IONICS, INC. AND SUBSIDIARIES QUARTERLY REPORT For the Nine Months Ended September 30, 2007 (SRC Form 17-Q)

Transcription

1 IONICS, INC. AND SUBSIDIARIES QUARTERLY REPORT For the Nine Months Ended September 30, 2007 (SRC Form 17-Q) 0

2 SEC Number File Number IONICS, INC. AND SUBSIDIARIES (Company's Full Name) Ionics Building Circuit Street, corner Main Avenue LISPP, Cabuyao, Laguna (Company's Address) (049) (Telephone Number) December 31 (Calendar Year Ending) (month & day) Quarterly Interim Financial Statements (SRC Form 17-Q) Form Type Amendment Designation (If applicable) Period Ended Date (Secondary License Type and File Number) 1

3 SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SRC RULE 17(2)(b) THEREUNDER 1. For the Quarter ended : September 30, Commission identification number : BIR Tax Identification No. : Exact name of issuer as specified in its charter : IONICS, INC. 5. Province, country or other jurisdiction of incorporation or organization : Philippines 6. Industry Classification Code : (SEC Use Only) 7. Address of issuer's principal office : Ionics, Bldg., Circuit Street, LISPP, Brgy. Diezmo, Cabuyao, Laguna Postal Code : Issuer's telephone number, including area code :(049) (049) Fax Number 9. In 1996 the Company changed its principal place of business from Makati, Metro Manila to Cabuyao, Laguna. 10. Securitis registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the SRC Title of each Class Common Number of shares of common stock outstanding and amount of debt outstanding $0.01 par value, issued and outstanding, 428,287,496 shares (net of 1.4 million shares of treasury stock with cost of $240,008) 11. Are any or all of the securities listed on a Stock Exchange? Yes [ X ] No [ ] 2

4 If yes, state the name of such Stock Exchange and the class/es of securities listed therein: Philippine Stock Exchange Common 12. Indicate by check mark whether the registrant: (a) has filed all reports required to be filed by Section 17 of the Code and SRC Rule 17 thereunder or Sections 11 of the SRC and SRC Rule 11(a)-1 thereunder, and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding twelve (12) months (or for such shorter period the registrant was required to file such reports) Yes [ x ] No [ ] (b) has been subject to such filing requirements for the past ninety (90) days. Yes [ x ] No [ ] 3

5 PART I FINANCIAL INFORMATION ITEM 1. Financial Statements The unaudited interim consolidated financial statements including notes thereto are filed as part of this report (pages 10-29). These consolidated financial statements include the accounts of the Parent Company and its wholly owned subsidiaries, Ionics Properties, Inc. (IPI), Synertronix, Inc. (SI), Ionics Circuits Limited (ICL), the 75% owned Ionics EMS, Inc. (EMS) and the 70% owned Iomni Precision, Inc. (Iomni). Material intercompany balances have been eliminated in the consolidation. On August 15, 2003, the Parent Company decided to discontinue the operations of SI. Accordingly, the accounts of SI are reflected in the consolidated financial statements as a separate line under discontinued operations. The Parent Company formerly owned a 30% share in Iomni. On September 26, 2007, the Parent Company purchased an additional 40% share in Iomni, which resulted to the current 70% ownership. Accordingly, the accounts of Iomni are reflected in the consolidated financial statements. ITEM 2. Management s Discussion and Analysis of Financial Condition and Results of Operations Below are the Consolidated Key Financial Ratios for the period ended September 30, 2007 and full year ended December 31, September 30 December % % Revenue Growth Gross Profit (Loss) Margin (4.72) 0.31 Net Income (Loss) Margin (5.85) 2.26 Return on Equity (11.72) 5.38 Current Ratio Leverage Ratio Revenue Growth Revenue growth is the Group s increase in revenue for a given period. Revenue growth is computed as current revenue less revenue of the prior year divided by revenue of the prior year. The result is expressed in percentage. 2. Gross Profit (Loss) Margin Gross profit (loss) margin reflects management s policies related to pricing and production efficiency. This is computed by dividing gross profit (loss) by net sales. The result is expressed in percentage. 4

6 3. Net Income (Loss) Margin Net income (loss) margin is the ratio of the Group s net income (loss) after tax for a given period. This is computed by dividing net income (loss) by net sales. The result is expressed in percentage. 4. Return on Equity Return on equity ratio is the ratio of the Group s net income (loss) to stockholders equity. This is computed by dividing net income (loss) by average stockholders equity. The result is expressed in percentage. This measures management s ability to generate returns on their investments. 5. Current Ratio Current ratio is the ratio of the Group s current assets to its current obligations. This is computed by dividing current assets by current liabilities. The result is expressed in percentage. 6. Leverage Ratio Leverage ratio shows the balance that the Group s management has struck between forces of risk versus cost. This is computed by dividing total liabilities by total stockholders equity. Consolidated Financial Position As of September 30, 2007 the consolidated assets of the Group amounted to US$85,533 thousand, which is US$3,939 thousand higher than the US$81,594 thousand as of December 31, Increase in the Group s total assets is mainly attributable to increase in receivables due to increase in business activity and increase in cash from proceeds on sale of available-for-sale (AFS) investments. Current ratio declined from 187% as of December 31, 2006 to 152% as of September 30, Simultaneously, the Group s liability-to-equity (leverage) ratio increased from 63% in December 31, 2006 to 94% in September 30, The decline in current ratio and increase in liability-to-equity ratio were due to the increase in payables and bank loans. Below is a summary of Balance Sheet accounts with more than 5% increase (decrease): September 30, 2007 December 31, 2006 % % ASSETS Cash and cash equivalents 28 (64) Receivables net Short term investments N/A (100) Inventories N/A 132 Prepayments and other current assets 128 (78) Investments (including available-for-sale) - net (16) (50) Property, plant and equipment net N/A 61 Deferred tax assets - net N/A (100) Deposits and others 20 5 (Forward) 5

7 September 30, 2007 December 31, 2006 % % Assets classified as held for discontinuing operations 12 (49) LIABILITIES Accounts payable and accrued expenses Bank notes payable 100 N/A Liabilities under trust receipts (7) 100 Income tax payable 259 (25) Pension obligations Refundable deposit N/A 14 Deferred rent income (10) (5) Deferred tax liabilities Liabilities classified as held for discontinued operations 16 N/A Reasons of increase (decrease) As of September 30, 2007 Cash and cash equivalents increased due to collection of proceeds from the sale of investments. Receivables increased due to increase in business activity. Prepayments increased due to availment of fire insurance. Investments decreased due to sale of AFS investments. Deposits and other assets increased due to rental deposit by subsidiary to one of its lessees/customers. Accounts payable and accrued expenses increased due to purchases of materials for the production demand of new customers. Bank loans increased due to availment of bank loans. Consummation of previous year tax credits caused the increase in income tax payable. Liabilities pertaining to discontinued operation increased due to accrual for realty tax for the 3 rd quarter. As of December 31, 2006 ( vs ) Cash and cash equivalents decreased mainly due to the subsidiary s acquisition of machineries and equipment as well as payments made to suppliers. The increase in receivables is attributable mainly to the increase in business activity for the year. The decrease in short-term investments was due to the termination of money market placements. Inventory increased due to higher production demand. The decrease in prepayments and other current assets was due to the amortization of prepaid insurance carried over from Investments decreased due to sale of an investment. Property, plant and equipment increased due to the acquisition of machineries and equipment for the re-opened plant in the Philippines and the plant in China. Deferred tax assets decreased due to expiry of net operating loss carryover. Deposits and other assets increased due to the increase in rental deposit of a subsidiary. Assets classified as held for discontinued operations decreased due to advances to a subsidiary. Accounts payable increased mainly due to purchases of materials for the production demand of new customers. Pension obligations increased due to the increase in the number of headcount and the lower interest rate used to calculate for the present value of pension obligations. Refundable deposits increased due to additional deposit of a lessee. 6

8 Results of Operations Consolidated The Group s turnover for the three quarters of 2007 increased by US$1,997 thousand or 2.16% from US$92,304 thousand for the three quarters of 2006 to US$94,301 thousand in the same period of The increase in turnover was brought about by the increase in number of customers, capacity expansion and increase in volume for the first half of 2007 as compared to the same period of Consolidated cost of sales for the three quarters of 2007 increased by US$9,373 thousand or 10.49% from US$89,380 thousand to US$98,753 in the same period in The Group performance resulted in a gross loss of US$4,452 thousand for the three quarters of 2007 from a gross income of US$2,924 thousand in the same period of Consolidated operating expenses increased by US$1,272 thousand from US$3,260 thousand for the three quarters of 2006 to US$4,532 in the same period of 2007 due to increase in sales volume of customers subject to commission and provision made on doubtful accounts of a subsidiary. Net non-operating income decreased by US$5,177 thousand from US$6,350 thousand for the three quarters of 2006 to US$1,173 thousand in the same period 2007 as a result of the following: 1. Net interest expense increased from US$51 thousand for the three quarters of 2006 to US$475 thousand in the same period of 2007 due to increase in interest expense from interestbearing advances from affiliates and bank loans. Interest from intercompany advances is fully eliminated in the consolidation. 2. Net foreign exchange loss decreased by US$70 thousand due to foreign exchange fluctuations. 3. Equity in net loss of associates decreased from US$148 thousand for the three quarters of 2006 to US$47 thousand in the same period of Rent income from third parties increased from US$1,495 thousand for the three quarters of 2006 to US$1,556 thousand in the same period of Non-operating income increased by US$74 thousand due to dividend income received from associated companies for the period. Loss from discontinued operations from SI increased by US$14 thousand from US$51 thousand for the three quarters of 2006 to US$65 thousand in the same period of The net assets of SI were written-down to their net realizable values. With the foregoing factors, the Group reported a consolidated net loss of US$5,524 thousand for the period ended September 30, 2007, as compared with a consolidated net income of US$6,080 thousand during the same period in The individual performances of the subsidiaries are as follows: Ionics EMS, Inc. and subsidiary, Ionics EMS, Ltd. (the Group) The Group's turnover for the three quarters of 2007 increased by USD1,997 thousand or 2.16% from USD92,304 thousand in the three quarters of 2006 to USD94,301 thousand in the same period of The slight increase in turnover was brought about by the increase in market demand for the first half of 2007 as compared to the same period in The Group performance however, resulted in a gross loss of USD5,248 thousand in the three quarters of 2007 from a gross income of 7

9 USD2,178 thousand in the same period of The major reason for the higher gross loss are inventory provision, valuation allowances, and increase in depreciation that were recognized during the period. Operating expenses of the Group increased from USD2,730 thousand in the three quarters of 2006 to USD3,966 thousand in the same period of 2007 due to increase in sales volume of customers which are subject to commission and a certain provision on impairment. Other charges increased from USD500 thousand in the three quarters of 2006 to USD1,485 thousand in the same period of 2007 due to increase in interest expense from interest-bearing advances from the parent company, affiliates and bank loans. Our overall capacity utilization fell short against total available capacity. Our total available capacity from April 2006 increased significantly in anticipation of higher demand starting in the third quarter of the same year. With the foregoing, the Group performance resulted to a net loss of USD10,699 thousand in the three quarters of 2007 as compared with a net loss of USD1,052 thousand in the same period of As a policy of the Group, the assets of EMS and its subsidiary are reviewed periodically, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. And, whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in the profit and loss account. During the quarter, EMS performed an updated evaluation of its investment in subsidiary and decided to recognize recovery on the value of investment by USD1,227 thousand. It should be noted that the abovementioned reversal of provision on investment does not affect the balance sheet and profit and loss account of the Group. Ionics Properties, Inc. IPI contributed rental income of US$1,884 thousand and US$1,820 thousand for the three quarters of 2007 and 2006, respectively. The increase in rental income came from a non-affiliated company as a result of the incremental rate adjustments. Operating expenses slightly increased by US$27 thousand from US$430 thousand in 2006 to US$457 thousand in 2007 due to increase in depreciation. Net income increased to US$1,467 thousand for the three quarters of 2007 from US$1,312 thousand in the same period of Ionics Circuits Limited, Inc. ICL reported net income amounting to US$748 thousand for the three quarters of 2007 as compared with US$5,428 thousand for the same period in The significant decline in the reported income for the period ended September 30, 2007 is due to the one-off gain recorded in 2006 arising from the sale of AFS securities which amounted to US$4,967 thousand. Iomni Precision, Inc. Iomni contributed sales revenue of US$2,733 and cost of sales amounted to US$2,913 thousand for the three quarters of 2007 that resulted to a gross loss of US$180 and a net loss amounting to US$511 thousand. 8

10 9

11 IONICS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) September 30 December ASSETS Current Assets Cash and cash equivalents (Note 2) US$4,185 US$3,271 Receivables - net (Note 3) 27,225 23,176 Inventories - net (Note 4) 23,677 23,612 Prepayments and other current assets Total Current Assets 55,225 50,120 Noncurrent Assets Property, plant and equipment - net (Note 7) 15,902 16,007 Investment properties - net (Note 8) 6,866 7,164 Available-for-sale investments - net (Note 5) 3,537 5,533 Equity investments - net (Note 6) 1, Deposits and others (Note 9) Total Noncurrent Assets 28,246 29,625 Assets classified as held for discontinued operations - net (Note 16) 2,062 1,849 US$85,533 US$81,594 LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses (Note 10) US$29,003 US$24,774 Bank notes payable 5,479 Liabilities under trust receipts 1,848 1,982 Income tax payable Total Current Liabilities 36,407 26,777 Noncurrent Liabilities Pension obligations 3,874 3,657 Refundable deposits Deferred tax liabilities Deferred rent income Term loan payable 29 Total Noncurrent Assets 4,919 4,659 Liabilities classified as held for discontinued operations (Note 16) Total Liabilities 41,412 31,510 Equity Capital stock 7,730 7,730 Additional paid-in capital 9,125 9,125 Retained earnings Appropriated 8,312 4,712 Unappropriated 16,572 25,196 Share in unrealized gain on available-for-sale investments of associates 890 Unrealized loss on available-for-sale investments (9) (661) (Forward) 10

12 September 30 December Other reserve (2,035) (2,035) Exchange differences Treasury shares (240) (240) 41,034 44,388 Minority interest 3,087 5,696 44,121 50,084 US$85,533 US$81,594 See accompanying Notes to Unaudited Consolidated Financial Statements. 11

13 IONICS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands) For the period ended September July to September (3 months) January to September (9 months) July to September (3 months) January to September (9 months) SALES (Note 15) US$29,085 US$94,301 US$40,858 US$92,304 COST OF GOODS SOLD 29,804 98,753 38,892 89,380 GROSS PROFIT (LOSS) ( 719) (4,452) 1,966 2,924 General and administrative (Note 12) (959) (3,322) (809) (2,402) Selling (Note 13) (464) (1,210) (377) (857) Gain on sale of investments ,209 Equity in net income (losses) of associates (Note 6) 80 (47) (43) (148) Interest - net (155) (475) (100) (51) Foreign exchange losses (172) (18) (186) (87) Rent income 516 1, ,495 Miscellaneous - net (172) (143) (33) (68) (1,326) (3,359) (794) 3,091 INCOME (LOSS) BEFORE INCOME TAX (2,045) (7,811) 1,172 6,015 PROVISION FOR INCOME TAX (100) (323) (53) (147) INCOME (LOSS) FROM CONTINUING OPERATIONS (2,145) (8,134) 1,119 5,868 LOSS FROM DISCONTINUED OPERATIONS (37) (65) (51) NET INCOME (LOSS) (US$2,182) (US$8,199) US$1,119 US$5,817 Attributable to: Equity holders of the parent company (US$1,476) (US$5,524) US$1,070 US$6,080 Minority interests (706) (2,675) 49 (263) (US$2,182) (US$8,199) US$1,119 US$5,817 EARNINGS (LOSS) PER SHARE (Note 13) Basic, for income (loss) for the period attributable to ordinary equity holders of the parent company (US$0.005) (US$0.019) US$0.002 US$0.013 Basic, for income (loss) from continuing operations attributable to ordinary equity holders of the parent company (US$0.005) (US$0.019) US$0.002 US$0.013 See accompanying Notes to Unaudited Consolidated Financial Statements. 12

14 IONICS, INC. AND SUBSIDIARIES UNAUDITED STATEMENTS OF RECOGNIZED INCOME (LOSS) AND EXPENSE (Amounts in Thousands) For the period ended September Actuarial losses on defined benefit pension plans recognized directly in equity (US$2,035) Unrealized losses on available-for-sale investments (9) (736) Share in unrealized gains (losses) on available-for-sale investments of associates 890 (81) Exchange differences NET LOSS RECOGNIZED DIRECTLY IN EQUITY (465) (280) NET INCOME (LOSS) FOR THE PERIOD (8,199) 5,817 TOTAL RECOGNIZED INCOME (LOSS) AND EXPENSE FOR THE PERIOD (US$8,664) US$5,537 Attributable to: Equity holders of the parent company (US$5,524) US$6,080 Minority interests (2,675) (263) (US$8,199) US$5,817 See accompanying Notes to Unaudited Consolidated Financial Statements. 13

15 IONICS, INC. AND SUBSIDIARIES UNAUDITED STATEMENTS OF CASH FLOWS (Amounts in Thousands) July to September (3 months) For the period ended September Jan. to September (9 months) July to September (3 months) January to September (9 months) CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before provision for income tax and net income (losses) applicable to minority interest (US$2,082) (US$7,876) US$1,172 US$5,964 Adjustments for: Depreciation and amortization (Notes 7 and 8) 3,813 5, ,027 Interest expense 309 1, Loss from discontinued operations Interest income (154) (622) (180) (334) Equity in net losses (income) of associates (Note 6) (80) Provision for probable losses Gain on sale of property, plant and equipment (7) (16) (14) Provision for inventory writedown 1, (87) Provision for impairment losses 56 Gain from sale of investment (301) (242) (5,209) Operating income (loss) before working capital changes 1,920 (170) 1,902 2,986 Changes in operating assets and liabilities: Decrease (increase) in: Receivables (2,848) (4,150) (6,688) (19,373) Short-term money market placements 27 1,072 Inventories 3,938 (1,165) 1,439 (19,455) Prepayments and other current assets (91) (93) Increase (decrease) in: Accounts payable and accrued expenses 96 4,348 3,303 25,095 Pension obligations Deferred rent income (7) (21) (7) (12) Deferred tax liabilities Refundable deposits Income tax payable Advance rental (37) 7 Net cash provided by (used in) operations 3,100 (1,014) 86 (9,359) Interest received (118) 59 (56) 123 Interest paid (506) (1,216) (49) (154) Income taxes paid (114) (236) (128) (199) Net cash provided by (used in) operating activities 2,362 (2,407) (147) (9,589) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: Property, plant and equipment AFS investments 3,449 4,334 6,234 Acquisitions of: Property, plant and equipment (Note 7) (4,826) (5,209) (4,240) (7,213) Investment properties (Note 8) (20) (607) Decrease (increase) in: Investment properties Available-for-sale investments (500) (4,091) (294) Equity investments Assets pertaining to discontinued operations (Note 15) (161) (266) (44) 1,772 Unrealized gain on AFS Share in the unrealized loss on AFS Minority Interest Exchange Difference Return of capital Deposits and others (79) (45) (27) 7 Net cash provided by investing activities (4,572) (2,053) (3,849) (70) (Forward) 14

16 -2- For the period ended September July to September (3 months) Jan. to September (9 months) July to September (3 months) January to September (9 months) CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in liabilities under trust receipts (150) (134) 2,000 2,000 Increase in term loan payable Increase (decrease) in Bank Loans (91) 5,479 3,000 3,000 Net cash provided by (used in) financing activities (212) 5,374 5,000 5,000 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,422) 914 1,004 (4,659) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,607 3,271 3,496 9,159 CASH AND CASH EQUIVALENTS AT END OF PERIOD (Note 2) US$4,185 US$4,185 US$4,500 US$4,500 See accompanying Notes to Unaudited Consolidated Financial Statements. 15

17 IONICS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements have been prepared on a historical basis except for available-forsale (AFS) investments that have been measured at fair value. The consolidated financial statements are presented in US Dollar and all values are rounded to the nearest thousand (US$000) except when otherwise indicated. The Group s functional currency is US Dollar. The Group has incurred continuous operating losses. These conditions may raise a question about the Group s ability to continue as a going concern. The financial statements do not include any adjustment relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary should the Group be unable to continue as going concern. Statement of Compliance The financial statements of the Group and of the Parent Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). Basis of Consolidation The consolidated financial statements comprise the financial statements of the Parent Company and the following wholly and majority-owned subsidiaries as at December 31 each year: Effective Percentage of Ownership Country of Incorporation Subsidiaries Ionics EMS, Inc. (EMS) Philippines 75% 75% Ionics EMS, Limited (IEL)* Cayman Islands Ionics Circuits, Limited (ICL) Cayman Islands Ionics Properties, Inc. (IPI) Philippines Synertronix, Inc. (SI) Philippines I-Omni Precision, Inc. (Iomni) Philippines 70 * 100% owned by Ionics EMS, Inc. The financial statements of the subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies. On August 15, 2003, the Parent Company discontinued the operations of SI. Accordingly, the accounts of SI are reflected in the consolidated financial statements under discontinued operations (Note 16). In late 2004, EMS established a manufacturing facility in the People s Republic of China which is managed by IEL, a wholly-owned subsidiary registered in the Cayman Islands. 16

18 On September 23, 2007, EMS entered into a share purchase agreement with Note AB on the sale of its 4,500,000 shares in IEL or equivalent to 50% equity interest. The expected closing date is November 12, In addition, on September 23, 2007 EMS signed a shareholders agreement and an option agreement with Note AB. As of September 30, 2007, management is estimating the fair value of call and put options held by the EMS. Management does not anticipate that the changes in the fair value of these options are material to the financial statements. On September 26, 2007, the Parent Company acquired an additional 40% stakeholding in Iomni, increasing the ownership interest of the Group in Iomni from 30% to 70%. Accordingly, the accounts of Iomni have been consolidated in the financial statements of the Group as of September 30, All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Consolidation of subsidiaries ceases when control is transferred out of the Group or Parent Company. Minority Interest Minority interest represents the portion of profit or loss and net assets not held by the Group and is presented separately in the consolidated statement of income and within equity in the consolidated balance sheet, separately from the Parent Company s equity. Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year except as follows: On January 1, 2007, the Group has adopted PFRS 7, Financial Instruments: Disclosures, and the complementary amendment to PAS 1, Presentation of Financial Statements: Capital Disclosures. PFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, as well as sensitivity analysis to market risk. It replaces disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under PFRS. The amendment to PAS 1 introduces disclosures about the level of an entity s capital and how it manages capital. The Group is currently assessing the impact of PFRS 7 and the amendment to PAS 1 and expects that the main additional disclosures will be the sensitivity analysis to market risk and the capital disclosures required by PFRS 7 and the amendment to PAS 1. The required disclosures of PFRS 7 and amendments to PAS 1 have not been reflected in these unaudited consolidated financial statements. Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from the dates of placements and that are subject to insignificant risk of changes in value. 17

19 Financial Instruments Date of Recognition The Group recognizes a financial asset or a financial liability on the balance sheet when it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date. Initial Recognition of Financial Instruments All financial assets, including trading and investment securities and loans and receivables, are initially measured at fair value. Except for securities valued at fair value through profit or loss (FVPL), the initial measurement of financial assets includes transaction costs. The Group classifies its financial assets in the following categories: securities at FVPL, held-to-maturity (HTM) investments, AFS investments, and loans and receivables. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. The financial assets of the Group consist of loans and receivables and AFS investments. Loans and Receivables Loans and receivables are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. Loans and receivables are carried at cost less allowance for impairment losses. The Group s loans and receivables include trade and other receivables. Trade and other receivables which generally have days terms are recognized and carried at original invoice amount less an allowance for any uncollectible amounts. An allowance for impairment losses is provided when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The allowance for impairment losses is maintained at a level considered adequate to cover any probable loss from uncollectible receivables. The level of allowance is evaluated by management on the basis of factors that affect the collectibility of the accounts. A review of the age and status of receivables, designed to identify the accounts to be provided with allowance, is made on a continuous basis. Bad debts are written off when identified. AFS Investments AFS investments are those which are designated as such or do not qualify to be classified as designated as FVPL, HTM or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. AFS investments also include investments in unquoted equity instruments, where the Group s ownership interest is less than 20% or where control is likely to be temporary, which are initially recorded at cost being the fair value of the investment at the time of acquisition, inclusive of direct acquisition charges associated with the investment. After initial measurement, AFS investments are subsequently measured at fair value. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported earnings and are reported as Unrealized gain on AFS investments in the equity section of the balance sheet. Investments in unquoted equity instruments are subsequently carried at cost due to the unpredictable nature of future cash flows and the lack of other suitable methods for arriving at a reliable fair value. 18

20 When the security is disposed of, the cumulative gain or loss previously recognized in equity is recognized as Gain on sale of AFS investment in the statement of income. The losses arising from impairment of such investments are recognized as Provision for impairment losses in the statement of income. Derecognition of Financial Assets and Liabilities Financial Assets A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where: 1. the rights to receive cash flows from the asset have expired; or 2. the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or 3. the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control of the asset. Financial Liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Impairment of Financial Assets The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the customer or a group of customers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and when observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlated with defaults. Inventories Inventories are valued at the lower of cost or net realizable value (NRV). Cost of finished goods and work-in-process inventories include actual labor, overhead costs and purchased materials, where applicable, and is determined using the first-in, first-out (FIFO) method. Cost of purchased raw materials, spare parts and supplies are stated at invoice value determined using the FIFO method. NRV is the estimated selling price in the ordinary course of business, less estimated cost of completion and marketing costs. In determining the NRV, the Group considers factors such as the aging and future demand of the inventory, contractual arrangements with customers and the Group s ability to redistribute inventory to other programs or return inventory to suppliers. 19

21 Investments in Subsidiaries and Associates Investments in Subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Investments in Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. In the consolidated financial statements, investments in associates are accounted for under the equity method of accounting. Under the equity method, an investment in an associate is carried in the balance sheet at cost plus postacquisition changes in the Group s share of the net assets of the associate. The Group s share in an associate s post-acquisition profits or losses is recognized in the statement of income, and its share of post-acquisition movements in the associate s equity reserves is recognized directly in equity. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Profits and losses resulting from transactions between the Group and an associate are eliminated to the extent of the interest in the associate. Property, Plant and Equipment Property, plant and equipment, except for land, are carried at cost less accumulated depreciation and amortization and any impairment in value. Land is carried at cost less any impairment in value. The initial cost of property, plant and equipment comprises its purchase price including import duties, taxes and any directly attributable costs of bringing the assets to its working condition and location for its intended use. Depreciation and amortization are computed using the straight-line method over the following estimated useful life of each type of asset: Years Machinery and equipment 5-7 Building and building improvements 5-30 Tools and other equipment 5 Plant water and airconditioning systems 5-15 Furniture, fixtures and equipment 3-5 Transportation equipment 5 The cost of the leasehold improvements is amortized over the shorter of the covering lease term or the estimated useful life of the improvements of 7 years. The useful lives and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment. Costs of repairs and maintenance are charged against current operations when incurred; significant renewals and improvements are capitalized when it can be clearly demonstrated that the expenditures have resulted in an increase in future economic benefits expected to be obtained from the use of an item 20

22 of property, plant and equipment beyond the originally assessed standard of performance. When property, plant and equipment are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is credited to or charged against current operations. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying values may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amounts, the assets or cashgenerating units are written down to their recoverable amounts. Investment Properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day-to-day servicing of an investment property. Subsequent to initial recognition, depreciable investment properties are carried at cost less accumulated depreciation and any impairment in value. Depreciation, except for land, is computed using the straight-line method over the estimated useful life of the building of 30 years. Investment properties are derecognized when either they have been disposed of, or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the statement of income in the year of retirement or disposal. Expenditures incurred after the investment properties have been put into operations, such as repairs and maintenance costs, are normally charged to operations in the period in which the costs are incurred. Depreciation is calculated on a straight-line basis using the remaining useful lives from the time of acquisition of the investment properties but not to exceed Years Building 30 Building improvements 7 Transfers are made to investment properties when, and only when, there is a change in use evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment properties when, and only when, there is a change in use evidenced by commencement of owner-occupation or commencement of development with a view to sale. Impairment of Non-Financial Assets At each reporting date, the Group assesses whether there is any indication that its non-financial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an asset s (or cash-generating unit s) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash generating unit to which it belongs. Where the carrying amount of an asset 21

23 (or cash generating unit)exceeds its recoverable amount, the asset (or cash generating unit) is considered impaired and is written down to its recoverable amount. 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 (or cash generating unit). An impairment loss is charged to operations in the year in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is charged to the revaluation increment of the said asset. Research and Development Costs Research and development costs are expensed as incurred. Provisions and Contingencies Provisions are recognized when an obligation (legal or constructive) is incurred, as a result of a past event and where, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. Revenue Recognition Revenue is recognized to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Sale of Goods Revenue is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer. Service Income Revenue is recognized when services are rendered. Interest Income Revenue is recognized as interest accrues (using the effective interest method that is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset). Dividend Income Revenue is recognized when the Group s right to receive the payment is established. Rental Income Rental income arising on investment properties is accounted for on a straight-line basis over the lease terms on ongoing leases. 22

24 Foreign Currency Transactions and Translation Transactions in foreign currencies are recorded using the exchange rate at the date of transactions. Foreign exchange gains or losses arising from foreign currency transactions and revaluation adjustments of foreign currency assets and liabilities are credited to or charged against current operations. Monetary assets and liabilities denominated in foreign currencies are translated using the foreign exchange rate prevailing at balance sheet dates. All differences are included in the statements of income. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Retirement Expense EMS is covered by a noncontributory defined benefit retirement plan. The retirement expense of EMS is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits payable in the future with respect to services rendered in the current period. The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past-service costs. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate on government bonds that have terms to maturity approximating the terms of the related retirement liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged against current operations in the period in which they arise. These gains or losses are recognized immediately in the statements of recognized income and expense. Past-service costs, if any, are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: (a) there is a change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal option is exercised or extension granted, unless that term or renewal or extension was initially included in the lease term; (c) there is a change in the determination of whether fulfillment is dependent on a specified asset; or (d) there is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). 23

25 Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statements of income on a straight-line basis over the lease term. Income Taxes Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from the excess minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductible temporary differences, carryforward of unused tax credits from MCIT and unused NOLCO can be utilized. Deferred income tax, however, is not recognized when it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable profit or loss. Deferred tax liabilities with respect to investments in foreign subsidiaries, are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax asset to be utilized. Deferred tax assets and liabilities are measured at the tax rate applicable to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Treasury Shares The Parent Company s own equity instruments which are reacquired (treasury shares) are deducted from the stockholders equity. No gain or loss is recognized in the statements of income on the purchase, sale, issue or cancellation of the Parent Company s own equity instruments. Earnings (Loss) Per Share Basic earnings (loss) per share is determined by dividing net income (loss) for the year attributable to ordinary equity holders of the parent by the weighted average number of common shares issued and outstanding during the period after giving retroactive adjustment to any stock dividend declared or stock split made during the period. Segment A segment is a distinguishable component of the Group that is engaged in providing product or services (business segment) which is subject to risks and rewards that are different from other segments. Subsequent Events Post year-end events that provide additional information about the Group s position at the balance sheet date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes when material to the financial statements. 24