comprised of: Cash and bank balances

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SUMMARY OF ACCOUNTING POLICIES

Statement of Compliance

The consolidated financial statements presented are those of Scott Technology Limited (“Company”) and its subsidiaries (“Group”).

The Company is a profit oriented entity, registered in New Zealand under the Companies Act 1993. The Company is an FMC reporting entity for the purposes of the Financial Markets Conduct Act 2013 and its annual financial statements comply with these Acts.

The Group’s principal activities are the design, manufacture, sales and servicing of automated and robotic production lines and processes for a wide variety of industries in New Zealand and overseas.

The financial statements have been prepared in accordance with Generally Accepted Accounting Practice (“GAAP”) and, for the purposes of complying with GAAP, it is a for profit entity. They comply with 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 were authorised for issue by the Board of Directors on 12 October 2017.

Basis of Preparation

The financial statements have been prepared on the basis of historical cost except for the revaluation of certain financial instruments.

Cost is based on the fair value of the consideration given in exchange for assets.

Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported.

The accounting policies set out below have been applied in preparing the financial statements for the year ended 31 August 2017 and the comparative information presented in these financial statements for the year ended 31 August 2016.

There have been no changes in accounting policy during the year.

The information is presented in thousands of New Zealand dollars, which is the functional currency of the Company and the presentation currency of the Group.

Critical Judgements, Estimates and Assumptions

In the application of NZ IFRS the Directors are required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making the judgements. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Judgements made by the Directors in the application of NZ IFRS that have significant effects on the financial statements and estimates with a significant risk of material adjustments in the next year include:

Estimating the percentage of completion for long term construction contracts (note A1)
Goodwill impairment (note B5)

Significant Accounting Policies

The principal accounting policies applied in the preparation of the financial report are set out within the particular note to which they relate. These policies have been consistently applied unless otherwise stated.

Consolidation of Subsidiaries

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company and its subsidiaries. Control is achieved when the Company:

has power over the investee;
is exposed, or has rights, to variable returns from its involvement with the investee; and
has the ability to use its power to affect its returns.

The Group financial statements are prepared by combining the financial statements of all the entities that comprise the Group, being the Company and its subsidiaries as defined by NZ IFRS-10 “Consolidated Financial Statements”. Consistent accounting policies are employed in the preparation and presentation of the Group financial statements.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SUMMARY OF ACCOUNTING POLICIES (cont.)

Accounting policies of subsidiaries are consistent with the policies of the Group.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to profit and loss in the period of acquisition.

The results of subsidiaries acquired or disposed of during the year are included in the Group Statement of Comprehensive Income from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Standards & Interpretations Effective in the Current Period

In the current year the Group adopted all mandatory new and amended Standards and Interpretations. None of the new and amended standards had a material impact on the amounts recognised in these financial statements.

Standards & Interpretations in Issue not yet Adopted

The Group has reviewed all standards and interpretations to existing standards in issue not yet adopted, with the exception of:

NZ IFRS 15 Revenue from Contracts with Customers which is effective for the financial year ending 31 August 2019. NZ IFRS 15 was issued on 3 July 2014 and establishes principles for reporting useful information about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. Although the Group has made progress in its implementation of NZ IFRS 15, it is not yet possible to make reliable estimate of the impact of the new standard on the Group’s financial statements as the Group is required to implement significant changes to its systems and processes across the Group in order to collect the new data requirements, as well as compile historical comparatives.
NZ IFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018. NZ IFRS 9 addresses the classification, measurement and recognition of financial assets

and financial liabilities and relaxes the current NZ IAS 39 requirements for hedge accounting. Although the Group has made progress in its implementation of NZ IFRS 9, it is not yet possible to make reliable estimate of the impact of the new standard on the Group’s financial statements. The Group expects to report more detailed information, including estimated quantitative financial effects in its 2018 financial statements and intends to apply the standard from the period ending 31 August 2019.

NZ IFRS 16 Leases is effective for periods beginning on or after 1 January 2019. NZ IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. Although the Group has made progress in its implementation of NZ IFRS 16, it is not yet possible to make reliable estimate of the impact of the new standard on the Group’s financial statements. The Group expects to report more detailed information, including estimated quantitative financial effects in its 2018 financial statements and intends to apply the standard for the period ending 31 August 2020.

Except for the three standards specified above, the Group does not expect the standards and amendments in issue and not yet adopted will have a material impact on the financial statements.

Goods & Services Tax & Value Added Tax (“GST”)

All items in the Balance Sheet are stated exclusive of GST, with the exception of receivables and payables, which include GST. All items in the Statement of Comprehensive Income are stated exclusive of GST.

Cash flows are included in the cash flow statement on a net basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.

Foreign Currencies

The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and position of each group entity are expressed in New Zealand dollars, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.

In preparing the financial statements of each individual group entity, transactions in currencies other than the

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SUMMARY OF ACCOUNTING POLICIES (cont.)

entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

For the purposes of presenting these consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated into New Zealand dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (and attributed to noncontrolling interests as appropriate).

SECTION A – FINANCIAL PERFORMANCE

A1. INCOME & OPERATING EXPENSES

Revenue Recognition – Long Term Projects

Policy

Profit on long term contracts is accounted for using the percentage of completion method. At balance date an assessment is made of the percentage of completion and costs associated with the work done to date relative to the total forecast cost to complete. Included in sales is the value attributed to work completed, which includes direct costs, overhead and profit.

At the point at which a project is expected to be loss making, losses would be recognised immediately in profit or loss.

Judgement

The estimation of percentage of completion relies on the Directors estimating future time and costs to complete long term contracts. If the actual time and costs incurred to complete the long term contracts differ from the estimates completed by management, the Directors could be over or under estimating the percentage of completion on the project, and consequently sales and profit to date may also be over or under estimated.

Revenue Recognition – Sale of Goods & Other Revenue

Policy

Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer or when services are provided.

Government Grants

Policy

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognised as other income over the periods necessary to match them with the costs for which they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

attributed to work completed, which includes direct costs, overhead and profit. becom	e receivable.
	2017 $’000s 2016 $’000s
a) Revenue Revenue from long term projects Sale of goods Other revenue(including service and short term projects) b) Other income Fair value gain on purchase of business(refer Note E1) Government grants related to research and development nterest received Gain on sale of property, plant and equipment	81,282 67,704 40,200 34,545 11,149 9,795
	132,631 112,044 936 - 926 2,172 664 299 73 -
	2,599 2,471

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION A – FINANCIAL PERFORMANCE (cont.)

A1. INCOME & OPERATING EXPENSES (cont.)

A1. INCOME & OPERATING EXPENSES(cont.)
	2017	2016
	$’000s	$’000s
(c) Operating expenses
The surplus is stated after c harging:
Auditor’s remuneration - audit of financial statements	151	121
- other assurance services	9	11
- taxation services	19	24
The auditor of the Group is Deloitte Limited.
Directors’ fees	193	205
Superannuation scheme contributions	2,275	1,345
Fair value losses on firm commitments	1	1,051
Leasing and rental costs	1,391	1,222
Foreign exchange losses	-	27
Unrealised fair value losses on foreign exchange derivatives	-	155
Loss on disposal of property, plant and equipment	-	215
Impairment of net assets(QMT Machinery Technology(Qingdao)Co Ltd)	-	449
and after crediting:
Fair value gains on derivatives held as fair value hedges	1	1,051
Foreign exchange gains	269	-
Unrealised fair value gains on foreign exchange derivatives	143	-

A2. INCOME TAXES

(a) Income tax recognised in net surplus

Policy

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent it is unpaid (or refundable).

The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows:

	2017 $’000s 2016 $’000s
Net surplus before tax Income tax expense calculated at28%(2016:28%) Non-deductible expenses Under/(over)provision of income tax in previous year Taxation expense Represented by: Current tax Deferred tax	14,913 10,965
	4,175 3,070
	439 244 34 (483)
	4,648 2,831
	4,447 2,213 201 618
	4,648 2,831

Prima Facie Tax Rate

The prima facie tax rate used in the above reconciliation is the corporate tax rate of 28% payable by New Zealand corporate entities on taxable profits under New Zealand tax law for the 2017 income tax year.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION A – FINANCIAL PERFORMANCE (cont.)

A2. INCOME TAXES (cont.)

(b) Deferred Tax Balances

Policy

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based on tax rates that have been enacted or substantively enacted at reporting date. Deferred tax is charged or credited to profit or loss, except when it relates to items charged or credited to other comprehensive income or directly to equity, in which case the deferred tax is also dealt with in other comprehensive income or in equity.

	Opening Balance $’000s Charged to Income $’000s Acquisition of Subsidiary/ Business $’000s Closing Balance $’000s	Opening Balance $’000s Charged to Income $’000s Acquisition of Subsidiary/ Business $’000s Closing Balance $’000s	Opening Balance $’000s Charged to Income $’000s Acquisition of Subsidiary/ Business $’000s Closing Balance $’000s
2017 Gross deferred tax assets: Trade debtors Inventories Other financial assets Employee entitlements Provisions Tax losses Gross deferred tax liabilities: Property, plant and equipment Intangible assets 2016 Gross deferred tax assets: Trade debtors Inventories Employee entitlements Provisions Tax losses Gross deferred tax liabilities: Property, plant and equipment Prepayments Accruals (c) Imputation credit account balances	129 25 - 154 336 (130) - 206 (65) 225 - 160 1,073 300 - 1,373 370 429 - 799 905 (371) 5 539
	2,748	478 5 3,231
	1,145 -	679 349 2,173 - 89 89
	1,145	679 438 2,262
	1,603	(201) (433) 969
		Opening Balance $’000s 98 165 804 364 2,283	Charged to Income $’000s Closing Balance $’000s 31 129 171 336 269 1,073 6 370 (1,378) 905
		3,714	(901) 2,813
		1,186 307 -	(41) 1,145 (307) - 65 65
		1,493	(283) 1,210
		2,221	(618) 1,603
			2017 $’000s 2016 $’000s
Imputation credits available to shareholders			2,567 2,385

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION A – FINANCIAL PERFORMANCE (cont.)

A3. SEGMENT INFORMATION

Policy

The Group has adopted NZ IFRS-8 Operating Segments. NZ IFRS-8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker (the Board) in order to allocate resources to the segments and to assess its performance.

The Group’s Board allocates resources and assesses performance of the Group by manufacturing base, therefore under NZ IFRS-8 the Group’s reportable segments are:

Australasia manufacturing
Americas manufacturing
Asia and Europe manufacturing

Australasia is reported as a single segment due to the integrated nature of customers, management, manufacturing, sales and financing activities across New Zealand and Australia.

Asia and Europe is reported as a single segment due to the integrated nature of customers, management, manufacturing and sales activities across Asia and Europe.

Segment Revenues & Results

The following is an analysis of the Group’s revenue and results by reportable segment. For the purposes of NZ IFRS-8 allocations are based on the operating results by segment. The Group does not allocate certain resources (such as senior executive management time) and central administration costs by segment for internal reporting purposes and therefore these allocations may not result in a meaningful and comparable measure of profitability by segment.

2017	Australasia Manufacturing $’000s Americas Manufacturing $’000s Asia & Europe Manufacturing $’000s Unallocated $’000s Total $’000s
Revenue Segment profit Fair value gain on purchase of business(refer Note A1) Depreciation and amortisation Share of net surplus of joint ventures nterest revenue Central administration costs Finance costs Net surplus before taxation Taxation expense Net surplus after taxation	99,846 17,055 15,730 - 132,631
	19,309 2,068 (509) - 20,868 - - - 936 936 (2,267) (155) (197) (368) (2,987) 175 44 1 - 220 1 - 2 661 664 - - - (4,721) (4,721) (4) - - (63) (67)
	17,214 1,957 (703) (3,555) 14,913 (5,031) (670) 19 1,034 (4,648)
	12,183 1,287 (684) (2,521) 10,265

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION A – FINANCIAL PERFORMANCE (cont.)

A3. SEGMENT INFORMATION (cont.)

A3. SEGMENT INFORMATION(con	t.)
2016	Australasia Manufacturing $’000s Americas Manufacturing $’000s Asia & Europe Manufacturing $’000s Unallocated $’000s Total $’000s
Revenue Segment profit Impairment of net assets Depreciation and amortisation Share of net surplus of joint ventures Interest revenue Central administration costs Finance costs Net surplus before taxation Taxation expense Net surplus after taxation	88,151 15,355 8,538 - 112,044
	18,362 881 (1,092) - 18,151 - - (449) - (449) (1,150) (150) (141) (303) (1,744) 250 120 8 - 378 5 - 2 292 299 - - - (4,985) (4,985) (346) (241) (2) (96) (685)
	17,121 610 (1,674) (5,092) 10,965 (4,599) (110) 469 1,409 (2,831)
	12,522 500 (1,205) (3,683) 8,134

Revenue reported above represents revenue generated from external customers. Inter-segment sales, which are eliminated on consolidation, were $7.9 million for the year ended 31 August 2017 (2016: $1.4 million).

The accounting policies of the reportable segments are the same as the Group’s accounting policies. Segment profit represents the profit earned by each segment without allocation of central administration costs and investment revenue.

Industry Information

The Group focuses its marketing on five principal industries: appliances, meat processing, mining, high temperature superconductor products and other industrial automation, including robotics. The Group’s revenue from external customers by industry is detailed below:

	2017 $’000s 2016 $’000s
Appliances Meat processing Mining High temperature superconductor products Other industrial automation, including robotics	26,308 20,181 39,581 38,875 26,461 22,357 1,747 3,335 38,534 27,296
	132,631 112,044

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION A – FINANCIAL PERFORMANCE (cont.)

A3. SEGMENT INFORMATION (cont.)

Geographical Information

The Group operates in eight principal geographical areas. The Group’s revenue from external customers by geographical location (of the customer) is detailed below:

	2017 $’000s 2016 $’000s
New Zealand(country of domicile) North America, including Mexico Australia and Pacific Islands South America Asia Russia and former states Africa and Middle East Other Europe	8,267 17,548 35,614 31,979 49,632 38,833 3,215 5,043 15,987 9,155 4,955 2,468 2,327 1,478 12,634 5,540
	132,631 112,044

The Group holds $12.1 million of non-current assets in geographical areas outside of New Zealand, the country of domicile (2016: $2.9 million).

Information About Major Customers

Sales to the Group’s largest single customer, who is from the Australasia Manufacturing segment and the Meat industry, accounted for approximately 10.6% of total Group sales (2016: Australasia Manufacturing segment and the Meat Industry 10.1%).

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION B – ASSETS

B1. TRADE DEBTORS

Policy

Trade debtors are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

	2017 $’000s 2016 $’000s
Trade debtors Allowance for doubtful debts(i)	18,574 16,285 (741) (452)
	17,833 15,833

Credit Period

The credit period on sales of goods ranges from 30 to 120 days depending on the terms negotiated by the customer for large contracts. No interest is charged on the trade debtors.

(i) Allowance for doubtful debts

(i) Allowance for doubtful debts
Balance at beginning of financial year Impairment loss recognised on trade debtors Balance at end of financial year	452 350 289 102
	741 452

Recoverability

In determining the recoverability of trade debtors, the Group considers any change in the credit quality of the trade debtor from the date credit was initially granted up to the reporting date. The Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts. All doubtful debts are aged beyond 90 days (2016: all aged beyond 90 days).

(ii) Past due but not impaired

Included in the Group’s trade debtors are debtors with a carrying amount of $3,101,000 (2016: $4,762,000) which are past due at the reporting date for which the Group has not provided as there has not been a significant change in credit quality and the amounts are considered recoverable.

	2017 $’000s 2016 $’000s
Ageing of past due but not impaired: 30–60days 60–90days 90days +	981 2,588 1,089 1,034 831 1,140
	2,901 4,762

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION B – ASSETS (cont.)

B2. INVENTORIES

Policy

Inventories are valued at the lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventories by the method most appropriate to the particular class of inventory, with the majority being valued on a first-in-first-out basis. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

	2017 $’000s 2016 $’000s
Raw materials Work in progress Finished goods	3,158 2,687 416 1,288 12,698 8,368
	16,272 12,343

Write downs

The cost of inventories recognised as an expense during the year includes $320,000 (2016: $ Nil) in respect of write downs of inventory to net realisable value

B3. CONTRACT WORK IN PROGRESS

Policy

Contract work in progress is recorded as an accumulation of the costs incurred to date, including overhead, plus any recognised profit less amounts received or receivable by way of progress payments on each particular contract

	2017 $’000s 2016 $’000s
Costs incurred and estimated earnings on uncompleted contracts Progress claims received or receivable Represented by: Sales recognised to be recovered by invoices Contracts invoiced in advance of sales recognised	110,372 116,557 (106,264) (117,694)
	4,108 (1,137)
	22,761 16,178 (18,653) (17,315)
	4,108 (1,137)

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION B – ASSETS (cont.)

B4. PROPERTY, PLANT & EQUIPMENT

Policy

All items of Property, Plant and Equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. In the event that settlement of all or part of a purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition.

Depreciation is calculated on a straight line basis so as to write off the net cost of the asset over its expected useful life to its estimated residual value. The following estimated useful lives are used in the calculation of depreciation:

Buildings - 40 years

Plant, equipment & vehicles - 1–13 years

	Freehold Land at Cost $’000s Freehold Buildings at Cost $’000s Plant, Equipment & Vehicles at Cost $’000s Total $’000s
Gross carrying amount As at31August2015 Acquisitions through business combinations Additions Disposals As at31 August2016 Acquisitions through business combinations Additions Disposals As at31 August2017 Accumulated depreciation & impairment As at31August2015 Disposals Depreciation expense As at31 August2016 Disposals Depreciation expense As at31 August2017 Net book value As at31August2016 As at31August2017	2,133 6,389 20,025 28,547 - - 802 802 296 591 2,097 2,984 - - (3,003) (3,003)
	2,429 6,980 19,921 29,330 - - 1,631 1,631 - 85 1,659 1,744 - - (1,483) (1,483)
	2,429 7,065 21,728 31,222 - 1,557 15,522 17,079 - - (2,307) (2,307) - 199 1,528 1,727
	- 1,756 14,743 16,499 - - (1,220) (1,220) - 216 1,478 1,694
	- 1,972 15,001 16,973 2,429 5,224 5,178 12,831
	2,429 5,093 6,727 14,249

Aggregate depreciation allocated, whether recognised as an expense or as part of the carrying amount of other assets during the year:

	2017 $’000s 2016 $’000s
Freehold buildings Plant, equipment and vehicles	216 199 1,478 1,528
	1,694 1,727

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION B – ASSETS (cont.)

B5. GOODWILL

Policy

Goodwill represents the excess of the purchase consideration over the fair value of the identifiable tangible and identifiable intangible assets, liabilities and contingent liabilities of the subsidiary recognised at the time of acquisition of a business or subsidiary. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group’s cashgenerating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cashgenerating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.

On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

	2017 $’000s 2016 $’000s
ross carrying amount alance at beginning of financial year dditional amounts recognised from business ombinations occurring during the period(refer Note E1) alance at end of financial year	29,911 29,758 76 153
	29,987 29,911

There has been no impairment recognised during the year or in prior periods.

Judgement

Determining whether goodwill is impaired requires an estimation of the value in use of the cashgenerating units to which goodwill has been allocated. The value in use calculation requires the Directors to estimate the future cash flows, particularly in relation to future project wins and market conditions, expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

Allocation of Goodwill to Cash-Generating Units

The Group’s cash-generating units are:

Australasia manufacturing
Americas manufacturing
Asia and Europe manufacturing

Australasia is reported as a single cash-generating unit due to the integrated nature of customers, management, manufacturing, sales and financing activities across New Zealand and Australia.

Asia and Europe is reported as a single cash-generating unit due to the integrated nature of customers, management, manufacturing and sales activities across Asia and Europe.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION B – ASSETS (cont.)

B5. GOODWILL (cont.)

Goodwill has been allocated for impairment testing purposes to the cash-generating units:

	2017 $’000s 2016 $’000s
Australasia manufacturing Americas manufacturing Asia and Europe manufacturing	24,051 23,975 5,422 5,422 514 514
	29,987 29,911

Australasia Manufacturing

The recoverable amount of the Australasia Manufacturing cash-generating unit is determined based on a value in use calculation which uses cashflow projections based on financial budgets and forecasts covering a five-year period, and using Scott Technology’s approximate weighted average cost of capital as the discount rate. The discount rate used is 11%.

Cashflow projections during the budget and forecast period for the Australasia Manufacturing cash-generating unit are also based on historical gross margins during the budget and forecast period and a constant rate of revenue and materials price inflation during the budget period of 3% reflecting a growing global demand for automation and robotics and consistent with past experience. Cashflows beyond that five year period have been extrapolated using a steady 2% p.a. growth rate. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the Australasian Manufacturing cash-generating unit.

Americas Manufacturing

The recoverable amount of the Americas Manufacturing cash-generating unit is determined based on a value in use calculation which uses cashflow projections based on financial budgets and forecasts covering a five-year period, and using Scott Technology’s approximate weighted average cost of capital as the discount rate. The discount rate used is 11%.

Cashflow projections during the budget and forecast period for the Americas Manufacturing cash-generating unit are also based on historical gross margins during the budget and forecast period and a constant rate of revenue and materials price inflation during the budget period of 3% reflecting a growing global demand for automation and robotics and consistent with past experience. Cashflows beyond that five year period have been extrapolated using a steady 2% p.a. growth rate. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the Americas Manufacturing cash-generating unit.

Asia & Europe Manufacturing

The recoverable amount of the Asia and Europe Manufacturing cash-generating unit is determined based on a value in use calculation which uses cashflow projections based on financial budgets and forecasts covering a five-year period, and using Scott Technology’s approximate weighted average cost of capital as the discount rate. The discount rate used is 11%.

Cashflow projections during the budget and forecast period for the Asia and Europe Manufacturing cashgenerating unit are also based on historical gross margins during the budget and forecast period and a constant rate of revenue and materials price inflation during the budget period of 2% reflecting historic inflation rates. Cashflows beyond that five year period have been extrapolated using a steady 2% p.a. growth rate. Management believes that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the Asia and Europe Manufacturing cash-generating unit.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION B – ASSETS (cont.)

B6. INTANGIBLE ASSETS

Policy

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight line basis over their estimated useful lives. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses.

Intangible assets that are acquired in a business combination and recognised separately from goodwill are initially recognised at fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are recognised on the same basis as intangible assets that are acquired separately.

	Bladestop Technology At Cost $’000s URLs at Cost $’000s Non- compete at Cost $’000s HTS Technology at Cost $’000s Centrifuge Technology at Cost $’000s Total $’000s
Gross carrying amount As at31August2015& August2016 Acquisitions through business combinations Additions As at31 August2017 Accumulated amortisation and impairment As at31August2015 Amortisation expense As at31 August2016 Amortisation expense As at31 August2017 Net book value As at31August2016 As at31 August2017	- 1,492 69 271 - 1,832 - - - - 338 338 10,568 - - - - 10,568
	10,568 1,492 69 271 338 12,738 - - 19 98 - 117 - - 1 16 - 17
	- - 20 114 - 134 1,261 - 1 25 6 1,293
	1,261 - 21 139 6 1,427 - 1,492 49 157 - 1,698
	9,307 1,492 48 132 332 11,311

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION B – ASSETS (cont.)

B6. INTANGIBLE ASSETS (cont.)

Assets

Intangible assets comprise:

Bladestop bandsaw safety technology purchased in October 2016 which is being amortised over a remaining useful life at the time of purchase of eight years.
Domain names (URLs) and a non-compete arrangement resulting from the purchase of the RobotWorx business. Intangible assets associated with the RobotWorx non-compete arrangement are being amortised over a fifteen year period, while intangible assets related to the URLs are indefinite life intangibles as the rights to the URLs are held indefinitely and are assessed for impairment annually.
Intellectual property associated with current leads and flux pumps which were largely acquired on the purchase of HTS-110 Limited and are being amortised over a remaining useful life at the time of purchase of eight years.
Centrifuge technology used in the honey and fish oil industry purchased through the acquisition of the other joint venture partners’ interests in Scott Separation Technology Limited in May 2017 and is being amortised over a remaining useful life at the time of purchase of thirteen years.

The amortisation expense has been included in the line item “depreciation and amortisation” in the Statement of Comprehensive Income.

B7. RESEARCH AND DEVELOPMENT COSTS

Policy

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following are demonstrated:

The technical feasibility of completing the asset so that it will be available for use or sale
The intention to complete the asset and use or sell it
The ability to use or sell the asset
How the asset will generate probable future economic benefits
The availability of adequate technical, financial and other resources to complete the development and to use or sell the asset
The ability to measure reliably the expenditure attributable to the asset during the development

B8. COMMITMENTS FOR EXPENDITURE

B8. COMMITMENTS FOR EXPENDITURE
	2017 $’000s 2016 $’000s
Commitments for future capital expenditure for purchase of plant and equipment	139 9

In June 2017 Scott Technology Limited announced plans to extend the building and associated facilities at 630 Kaikorai Valley Road, with the expectation that it would nearly double the available floor space. As at 31 August 2017 preliminary designs and exploratory groundwork was still to be completed and no construction contract had been quoted or signed.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION C – CAPITAL & FUNDING

C1. SHARE CAPITAL

Policy

Equity instruments issued by the Group are recorded at the proceeds received (net of issue costs).

	2017 Number 2016 Number 2017 $’000s 2016 $’000s
Fully paid ordinary shares at beginning of financial year Issue of shares under JBS Australia Pty Ltd Scheme of Arrangement Less share issue costs Balance at end of financial year	74,680,754 45,473,890 71,312 30,943 - 29,206,864 - 40,597 - - - (228)
	74,680,754 74,680,754 71,312 71,312

2016 Scheme of Arrangement

Under the 2016 JBS Australia Pty Ltd Scheme of Arrangement:

27,231,246 new shares were issued to JBS Australia Pty Ltd for $1.39 per share;
1,975,618 new shares were issued to existing shareholders who participated in the rights issue at $1.39 per share; and
10,183,812 existing shares were transferred from existing shareholders to JBS Australia Pty Ltd at $1.39 per share.

All shares have equal voting rights and participate equally in any dividend distribution or any surplus on the winding up of the Group.

C2. EARNINGS & NET TANGIBLE ASSETS PER SHARE

	2017	2016
	Cents	Cents
	Per Share	Per Share
Earnings per share from continuing operations
Basic	13.2	13.3
Diluted	13.2	13.3
Net tangible assets per ordinary share
Basic	73.5	82.2
Diluted	73.5	82.2

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION C – CAPITAL & FUNDING (cont.)

C2. EARNINGS & NET TANGIBLE ASSETS PER SHARE (cont.)

C2. EARNINGS & NET TANGIBLE ASSETS PER SHARE(cont.)
	2017 $’000s 2016 $’000s
Net surplus for the year used in the calculation of basic and diluted earnings per share from continuing operations Net tangible assets(excluding goodwill, intangible assets and deferred tax)	9,890 7,485
	54,889 61,388
	2017 #’000s 2016 #’000s
Weighted average number of ordinary shares used in the calculation of basic and diluted earnings per share from continuing operations Ordinary shares at year end used in the calculation of net tangible assets per ordinary share(Note C1)	74,681 56,327
	74,681 74,681

C3. BANK FACILITIES

Policy

Borrowings are recorded initially at fair value, net of transaction costs.

Subsequent to initial recognition, borrowings are measured at amortised cost with any difference between the initial recognised amount and the redemption value being recognised in the profit or loss over the period of the borrowings using the effective interest rate method.

Borrowings

The Group has a working capital facility from ANZ Bank New Zealand Limited with a total limit of $500,000 (2016: $500,000). As at 31 August 2017 the amount used was $Nil (2016: $Nil).

The Group has a financial guarantee facility and a trade performance bond facility from ANZ Bank New Zealand Limited with a total limit of $10,700,000 (2016: $10,700,000) and from Bank of China with a total limit of $152,000 (2016: $Nil). As at 31 August 2017 the amount used was $7,786,000 (2016: $6,146,000). Refer note F2, Contingent Liabilities.

The Group has secured credit card facilities from:

For New Zealand - ANZ Bank New Zealand Limited with a total limit of $750,000 (2016: $750,000). As at 31 August 2017 the total amount used was $61,000 (2016: $76,000).
For Australia – Australia and New Zealand Banking Group Limited with a total limit of $220,000 (2016: $Nil). As at 31 August 2017 the total amount used was $178,000 (2016: $Nil).
For USA – PNC Bank with a total limit of $139,000 (2016: $Nil). As at 31 August 2017 the total amount used was $59,000 (2016: $Nil).

The total amount used is included in trade creditors and accruals.

Security

The bank facilities from ANZ Bank New Zealand Limited are secured by general security agreements over all the present and after acquired property of Scott Technology Limited and its subsidiaries, and therefore all property, plant and equipment assets are pledged as security for these facilities. The bank facilities from ANZ Bank New Zealand Limited are also secured by mortgages over the 630 Kaikorai Valley Road, Dunedin and 10 Maces Road, Christchurch properties.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION C – CAPITAL & FUNDING (cont.)

C4. TRADE CREDITORS & ACCRUALS

Policy

Trade creditors are initially measured at fair value and subsequently measured at amortised cost using the effective interest rate method.

	2017 $’000s 2016 $’000s
Trade creditors Accruals	10,866 4,466 5,724 3,898
	16,590 8,364

Terms

All trade creditors are current and paid within the terms agreed with individual suppliers.

C5. LEASES

Operating Leases

Policy

Operating lease payments are recognised as an expense on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

Non Cancellable Operating Lease Payments

Operating leases relate to vehicles, printers and manufacturing and warehouse facilities with original lease terms of between six months to six years. All operating lease contracts contain market review clauses in the event that the Group exercises its option to renew. The Group has an option to purchase the leased property used for the RobotWorx business.

	2017 $’000s 2016 $’000s
No longer than1year Longer than1year and not longer than2years Longer than two years and not longer than5years Longer than5years	1,941 1,151 1,685 1,151 2,624 1,572 399 26
	6,649 3,900

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION C – CAPITAL & FUNDING (cont.)

C5. LEASES (cont.)

Finance Leases

Policy

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Group Entity as Lessor

Amounts due from finance leases are recorded as receivables. Finance lease receivables are initially recognised at amounts equal to the present value of the minimum lease payments receivable plus the present value of any unguaranteed residual value expected to accrue at the end of the lease term. Finance lease payments are allocated between interest revenue and reduction of the lease receivable over the term of the lease in order to reflect a constant periodic rate of return on the net investment outstanding in respect of the lease.

Group Entity as Lessee

Assets held under finance lease are initially recorded at their fair value or, if lower, at amounts equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the Balance Sheet as a finance lease obligation.

Lease payments are apportioned between finance charges and reduction of the lease obligations so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.

Finance leased assets are depreciated on a straight line basis over the estimated useful life of the asset or the lease term, whichever is shorter.

C6. DERIVATIVES

Policy

Derivatives are initially recognised at fair value on the date the derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition depends on the nature of the hedge relationship.

The Group entity designates certain derivatives as hedges of the fair value of firm commitments (fair value hedge) or as hedges of forecast future sales (cash flow hedge). Open firm commitments reflect contractual agreements to provide goods to customers at an agreed price denominated in a foreign currency on specified future dates.

Fair Value Hedge

Changes in fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit and loss immediately, together with any changes in the fair value of the firm commitment that is attributable to the hedged risk.

Hedge accounting is discontinued when the hedge instrument expires, or is sold, terminated, exercised, or no longer qualifies for hedge accounting. The carrying amount of the firm commitment at that time continues to be recognised as a firm commitment until the forecast transaction ultimately impacts profit or loss.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION C – CAPITAL & FUNDING (cont.)

C6. DERIVATIVES (cont.)

Cash Flow Hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in other comprehensive income and accumulated as a separate component of equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the other expenses line.

Amounts recognised in the hedging reserve are reclassified from equity to profit or loss (as a reclassification adjustment) in the periods when the hedged item is recognised in profit or loss, in the same line as the recognised hedged item.

However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in the hedging reserve are reclassified from equity and included in the initial measurement of the cost of the asset or liability (as a reclassification adjustment).

Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss recognised in the hedging reserve at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in the hedging reserve is recognised immediately in profit or loss.

	2017 $’000s 2016 $’000s
Assets At fair value: Foreign currency forward contracts held as effective fair value hedges Foreign exchange collar option derivatives Foreign exchange derivatives Represented by: Current financial assets Non current financial assets Liabilities At fair value: Fair value hedge of open firm commitments Represented by: Current financial liabilities Non current financial liabilities	1 620 - 479 143 377
	144 1,476
	144 1,377 - 99
	144 1,476
	1 620
	1 521 - 99
	1 620

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION C – CAPITAL & FUNDING (cont.)

C7. EMPLOYEE BENEFITS

Policy

Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave and sick leave when it is probable that settlement will be required and they are capable of being measured reliably.

Provision made in respect of employee benefits expected to be settled within 12 months are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured at the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date.

C8. PROVISION FOR WARRANTY

Policy

The provision for warranty claims represents the present value of the Directors’ best estimate of the future outflow of economic benefits that will be required under the Group’s twelve month warranty programme for certain equipment. The estimate has been made on the basis of historical warranty trends and may vary as a result of new materials, altered manufacturing processes or other events affecting product quality.

	2017 $’000s 2016 $’000s
Balance at beginning of financial year Additional provisions recognised Reductions arising from payments Balance at end of financial year	1,100 750 550 820 (350) (470)
	1,300 1,100

Obligation

The provision for warranty reflects an obligation for after sales service work in relation to completed contracts and products sold to customers. The provision is expected to be utilised within two years of balance date, however this timing is uncertain and dependent upon the actual level of after sales service work required.

C9. SHARE BASED PAYMENT ARRANGEMENTS

Policy

For cash-settled share-based payments, a liability is recognised for the goods or services acquired, measured initially at the fair value of the liability. At the end of each reporting period until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with any changes in fair value recognised in profit or loss for the year.

Details of Arrangement

The Group has a long term bonus scheme for certain executives and senior employees of the Group. In accordance with the terms of the plan, executives and senior employees who remain in employment with the Group at the vesting dates will be granted a cash incentive based on the movement in Scott Technology Limited’s share price from the beginning of the scheme to the vesting date. The fair value of the scheme is measured at year end with reference to the share price. At balance date there is a liability of $1,420,000 included in employee entitlements in the balance sheet. The impact of the movement in the liability on profit for the year was $790,000 and is included in employee benefits expense. No shares or share options in Scott Technology Limited are issued under the plan.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION D – RISK MANAGEMENT

D1. FINANCIAL INSTRUMENTS

Policy

The Group enters into derivative financial instruments to manage its exposure to foreign exchange rate risk.

Impairment of Financial & Non Financial Assets

Financial assets are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted.

Objective evidence of impairment could include:

Significant financial difficulty of the issuer or counterparty; or
Default or delinquency in interest or principal payments; or
It becoming probable that the borrower will enter bankruptcy or financial re-organisation.

For certain categories of financial assets, such as trade receivables, assets that are assessed not to be impaired individually are subsequently assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio past an average credit period, as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance for doubtful debts. When a trade receivable is considered uncollectible, it is written off against the allowance account.

Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

At each balance sheet date, the Group reviews the carrying amounts of its non financial tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Goodwill is tested for impairment annually. Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION D – RISK MANAGEMENT (cont.)

D1. FINANCIAL INSTRUMENTS (cont.)

Impairment of Financial & Non Financial Assets (cont.)

If the recoverable amount of an asset (cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately, unless the asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately unless the asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. Impairment losses in relation to goodwill are not reversed.

Financial Risk Management Objectives

The Group’s finance function provides services to the business, co-ordinates access to domestic and international financial markets and monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk and fair value interest rate risk), credit risk, liquidity risk and cash flow interest rate risk.

The Group seeks to minimise the effects of these risks by using derivative financial instruments to hedge certain of these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the Board of Directors, which provide written principles on foreign exchange risk, interest rate risk, credit risk, the use of financial derivatives and non-derivative financial instruments and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed on a continuous basis. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purpose.

Capital Risk Management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from 2016.

The capital structure of the Group consists of equity attributable to equity holders of the parent, comprising issued capital and retained earnings.

The Group has sufficient liquid assets to fund the operational assets. To the extent that additional working capital funding is required the Group has bank facilities available as disclosed in note C3. Where the Group requires funding for a significant capital acquisition, separate funding facilities are established, provided the Directors consider that the Group has adequate equity to support these facilities.

Market Risk

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates. The Group enters into a variety of derivative financial instruments to manage its exposure to foreign currency risk, including forward foreign exchange contracts to hedge the exchange rate risk arising on the export of manufactured products.

There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION D – RISK MANAGEMENT (cont.)

D1. FINANCIAL INSTRUMENTS (cont.)

Foreign Currency Risk Management

The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The carrying amounts in New Zealand Dollars of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows:

	Assets Liabilities 2017 $’000s 2016 $’000s 2017 $’000s 2016 $’000s
United States Dollar Euros Australian Dollar Japanese Yen Great Britain Pound Chinese RMB Canadian Dollar	13,169 9,618 2,810 1,143 2,542 1,255 1,974 710 8,460 7,492 4,956 1,239 7 8 - - 1 115 36 16 797 337 931 373 - 40 - -
	24,976 18,865 10,707 3,481

Forward Foreign Exchange Contracts

It is the policy of the Group to enter into forward foreign exchange contracts to cover specific foreign currency payments and receipts. The Group also enters into forward foreign exchange contracts to manage the risk associated with anticipated sales and purchase transactions.

The following table details the forward foreign currency (FC) contracts outstanding as at reporting date:

Average Exchange Rate Foreign Currency NZ$ Contract Value Fair Value 2017 2016 2017 FC’000s 2016 FC’000s 2017 $’000s 2016 $’000s 2017 $’000s 2016 $’000s	Average Exchange Rate Foreign Currency NZ$ Contract Value Fair Value 2017 2016 2017 FC’000s 2016 FC’000s 2017 $’000s 2016 $’000s 2017 $’000s 2016 $’000s
Foreign currency forward contracts held as effective fair value hedges Sell United States Dollars Less than3months 0.7204 0.6498 3to6months 0.6999 0.6822 6to12months 0.6921 0.6735 1to2years - 0.6311 Sell Euros 0to3months 0.6511 0.5835 3to6months 0.6461 - Sell Australian Dollars Less than3months 0.9059 0.8828 3to6months 0.9048 0.9055 6to12months 0.9330 0.9053	79 1,215 110 1,870 (1) 188 1,275 754 1,822 1,105 35 58 823 136 1,189 202 34 12 - 597 - 946 - 99
	2,177 2,702 3,121 4,123 68 357 118 69 181 118 (16) 11 59 - 91 - (8) -
	177 69 272 118 (24) 11 1,400 240 1,545 272 1 22 1,470 2,895 1,625 3,197 2 186 1,444 700 1,548 773 (46) 44
	4,314 3,835 4,718 4,242 (43) 252
	8,111 8,483 1 620

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION D – RISK MANAGEMENT (cont.)

D1. FINANCIAL INSTRUMENTS (cont.)

Average Exchange Rate Foreign Currency 2017 2016 2017 FC’000s 2016 FC’000s	Average Exchange Rate Foreign Currency 2017 2016 2017 FC’000s 2016 FC’000s	NZ$ Contract Value Fair Value 2017 $’000s 2016 $’000s 2017 $’000s 2016 $’000s
Foreign exchange derivatives Sell United States Dollars Less than3months 0.6972 0.6659 3to6months 0.6843 - 6to12months 0.7012 - Sell Australian Dollars Less than3months 0.9346 0.9160 Foreign exchange collar option derivatives Group has the right(but not the obligation) above the exchange rate to: Sell United States Dollars Less than3months - 0.6700 Sell Canadian Dollars Less than3months - 0.8900 Group has the obligation below the exchange rate to: Sell United States Dollars Less than3months - 0.5918 Sell Canadian Dollars Less than3months - 0.8545	2,459 3,166 573 - 1,820 -	3,527 4,754 86 367 837 - 35 - 2,595 - 39 -
	4,852 3,166 525 192 - 4,000 - 600 - 8,000 - 1,200	6,959 4,754 160 367 562 210 (17) 10
		7,521 4,964 143 377
		- 5,970 - 439 - 674 - 40 - 13,518 - - - 1,404 - -
		- 21,566 - 479

The fair value of foreign exchange contracts outstanding is recognised as other financial assets/liabilities.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION D – RISK MANAGEMENT (cont.)

D1. FINANCIAL INSTRUMENTS (cont.)

Forward Foreign Exchange Contracts

The Group is mainly exposed to the United States Dollar, the Australian Dollar, the Chinese Renminbi and the Euro.

The following table details the Group’s sensitivity to a 10% increase and decrease in the New Zealand Dollar against the relevant foreign currencies. 10% represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. A positive number below indicates an increase in profit and equity where the New Zealand Dollar weakens 10% against the relevant currency.

	US	Dollar	Euro	Euro			Australian Dollar	Australian Dollar	Chinese RMB	Chinese RMB
	Impact		Impact				Impact		Impact
	2017	2016	2017		2016		2017	2016	2017	2016
	$’000s	$’000s	$’000s	$’000s			$’000s	$’000s	$’000s	$’000s
Impact on profit or loss and equity:
10% increase in New Zealand Dollar	(340)	(225)	(57)			(55)	(294)	(604)	(13)	(4)
10% decrease in New Zealand Dollar	340	225	57			55	294	604	13	4

These movements are mainly attributable to the exposure to outstanding foreign currency bank accounts, receivables, payables and derivatives at year end in the Group.

In management’s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk as the year end exposure does not reflect the exposure during the year.

Credit Risk Management

In the normal course of business, the Group incurs credit risk from trade receivables and transactions with financial institutions. The Group has a credit policy which is used to manage this exposure to credit risk, including requiring payment prior to shipping to high credit risk countries and customers, the use of Export Credit Office financing facilities and customer credit checks. The Group, as a result of the industries in which they operate, can be exposed to significant concentrations of credit risk from trade receivables and counterparty risk with the bank in relation to the outstanding forward exchange contracts. They do not require any collateral or security to support financial instruments as these represent deposits with, or loans to, banks and other financial institutions with high credit ratings.

At year end the amount receivable from the five largest trade debtors is $3,827,000 (2016: $7,478,000).

The maximum credit risk of on balance sheet financial instruments is their carrying amount.

The carrying amount of financial assets recorded in the financial statements, which is net of impairment losses, represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION D – RISK MANAGEMENT (cont.)

D1. FINANCIAL INSTRUMENTS (cont.)

Liquidity & Interest Rate Risk Management

Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in Note C3 are details of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk.

There is no reasonable movement in interest rates that could have a material impact on the financial statements.

The following table details the Group’s remaining undiscounted contractual maturity for its non derivative financial liabilities. The tables below have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay.

The tables include both interest and principal cash flows.

	Weighted
	Average
	Effective		Less
	Interest	On	than	1-2	2-3	3-5	5+
	Rate	Demand	1 Year	Years	Years	Years	Years	Total
	%	$’000s	$’000s	$’000s	$’000s	$’000s	$’000s	$’000s
2017 Financial Liabilities
Finance lease liabilities	3.47%	-	31	12	8	7	-	58
Payable to joint ventures	-	-	547	-	-	-	-	547
Trade creditors & accruals	-	16,590	-	-	-	-	-	16,590
		16,590	578	12	8	7	-	17,195
2016 Financial Liabilities
Finance lease liabilities	3.88%	-	35	30	11	15	-	91
Payable to joint ventures	-	-	346	-	-	-	-	346
Trade creditors & accruals	-	8,364	-	-	-	-	-	8,364
		8,364	381	30	11	15	-	8,801

The Group has access to financing facilities, of which the total unused amount is $4.4 million at the balance sheet date, (2016: $5.7 million). The Group expects to meet its other obligations from operating cash flows and proceeds of maturing financial assets.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION D – RISK MANAGEMENT (cont.)

D1. FINANCIAL INSTRUMENTS (cont.)

Fair Value Measurements Recognised in the Balance Sheet

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 on the degree to which fair value is observable:

The fair values of financial assets and financial liabilities are determined as follows:

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and liabilities;
Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and;
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The fair value of forward exchange contracts and options is based on their quoted market price, if available. If a quoted market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity and options of the contract using a market rate of interest.

	Level1 $’000s Level2 $’000s Level3 $’000s Total $’000s
2017 Financial assets at fair value through profit and loss Foreign currency forward contracts held as effective fair value hedges Foreign exchange derivatives Financial liabilities at fair value through profit and loss Fair value hedge of open firm commitments 2016 Financial assets at fair value through profit and loss Foreign currency forward contracts held as effective fair value hedges Foreign exchange derivatives Foreign exchange collar option derivatives Financial liabilities at fair value through profit and loss Fair value hedge of open firm commitments	- 1 - 1 - 143 - 143 - (1) - (1)
	- 143 - 143
	- 620 - 620 - 377 - 377 - 479 - 479 - (620) - (620)
	- 856 - 856

Fair Value

The fair value of financial instruments not already measured at fair value approximates their carrying value.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2017

SECTION E – GROUP STRUCTURE & SUBSIDIARIES

E1. ACQUISITION OF BUSINESS

Business Acquired

Business Acquired
			Proportion of Shares /	Cost of Acquisition
Name	Principal Activity	Date of Acquisition	Assets Acquired	$’000s
DC Ross	Precision metal	30June2017	100%	375
	stamping
Scott Separation	Centrifuge	22May2017	50%	433
Technology Limited	technology
(Acquired other joint
venture partners’ shares)

Analysis of Assets & Liabilities Acquired

	DC Ross Book Value $’000s Fair Value Adjustment $’000 Fair Value on Acquisition $’000s	DC Ross Book Value $’000s Fair Value Adjustment $’000 Fair Value on Acquisition $’000s	Scott Separation Technology Book Value $’000s Fair Value Adjustment $’000s Fair Value On Acquisition $’000s	Scott Separation Technology Book Value $’000s Fair Value Adjustment $’000s Fair Value On Acquisition $’000s	Total Fair Value on Acquisition $’000s
Assets & Liabilities Inventories & other current assets - 37 37 Plant & equipment 375 1,248 1,623 Intangible assets - - - Deferred tax - (349) (349) Total assets & liabilities 375 936 1,311 (Fair value gain)/ goodwill on acquisition (936) Cost of acquisition 375	- 37 37 375 1,248 1,623 - - - - (349) (349)		95 - 95 19 (11) 8 338 - 338 5 (89) (84)		132 1,631 338 (433)
		1,311 (936) 375	457 (100) 357 76 433		1,668 (860)
				433	808

Cost of Acquisition

The cost of acquisition of the DC Ross business was fully paid in cash. The cash outflow on acquisition was $375,000.

No cash was paid for the acquisition of Scott Separation Technology Limited. The cost of acquisition was represented by Scott Technology Limited’s existing equity in ($24,000) and advances to ($409,000) this previous joint venture company.

Fair Value Gain Arising on Acquisition

The inventories, plant and equipment of the DC Ross business were purchased from DC Ross’ receivers for an agreed total value which was less than market value, resulting in a fair value gain on acquisition. The fair value gain on acquisition is reported in the Statement of Comprehensive Income.

Goodwill Arising on Acquisition

The consideration paid for the acquisition of the remaining 50% of the shares in Scott Separation Technology Limited effectively included amounts in relation to the benefit of expected synergies, current product development and knowhow. These benefits are not recognised separately from goodwill as the future economic benefits arising from them cannot be readily measured and they do not meet the definition of identifiable intangible assets.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION E – GROUP STRUCTURE & SUBSIDIARIES (cont.)

E1. ACQUISITION OF BUSINESS (cont.)

Impact of Acquisition on the Results of the Group

Given that DC Ross was acquired from its receivers and Scott Separation Technology Limited is a very small business and was an acquisition of the other joint venture partners’ shares, disclosure has not been made of the full year revenue or profit as if both acquisitions had been effected at 1 September 2016 as doing so would not be a fair representation of the performance of the combined Group on an annualised basis.

E2. SUBSIDIARIES

E2. SUBSIDIARIES
			Ownership	Interests
		Country of	Voting	& Rights
Name of Entity	Balance Date	Incorporation	2017 %	2016 %
Parent Entity
Scott Technology Limited(i)	31August	New Zealand
New Zealand Trading Subsidiaries
Scott Technology NZ Limited(ii)	31August	New Zealand	100	100
HTS-110Limited(iii) (***)	31August	New Zealand	-	100
Scott Automation Limited(iv)	31August	New Zealand	100	100
Scott Technology USA Limited(v)	31August	New Zealand	100	100
QMT General Partner Limited(vi)	31August	New Zealand	93	93
QMT New Zealand Limited Partnership(vii)	31August	New Zealand	92	92
Scott Milktech Limited(viii) (***)	31March(*)	New Zealand	-	61
Scott Separation Technology(ix)	31August	New Zealand	100	50
New Zealand Non Trading Subsidiaries
Scott LED Limited	31August	New Zealand	100	100
Rocklabs Limited	31August	New Zealand	100	100
Overseas Subsidiaries
Scott Technology Australia Pty Ltd(x)	31August	Australia	100	100
Applied Sorting Technologies Pty Ltd(xi)	31August	Australia	100	100
Scott Automation & Robotics Pty Ltd(xii)	31August	Australia	100	100
QMT Machinery Technology(Qingdao)Co Limited(xiii)	31December(**)	China	70	70
Scott Systems International Incorporated(xiv)	31August	USA	100	100
Scott Systems(Qingdao)Co Limited(xv)	31December(**)	China	95	95
Scott Technology GmbH(xvi)	31December(**)	Germany	100	100

(*) Determined by agreement between the shareholders on incorporation.

(**) Determined by local regulatory requirements.

(***) Amalgamated with Scott Technology NZ Limited on 31 March 2017

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION E – GROUP STRUCTURE & SUBSIDIARIES (cont.)

E2. SUBSIDIARIES (cont.)

New Zealand Trading Subsidiaries

(i) Scott Technology Limited is the ultimate parent entity of the Group. It is an investment holding company and owns all properties.
(ii) Scott Technology NZ Limited is the main trading company for New Zealand operations, including the design and manufacture of automated and robotic systems (under the “Scott” brand), the service and upgrade of Scott equipment worldwide (under the “Scott Service International” brand), the manufacture and sale of automated laboratory sampling equipment for the mining industry (under the “Rocklabs” brand) and development, design and manufacture of high temperature superconductor equipment (under the “HTS-110” brand).
(iii) HTS-110 Limited developed, designed and manufactured high temperature superconductor equipment. In 2015 these operations were transferred to Scott Technology NZ Limited and the company was amalgamated with Scott Technology NZ Limited on 31 March 2017.
(iv) Scott Automation Limited’s principal activity is the design and manufacture of automation systems.
(v) Scott Technology USA Limited is a financing subsidiary for the USA businesses, as well as owning a number of domain names (URLs) associated with the RobotWorx business.
(vi) QMT General Partner Limited is the general partner for the QMT New Zealand Limited Partnership and directly owns 1% of QMT New Zealand Limited Partnership.
(vii) QMT New Zealand Limited Partnership is an investment holding entity and owns 75% of QMT Machinery Technology (Qingdao) Co Limited.
(viii) Scott Milktech Limited’s principal activity was the development of automated solutions for the dairy industry. Scott Technology Limited acquired the shares of the minority shareholder in January 2017 and then the company was amalgamated with Scott Technology NZ Limited on 31 March 2017.
(ix) Scott Separation Technology Limited develops and markets patented centrifuge technology with particular application to the honey and fish processing industries.

Overseas Subsidiaries

(x) Scott Technology Australia Pty Limited is a holding company for Australian activities.
(xi) Applied Sorting Technologies Pty Limited’s principal activity was the manufacture and sale of x-ray and sorting technology. These activities are now conducted through Scott Automation & Robotics Pty Limited.
(xii) Scott Automation & Robotics Pty Limited is the main trading company for Australia operations, including the business of Machinery Automation and Robotics which was acquired on 31 January 2015.
(xiii) QMT Machinery Technology (Qingdao) Co Limited is a general engineering business located in Qingdao, China. The woodworking lathes and parts business has ceased and the automation engineering business has been transferred to Scott Systems (Qingdao) Co Limited. Remaining net assets have been impaired as disclosed in Note A1.
(xiv) Scott Systems International Incorporated’s principal activity is in North America for the sale of robot systems under the RobotWorx brand and undertaking sales and service for the wider Group.
(xv) Scott Systems (Qingdao) Co Limited is a general engineering business located in Qingdao, China.
(xvi) Scott Technology GmbH designs and manufactures automation systems and is located in Kurnbach, Germany.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION E – GROUP STRUCTURE & SUBSIDIARIES (cont.)

E3. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD

Interests in Joint Ventures

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The results and assets and liabilities of joint ventures are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the joint venture. In assessing the Group’s share of the profit or loss or other comprehensive income of the joint venture, the Group’s share of any unrealised profits or losses on transactions between Group companies and the joint venture is eliminated. Dividends or distributions received from a joint venture reduce the carrying amount of the investment in that joint venture in the Group financial statements. When the Group’s share of losses of a joint venture exceeds the Group’s interest in that joint venture, the Group discontinues its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the joint venture.

An investment in a joint venture is accounted for using the equity method from the date on which the investee becomes a joint venture until the date it ceases to be a joint venture. On acquisition of the investment in a joint venture, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying value of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired.

investment is acquired.
Ownership Interest Name of Entity Country of Incorporation 2017 % 2016 %	Carrying Value 2017 $’000s 2016 $’000s
Joint Ventures Robotic Technologies Limited(i) New Zealand 50 50 Scott Technology Euro Limited(ii) Ireland 50 50 NS Innovations Pty Limited(iii) Australia 50 50 Scott Separation Technology Limited(iv)(*) New Zealand 100 50 Scott Technology S.A.(v) Chile 50 50 Rocklabs Automation Canada Limited(vi) Canada 50 50 Balance at end of financial year	983 807 78 77 - - - 26 50 88 7 (75)
	1,118 923

(*) Now reported as a subsidiary under Note E2.

(i) Scott Technology Limited’s joint venture with Silver Fern Farms Limited, Robotic Technologies Limited (RTL), was formed in October 2003 and has a balance date of 31 August. RTL’s principal activity is the marketing and development of (primarily) lamb meat processing equipment and the management of the intellectual property associated with these developments. Scott Technology Limited’s share of RTL’s net surplus was $176,000 (2016: $264,000).

(ii) Scott Technology Euro Limited (STEL) is a European sales agency for Scott Technology Limited and is a joint venture between Scott Technology Limited and Industrial Process Solution of Italy. STEL was formed in 2009 and has a balance date of 31 August. Scott Technology Limited’s share of STEL’s net surplus was $1,000 (2016: share of net surplus $8,000).

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION E – GROUP STRUCTURE & SUBSIDIARIES (cont.)

E3. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (cont.)

(iii) NS Innovations Pty Limited (NSIL) is a joint venture between Scott Technology Limited and Northern CoOperative Meat Company Limited of Australia. NSIL was formed in August 2009 and has a balance date of 30 June, in line with Australian tax rules. NSIL’s principal activity was the marketing and development of (primarily) beef meat processing equipment and the management of the intellectual property associated with these developments. NSIL is no longer operating and is in the process of being wound up. Scott Technology Limited’s share of NSIL’s net deficit was $Nil (2016 share of net deficit: $14,000).
(iv) Scott Separation Technology Limited (SSTL) was a joint venture between Scott Technology Limited and private individuals. SSTL was formed in December 2011 and has a balance date of 31 August. SSTL’s principal activity is the marketing and development of patented centrifuge technology which has particular application to the honey and fish processing industries. Scott Technology Limited acquired its joint venture partners’ shareholdings in May 2017 and it is now reported as a wholly owned subsidiary. Scott Technology Limited’s share of SSTL’s net deficit up to acquiring the joint venture partners’ shareholdings was $1,000 (2016: share of net surplus $Nil).
(v) Scott Technology S.A. (STSA) is a joint venture between Scott Technology Limited and Canadian private company STG Holdings Limited. STSA commenced trading in June 2014 and has a balance date of 31 August. STSA is a sales agency for mining equipment in the Americas and is based in Chile. Scott Technology Limited’s share of STSA’s net deficit was $38,000 (2016: share of net surplus $154,000).
(vi) Rocklabs Automation Canada Limited (RAC) is a joint venture between Scott Technology Limited and Canadian private company STG Holdings Limited. RAC commenced trading in 2013 and has a balance date of 31 August. RAC is a sales agency for mining equipment in North America. Scott Technology Limited’s share of RAC’s net surplus was $82,000 (2016: share of net deficit $34,000).

Carrying value of equity accounted investments:

Carrying value of equity accounted investments:
	2017 $’000s 2016 $’000s
Balance at beginning of financial year Share of net surplus Sale of interest in joint venture Balance at end of financial year	923 545 220 378 (25) -
	1,118 923

Summarised statement of comprehensive income of joint ventures from continuing operations:	Joint Ventures 2017 $’000s 2016 $’000s
Income Expenses Net surplus and total comprehensive income Group share of net surplus	12,136 14,542 (11,696) (13,786) 440 756
	220 378

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION E – GROUP STRUCTURE & SUBSIDIARIES (cont.)

E3. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (cont.)

Summarised balance sheets of joint ventures:

Summarised balance sheets of joint ventures:
	Joint Ventures 2017 $’000s 2016 $’000s
Current assets Non current assets Current liabilities Non current liabilities Net assets Group share of net assets	3,937 3,864 1,731 2,149 (2,049) (1,216) (1,349) (2,914)
	2,270 1,883
	1,135 942

RTL, STEL, NSIL, STSA and RAC do not have any contingent assets, contingent liabilities or commitments for capital expenditure. The Group is not jointly and severally liable for any of the joint ventures’ liabilities.

E4. RELATED PARTY TRANSACTIONS

Group Companies

The Group owns 50% of Robotic Technologies Limited (RTL), 50% of NS Innovations Pty Limited (NSI), 50% of Scott Technology Euro Limited (STEL), 50% of Scott Separation Technology Limited (SSTL) up to 31 May 2017 70% of QMT Machinery Technology (Qingdao) Co Limited (QMT), 50% of Scott Technology S.A. (STSA) and 50% of Rocklabs Automation Canada Limited (RAC).

	2017	2016
Joint Ventures	$’000s	$’000s
Project work undertaken by the Group for RTL	8,095	12,767
Administration, sales and marketing fees charged by the Group to RTL	173	230
Sales revenue received by RTL from the Group	8,875	9,689
Advance(from)/to RTL(to)/from Scott Technology	(371)	431
Administration fees charged by the Group to STEL	6	6
Commission received by STEL from the Group	199	185
Advance from STEL to Scott Technology	(176)	(346)
Project work undertaken by the Group for SSTL	2	254
Advance from Scott Technology to SSTL	-	479
Advance from Scott Technology to NSI	-	11
Project work undertaken by the Group for STSA	1,466	759
Advance from Scott Technology to STSA	1,223	840
Project work undertaken by the Group for RAC	1,583	170
Advance from Scott Technology to RAC	686	63

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION E – GROUP STRUCTURE & SUBSIDIARIES (cont.)

E4. RELATED PARTY TRANSACTIONS (cont.)

Advances

Advances to Group companies are unsecured, interest free and repayable on demand.

Directors

C C Hopkins and S J McLauchlan are trustees of the Scott Technology Employee Share Purchase Scheme. The balance of the interest free advance owing to the scheme at 31 August 2017 was $4,000 (2016: $2,000). During the year no shares vested with employees and no shares (2016: 1,164 shares) which had not vested with employees were disposed of at market value. As at 31 August 2017 17,779 (31 August 2016: 17,779) shares were being held on trust which had vested with the Trustees upon the resignation of employees during the period of the Scheme and are available for sale. These shares have been treated as equity under share capital.

Substantial Shareholders

C C Hopkins is a Director of Oakwood Group Limited, which owns Oakwood Securities Limited, a substantial shareholder of Scott Technology Limited. C C Hopkins has received Directors’ fees of $17,000 from Oakwood Group Limited during the year (2016: $17,000).

JBS Australia Pty Limited owns a 50.1% shareholding in Scott Technology Limited. The Group has recognised sales to JBS Companies of $3.2 million (2016: $307,000 since acquisition date of 14 April 2016) and has made purchases from JBS Companies of $2.5 million (2016: $9,000 since acquisition date).

SECTION F – OTHER DISCLOSURES

F1. NOTES TO THE CASH FLOW STATEMENT

Policy

The Statement of Cash flows is prepared exclusive of GST, which is consistent with the method used in the Statement of Comprehensive Income.

Definition of terms used in the Statement of Cash flows:

Cash includes cash on hand, demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value, net of bank overdrafts.
Operating activities include all transactions and other events that are not investing or financing activities.
Investing activities are those activities relating to the acquisition and disposal of current and non-current investments and any other non-current assets.
Financing activities are those activities relating to changes in the equity and debt capital structure of the Group and those activities relating to the cost of servicing the Group’s equity.

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION F – OTHER DISCLOSURES (cont.)

F1. NOTES TO THE CASH FLOW STATEMENT (cont.)

2017
$’000s
2016
$’000s

Net surplus for the year
Adjustments for non-cash items:
Depreciation and amortisation
Net loss/(gain)on sale of property, plant and equipment
Deferred tax
Share of net surplus of joint ventures and associates
Impairment of net assets(QMT Machinery Technology(Qingdao)Co Ltd)
Fair value gain on purchase of business
Add /(less) movement in working capital:
Trade debtors
Other financial assets – derivatives
Sundry debtors
Inventories
Contract work in progress
Taxation payable
Trade creditors and accruals
Other financial liabilities – derivatives
Employee entitlements
Provision for warranty
Movements in working capital disclosed in
investing/financing activities:
Working capital relating to purchase of business and non controlling
interest
Movement in foreign exchange translation reserve relating to working
capital
Impairment of net assets(QMT Machinery Technology(Qingdao)Co Ltd)
Net cash inflow from operating activities

10,265
8,134
2,987
1,744
(73)
215
201
618
(220)
(378)
-
449
(936)
-
(2,000)
79
1,332
172
174
(18)
(3,929)
(927)
(5,245)
4,185
1,779
750
8,228
(510)
(619)
(17)
1,195
1,987
200
350
675
(75)
(607)
(201)
-
(449)

13,407
16,108

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SECTION F – OTHER DISCLOSURES (cont.)

F2. CONTINGENT LIABILITIES

	2017	2016
	$’000s	$’000s
Payment guarantees and performance bonds	7,711	6,071
Stock Exchange bond	75	75
Maximum contract penalty clause exposure	1,501	1,431

Payment guarantees are provided to customers in respect of advance payments received by the Group for contract work in progress, while performance bonds are provided to some customers for a period of up to one year from final acceptance of the equipment.

Scott Technology Limited has a payment bond to the value of $75,000 in place with ANZ Bank New Zealand Limited in favour of the New Zealand Stock Exchange.

The Group has exposure to penalty clauses on its projects. These clauses relate to delivery criteria and are becoming increasingly common in international contractual agreements. There is a clearly defined sequence of events that needs to occur before penalty clauses are imposed.

F3. KEY MANAGEMENT PERSONNEL COMPENSATION

The compensation of the Directors and executives, being the key management personnel of the entity, is set out below:

	2017 $’000s 2016 $’000s
Short term benefits - employees Short term benefits – executive Director Short term benefits – non-executive Directors Long term benefits – employees Long term benefits – executive Director	2,535 2,200 708 533 193 216 604 614 284 279
	4,324 3,842

F4. SUBSEQUENT EVENTS

Dividend

On 12 October 2017 the Board of Directors approved a final dividend of six cents per share with full imputation credits attached to be paid for the 2017 year (2016: five and a half cents per share).

ADDITIONAL STOCK EXCHANGE INFORMATION

FOR THE YEAR ENDED 31 AUGUST 2017

Substantial Shareholders

Substantial Shareholders	Substantial Shareholders	Substantial Shareholders
Names of substantial security holder Number of shares in which a relevant interest was held as at15 September2017
1. JBS Australia Pty Limited 37,415,058 2. Oakwood Securities Limited 5,500,000 The total number of issued voting securities of the company as at15September2017was 74,680,754ordinary shares. Distribution of Shares by Holding Size # of Shareholders % of Total Number % of Total
1-1,000 683 26.15 347,523 0.46 1,001-5,000 1,110 42.50 2,901,588 3.89 5,001-10,000 393 15.04 2,906,869 3.89 10,001-50,000 353 13.51 6,779,364 9.08 50,001-100,000 37 1.42 2,544,810 3.41 100,001and over 36 1.38 59,200,600 79.27 Total and percentage 2,612 100.00 74,680,754 100.00 Twenty Largest Shareholders as at15 September2017 Shares % of Total 1. JBS Australia Pty Limited 37,415,058 50.10 2. New Zealand Central Securities Depository Limited 5,595,593 7.49 3. Oakwood Securities Limited 5,500,000 7.36 4. Russell John Field & Anthony James Palmer(JI Urquart Family A/C) 2,000,000 2.68 5. JB Were(NZ)Nominees Limited 1,591,492 2.13 6. Forsyth Barr Custodians Limited(1-33A/C) 720,017 0.96 7. Leveraged Equities Finance Limited 519,247 0.70 8. Jarden Custodians Limited 479,982 0.64 9. Jack William Allan & Helen Lynette Allan 425,000 0.57 10. Rosebery Holdings Limited 375,096 0.50 11. Kenneth William Wigley 313,512 0.42 12. Custodial Services Limited(4A/C) 303,139 0.41 13. FNZ Custodians Limited 292,949 0.39 14. Opito Investments Pty Ltd 280,000 0.37 15. Margaret Ann Ring & Richard Arthur Prevett 270,000 0.36 16. Graham William Batts and Roger Norman Macassey 248,053 0.33 17. Forsyth Barr Custodians Limited 220,890 0.30 18. Investment Custodial Services Limited 208,711 0.28 19. Harry McMillan Hearsay Salmon 200,000 0.27 20. Michael Walter Daniel, Nigel Geoffrey Burton and Michael Murray Benjamin 200,000 0.27 57,158,739 76.53	683 26.15 347,523 0.46 1,110 42.50 2,901,588 3.89 393 15.04 2,906,869 3.89 353 13.51 6,779,364 9.08 37 1.42 2,544,810 3.41 36 1.38 59,200,600 79.27
	2,612 100.00 74,680,754 100.00
		Shares % of Total 37,415,058 50.10 5,595,593 7.49 5,500,000 7.36 2,000,000 2.68 1,591,492 2.13 720,017 0.96 519,247 0.70 479,982 0.64 425,000 0.57 375,096 0.50 313,512 0.42 303,139 0.41 292,949 0.39 280,000 0.37 270,000 0.36 248,053 0.33 220,890 0.30 208,711 0.28 200,000 0.27 200,000 0.27 57,158,739 76.53
1. JBS Australia Pty Limited 2. New Zealand Central Securities Depository Limited 3. Oakwood Securities Limited 4. Russell John Field & Anthony James Palmer(JI Urquart Family A/C) 5. JB Were(NZ)Nominees Limited 6. Forsyth Barr Custodians Limited(1-33A/C) 7. Leveraged Equities Finance Limited 8. Jarden Custodians Limited 9. Jack William Allan & Helen Lynette Allan 10. Rosebery Holdings Limited 11. Kenneth William Wigley 12. Custodial Services Limited(4A/C) 13. FNZ Custodians Limited 14. Opito Investments Pty Ltd 15. Margaret Ann Ring & Richard Arthur Prevett 16. Graham William Batts and Roger Norman Macassey 17. Forsyth Barr Custodians Limited 18. Investment Custodial Services Limited 19. Harry McMillan Hearsay Salmon 20. Michael Walter Daniel, Nigel Geoffrey Burton and Michael Murray Benjamin

Employee Remuneration

Remuneration and other benefits of $100,000 per annum or more, received or receivable by employees in their capacity as employees were: Salary Range Number of Employees Salary Range Number of Employees $100,000 - $110,000

Salary Range	Number of Employees	Salary Range	Number of Employees
$100,000- $110,000	22	$210,001- $220,000	2
$110,001- $120,000	18	$240,001- $250,000	2
$120,001- $130,000	15	$250,001- $260,000	1
$130,001- $140,000	14	$280,001- $290,000	1
$140,001- $150,000	10	$330,001- $340,000	1
$150,001- $160,000	9	$340,001- $350,000	1
$160,001- $170,000	7	$350,001- $360,000	1
$170,001- $180,000	8	$370,001- $380,000	1
$180,001- $190,000	6	$420,001- $430,000	1
$190,001- $200,000	1	$440,001- $450,000	1
$200,001- $210,000	1	$490,001- $500,000	1

AUDIT REPORT

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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS OF SCOTT TECHNOLOGY LIMITED

Opinion

We have audited the consolidated financial statements of Scott Technology Limited and its subsidiaries (the ‘Group’), which comprise the consolidated balance sheet as at 31 August 2017, and the consolidated statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements, on pages 24 to 64, present fairly, in all material respects, the consolidated financial position of the Group as at 31 August 2017, and its consolidated financial performance and 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 (‘ISAs’) and International Standards on Auditing (New Zealand) (‘ISAs (NZ)’). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section 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 issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

Other than in our capacity as auditor and the provision of taxation advice and other assurance services, we have no relationship with or interests in the Company or any of its subsidiaries. These services have not impaired our independence as auditor of the Company and Group.

Audit materiality

We consider materiality primarily in terms of the magnitude of misstatement in the financial statements of the Group that in our judgement would make it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced (the ‘quantitative’ materiality). In addition, we also assess whether other matters that come to our attention during the audit would in our judgement change or influence the decisions of such a person (the ‘qualitative’ materiality). We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

We determined materiality for the Group financial statements as a whole to be $700,000.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. 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.

Key audit matter

Recognition of Profit on Long Term Projects

The Group’s most significant revenue stream relates to long term projects for customers in various industries. Revenue and profit on long term projects are accounted for based on management’s estimate of the percentage of completion of the individual contracts as detailed in note A1.

There is a significant level of judgement involved in the recognition of revenue and profit on long term projects driven by a number of occurrences throughout the life of the project requiring estimation and contract conditions differing between projects. For these reasons, we have identified this area as a key audit matter.

How our audit addressed the key audit matter

Our procedures included, among others:

Assessment of controls – Assessing the group’s processes and controls around preparation/calculation of the percentage of completion.
Lookback procedures – For a sample of projects in place at the end of the prior year, we compared current year actual information to prior year forecasts to assess the reliability of the forecast cost to complete determined by management.
Testing of contract revenue – For a sample of contracts, we have performed the following procedures:
Assessed whether the key estimates made by management reflect the terms and conditions of the contract;
Evaluated cost to complete forecasts by challenging management’s key assumptions and comparing revenue recognition calculations to project cost forecasts prepared by project managers;
Obtained evidence of scope variations and claims and verified that these have not been included in management’s determination of revenue recognition until agreed with the customer;
Tested contract costs incurred during the year to validate the costs and assess whether they have been applied to contracts appropriately.

Goodwill and Indefinite Life Intangible Assets Impairment Assessment

As at 31 August 2017, there are $30.0million (2016: $29.9million) of goodwill and $1.5m (2016: $1.5m) of indefinite life intangible assets (URL’s) included on the balance sheet of the Group as detailed in notes B5 and B6. The balance is held across three cash generating units.

In accordance with NZ IAS 36, the Group is required to complete an impairment test related to goodwill annually. The assessment of value in use is performed using a discounted cash flow calculation.

This calculation is subjective, and requires the use of judgement, primarily in respect of:

Forecast cash flows, particularly in relation to future project wins and market conditions; and
Discount rates.

We have assessed a key audit matter in relation to the significant judgements and estimates required in preparing the value in use model.

We considered whether the Group’s methodology for assessing impairment is compliant with NZ IAS 36: Impairment of Assets. We focused on testing and challenging the suitability of the models and reasonableness of the assumptions used by the Group in conducting their impairment reviews.

Our procedures included, among others:

Assessment of controls – Assessing the group’s processes and controls around the value in use calculation.
Cash generating units – We assessed management’s determination of cash generating units and our understanding of the Group’s business and operating environment.
Past performance – We assessed the reasonableness of forecast figures by looking at historical performance against past forecasts.
Use of specialists – We used our internal valuation experts to assist in our evaluation of the reasonableness of the discount rates applied by the Group through consideration of the relevant risk factors for each CGU or impairment model, the cost of capital for the Group, and market data on comparable businesses.
Integrity check – We tested the mathematical accuracy of the models.
Sensitivity analysis – We evaluated the sensitivity analysis performed by management to consider the extent to which a change in one or more of the key assumptions could give rise to impairment in the goodwill.

Other information

The directors are responsible on behalf of the Group for the other information. The other information comprises the information in the Financial Report that accompanies the consolidated financial statements and the audit report, and the Annual Report, which is expected to be made available to us after the date of the audit report.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

Our responsibility is to read the other information and consider whether it is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If so, we are required to report that fact. We have nothing to report in this regard.

When we read the Annual Report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and consider further appropriate actions.

Directors’ responsibilities for the consolidated financial statements

The directors are responsible on behalf of the Group 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 on behalf of the Group 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 and ISAs (NZ) 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 consolidated financial statements is located on 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.

Restriction on use

This report is made solely to the Company’s shareholders, as a body. Our audit has been undertaken so that we might state to the Company’s shareholders those matters 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’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed.

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Michael Wilkes, Partner for Deloitte Limited Christchurch, New Zealand 12 October 2017

PARENT COMPANY

Registered Office Scott Technology Limited 630 Kaikorai Valley Road Dunedin 9011 New Zealand t +64 3 478 8110

Mailing Address Scott Technology Limited Private Bag 1960 Dunedin 9054 New Zealand

Website scottautomation.com

Chairman & Independent Director Stuart McLauchlan

Independent Directors Christopher Staynes Mark Waller

Directors Representing JBS Australia Pty Ltd (not Independent Directors) Andre Nogueira Brent Eastwood Edison Alvares John Berry (Alternate Director)

Managing Director/CEO Chris Hopkins

Chief Financial Officer & Company Secretary Greg Chiles

REGIONAL CONTACTS

Australia Clyde Campbell t +61 425 259 270 e [email protected]

Europe Luciano Schiavi t +39 345 393 1722 e [email protected]

Americas

Tony Joyce t +1 740 692 5086 e [email protected]

Asia Ken Snowling t +49 151 7437 5544 e [email protected]

PROFESSIONAL SERVICES

Share Registry Link Market Services Ltd PO Box 91976 Auckland 1142 t +64 9 375 5998 f +64 3 375 5990 e [email protected]

Bankers ANZ Bank New Zealand Ltd

Solicitors Gallaway Cook Allan

Auditor Deloitte

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scottautomation.com

AI assistant

Scott Technology Limited — Annual Report 2017

66266_rns_2017-11-01_d48ed60a-ecab-49bf-a87d-10d01fcd2d5d.pdf

01 HIGHLIGHTS

HIGHLIGHTS

DIVIDEND

ANNUAL MEETING

GLOBAL PRESENCE & MARKETS

FIVE YEAR TREND

CHAIRMAN & MANAGING DIRECTOR’S COMMENTARY

Another Year of Achievement

Financial Performance

Dividend

CHAIRMAN & MANAGING DIRECTOR’S COMMENTARY (cont.)

Board

Health & Safety

Our Customer and Market Focus

Operations

Research and Development

CHAIRMAN & MANAGING DIRECTOR’S COMMENTARY (cont.)

People and Process

Outlook

OUR VALUES

ROBOTWORX CELEBRATES 25 YEARS

Features of an integrated AGV system include:

OUR BRANDS

CORPORATE GOVERNANCE

BOARD OF DIRECTORS

CORPORATE GOVERNANCE (cont.)

1. ETHICAL STANDARDS

3. BOARD COMMITTEES

Audit Committee

2. BOARD COMPOSITION AND ROLE

Remuneration and Nomination Committee

Treasury Committee

4. REPORTING AND DISCLOSURE

5. REMUNERATION

6. RISK MANAGEMENT

8. SHAREHOLDER RELATIONS

9. STAKEHOLDER INTERESTS

7. AUDIT

ATTENDANCE

Directors’ Shareholding as at 31 August 2017

Directors’ Share Dealings

Use of Company Information

Disclosures of Interest by Directors

FOR THE YEAR ENDED 31 AUGUST 2017

S J McLauchlan

M B Waller

J K Berry

DIRECTORS’ INTERESTS

Remuneration of Directors

Directors’ Indemnity & Insurance

Gender Composition

Donations

DIRECTORS’ RESPONSIBILITY STATEMENT

FINANCIAL REPORT

CONTENTS

KEY

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 AUGUST 2017

STATEMENT OF CHANGES IN EQUITY

BALANCE SHEET

AS AT 31 AUGUST 2017

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 AUGUST 2017

NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 AUGUST 2017

SUMMARY OF ACCOUNTING POLICIES

Statement of Compliance

Basis of Preparation

Critical Judgements, Estimates and Assumptions

Significant Accounting Policies

Consolidation of Subsidiaries

FOR THE YEAR ENDED 31 AUGUST 2017

SUMMARY OF ACCOUNTING POLICIES (cont.)

Standards & Interpretations Effective in the Current Period

Standards & Interpretations in Issue not yet Adopted

Goods & Services Tax & Value Added Tax (“GST”)

Foreign Currencies

Scott Technology Limited Annual Report 2017