Key Concepts and Questions for Oldfields

Hi everyone, Just finished reviewing the annual financial reports for Oldfields and thought it was time to share my findings (how fun!). You can find the the latest annual report for my company here.

What concerns do I have at this stage?

At this stage, I am somewhat confident in addressing this assignment. My initial reaction to the company I was given was as expected. I thought a painting manufacturer would be boring and that I would have trouble understanding its background and company procedures. However, after viewing the annual reports and gaining insight on the company’s operations, I am happy with the business I have been assigned. Its crazy endeavours and financial circumstances have kept me intrigued. 

On the other hand, like most people I have been talking to, I am still concerned with the annual reports. The notion of having to grasp the financial statements and remembering what each underlying concept meant is overwhelming (daunting even), especially when I discovered each report is over sixty plus pages in length.  Also, my statement of changes balance for example, I couldn’t find, but realised that for my firm it was titled ‘Consolidated Statement of Financial Position’ whilst my income statement is titled, 'Profit and Loss Statement'. The question on how I will manage transferring the data to excel for step 3 is a definite issue now!

Let’s see how I go!

Areas of the business that seem important and critical to me?

Consolidation

Firstly, Oldfield’s holdings is a consolidated group of companies which means understanding the concept of proprietorship and separate entities was critical. An understanding that the accounts and figures on my balance sheets represented the company as a whole was important because events such as the selling of shares and disposal of organisations occurred throughout the recent financial period which affected profits, loss, revenue and equity of each entity. My company uses operating segments however, when compiling these statements which has provided consistency in the consolidating groups financial reports.

I have found it should also be considered that Oldfield’s Holdings and its wholly-owned entities have entered into a deed under which the company and its subsidiaries guarantee the debts of each other. To me, this seems critical to the group as its financial position has been fragile of late and under this law, the debts of the parent entity can thus significantly affect the operations of such businesses as Advanced Scaffolding, or the painting sector which is already under threat. 

Financial Position

KC: Going- Concern Assumption- Management of the group sought to control capital to ensure the group can fund its operation and continue with this going concern.  Analysis of the profit and loss statements has however found that financial position is suffering and affecting various aspects of business operations. The company director has mentioned that threats to the going-concern assumption played out as a result of a trending loss of profits since 2012. He states that a combination of circumstances represented a material uncertainty that may cost significant doubt on the group’s ability to continue. In comparison to 2013 I noticed through this, there was a reduction in profits from 2013 year ended at $4 640 000, to $2576000 in the 2014 fiscal year. The going-concern assumption is a critical aspect of any business and the annual reports as investors (and myself) use these accounts to place future value on the equity of a company. Without going-concern, Oldfield’s wouldn’t have the ability to repay or accrue expenses.

Question- With such a financial position of on-going loss, why would Gregory Park (Company Secretary) make the statement, "These initiatives and strategies made in 2014 will continue in 2015 and are expected to support future growth of the business," in the report? I find this to be an inconsistency in the strategies Oldfield’s have outlined recently in their annuals.

   

KC: Debt Buy-Back- Unsustainably high net debt back in 2011 (a long-term result of the GFC) was another critical part of the company’s finances and this can be seen in today’s company’s cash-flow statement and equity value. The repurchases of a debtor of its own debt for a substantial discount meant the obligations for Oldfield’s holding to focus on using working capital to meet obligations reduced. These arrangements with the principle lender meant the group trimmed its liabilities by $5 million although in apparent contravention of standard commercial bank loan agreements. For me, I believe this would cause a trust issue between these shareholders of Oldfield’s Holdings which is critical to the equity value of a firm. Debt investors such as the Westpac bank have entrusted the group with something of value to them, the borrowings but when banks stop trusting companies to pay, they stop lending. I feel that the maintenance of a sustainable debt to equity ratio could be crucial in this area.

Question- How did the GFC cause such detrimental effects on a company in this industry? What caused the Global Financial Crisis in the first place? This is something I had never really understood and was too young at the time to really acknowledge its impacts.

KC- Cash Flow- Another significant aspect for Oldfield’s is the need to engage in strategies to eliminate the net cash issue that is arising. Net Cash is critical to a business, and diminishing cash can send a company into forced liquidation. In 2014, the Net Cash provided by operating activities was down to $655,927 in comparison to $1 064 247, a decrease of over 50%. Improving operating cash flow is having to become a major focus with increased emphasis on improving sales margins, reducing inventory levels back to sustainable amounts, as well as a concentration of profitable growth opportunities to improve the net asset position of the group.

As an example,  I noticed the company has made a firm statement of assumption in the report that the sale of the investment associate, PT Ace Oldfield’s, was in consideration for this inventory and as the inventory is sold down, they aim to convert it into cash an assist with the working capital liquidity.  I feel this is interesting and that putting emphasis on working capital is important for Oldfield’s as they continue growing in a competitive market with increased operating expenses.

Question- What are cash flow hedges? These are mentioned both in my Cash-flow Statement and Income Statement. 

KC- Significant Changes to State of Affairs

Since March 2014, Oldfield’s has undergone changes to its consolidation structure and the company shareholders. The consolidated group has a loss of $13 63000 from the disposal of the associated companies, PT Ace, Enduring Enterprise and Honeytree and Partners. Looking at the annual reports, and analysing the footnotes particularly, these significant changes of affairs have made an impact on the way the reports have been compiled and the comparisons with previous years. For instance, when looking at the changes of equity statements, you can see that disposal of these entities has caused loss through the transactions with accrual realisation of foreign exchange differences in 2014. This is a concept that has only arisen since the removing of PT Ace etc. from the group during the fiscal year. With all this terminology, this is why I still struggle to grasp the concept of disposing assets and the questions arise:

Question- How and why do foreign exchange differences result from the disposal of associates?

Question- Is disposing of an asset the same as selling a share? Why has the company made a loss by taking such action?

     Question- What are recycled amounts from the currency translation reserve? I identified the term’   recycled amounts’ as a part of the loss from the disposal of associated companies and it has significantly affected the revenue for the period but what is it?

Key Challenges the firm is facing and strategies adapted to meet these Challenges?

KC- Competition. Oldfield’s Holdings has put in place a risk management strategy that seeks to assist the group in meeting its financial targets, while minimising potential adverse effects on financial performance. However, as I review the financial reports across the 4 fiscal years, Oldfield’s is facing various challenges that are in need of managerial attention. Like many other firms in the industry today, there has been increased competition and limited market opportunities across all divisions of the market which makes company reputation crucial. For example, the paint equipment division has experienced added pressure to maintain gross margins due to the lessened requirement of traditional painting methods by consumers. 

The significance of this challenge lies in the forms of inter alia; the changing methods of painting due to technological updates and the introduction of new competitors to the market, which in turn is affecting profits and good will negatively. For Oldfield’s this has meant driving efficiencies by investing in improving in-store presence in key national hardware’s (for the purposes of reaching customers in geographical coverage), launching new products to paint specialist markets and being more vigilant in increasing awareness to improve revenue generation and market growth in the well positioned sector of scaffolding. They aimed to do so by formalising a strategic supplier agreement which will help continue to provide market leadership in the future. Revenue increase in 2014 was due to this scaffolding division, occurring as a result of increases to the building construction industry. As the strategy aligns with this concept with an extended focus on reinvesting/capitalising in this sector, Oldfield’s strategy is successful at meeting the challenge of increased competition and ensuring key customers can now compete with competitors of their own.

KC- Credit Risk.  Secondly, Oldfield’s have a continual challenge of credit risks. Currently, the class of assets described as ‘Trades and Other Receivables’ is considered the main source of credit risk for Oldfield’s and as at June 2014, $284 616 worth of accounts receivables are over-due up to a period of 31-60 days.  Recognised at fair value, placing high credit value on accounts receivables for extended time can contribute to negative cash flow and liquidity as the companies are distributing assets faster than they earn. To counteract the current issue they have developed a strategy to ensure supply and distribution chain is efficient, customer expectations are still met, and that lead times for accounts are then improved.

This strategy is working so-far as the group’s total non-current accounts receivables have reduced since 2013 by over $300,000, but based on the current time frames placed on receivables being considered an asset in the active market (12 months), the credit risk has not completely diminished. In terms of liabilities and credit, I believe that this is an extensive period of time, especially for the smaller inventory such as painting accessories sold to retailers.

Business Ethics and the Triple Bottom Line

The understanding of annual reports really does give the reader a clear identifications with the business’s triple bottom lines and operations. From my studies in Management this semester and from viewing the report, I can see that the company has a proactive strategy of social responsibility applied to each facet of the business operations- social, environmental and financial. In reference to the environment for example, ‘the economic entity has established procedures whereby compliance with the existing environmental regulations and new regulations, are monitored continually and includes procedures to follow should an incident adversely impact the environment’. I commend the group particularly on its recent membership of the Australian Packaging Covenant in which it promises to reduce packaging waste and its environmental impacts, as well as for its association with the Workplace Gender Equal Opportunity Act to facilitate recognition for human capital and anti-discriminatory policies.

With its strategies, Oldfield’s corporate behaviour also conforms to the financial requirements, and competitive market pressures reflected in the company’s strong focus on reputations and the board of director’s continuous mention of profit and loss. These areas of the statement are meaningful to firms as I learnt that controlling social ethics and environmental impacts are crucial to managing a prosperous business; even from the accounting perspective.

Okay, for somebody who is not a number’s person I actually found reading the annual reports an interesting process. As significant areas raised questions for me, I actively engaged in the realities of Oldfield’s and discovered that it is not as transparent as it seems. Now it’s time to begin step 3- Wish me luck!