10% Highlights 2014 WORLDWIDE DISTRIBUTION 70 COUNTRIES. 12.9m m 2013 OVER 1 BILLION LITRES. anticipated milk intake by PRODUCTS

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1 Annual Report and Financial Statements 2014

2 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Highlights 2014 Turnover Percentage by Division Turnover 000s 2014 has been a year of further growth and development 9% for Lakeland Dairies, driven by innovation, efficiency, new business developments and Food a Ingredients focused 31% 60% approach to meeting the Foodservice needs of our customers worldwide. Agri-Trading 700, , , , , , ,770 15% Lakeland Dairies is creating long term value and sustainability. Utilising the high quality milk supplied by our producers, we offer a diverse portfolio of market leading dairy ingredients and foodservice products across numerous food industry sectors. With growing milk processing volumes, technologically Operating Profit advanced production facilities and an excellent global logistics capability, we are in a strong position to maximise international dairy market growth 10% 12.9m m 2013 opportunities. All of this is underpinned by the collective strength and ambition of our co-operative dairy farmers and the skills of our people, working together to achieve continuing future success for Lakeland Dairies. Profit Before Tax 000s 400, , , , , Shareholders Funds 000s ,000 PROVENDER MILL LOUGH 8,000EGISH 6,000 6,852 7,963 10,335 10,864 Farmer 100,000 80,000 60,000 76,697 81,061 78,366 87,091 87,091 4,000 4,510 40,000 2,000 20, WORLDWIDE DISTRIBUTION 70 COUNTRIES 170 PRODUCTS OVER 1 BILLION LITRES anticipated milk intake by 2020

3 10% 12.9m m 2013 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements Turnover Percentage by Division Turnover 000s Turnover Percentage by Division 9% 700, ,000 Profit Turnover Before 000s Tax 000s 625,770 31% 31% 9% 60% 60% Food Ingredients Foodservice Ingredients Agri-Trading Foodservice Agri-Trading 600,000 10, , ,000 8, , ,000 6, , ,000 4, , , ,006 4, , ,222 6, ,940 7, ,940 10, , , ,770 10,864 15% 15% ,000 8,000 6,000 4,000 2,000 10% 10% ,000 8,000 6,000 4,000 2, Operating 12.9m Profit m 11.7m 11.7m 2013 Profit Before Group Tax Revenues 000s Profit Before 625.7m Tax 000s 4,510 4,510 Operating Profit 6,852 6,852 7,963 7, ,335 10,335 Foodservice 190.3m 10,864 10,864 Milk Parlour 800m LITRES OF MILK ,000 2, , , , Food Ingredients Shareholders Agribusiness Funds Shareholders' 000s Funds 377.9m Shareholders 57.5m Funds 90.5m 000s 100, ,000 80,000 80,000 60,000 60,000 40,000 40,000 20,000 20, ,697 76,697 81,061 81,061 MILK COLLECTION 78,366 78,366 87,091 87, ,091 87, Killeshandra Foodservice Ice Cream UHT Casein Lactose Milk Sticks Bailieboro Powders Butter Newtownards Foodservice Ice Cream UHT Lough Egish Powders GLOBAL LOGISTICS

4 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited "We are in a strong position to maximise international dairy market growth opportunities with blue chip customers and a diverse product portfolio" 2

5 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 CONTENTS Chairman s Review 2 Chief Executive s Review 4 Directors and Other Information 9 Statement of Directors Responsibilities 12 Independent Auditor s Report 13 Consolidated Profit and Loss Account 14 Consolidated Statement of Total Recognised Gains and Losses 14 Consolidated Balance Sheet 15 Consolidated Cash Flow Statement 16 Notes to the Financial Statements 17 1

6 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Chairman s Review 2014 has been a year of further significant progress for Lakeland Dairies underpinned by a strong business performance where the Society has reported very satisfactory results for the year. Alo Duffy Chairman 2

7 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 The dairy sector continues to make a major contribution to economic growth north and south. Through that contribution, it has a big influence on community wellbeing and on the quality of rural living standards. We re proud to support dairy farming communities through our operations including investments in our dairy processing infrastructure on a cross border basis. EU milk quotas have been abolished in the current year. This is a major change in the international dairy landscape. It alters competitive conditions among the dairy producing countries of the world with producers and the dairy industry gradually adapting to this new market dynamic. The Board of Lakeland Dairies is focused on the creation of a positive and sustainable future for our milk producers. This includes ongoing investments in modern and streamlined plants which guarantee flexibility to meet global market needs. Based on the strategic preparations that we have made, I m really confident that our milk producers will benefit from expansion opportunities in the future. All of the building blocks have been put in place to ensure that we ll continue to operate on the most efficient basis possible. We re going to grow our business while paying the highest possible milk price in line with market conditions. We re also supporting producers with research based information through the Lakeland Dairies Teagasc Joint Programme. This is focused on milk protein content, grass utilisation and herd fertility and it is backed up by our expert farm advisory and livestock nutrition services. Our mainly pasture based production system gives us many advantages in serving world markets. Maximising grass and silage based feeding, as part of overall production efficiency, can enhance returns for milk producers. It also helps the positioning of our products where they originate from milk produced on high quality farms in a natural and green environment. Ultimately, it s the global food companies and consumers worldwide who are influenced by these factors and if we can continue to supply the products that they want to buy from us then our expansion will continue to be successful. With world class processing plants, we are able to process all of the milk that our producers will send to us into an array of excellent dairy products. Our increasing milk intake will also be supplemented by new milk producer entrants and conversions from other sectors to dairy farming, all of whom will be welcome. I thank the Vice-Chairman, Board, Regional Committees, all Members and Milk Producers of Lakeland Dairies for your great support for Lakeland Dairies. On behalf of the Board I thank our management team, headed by Michael Hanley, and all staff throughout the organisation for their dedication to the business. I welcome new Board member Anthony Leddy and I very warmly acknowledge the outstanding contribution of our former Chairman Padraig Young who retired from the Board during the year. Together, we can be pleased when we look back at the achievements of our co-operative for over a century and in particular over the past 25 years since we formed Lakeland Dairies. Overall, our continuing investments signal our commitment to the future of co-operative dairy farming in this northern region of the island. That s a future worth investing in! Your co-operative has built a roadmap for further progress and innovation where Lakeland Dairies is a driver of rural economic development and dairy industry growth across fifteen counties north and south. We can now look forward with confidence to the further success of our co-operative as we continue to build our future together. Alo Duffy Chairman 3

8 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Chief Executive s Review I m pleased to report another positive year of growth and development following from a strong trading performance with higher processing volumes and consistently strong demand for our dairy products. Michael G. Hanley Group Chief Executive 4

9 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Group revenues increased by 15% to 625.7m yielding a 10% growth in operating profit to 12.9m and profit before tax of 10.9m. Set against the increasingly difficult market conditions of 2014, these are a robust set of results where the Co-operative also paid a competitive milk price throughout the year. The Society closed its financial year with shareholders' funds of 90.5m and a strong balance sheet as outlined on page 15. Performance by Division Foodservice 190.3m Foodservice Division revenues increased by 12% to 190.3m driven by encouraging levels of demand for our innovative products, organic growth and new business development activity in key markets including EMEA and Asia. Consumer sentiment has improved gradually in key markets. This benefited our foodservice customers and fed into stronger sales across our hospitality, catering and convenience market segments. Food Ingredients 377.9m Food Ingredients revenues increased by 22% to 377.9m due to consistently strong demand across our portfolio of dairy ingredients from leading food manufacturers and infant formula customers worldwide. There is a continuing and growing requirement for high quality milk powders and functional ingredients, particularly in nutritional, pharmaceutical and beverage markets, which we are also addressing through an expansion of operations. Agribusiness 57.5m With significantly better growing and grazing conditions in 2014, Agribusiness revenues were reduced due to lower feed demand and overall lower prices. However the division manufactured and sold over 155,000 tonnes of high quality ruminant feedstuffs during the year also saw the development and launch of our Rumismart Sustain integrated feeding programmes and solutions. These are designed to help our milk suppliers and customers to improve the efficiency of their production systems and facilitate a more efficient use of nutrients on the farm. This approach also gives advice on how our high quality feed products can be utilised most efficiently on-farm to optimise outputs from the same or lower levels of inputs. 5

10 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited BAILIEBORO DRYER NUMBER 3 Bailieboro, Co. Cavan has been designated as our centre of excellence for milk powder manufacturing. There are currently two major milk drying plants at this location, the most recent of which was commissioned in 2010 following investment of 20m. In 2014 we announced a planned 36m investment in a further Bailieboro Dryer Number 3, construction of which has now started in the current year for completion in The development of Bailieboro Dryer Number 3 will see the installation of a new 7 tonne per hour milk drying facility at Bailieboro where total milk powder production capacity will increase to 19 tonnes per hour. This will provide a value-added processing capability for all future milk produced by Lakeland Dairies farmers. Additionally, we have processing flexibility to draw on through our milk powder plant at Lough Egish Co. Monaghan, which will cater for peak milk production periods. Lakeland Dairies currently produces 90,000 tonnes of milk powders a year and this will rise to 130,000 tonnes on completion of the new Bailieboro Dryer Number 3. The same site also produces 24,000 tonnes of butter. This major dual factory presence on a single site provides total flexibility in our milk throughput, for maximum value added returns, and it contributes to overall economies of scale for our food ingredients business. GLOBAL LOGISTICS CENTRE During the year, we completed a new 10m global logistics centre at our major foodservice processing centre in Newtownards, Co. Down. This is a highly automated facility with over 14,000 individual pallet spaces and robotic systems to manage, assemble and prepare consignments for export. It will ensure our capacity to meet global customer requirements with the maximum flexibility. Our ice cream and UHT dairy manufacturing facilities at Killeshandra have also been upgraded. This is an impressive and efficient operation which is contributing strongly to the delivery of customer satisfaction in our foodservice division. 6

11 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 WEB PRESENCE Lakeland Dairies launched a new web presence which will further support our business development activities across the Group as well as providing enhanced services to milk producers. The website includes video capability and is also optimised for viewing on mobile devices including smartphones and tablets. MILK STICKS Constant innovation is key to our success. Our new milk stick dairy product was developed for the global dairy foodservice industry including airlines, convenience outlets and cafés. It has received an immensely positive reaction from our customers. Human Resources We are focused on continuous professional development, upskilling and training for our staff to ensure that our workforce remains agile and flexible as we continue our growth as a deeply competitive international dairy company. Our Management and Graduate Development Programmes are contributing successfully to the achievement of high standards of leadership and business process innovation across the organisation. Outlook 2014 was a global turning point where an oversupply of dairy production created downward pressure on prices. The Russian ban on EU dairy products (arising from the crisis in Ukraine) has also led to large volumes of product previously destined for Russia being sold at discount rates onto world markets. Global dairy supplies are reducing but there is still an overhang of product in the markets. The long term outlook for dairy is reasonably stable in spite of current volatility. OECD estimates are that dairy consumption will increase by over 13% per head of population worldwide between now and Global dairy demand continues to rise at a rate of approximately 2% per annum. International projections foresee a world population of over 9 billion people by 2050 (from a current 7.2 billion) and an increased need for food including higher volumes of dairy. The investments we have made on an ongoing basis are strategically designed to create sustainability through economies of scale including innovation, technological competitiveness and cost effectiveness. This ensures that we will support milk producers as a strong player in the international marketplace in the years ahead, including the payment of a sustainably competitive milk price. Worldwide usage of dairy ingredients and foodservice dairy products is driven by global trends including wellness, convenience, safety and sustainability. These trends are advantageous to Lakeland Dairies where we are specialists in key manufacturing areas including protein technology, aseptic manufacturing processes, emulsion technology and spray drying technology. We are in a strong position to maximise international dairy market growth opportunities with blue chip customers and a diverse product portfolio. We see a consistently growing opportunity in areas including infant formula, dairy proteins and health related nutritional products including lactose and whey, among other categories. 7

12 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Conclusion I welcome Alo Duffy as Chairman and I express our warm appreciation to our former Chairman Padraig Young for his dedication and commitment to Lakeland Dairies over many years. I thank the Chairman, Board and Regional Committees for their guidance and support throughout the past year. I am very grateful to each of my management colleagues and all staff for their excellent contribution across the business. In particular, I acknowledge and thank our valued customers across all divisions. Lakeland Dairies has created a processing, marketing and worldwide distribution capability designed to enhance the future long term sustainability and profitability of our business. We currently process over 800m litres of milk annually. This will rise to over 1 billion litres annually by 2020 and that capacity will be underpinned by enhanced innovation, new product developments and intensive business development activity. Our mission is to promote the long term future success of dairy farming and processing throughout our operating region. We are ready and able to meet that opportunity with maximum efficiency and competitiveness. Michael G. Hanley Group Chief Executive Five Year Review Turnover 401, , , , ,770 Profit Before Tax as % of Turnover 4, % 6, % 7, % 10, % 10, % 000s Shareholders funds 76,697 81,061 78,366 87,091 90,

13 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Board of Directors and Other Information

14 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited BOARD OF DIRECTORS 1. Aloysius Duffy (Chairman) (appointed 13th November 2014) 2. Gerard Melia (Vice-Chairman) 3. Michael G. Hanley (Chief Executive) 4. Seamus Brennan 5. John Farrell 6. Vincent Farrelly 7. Seán M. Finnegan 8. Seán Glennon 9. David Hannon 10. Colin Kelso 11. James Lynch 12. Oliver Neville 13. Peter Quinn 14. John Taylor 15. Alan Thompson 16. Anthony Leddy (appointed 13th November 2014) 17. Padraig Young (retired 13th November 2014) Management Executives & Operational Divisions Group Chief Executive Michael G. Hanley Group Financial Controller Peter Sheridan Food Ingredients Kieran Lonergan General Manager Foodservice Dermot Farrell General Manager Agri-Trading Pat Shiels General Manager Head of Group Human Resources Tadhg O'Halloran 10

15 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements Other information Secretary Michael Ryan Principal Bankers AIB Bank Bank of Ireland Rabobank Ireland Ulster Bank Auditor KPMG Chartered Accountants 1 Stokes Place St. Stephen s Green Dublin 2 Registered Office Killeshandra Co. Cavan Ireland 11

16 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Statement of Directors Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements, in accordance with applicable law and regulations. The Industrial and Provident Societies Acts, 1893 to 2014, require the Directors to prepare the Society s financial statements for each financial year. Under that legislation, the Directors have elected to prepare the Society s consolidated financial statements ( the financial statements ) in accordance with Generally Accepted Accounting Practice in Ireland, comprising applicable law and the accounting standards issued by the Financial Reporting Council and promulgated by the Institute of Chartered Accountants in Ireland. The Society s financial statements are required by law to give a true and fair view of the state of affairs of the Society and of the profit or loss of the Society for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Society will continue in business. The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the Society and enable them to ensure that the financial statements comply with the Industrial and Provident Societies Acts, 1893 to They are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the Society and to prevent and detect fraud and other irregularities. The Directors are also responsible for preparing the Annual Report and ensuring that it complies with the requirements of the Industrial and Provident Societies Acts, 1893 to The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Society s website. Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. On behalf of the Board of Directors Aloysius Duffy, Chairman Gerard Melia, Vice-Chairman 12th March

17 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Independent Auditor s Report To the members of Lakeland Dairies Co-operative Society Limited We have audited the Lakeland Dairies Co-operative Society Limited ( the Society ) consolidated financial statements ( the financial statements ) for the year ended 27 December 2014 which comprise the profit and loss account, statement of total recognised gains and losses, balance sheet, cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is Irish law and accounting standards issued by the Financial Reporting Council and promulgated by the Institute of Chartered Accountants in Ireland (Generally Accepted Accounting Practice in Ireland). This report is made solely to the Society s members, as a body. Our audit work has been undertaken so that we might state to the Society s members as a body 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 Society and the Society s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Directors and auditor As explained more fully in the Statement of Directors Responsibilities set out on page 12 the directors are responsible for the preparation of financial statements giving a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with Irish law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Financial Reporting Council s Ethical Standards for Auditors. Scope of the audit of the financial statements In addition, we read all the financial and non-financial information in the financial statements to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements give a true and fair view, in accordance with Generally Accepted Accounting Practice in Ireland, of the state of affairs of the Society as at 27 December 2014 and of the Society s profit for the year then ended; and have been properly prepared in accordance with Generally Accepted Accounting Practice in Ireland. As required by Section 13(2) of the Industrial and Provident Societies Act 1893 we examined the balance sheet showing the receipts and expenditure funds and effects of the Society, and verified the same with the books, deeds, documents, accounts and vouchers relating thereto, and found them to be correct, duly vouched and in accordance with law. Conall O Halloran For and on behalf of KPMG, Chartered Accountants Statutory Audit Firm 1 Stokes Place St. Stephen s Green Dublin 2 12th March 2015 An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Society s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. 13

18 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Consolidated Profit and Loss Account FOR THE YEAR ENDED 27 DECEMBER 2014 NOTES Society turnover continuing operations 2 625, ,532 Net operating costs 3 (612,829) (533,814) Operating profit continuing operation, being profit on ordinary activities before interest and taxation 12,941 11,718 Interest payable, net 4 (2,168) (1,343) Other financial charges, net 5 91 (40) Profit on ordinary activities before taxation 10,864 10,335 Tax on profit on ordinary activities 7 (1,501) (1,420) Profit for the year 9,363 8,915 Consolidated Statement of Total Recognised Gains and Losses FOR THE YEAR ENDED 27 DECEMBER 2014 NOTES Profit for the year 9,363 8,915 Currency translation adjustments 1,176 (174) Actuarial (loss)/gain on post-employment schemes 22 (8,439) 457 Related deferred tax movement 22 1,364 (381) Total recognised gains and losses for the year 3,464 8,817 Aloysius Duffy Chairman Gerard Melia Vice-Chairman 12th March

19 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Consolidated Balance Sheet AS AT 27 DECEMBER 2014 NOTES Fixed assets Goodwill and intangible assets 9 12,696 13,952 Tangible assets 10 79,038 59,619 Financial fixed assets 11 2,318 2,382 94,052 75,953 Current assets Stocks 12 53,321 66,439 Debtors 13 89,083 96,348 Cash at bank and in hand , ,135 Creditors: amounts falling due within one year 14 (97,684) (124,764) Net current assets 45,178 38,371 Total assets less current liabilities 139, ,324 Creditors: amounts falling due after one year 15 (16,250) - Provisions for liabilities 16 (1,479) (2,503) Capital grants 17 (5,362) (5,067) Net assets excluding pension liability 116, ,754 Pension liability net of deferred tax 22 (25,685) (19,663) Net assets 90,454 87,091 Capital and reserves Ordinary share capital 18 6,220 6,269 Revenue reserves 19 84,234 80,822 Shareholders funds 20 90,454 87,091 Aloysius Duffy Chairman Gerard Melia Vice-Chairman 12th March

20 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Consolidated Cash Flow Statement FOR THE YEAR ENDED 27 DECEMBER 2014 NOTES Net cash inflow/(outflow) from operating activities 24(a) 39,688 (2,374) Returns on investments and servicing of finance 24(b) (2,116) (1,160) Tax paid (800) (908) Capital expenditure and financial investment 24(c) (23,854) (14,418) Dividends paid (52) (57) Net cash inflow/(outflow) before financing and management of liquid resources 12,866 (18,917) Financing 24(d) (12,756) 18,863 Increase/(decrease) in cash 25(b) 110 (54) 16

21 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 1. ACCOUNTING POLICIES The principal accounting policies of the Society, which are outlined below, have been applied consistently throughout the current year and prior year. (a) Basis of preparation The consolidated financial statements ( the financial statements ) are prepared in accordance with Irish law and accounting standards issued by the Financial Reporting Council and promulgated by the Institute of Chartered Accountants in Ireland. The annual financial statements are made up to the last Saturday of the calendar year. For the current year the financial statements cover the 52 week period ending on 27 December 2014, while comparatives are for the 52 week period ending on 28 December The consolidated balance sheets for 2014 and 2013 have been drawn up as at 27 December 2014 and 28 December 2013 respectively. (b) Basis of consolidation The financial statements incorporate the results and financial position of the Society and its subsidiaries prepared to the balance sheet date. Upon the acquisition of a business, fair values are attributed to identifiable net assets acquired. Goodwill arising on acquisitions is dealt with as set out in (g) overleaf. (c) Turnover Turnover comprises the fair value of goods and services delivered to third parties, exclusive of trade discounts and value added tax. Goods are deemed to have been delivered when the customer has access to the significant benefits inherent in the goods and exposure to the risks inherent in these benefits. Turnover includes the value of selling aids and supports received under EU regulations. (d) Tangible assets Tangible fixed assets are stated at cost, less depreciation and impairment. Freehold land and assets under construction are not depreciated. Depreciation is charged so as to write off the cost of other tangible fixed assets over their estimated useful lives as follows: Buildings 10 to 20 years Plant and machinery 3 to 10 years Motor vehicles 4 to 5 years Provision is made for any impairment of tangible fixed assets. (e) Financial assets Financial fixed assets are shown at cost less provisions for impairment in value. Income from financial fixed assets, together with any related tax credits, is recognised in the Profit and Loss Account in the year it is received. (f) Leased assets Tangible fixed assets held under leasing arrangements that transfer substantially all the risks and rewards of ownership to the Society are capitalised and depreciated over the lesser of the estimated useful life or the period of the lease. The capital element of the related rental obligations is included in creditors. The interest element of the rental obligations is charged to the Profit and Loss Account so as to produce a constant periodic rate of charge. Rentals in respect of all other leases are charged to the Profit and Loss Account as incurred. Assets subject to sale and leaseback transactions are retained on the Society s Balance Sheet and the proceeds of the sale are included in deferred income within creditors where this reflects the substance of the agreements in accordance with FRS 5 Reporting the substance of transactions. 17

22 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 1. ACCOUNTING POLICIES (continued) (g) Goodwill Purchased goodwill arising on the acquisition of a business represents the excess of the acquisition cost over the fair value of the identifiable net assets when they were acquired. Any excess of the aggregate of the fair value of the identifiable net assets acquired over the fair value of the acquisition cost is negative goodwill. Purchased goodwill arising on acquisitions prior to 1 January 1999 was eliminated against reserves on acquisition and negative goodwill arising on such acquisitions was credited directly to reserves as a matter of accounting policy. On the disposal of a business, any goodwill so treated is included in determining the profit or loss on sale of the business. Purchased goodwill arising on acquisitions after 1 January 1999 is capitalised in the Balance Sheet and written off on a straight line basis over its useful economic life, subject to a maximum of 20 years. Goodwill arising on the acquisition of subsidiaries is shown separately in the Balance Sheet. (h) Intangible assets Intangible assets acquired separately are capitalised at cost. Intangible assets acquired in the course of a business combination are capitalised at fair value being their deemed cost as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any applicable accumulated amortisation and any accumulated impairment losses. Where amortisation is charged on these assets, this expense is taken to the Profit and Loss Account. The amortisation of intangible assets is calculated to write off the book value of intangible assets over their useful lives on a straight-line basis on the assumption of zero residual value. In general, intangible assets are amortised over periods ranging from 5 to 20 years, depending on the nature of the intangible asset. (i) Stocks Stocks are valued at the lower of cost and net realisable value. In the case of work-in-progress and finished goods, cost comprises of direct materials, direct labour and an appropriate proportion of manufacturing overheads based on normal production levels. Net realisable value represents the estimated selling price less all further costs to completion and all related costs to be incurred in marketing, selling and distribution. (j) Research and development Expenditure on research and development is written off to the Profit and Loss Account in the year in which it is incurred. (k) Capital grants Capital grants received and receivable are credited to the capital grants account. Annual transfers to income are made from that account to amortise such grants on the same basis as the related assets are depreciated. (l) Taxation Current tax, including Irish corporation tax and foreign tax, is provided on the Society s taxable profits at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date. Provision is made at the rates expected to apply when the timing differences reverse. Timing differences are differences between the Society s taxable profits and its results as stated in the financial statements. These differences arise from the inclusion of gains and losses in taxable profits in periods different from those in which they are recognised in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. 18

23 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 1. ACCOUNTING POLICIES (continued) (m) Foreign currencies The accounts are expressed in euro ( ). Transactions denominated in foreign currencies during the year have been translated at the rate of exchange ruling at the date of the transactions or at a contracted rate where there are matching forward contracts. Assets and liabilities denominated in foreign currencies are retranslated to euro at the rates of exchange ruling at the balance sheet date. The resulting profits or losses are dealt with in the Profit and Loss Account. The Society s net investment in overseas and subsidiaries is retranslated at the rate ruling at the balance sheet date. The profits and losses of overseas joint ventures and subsidiaries are translated at the average rates for the year. Exchange differences resulting from the translation of the opening Balance Sheets of overseas joint ventures and subsidiaries at closing rates together with the differences on the translation of the Profit and Loss Account are dealt with through reserves and reflected in the Statement of Total Recognised Gains and Losses. (n) Defeasance of borrowings Where a defeasance arrangement is entered into in relation to borrowings, the gain or loss arising on the defeasance of the borrowings is recognised as it is realised by applying the effective interest rate method. (o) Dividends Dividends are recognised in the period in which they are approved by the Society s shareholders, or in the case of an interim dividend, when it has been approved by the Board of Directors and paid. (p) Pension costs The Society makes pension contributions for a substantial number of employees. In relation to the Society s defined contribution schemes, contributions are accrued and recognised in operating profit or loss in the period in which they are earned by the relevant employees. For the Society s defined benefit schemes, the difference between the market value of the schemes assets and the actuarially assessed present value of the schemes liabilities, calculated using the projected unit credit method, is disclosed as an asset/liability in the Balance Sheet, net of deferred tax as appropriate. The amount charged to operating profit is the actuarially determined cost of pension benefits promised to employees and earned during the year plus any improvement changes granted to members during the year. The expected return on the pension schemes assets during the year and the increase in the schemes liabilities due to the unwinding of the discount during the year are shown as financing costs in the Profit and Loss Account. Any difference between the expected return on assets and that actually achieved, and any changes in the liabilities due to changes in assumptions or because actual experience during the year was different to that assumed, are recognised as actuarial gains and losses in the Statement of Total Recognised Gains and Losses. (q) Financial instruments The Society enters into transactions in the normal course of business using financial instruments in order to hedge its exposure to exchange rate variations. These transactions are accounted for as an adjustment to the underlying transaction being hedged. (r) Bank factored debtors and stock Factored debt where full recourse is held by the lender is recognised as a liability and included in Creditors: amounts falling due within one year while the related receivables and stock balances continue to be reported separately in trade debtors and stock until the related account balances are collected. 19

24 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 2. SOCIETY TURNOVER CONTINUING OPERATIONS The amount of Society turnover by market supplied is as follows: Food Ingredients 377, ,921 Foodservice 190, ,802 Agri-Trading 57,547 66, , ,532 Segmental disclosure of turnover by source and by geographical region and profit before taxation and net assets by geographical area and by class of business are not provided, as in the opinion of the Directors, such information would be prejudicial to the interests of the Society. Convertible Loan Stock has been allocated by the Irish Dairy Board to the Society. The Loan Stock is convertible into cash at the discretion of the Irish Dairy Board over a six year period which starts five years from the date of issue. This discretion has been exercised since Based on this discretion and on grounds of prudence, the Loan Stock is being recognised as and when receivable in cash. The allocation of Convertible Loan Stock to the Society and the benefit received is based on the level of trading with the Irish Dairy Board. Income of 386,000 (2013: 753,000), in respect of this Loan Stock, has been included in turnover for the 2014 financial year. The total income earned but not yet recognised at 2014 amounts to 1,374,000 (2013: 1,457,000), stated on a net present value basis. Such income will be recognised as and when receivable. 3. NET OPERATING COSTS Employee costs (Note 6) 36,781 33,038 Other external charges 566, ,757 Auditor s remuneration Depreciation (Note 10) 7,658 6,809 Operating lease payments 986 1,176 Amortisation of capital grants (Note 17) (739) (689) Amortisation of goodwill and intangible assets assets (Note 9) 1,616 1,606 Profit on disposal of tangible assets - (27) 612, , NET INTEREST PAYABLE AND SIMILAR CHARGES Interest expense arising on bank loans and overdrafts repayable within five years 2,179 1,350 Bank interest receivable (11) (7) 2,168 1,343 20

25 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 5. OTHER FINANCIAL CHARGES, NET Gain on disposal of financial fixed assets (186) - Dividend income (Note 11) (52) (183) Defeasance gain (Note 10) (15) (154) Expected return on pension scheme assets (Note 22) (3,421) (3,084) Interest on pension scheme liabilities (Note 22) 3,583 3,461 (91) EMPLOYEE COSTS The total employee remuneration was as follows: Wages and salaries 30,749 28,429 Social welfare costs 3,387 3,050 Pension costs: Current service costs: defined benefit schemes (Note 22) Past service credit: defined benefit schemes (Note 22) (470) (465) Other pension costs: defined contribution and similar schemes 2,408 1,416 Amount charged to Profit and Loss Account 36,781 33,038 The average number of employees during the year were as follows: Foodservice Food Ingredients Agri-Trading In addition to the employee costs above, an amount of 8,439,000 relating to actuarial losses on post employment schemes has been recorded in the Consolidated Statement of Total Recognised Gains and Losses (2013: actuarial gains 457,000). 21

26 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 7. TAX ON PROFIT ON ORDINARY ACTIVITIES Current tax Irish corporation tax on profit for the year 1, Adjustment to tax charge in respect of previous periods (22) (52) Total current tax 1, Deferred tax charge (Note 16) Deferred tax on post employment schemes Total deferred tax Total tax on profit on ordinary activities 1,501 1,420 The difference between the total current taxation shown above and the amount calculated by applying the standard rate of corporation tax to the profit before tax is as follows: Profit on ordinary activities before tax 10,864 10,335 Tax on Society profit on ordinary activities at standard corporation tax rate of 12.5% 1,358 1,292 Effects of: Expenses allowable/not deductible (76) (183) Research and development tax credit (150) (140) Depreciation in excess of capital allowances (39) 12 Income taxed at different rate (1) - Grant amortisation (77) (77) Disposal of chargeable asset (23) - Utilisation of overseas losses forward (46) (71) Tax loss forward Adjustments to tax charge in respect of previous periods (22) (52) Society current tax charge for the year 1, Factors that may affect future tax charges In Ireland taxable profits arising from trading operation are taxable at 12.5%. Non-trading income is taxed at 25%. In the UK, reductions in the corporation tax rate to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July This will reduce the Society s future current tax charge accordingly. The deferred tax balances at 2014 have been calculated based on the rate of 20% substantively enacted at the balance sheet date. 22

27 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 8. DIVIDENDS ON EQUITY SHARES Dividends paid Dividends of 52,000 (2013: 57,000) were approved by the Directors in March 2014 and ratified at the subsequent Annual General Meeting. 9. GOODWILL AND INTANGIBLE ASSETS TOTAL 000 Cost At 29 December ,052 Additions 360 At 27 December ,412 Amortisation At 29 December ,100 Amortisation for the year 1,616 At 27 December ,716 Net book value At 27 December ,696 At 29 December ,952 Goodwill is amortised over its expected useful economic life, which the Directors estimate to be 5 to 20 years. Additions during the year relate to acquired brand names and recipes. The Directors have reviewed the recoverable amount of goodwill as at 27 December 2014, in the context of the Society s budgets and business plans. No indications of impairment were noted and in their opinion the recoverable amount of the goodwill balance is not less than the net book value and, accordingly, no impairment has arisen. 23

28 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 10. TANGIBLE ASSETS Land & Plant & Motor Assets under Buildings Machinery Vehicles construction Total 000 Cost At 29 December , ,551 3, ,144 Additions 2,568 12, ,615 25,978 Foreign exchange movement 588 1, ,811 At 27 December , ,566 3,258 10, ,933 Depreciation At 29 December ,335 69,083 3,107-95,525 Charge for the year 1,654 5, ,658 Foreign exchange movement At 27 December ,133 75,616 3, ,895 Net book value At 27 December ,361 44, ,615 79,038 At 29 December ,003 37, ,619 Included in the above are the following amounts in respect of fixed assets, principally plant and machinery, which are financed by finance leases and which continue to be legally owned by the lessors: Net book value as at year end 2,066 2,492 Depreciation charge for year Tangible fixed assets with a net book value of Nil at 27 December 2014 (2013: 123,000) were subject to a sale and leaseback financing arrangement entered into in 2006, and which ended in A gain of 4,015,000 arose on the transaction and was credited to deferred income. This gain is being recognised over eight years as, in the opinion of the Directors, this represents the period over which the gain is realised (Note 5). Tangible fixed assets with a net book value of 1,999,000 at 27 December 2014 (2013: 2,251,000) were subject to a sale and leaseback financing arrangement entered into in 2001 and are included in leased assets at the year end. A gain of 1,508,000 arose on the transaction and was credited to deferred income. This gain is being recognised over thirteen years as, in the opinion of the Directors, this represents the period over which the gain is realised (Note 5). Amounts recognised in the Profit and Loss Account relating to these arrangements were 15,000 (2013: 154,000). 24

29 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 11. FINANCIAL FIXED ASSETS a) Listed investments at cost At start and end of year The market value of listed investments at year end was 155,000 (2013: 231,000). (b) Unlisted investment at cost One51plc: Equity interest million ordinary shares (2013: 4.7 million) At 29 December Additions At 27 December Equity interest in Socius Ingredients LLC At 29 December ,640 1,640 Disposal (164) - At 27 December ,476 1,640 Total at 27 December ,318 2,382 Dividends of 42,000 (2013: 174,000) and 10,000 (2013: 9,000) were received in respect of the Socius Ingredients LLC investment and the listed investment, respectively, during the year. 12. STOCKS Finished goods 38,988 52,224 Raw materials 5,587 6,503 Consumables 8,746 7,712 53,321 66,439 In the opinion of the Directors, the replacement cost of stocks does not differ materially from the amounts stated above. 25

30 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 13. DEBTORS Amounts falling due within one year Trade debtors (a) 85,615 89,367 Other debtors and prepayments 2,867 5,977 Corporation tax recoverable Unpaid share capital ,534 95,662 Amounts falling due after one year Other debtors (b) ,083 96,348 (a) Included in trade debtors above are amounts totalling 13,363,000 (2013: 31,905,000) subject to debt factoring arrangements with the Society s banks. (b) Other debtors include IDB Convertible Loan Stock, which falls due after one year. 14. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR Bank loans (15(a)) 3,750 - Bank overdraft (15(a)) - 1,587 Bank factored debt (15(a)) 18,481 49,601 Trade creditors 33,403 35,340 PAYE and PRSI 1, Other creditors and accruals 40,003 37,270 VAT payable , ,764 26

31 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 15. CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR Bank loans (a) 16,250 - (a) The Society s bank facilities comprise a combination of bank overdraft, bank factored debt and term debt. Borrowings under the bank facilities are secured by fixed and floating charges over the assets of the Society and its material subsidiaries and the bank factored debt is secured over the Society s trade debtors and stock. 16. PROVISIONS FOR LIABILITIES Deferred Restructuring and taxation other provisions Total 000 At 29 December ,102 2,503 Utilised in the year - (511) (511) Charge/(credit) for the year 110 (623) (513) At 27 December ,479 Deferred taxation Deferred tax liabilities represents provision for timing differences as follows: Accelerated capital allowances 1, Tax losses forward (517) (373) Defined benefit pension contributions (209) (164) The deferred tax asset of 517,000 (2013: 373,000) relates to taxable losses arising in subsidiary companies, L.E. Pritchitt & Co. Limited and Lakeland Dairies (N.I.) Limited. A deferred tax asset of 209,000 (2013: 164,000) also exists in relation to pension contributions on which a tax deduction will be available over a number of years. The asset has been recognised on the basis that the Directors are of the opinion that there will be suitable taxable profits in the future to utilise this tax loss. There is no significant unrecognised deferred tax (2013: Nil). The Society s financial statements do not recognise deferred tax liabilities in relation to retained reserves of overseas subsidiaries as there is no binding agreement to distribute such reserves. Since such reserves are continually reinvested by the Society, no tax is expected to be payable on them in the foreseeable future. Restructuring provisions This provision relates to the costs of the restructuring plan announced in recent years by the Society. The provision is not discounted as it is expected that it will be substantially utilised during the coming year. 27

32 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 17. CAPITAL GRANTS 000 Recognised At 29 December ,212 Received during the year 980 Foreign exchange movement 78 At 27 December ,270 Amortised At 29 December ,145 Credited to profit and loss account 739 Foreign exchange movement 24 At 27 December ,908 Net book amount At 27 December ,362 At 29 December ,067 Under agreements with a number of grant agencies, the Society has received grants which may be revoked, cancelled or repaid in certain circumstances. During the year, a grant of 980,000 was received from Invest NI in relation to a warehouse development at the Society s Newtownards site. 18. ORDINARY SHARE CAPITAL At 29 December ,368,546 ordinary shares (2013: 126,063,275) of 5 cent each 6,269 6,304 Redemption of 983,425 ordinary shares (2013: 694,729) of 5 cent each (49) (35) At 27 December ,385,121 ordinary shares (2013: 125,368,546) of 5 cent each 6,220 6,269 In common with organisations registered under the Industrial and Provident Societies Acts, 1893 to 2014, the Society does not have an authorised share capital. 28

33 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 19. REVENUE RESERVES At beginning of year 80,822 72,062 Profit for the year 9,363 8,915 Dividends paid (Note 8) (52) (57) Currency translation adjustment 1,176 (174) Actuarial (loss)/gain on post employment schemes, net of deferred tax movement (7,075) 76 At end of year 84,234 80,822 Profits available for distribution are partially restricted by existing grant agreements. At 27 December 2014 this restriction amounted to 7,071,000 (2013: 7,071,000). The cumulative amount of goodwill written off directly against the Society s reserves at 27 December 2014 was 1,714,000 (2013: 1,714,000). 20. RECONCILIATION OF MOVEMENT IN SHAREHOLDERS FUNDS Opening shareholders funds 87,091 78,366 Profit for the year 9,363 8,915 Dividends paid (Note 8) (52) (57) Shares redeemed (49) (35) Currency translation adjustment 1,176 (174) Actuarial (loss)/gain on post employment schemes, net of deferred tax movement (7,075) 76 Closing shareholders funds 90,454 87, COMMITMENTS At the year end, the following capital commitments authorised by the Board have not been provided for in the financial statements: (a) Capital commitments Contracted for 26,447 6,947 Not contracted for 19,917 6,583 46,364 13,530 The capital commitments at year end relate predominately to the Society s investment in a new dryer at the Bailieborough site. 29

34 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 21. COMMITMENTS (continued) (b) Forward contracts The Society enters into forward foreign exchange contracts in the normal course of business to reduce transactional exposures arising from purchases or sales, predominantly in pounds sterling and US dollars. The foreign currency contracts are denominated in the same currency as the hedged item. It is the Society s policy that no trading in financial instruments is undertaken. At the year end, the Society had entered into various contracts whereby it is committed to buying sterling and selling dollars with an equivalent euro nominal value of 27,111,000 (2013: 22,999,000). At the year end, purchase commitments on forward contracts for certain raw materials not yet provided for in the financial statements amounted to 12,373,000 (2013: 10,008,000). 22. PENSION COSTS Defined contribution The Society operates a number of defined contribution schemes. In addition the Society contributed to a defined benefit scheme which is accounted for as a defined contribution scheme under the multi employer scheme provisions of FRS17 Retirement Benefits (FRS 17). This is due to the fact that the underlying assets and liabilities attributable to individual employers cannot be identified on a consistent and reasonable basis. Contributions payable in the year in respect of the above amounted to 2,408,000 (2013: 1,416,000), of which 162,000 (2013: 135,000) was outstanding at the year end. Defined benefit Pensions for certain staff in the Republic of Ireland are funded through two defined benefit pension schemes, one of which is referred to above. The assets of both schemes are vested in independent trusts for the benefit of the members and their dependants. The contributions are based on the advice of an independent professionally qualified actuary obtained at three-yearly intervals. The latest finalised actuarial valuation for the principal scheme, the defined benefit occupational pension scheme ( the principal scheme ), was conducted as at 1 January In this actuarial report the funding requirements for the scheme are set out in order to ensure that there are adequate funds available to meet the cost of benefits as they fall due. A level of contribution that needs to be paid to the scheme in the period to the next review was recommended. The Society accepted this recommendation and has arranged payment of contributions accordingly. This scheme was closed to new entrants effective from 1 January The Society operates one closed defined benefit arrangement in the UK and the last formal actuarial review was carried out as at 1 August The actuary outlined in his report the scheme s funding requirements and recommended a level of contributions to be paid in the period to the next review. The Society accepted this recommendation and has arranged payment of contributions accordingly. The actuarial reports are not available for public inspection but the results are advised to the members of the schemes. The actuarial reports include details of agreed contribution rates for future years. There are no unfunded pension schemes. The valuation of the defined benefit schemes used for the purpose of FRS 17 disclosures have been based on the most recent actuarial valuations as identified above and updated by the independent actuaries to take account of the requirements of FRS 17 in order to assess the liabilities at the balance sheet date. Scheme assets are stated at their market value at the balance sheet date. The financial assumptions used to calculate the retirement benefit liabilities under FRS 17 were as follows: Republic of Ireland: 2012 Projected Projected Projected Unit Unit Unit 30 Rate of increase in salaries 1.30% 2.00% 2.00% Rate of increase of pensions in payment 1.30% 1.80% 1.80% Rate of increase of deferred pensions 1.40% 1.90% 2.00% Discount rate 2.25% 3.70% 4.00% Inflation rate 1.50% 2.00% 2.00%

35 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 22. PENSION COSTS (continued) The assumptions relating to longevity underlying the pension liabilities at the balance sheet date are based on standard actuarial mortality tables and include an allowance for future improvements in longevity. The assumptions are equivalent to expecting a 65-year old to live for 20.9 years for males (2013: 21.1 years) and 23.5 years for females (2013: 23.2 years). The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. The actual return on the assets during the year was a positive 16.47% (2013: positive return of 15.43%). United Kingdom: 2012 Projected Projected Projected Unit Unit Unit Rate of increase of pensions in payment 2.85% 3.30% 2.70% Rate of increase of deferred pensions 2.15% 2.60% 2.00% Discount rate 3.80% 4.60% 4.65% Inflation rate - CPI 2.15% 2.60% 2.00% The assumptions relating to longevity underlying the pension liabilities at the balance sheet date are based on standard actuarial mortality tables and include an allowance for future improvements in longevity. The assumptions are equivalent to expecting a 63-year old to live for years for males and years for females. The assumptions used by the actuary are chosen from a range of possible actuarial assumptions which, due to the timescale covered, may not necessarily be borne out in practice. The actual return on the assets during the year was 10.1% (2013: 5.8%). The market value of the assets in the pension schemes and the expected rates of return were: Total Rate of Market Rate of Market Rate of Market return value return value return value Equities * 47, %-6.75% 41, % 37,269 Bonds * 24, %-4.65% 18, %-4.65% 15,974 Other assets * 6, %-6.00% 5, %-6.00% 4,706 Total market value of pension scheme assets 78,107 65,587 57,949 Present value of pension scheme liabilities (108,713) (89,131) (84,212) Deficit in the pension schemes (30,606) (23,544) (26,263) Deferred tax asset 4,921 3,881 4,549 Net pension liability (25,685) (19,663) (21,714) * Under revised Irish GAAP coming into effect from the 2015 financial year onwards, the expected return in assets equals the discount rate. 31

36 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 22. PENSION COSTS (continued) Republic of Ireland Rate of Market Rate of Market Rate of Market return value return value return value Equities * 35, % 31, % 27,282 Bonds * 20, % 14, % 12,080 Other assets * 1, % % 1, %-6.00% 1,176 Total market value of pension scheme assets 57,231 47,881 40,538 Present value of pension scheme liabilities (73,239) (58,922) (54,750) Deficit in the pension schemes (16,008) (11,041) (14,212) Deferred tax asset 2,002 1,380 1,777 Net pension liability (14,006) (9,661) (12,435) * Under revised Irish GAAP coming into effect from the 2015 financial year onwards, the expected return in assets equals the discount rate. United Kingdom Rate of Market Rate of Market Rate of Market return value return value return value Equities * 11, % 10, % 9,987 Bonds * 4, % 3, % 3,894 Other assets * 4, %-6.00% 3, %-6.00% 3,530 Total market value of pension scheme assets 20,876 17,706 17,411 Present value of pension scheme liabilities (35,474) (30,209) (29,462) Deficit in the pension schemes (14,598) (12,503) (12,051) Deferred tax asset 2,919 2,501 2,772 Net pension liability (11,679) (10,002) (9,279) * Under revised Irish GAAP coming into effect from the 2015 financial year onwards, the expected return in assets equals the discount rate. 32

37 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 22. PENSION COSTS (continued) The following are the amounts that have been included in the Profit and Loss Account and the Statement of Total Recognised Gains and Losses: ROI UK TOTAL Included in payroll costs Current service costs (Note 6) (707) (608) - - (707) (608) Past service credit (237) (143) - - (237) (143) Included in net interest payable and similar charges Expected return on pension scheme assets (Note 5) 2,182 2,085 1, ,421 3,084 Interest on pension scheme liabilities (Note 5) (2,158) (2,167) (1,425) (1,294) (3,583) (3,461) Net return included in net interest payable and similar charges 24 (82) (186) (295) (162) (377) Included in Statement of Total Recognised Gains and Losses Difference between expected and actual return on assets 5,815 4, (8) 6,435 4,001 Experience gains and losses on scheme liabilities 1, , Effect of changes in actuarial assumptions underlying the present value of the scheme liabilities (13,416) (2,928) (2,502) (1,132) (15,918) (4,060) Actuarial gains/(losses) included in the Statement of Total Recognised Gains and Losses (6,557) 1,597 (1,882) (1,140) (8,439) Present value of funded defined benefit obligations (108,713) (89,131) (84,212) (67,650) (67,706) Fair value of plan assets 78,107 65,587 57,949 48,471 49,532 Deficit in the scheme (30,606) (23,544) (26,263) (19,179) (18,174) Related deferred tax asset 4,921 3,881 4,549 4,023 3,767 Net liability (25,685) (19,663) (21,714) (15,156) (14,407) 33

38 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 22. PENSION COSTS (continued) Movement in present value of defined benefit obligation ROI UK TOTAL At beginning of year (58,922) (54,750) (30,209) (29,462) (89,131) (84,212) Current service costs (707) (608) - - (707) (608) Interest cost (2,158) (2,167) (1,425) (1,294) (3,583) (3,461) Past service credit Scheme participants contribution (686) (678) - - (686) (678) Benefits paid 1,136 1, ,101 1,837 2,329 Actuarial losses (12,372) (2,412) (2,502) (1,132) (14,874) (3,544) Foreign exchange adjustment - - (2,039) 578 (2,039) 578 At end of year (73,239) (58,922) (35,474) (30,209) (108,713) (89,131) Movements in fair value of plan assets ROI UK TOTAL At beginning of year 47,881 40,538 17,706 17,411 65,587 57,949 Expected return on plan assets 2,182 2,085 1, ,421 3,084 Actuarial gains/(losses) 5,815 4, (8) 6,435 4,001 Contributions by employer 1,803 1, ,618 2,549 Contributions by members Benefits paid (1,136) (1,228) (701) (1,101) (1,837) (2,329) Foreign exchange adjustment - - 1,197 (345) 1,197 (345) At end of year 57,231 47,881 20,876 17,706 78,107 65,587 Movement in deficit during the year ROI UK TOTAL Deficit in schemes at beginning of year (11,041) (14,212) (12,503) (12,051) (23,544) (26,263) Current service cost (707) (608) - - (707) (608) Contributions paid 1,803 1, ,618 2,549 Past service credit Expected return on assets 2,182 2,085 1, ,421 3,084 Interest on liabilities (2,158) (2,167) (1,425) (1,294) (3,583) (3,461) Difference between expected and actual returns 5,815 4, (8) 6,435 4,001 Experience gains on scheme liabilities 1, , Change in financial and demographic assumptions (13,416) (2,928) (2,502) (1,132) (15,918) (4,060) Foreign exchange adjustment - - (842) 233 (842) 233 Deficit in schemes at end of year (16,008) (11,041) (14,598) (12,503) (30,606) (23,544) 34

39 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 22. PENSION COSTS (continued) Experience gains/(losses) are as follows: Total Difference between the expected and actual return on schemes assets: Amount ( 000) 6,435 4,001 3,861 (5,710) 1,492 Percentage of schemes assets 8.24% 6.10% 6.66% (11.78%) 3.01% Experience gains/(losses) on schemes liabilities: Amount ( 000) 1, (36) Percentage of schemes liabilities (0.95%) (0.58%) (0.33%) 1.06% 0.05% Total amount included in Statement of Total Recognised Gains and Losses: Amount ( 000) (8,439) 457 (10,231) (1,786) 1,390 Percentage of schemes liabilities 7.76% (0.51%) 12.15% 2.64% (2.05%) The cumulative actuarial loss before deferred tax recognised in the Statement of Total Recognised Gains and Losses is a loss of 28,567,000 (2013: loss of 20,128,000). Republic of Ireland Difference between the expected and actual return on schemes assets: Amount ( 000) 5,815 4,009 3,446 (3,959) 1,100 Percentage of schemes assets 10.16% 8.37% 8.5% (12.08%) 3.26% Experience gains/(losses) on schemes liabilities: Amount ( 000) 1, (36) Percentage of schemes liabilities 1.41% (0.88%) (0.52%) (1.79%) 0.09% Total amount included in Statement of Total Recognised Gains and Losses: Amount ( 000) (6,557) 1,597 (10,089) 639 2,001 Percentage of schemes liabilities 8.95% (2.71%) 18.43% (1.60%) (4.74%) United Kingdom Difference between the expected and actual return on schemes assets: Amount ( 000) 620 (8) 415 (1,751) 392 Percentage of schemes assets 2.97% (0.05%) 2.39% (11.15%) 2.48% Total amount included in Statement of Total Recognised Gains and Losses: Amount ( 000) (1,882) (1,140) (142) (2,425) (611) Percentage of schemes liabilities 5.31% 3.77% 0.48% 8.74% 2.39% The expected contributions for the year ended 2 January 2016 total 2,694,

40 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 23. SUBSIDIARIES At 27 December 2014, the Society had the following principal subsidiaries: Subsidiaries Society Share (held directly) Activity Denothar Limited* 100% Holding company Lakeland Dairy Sales Limited* 100% Sales of dairy produce Lakeland Dairy Processing Limited* 100% Research & Development Lakeland Dairies (N.I.) Limited** 100% Milk procurement Lakeland Dairy Food Services Limited* 100% Manufacture and supply of dairy produce Bailie Foods Limited* 100% Manufacture and supply of dairy produce L.E. Pritchitt & Co. Limited*** 100% Manufacture and supply of dairy produce Lakeland Securities Limited* 100% Investment holding company (* Registered in the Republic of Ireland, ** Registered in Northern Ireland, *** Registered in the UK) All shares held are ordinary shares. The Society has given guarantees for the purposes of Section 17 of the Companies (Amendment) Act, 1986 to all wholly owned subsidiary companies registered in the Republic of Ireland. The addresses of the Registered Offices of the subsidiaries are available from the Secretary of Lakeland Dairies Co-operative Society Limited. All of the above companies have a year end date of 27 December

41 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 24. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (a) Reconciliation of operating profit to net cash inflow/(outflow) from operating activities Operating profit 12,941 11,718 Profit on disposal of fixed assets - (27) Depreciation 7,658 6,809 Amortisation of goodwill 1,616 1,606 Grant amortisation (739) (689) Decrease/(increase) in stocks 13,118 (20,962) Decrease/(increase) in debtors 6,999 (12,301) Increase in creditors 1,610 14,433 Restructuring charge (623) (470) Difference between pension charge and cash contributions (2,381) (2,404) Restructuring provision utilised (511) (87) Net cash inflow/(outflow) from operating activities 39,688 (2,374) (b) Returns on investments and servicing of finance Interest received 11 7 Interest paid (2,179) (1,350) Dividends received Net cash outflow (2,116) (1,160) (c) Capital expenditure and financial investment Purchase of fixed assets (24,724) (14,462) Purchase of financial fixed asset (100) - Purchase of intangible asset (360) - Sales proceeds on disposal of fixed assets - 44 Sales proceeds on disposal of financial fixed assets Grants received Net cash outflow (23,854) (14,418) 37

42 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes to the Financial Statements 24. NOTES TO THE CONSOLIDATED CASH FLOW STATEMENT (continued) (d) Financing Bank term loans received 20,000 - Bank overdraft (repaid)/received (1,587) 923 Factored debt (repaid)/received (31,120) 18,731 BES scheme repayments - (756) Share redemptions (49) (35) Net cash (outflow)/inflow (12,756) 18, ANALYSIS AND RECONCILIATION OF NET DEBT (a) Analysis and changes in net debt 2013 Cash flow Cash at bank and in hand Overdraft/loans due within 1 year (51,188) 28,957 (22,231) Loans due after 1 year - (16,250) (16,250) (50,840) 12,817 (38,023) (b) Reconciliation of net cash flow - movement in net debt Net debt at beginning of year (50,840) (31,888) Increase/(decrease) in cash 110 (54) Decrease/(increase) in loans 12,707 (19,654) Decrease in other debt Net debt at end of year (38,023) (50,840) 38

43 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes to the Financial Statements 26. FINANCIAL RISK MANAGEMENT Key financial risks are reviewed on an ongoing basis by the Board of Directors and management of the Society. The Society does not trade in financial instruments nor does it enter into any leveraged derivative transactions. The four key financial risks managed by the Society on an ongoing basis are interest rates, liquidity, credit and currency risks. Interest rates The objective of the Society s interest rate management policy is to manage the Society s debt to ensure that the cost of this debt is minimised. In this regard, the Society occasionally enters into interest rate swap agreements. No such agreements were used in the year to 27 December Liquidity The Society s objective is to ensure it has adequate funds available to meet its financial commitments as they fall due. Accordingly, it ensures an appropriate mix of current and long term borrowings and monitors future expected cash flows carefully. Credit The Society s objective is to ensure there are no significant risks to the Society from failure by customers to pay. To reduce this exposure the Society seeks to insure the majority of customers, within the Food Ingredients and Foodservices divisions, for credit risk. In addition, all customers must undergo a credit check before commencement of services. Currency The Society s reporting currency is the euro. Exposure to other currencies that arise in the course of ordinary trading, principally sterling and the US dollar, are monitored on an ongoing basis and are typically managed by entering into appropriate forward currency contracts. 27. RELATED PARTY TRANSACTIONS In the ordinary course of their business as farmers, the Directors transact with the Society on similar commercial terms to other shareholders. There were no transactions with the Directors, during the year, outside of the ordinary course of business of the Society. 28. POST BALANCE SHEET EVENTS On 31 December 2014, the Society acquired Taste Trends Limited. It is the leading UK maker of fat-free frozen yogurts for the foodservice market. 29. BOARD APPROVAL These financial statements were approved by the Board of Directors on 12th March

44 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited Notes 40

45 Lakeland Dairies Co-operative Society Limited Annual Report and Financial Statements 2014 Notes 41

46 Annual Report and Financial Statements 2014 Lakeland Dairies Co-operative Society Limited 42

47 "Coolicious is the leading brand of frozen yogurt in the foodservice sector"