CAVALIER CORPORATION LIMITED 2009/10 ANNUAL REPORT Year ended 30 June 2010 Values r to maximise returns to shareholders in a sustainable and consistent manner, whilst having regard to the interests of our other stakeholders r to be a good corporate citizen in terms of social and environmental responsibilities, and to conduct business with consistency and absolute integrity at all times Vision r to be Australasia’s best carpet manufacturer and wool processor, with each business unit outperforming its competitors in earnings, service, product innovation and quality r to achieve growth by leveraging off our experience and knowledge in core and allied businesses where we have distinct and proven competitive advantages Mission r to be the market leader, and the most preferred supplier, by focusing on brand values, superior product quality and innovation, and outstanding customer service r to foster an organisational culture dedicated to best practice and continuous improvement in product quality, customer service and operational efficiencies r to attract and retain the very best people and to provide them with the environment to develop and grow r to develop long-term alliances, with key business partners, that are strategic to our business units r to ensure that returns from current and new investments in our existing business units exceed the Group’s cost of capital r to actively seek and evaluate growth opportunities that best fit our investment criteria and risk profile As required by section 211(1)(k) of the Companies Act 1993, the 2010 Annual Report of Cavalier Corporation Limited is signed on behalf of the Board on 21 September 2010 by: A M JAMES – Chairman W K CHUNG – Managing Director CAVALIER CORPORATION LIMITED ContentsTABLE OF ANNUAL REVIEW Highlights 2 Financial Overview 3 Managing Director’s Review 4 Directors’ Report 9 Our Journey Through Time 14 Our Operations 16 Board of Directors 18 Corporate Governance 19 Shareholder Information 23 FINANCIAL STATEMENTS & OTHER DISCLOSURES Financial Statements 25 Other Statutory Disclosures 97 Corporate Directory 107 Product featured: Ontera Colourweave Custom Design Project: Westpac Place, Sydney, NSW, Australia Sector: Corporate Specifier: Geyer Design and Hassell Printed on sustainable paper. 1 CAVALIER CORPORATION LIMITED 2009/10 Highlights Normalised tax-paid earnings Net debt : equity 22% INCREASE 35:65 from $13.7 million to compared with 42 : 58 the previous $16.6 million year and 50 : 50 the year before that Net interest-bearing debt Dividends declared 23% REDUCTION 20% INCREASE from $64.6 million to $49.8 from 15 cents per share to million, following an identical 23% 18 cents per share reduction the previous year from $83.8 million to $64.6 million Cost reduction programme Restructured wool scouring operation Enabled Group to more than offset reduction in earnings from the Share of normalised tax-paid lower revenue base brought about earnings of the successfully by the recession restructured wool scouring operation topped $4 million Financial position 48% PROPRIETORSHIP RATIO compared with 45% the previous year and 38% the year before that. Group well poised to make the most of the opportunities that may arise when economic conditions improve 2 CAVALIER CORPORATION LIMITED FINANCIAL Overview Year ended 30 June 2010 22.0 2006 22.4 PREVIOUS PREVIOUS 14.4 14.2 PREVIOUS NZ GAAP NZ 2006 GAAP NZ 7.6 23.6 23.8 2007 15.6 2007 14.1 8.0 23.7 22.5 2007 15.9 2007 13.5 7.8 26.7 22.8 RETURN 2008 13.2 IFRS NZ 2008 17.9 IFRS NZ PROFIT 8.8 ON AVERAGE BEFORE TAX SHAREHOLDERS’ 19.5 EQUITY 15.8 PROFIT (NORMALISED) 2009 AFTER TAX 2009 13.7 11.5 5.8 NOPAT : TOTAL FUNDS INCOME TAX 22.2 EMPLOYED 18.6 EXPENSE 2010 16.6 (NORMALISED) 2010 12.9 5.6 FINANCIAL RESULTS (NORMALISED) RETURN ON AVERAGE SHAREHOLDERS’ ($ MILLIONS) 1 EQUITY AND NOPAT : TOTAL FUNDS EMPLOYED (%) 1 2006 21.4 PREVIOUS PREVIOUS PREVIOUS PREVIOUS NZ GAAP NZ 22.5 GAAP NZ 2006 0.93 23.1 2007 18.5 2007 0.94 24.3 2006 1.03 2007 18.5 2007 1.04 27.1 NZ IFRS NZ 2008 19.5 IFRS NZ EARNINGS PER 2008 1.10 ORDINARY SHARE (NORMALISED) 20.3 2009 1.22 DIVIDENDS 18.0 2009 PAID PER ORDINARY SHARE 24.6 2010 1.27 2010 15.0 EARNINGS AND DIVIDENDS PAID NET TANGIBLE ASSET BACKING PER ORDINARY SHARE (CENTS) 1 PER ORDINARY SHARE ($) 153 2006 42.1 PREVIOUS PREVIOUS PREVIOUS PREVIOUS NZ GAAP NZ 2006 64 GAAP NZ 166 2007 40.2 2007 67 164 2006 42.1 2006 69 177 2007 40.9 2007 73 NZ IFRS NZ TOTAL ASSETS IFRS NZ EMPLOYED 222 2008 38.3 2008 85 SHAREHOLDERS’ 196 44.6 EQUITY 2009 88 2009 191 2010 91 2010 47.9 TOTAL ASSETS EMPLOYED AND PROPRIETORSHIP RATIO (%) SHAREHOLDERS’ EQUITY ($ MILLIONS) 1 All references to “normalised” are to the normalised results used in the underlying calculations. The normalised results are derived from the reported results of either the previous NZ GAAP or the NZ IFRS financial statements, adjusted for one-off items. 3 CAVALIER CORPORATION LIMITED MANAGING DIRECTOR’S REVIEW Year ended 30 June 2010 WAYNE CHUNG – MANAGING DIRECTOR DEAR SHAREHOLDERS The Directors of Cavalier Corporation are pleased to announce Group normalised operating profit after tax for the year to 30 June 2010 of $16.6 million, which is up 22% on the previous year’s equivalent of $13.7 million. This is a substantial improvement in earnings and comes from have no impact on the Group’s underlying profitability, cash outstanding performances across all of the Group’s operations. flows and, therefore, dividend policy or financing covenants. The excellent operating result has been disguised somewhat In looking at the detailed results for the current period and by the one-off non-cash adjustments of $5.2 million to the comparing these with the results for the previous year, Group’s tax expense and to that of its equity-accounted shareholders should note that the Cavalier Wool Holdings investee (Cavalier Wool Holdings) as a result of the wool processing operation was accounted for as a subsidiary Government’s 2010 Budget changes to tax depreciation for most of the previous year, but as an equity-accounted on buildings and to tax rates. investee for the whole of the current year. This has had the effect of reducing the Group’s normalised Revenue for the Group of $220 million is down 11% on tax-paid profit of $16.6 million to a reported tax-paid profit of the previous period. On a like-for-like basis, and with the $11.4 million. revenue of Cavalier Wool Holdings excluded from the comparative, Group revenue for the year is down just The Directors reiterate the comments made previously about 3% on the previous year. these one-off accounting adjustments and stress that they 4 CAVALIER CORPORATION LIMITED FINANCIAL PERFORMANCE Year ended 30 June 2010 2010 2009 Change Audited $000 $000 Revenue $220,274 $246,686 (11%) Earnings before interest and tax 21,676 25,000 (13%) Interest (3,478) (5,936) (41%) Share of profit of equity-accounted investee (tax-paid)1 4,015 430 834% Profit before tax 22,213 19,494 14% Income tax1 (5,586) (5,843) (4%) Profit after tax from operations (Normalised) 16,627 13,651 22% One-off items: Deferred tax adjustments following Government’s 2010 Budget changes to tax legislation – Group (3,979) – – Equity-accounted investee (Group’s share) (1,279) – Gain on dilution of subsidiary – 1,843 Impairment of trademarks – (605) Profit after tax (Reported) $11,369 $14,889 (24%) Earnings per share (cents) (Normalised) 24.6 20.3 21% 1 Before the deferred tax adjustments as a consequence of the Government’s 2010 Budget changes to tax legislation. FINANCIAL POSITION The continuing strong cash flows from operations can be attributed to the Group’s unwavering focus on working The Group’s financial position continues to strengthen. capital and, more particularly, the levels of inventory The Group’s proprietorship ratio (being shareholders’ employed in the business whilst maintaining the excellent equity to total assets) as at 30 June 2010 is 48%, compared levels of customer service. with 45% the previous year and 38% the year before that. The reduced spends on capital projects (after the previous At the same time, the Group’s leverage (being net interest couple of years of significant investments aimed at increasing bearing debt to sum of net interest bearing debt and capacity and improving operational efficiencies), dividends shareholders’ equity) has improved to 35%, compared from Cavalier Wool Holdings and the introduction of the with 42% and 50% as at 30 June 2009 and 30 June 2008 dividend reinvestment plan also aided the Group’s cash flows respectively. in other areas. The Group’s significantly-improved financial position over As a result, the Group’s net interest bearing debt as at the last couple of years has put it in an excellent position 30 June 2010 is $49.8 million, which is a substantial reduction to weather the continuing difficult trading environment, of $14.8 million from the previous period’s equivalent of particularly in New Zealand, but more importantly to make $64.6 million and $34 million on the $83.8 million two years ago. the most of the opportunities that may arise when economic conditions improve. CARPET BUSINESS Our carpet business specialises in broadloom carpets and CASH FLOWS carpet tiles. Whilst broadloom carpets are developed and Cash flows from operating activities are $26.7 million for the manufactured for both residential and commercial uses, 2009/10 financial year, unchanged from that for the previous carpet tiles are designed for commercial use.