CFD Articles 1, 2 and 3 Dept. Requiring this Doc. Amended Articles Number/Section
Total Amount of Borrowings 1,932 P= Total No. of Stockholders Domestic Foreign
To be accomplished by SEC Personnel concerned
File Number LCU
Document ID Cashier
S T A M P S Remarks: Please use BLACK ink for scanning purposes.
COVER SHEET
2GO SEC Form 17-Q Second Quarter 2014 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 quarterly period ended June 30, 2014
2. Commission identification number 4409 3. BIR Tax Identification No 000-313-401-000
2GO GROUP, INC. 4. Exact name of issuer as specified in its charter
Philippines 5. Province, country or other jurisdiction of incorporation or organization
6. Industry Classification Code: (SEC Use Only)
15th Floor Times Plaza Bldg, UN Ave cor Taft Ave, Ermita, Manila 1000 7. Address of issuer's principal office Postal Code
(02) 528-7540, (02) 528-7412 8. Issuer's telephone number, including area code
12th Floor Times Plaza Bldg, UN Ave cor Taft Ave, Ermita, Manila 9. Former name, former address and former fiscal year, if changed since last report
10. Securities registered pursuant to Sections 8 and 12 of the Code, or Sections 4 and 8 of the RSA
Title of Each Class Number of Shares of Common Stock Outstanding and Amount of Debt Outstanding Common Stock 2,446,136,400 Total Liabilities 9,168,835,035 11. Are any or all of the securities listed on a Stock Exchange?
Yes [ X ] No [ ] Philippine Stock Exchange - Common Stock
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 there under or Sections 11 of the RSA and RSA Rule 11(a)-1 there under, 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 [ ]
2GO SEC Form 17-Q Second Quarter 2014 FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this SEC Form 17-Q:
1. Unaudited Consolidated Balance Sheets as of June 30, 2014 and Audited Consolidated Balance Sheets as of December 31, 2013 i - ii
2. Unaudited Consolidated Statements of Income for the Six Months Ended June 30, 2014 and 2013 iii
3. Unaudited Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2014 and 2013 iv
4. Unaudited Consolidated Statement of Changes in Equity as of June 30, 2014 and Audited Consolidated Statement of Changes in Equity as of December 31, 2013 v
5. Unaudited Consolidated Cash Flows for the Six Months Ended June 30, 2014 and 2013 vi - vii
6. Note to Consolidated Financial Statements 1 76
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Key Performance Indicators and Results of Operations 77 82
2. Company Outlook 82
3. Financial Soundness Indicators 83
4. Map Of The Conglomerate Or Group Of Companies Of The Registrant 84
5. Statements of Retained Earnings Available For Dividend Declaration 85
2GO SEC Form 17-Q Second Quarter 2014
2GO GROUP, INC. AND SUBSIDIARIES
ITEM 1
Unaudited Consolidated Financial Statements
2GO SEC Form 17-Q Second Quarter 2014 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in Thousands)
June 30, 2014 (Unaudited) December 31, 2013 (Audited) ASSETS Current Assets Cash and cash equivalents (Note 6) P= 937,371 P= 918,645 Trade and other receivables (Notes 7 and 23) 3,599,608 3,949,819 Inventories (Note 8) 488,195 421,957 Other current assets (Note 9) 1,295,374 1,054,409 Total Current Assets 6,320,548 6,344,830 Noncurrent Assets Property and equipment (Notes 13 and 20) 5,346,606 5,054,932 Available-for-sale investments (AFS) (Note 11) 6,907 6,907 Investments in associates and joint ventures (Note 12) 188,979 181,977 Investment property (Note 14) 9,763 9,763 Software development costs (Note 15) 16,706 15,379 Deferred income tax assets - net (Note 29) 504,982 477,076 Goodwill (Note 5) 250,450 250,450 Other noncurrent assets (Note 16) 172,729 180,590 Total Noncurrent Assets 6,497,122 6,177,074 TOTAL ASSETS P= 12,817,670 P= 12,521,904
LIABILITIES AND EQUITY Current Liabilities Loans payable (Note 17) P= 1,263,181 P= 1,344,927 Trade and other payables (Notes 18 and 23) 4,010,825 4,189,244 Income tax payable 10,106 5,772 Redeemable preferred shares (Notes 21 and 24) 6,640 6,680 Current portions of: Long-term debts (Note 19) 373 Obligations under finance lease (Notes 13 and 20) 24,054 28,592 Total Current Liabilities 5,314,806 5,575,588 Noncurrent Liabilities Long-term debts - net of current portion (Note 19) 3,600,032 3,597,496 Obligations under finance lease - net of current portion (Notes 13 and 20) 82,894 89,192 Accrued retirement benefits (Note 28) 161,734 167,243 Deferred income tax liabilities - net (Note 29) Other noncurrent liabilities 9,368 9,369 Total Noncurrent Liabilities 3,854,029 3,863,300 Total Liabilities P= 9,168,835 P=9,438,888 (Forward) i 2GO SEC Form 17-Q Second Quarter 2014
June 30, 2014 (Unaudited) December 31, 2013 (Audited) Equity Attributable to the equity holders of the Parent Company: Share capital (Note 24) P=2,484,653 P=2,484,653 Additional paid-in capital 910,901 910,901 Acquisitions of non-controlling interests (Note 24) (3,093) (3,243) Excess of cost over net assets of investments (Note 24) (10,912) (9,835) Treasury shares (Note 24) (58,715) (58,715) Other comprehensive loss (86,353) (86,405) Retained Earnings (Deficit) (Note 24) 382,992 (179,314) 3,619,473 3,058,042 Non-controlling interests 29,362 24,974 Total Equity 3,648,835 3,083,016 TOTAL LIABILITIES AND EQUITY P= 12,817,670 P=12,521,904
See accompanying Notes to Consolidated Financial Statements.
ii 2GO SEC Form 17-Q Second Quarter 2014 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in Thousands, Except for Earnings (Loss) Per Common Share)
Six Months Ended June 30 Three Months Ended June 30
2014 (Unaudited) 2013 (Unaudited and restated) 2014 (Unaudited) 2013 (Unaudited and restated) REVENUES Freight (Note 23) P=2,420,332 P= 2,852,471 P= 1,280,706 P= 1,555,385 Passage 1,880,716 1,876,477 1,139,639 1,024,235 Service fees (Note 23) 1,285,964 1,304,774 672,041 642,764 Sale of goods 1,108,314 1,002,936 502,696 496,929 Others 550,548 646,126 331,218 296,283 7,245,873 7,682,784 3,926,299 4,015,596 OPERATING COSTS AND EXPENSES (Note 25) Operating 4,468,227 4,782,725 2,423,067 2,357,353 Terminal 628,040 683,386 280,254 357,016 Cost of goods sold (Note 8) 924,857 835,162 435,824 409,618 Overhead 469,482 600,753 231,553 312,671 6,490,605 6,902,026 3,370,698 3,436,657 OTHER INCOME (CHARGES) Equity in net earnings (losses) of associates (Note 12) 7,003 24,229 505 12,041 Interest and financing charges (Note 26) (160,833) (202,919) (87,279) (98,196) Others - net (Note 26) 18,854 (15,117) (4,374) (31,835) (134,977) (193,808) (91,149) (117,990) INCOME BEFORE INCOME TAX 620,291 586,950 464,453 460,948 PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 29) 51,322 77,044 30,470 47,447 NET INCOME P= 568,970 P= 509,906 P=433,983 P= 413,502 Attributable to: Equity holders of the Parent Company P= 562,306 P= 501,920 P= 430,411 P= 408,230 Non-controlling interests 6,664 7,986 3,571 5,272 P= 568,970 P= 509,906 P= 433,983 P= 413,502 Basic Income Per Common Share (Note 31) P= 0.2299 P=0.2052 P= 0.1760 P= 0.1669
See accompanying Notes to Consolidated Financial Statements. iii 2GO SEC Form 17-Q Second Quarter 2014 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in Thousands)
June 30, 2014 (Unaudited) June 30, 2013 (Unaudited and Restated) NET INCOME (LOSS) P= 568,970 P= 509,906 OTHER COMPREHENSIVE INCOME (LOSS) Other comprehensive income to be reclassified to profit or loss in subsequent periods: Net changes in unrealized gain on AFS investments (Note 11) 52 38 52 38 TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR P= 569,022 P= 509,944 Attributable to: Equity holders of the Parent Company P= 562,358 P= 494,907 Non-controlling interest 6,664 15,037 P= 569,022 P= 509,944
See accompanying Notes to Consolidated Financial Statements.
iv
2GO SEC Form 17-Q Second Quarter 2014 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE PERIOD ENDED JUNE 30, 2014 AND JUNE 30, 2013 (Amounts in Thousands)
Attributable to Equity Holders of the Parent Company
Share Capital (Note 24) Additional Paid-in Capital Acquisition of Non- controlling Interests (Note 24) Excess of Cost Over Net Assets (Excess of Net Assets Over Cost) of Investments (Note 24) Other Comprehensive Income (Loss)
Unrealized Gain (Loss) on AFS Investments (Note 11) Share in Cumulative Translation Adjustment of an Associate Re- measurement Gains (Losses) on Accrued Retirement Benefits, net of Deferred Income Tax Effect Share in Re- measurement Gains (Losses) on Accrued Retirement Benefits of Associates and Joint Ventures (Note 12)
Subtotal Retained Earnings (Deficit) (Note 24) Treasury Shares (Note 24) Total Non-controlling Interests Total Equity BALANCES AT DECEMBER 31, 2013 P=2,484,653 P=910,901 (P=3,243) (P=9,835) P=434 P=5,294 (P=91,884) (P=249) (P=86,405) (P=179,314) (P=58,715) P=3,058,042 P=24,974 P=3,083,016 Total comprehensive income for the year 562,306 562,306 6,664 568,970 Effect of acquisition of acquisition of non-controlling interest 150 (1077) 52 52 (875) (875) Dividends declared BALANCES AT JUNE 30, 2014 P=2,484,653 P=910,901 (P=3,093) (P=10,912) P= 486 P=5,294 (P=91,884) (P=249) (P=86,353) P=382,992 (P=58,715) P= 3,619,473 P=29,362 P= 3,648,835 Attributable to Equity Holders of the Parent Company
Share Capital (Note 24) Additional Paid-in Capital Acquisition of Non- controlling Interests (Note 24) Excess of Cost Over Net Assets (Excess of Net Assets Over Cost) of Investments (Note 24) Other Comprehensive Income (Loss)
Unrealized Gain (Loss) on AFS Investments (Note 11) Share in Cumulative Translation Adjustment of an Associate Re- measurement Gains (Losses) on Accrued Retirement Benefits, net of Deferred Income Tax Effect Share in Re- measurement Gains (Losses) on Accrued Retirement Benefits of Associates and Joint Ventures (Note 12)
Subtotal Retained Earnings (Deficit) (Note 24) Treasury Shares (Note 24) Total Non-controlling Interests Total Equity BALANCES AT DECEMBER 31, 2012 P=2,484,653 P=910,901 P=5,940 (P=9,835) P= 396 P=5,294 (P=91,884) (P=249) (P=86,405) (P=179,314) (P=58,715) P=3,058,042 P=24,974 P=3,083,016 Total comprehensive income for the year 131,894 131,894 3,093 134,987 Effect of acquisition of acquisition of non-controlling interest (1077) 21 52 (875) (875) Dividends declared BALANCES AT JUNE 30, 2013 P=2,484,653 P=910,901 P=5,940 (P=10,912) P= 486 P=5,294 (P=91,884) (P=249) (P=86,353) (P=47,420) (P=58,715) P=3,189,062 P=28,067 P= 3,217,128 See accompanying Notes to Consolidated Financial Statements. v
2GO SEC Form 17-Q Second Quarter 2014
2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in Thousands)
Period Ended June 30
2014 (Unaudited) 2013 (Unaudited and restated) CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) before income tax P= 620,291 P= 586,950 Adjustments for: Depreciation and amortization of property and equipment and software development cost (Note 13 and 15) 423,462 481,531 Interest and financing charges (Note 26) 163,495 202,919 Interest income (Note 26) (8,693) (12,894) Unrealized foreign exchange gains (losses) -net 3,121 (206) Equity in net loss (earnings) of associates and joint ventures (Note 12) (7,003) (24,229) Provisions for doubtful accounts 328 (206) Loss (gain) on disposals of: Property and equipment (Notes 13 and 26) (5,788) Asset held for sale 48,842 Decline in value of assets 11,455 Operating cash flows before working capital changes 1,195,001 1,292,451 Decrease (increase) in: Trade and other receivables (200,697) (510,992) Inventories (66,238) 3,546 Other current assets (240,965) (109,211) Increase (decrease) in trade and other payables (239,589) (17,632) Net cash from (used in) operations 447,512 658,162 Interest received (371) Income taxes paid, including creditable withholding taxes (20,851) (89,841) Net cash flows from (used in) operating activities 396,190 567,950 CASH FLOWS FROM INVESTING ACTIVITIES Additions to: Property and equipment and software development cost (716,463) (421,734) Proceeds from sale of: Other noncurrent assets 9,540 Short term investment 1,233 Disposal of asset held for sale 10,080 Insurance claims 559,273 Net cash flows from (used in) investing activities (P=157,189)) P=(400,881) (Forward)
vi
2GO SEC Form 17-Q Second Quarter 2014
Period Ended June 30
2014 (Unaudited) 2013 (Unaudited and restated) CASH FLOWS FROM FINANCING ACTIVITIES Net availments (payments) of: Loans payable (Note 17) (P=81,746) (P=33,570) Payments of: Long-term debts (Note 19) (11,334) 5,151 Redemption of preferred shares (Note 21) (40) Interest paid (127,155) (201,519) Dividends paid to non-controlling interests Net cash flows from (used in) financing activities (220,275) (229,938) EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,726 (62,869) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 918,645 786,856 CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 6) P= 937,371 P= 720,865
See accompanying Notes to Consolidated Financial Statements. vii
2GO SEC Form 17-Q Second Quarter 2014 2GO GROUP, INC. [formerly ATS Consolidated (ATSC), Inc.] AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands, Except Number of Shares, Earnings per Common Share, Exchange Rate Data and When Otherwise Indicated)
1. Corporate Information, Status of Operations and Management Action Plans and Approval of the Consolidated Financial Statements
Corporate Information 2GO Group, Inc. [2GO or the Company, formerly ATS Consolidated (ATSC), Inc.] was incorporated in the Philippines on May 26, 1949. Its corporate life was renewed on May 12, 1995 and will expire on May 25, 2045. The Companys shares of stocks are listed in the Philippine Stock Exchange (PSE). The Company and its subsidiaries (collectively referred to as the Group) are primarily engaged in the business of operating vessels, motorboats and other kinds of watercrafts; aircrafts and trucks; and acting as agent for domestic and foreign shipping companies for purposes of transportation of cargoes and passengers by air, land and sea within the waters and territorial jurisdiction of the Philippines. The Companys registered office address is 15 th Floor, Times Plaza Building, United Nations Avenue corner Taft Avenue, Ermita, Manila.
As of December 31, 2013 and 2012, the Company is 88.3%-owned subsidiary of Negros Navigation Co., Inc (NN or the Parent Company). Its ultimate parent is Negros Holdings & Management Corporation (NHMC). NN and NHMC are both incorporated and domiciled in the Philippines.
On December 1, 2010, the Board of Directors (BOD) of Aboitiz Equity Ventures, Inc. (AEV) and Aboitiz & Company, Inc. (ACO) approved the sale of their shareholdings in the Parent Company to NN in accordance with the securities and purchase agreements executed among AEV, ACO and NN. On December 28, 2010, the sale was finalized at P=1.8813 per share. AEV sold its entire shareholdings in the Company comprising of 1,889,489,607 common shares for P=3.6 billion. ACO, on the other hand, sold its entire shareholdings in the Company comprising of 390,322,384 common shares for P=734.0 million. This resulted to 93.20% NN ownership of the outstanding common shares of the Company, along with all the Companys non-controlling shares that may be tendered to NN subsequent to December 31, 2010.
On February 22, 2011, in relation to the tender offer issued by NN for the outstanding common shares held by public shareholders of the Company, NN acquired 120,330,004 common shares from the Companys non-controlling shareholders equivalent to 4.9% additional ownership interest in the Company for a total purchase price of P=226.8 million. As a result, NNs ownership interest in the Company increased to 98.12%. On December 21, 2012, NN sold 240,000,000 common shares of the Company at a price of P=1.65 per share to the public shareholders. The sale of shares resulted to a reduction in the ownership of NN in the Company from 98.12% to 88.31%.
In February and March 2012, the Philippine SEC approved the application of the Company and its subsidiaries to amend their Articles of Incorporation and By-laws, which include, among others, the change in their corporate names to 2GO Group, Inc. (formerly ATSC), 2GO Express, Inc. [formerly ATS Express, Inc. (ATSEI)], and 2GO Logistics, Inc. [formerly ATS Distribution, Inc. (ATSDI)].
- 1 - - 2 -
2GO SEC Form 17-Q Second Quarter 2014 On August 24, 2011, the Philippine SEC also approved the amendment to the Companys secondary purpose to include rendering technical services requirement to customers for refrigerated marine container vans and related equipment or accessories. This amendment was previously approved by the BOD on April 28, 2011 and ratified by the stockholders on June 22, 2011.
Status of Operations and Management Action Plans In 2012 (2 nd phase of the integration), NN Group incurred consolidated net loss amounting to P=89.0 million (after non-controlling interest), which is 93.2% lower compared to the consolidated net loss reported in 2011. This net loss increased the deficit to P=1,591.6 million as of December 31, 2012. Despite the improvement in operations, and higher consolidated net cash inflow from operating activities of P=627.2 million in 2012 and P=625.6 million in 2011, 2GO remained in breach of the maximum debt to equity ratio, including the minimum DSCR and minimum current ratio. This, however, again did not affect the status of the loan because the creditor bank has issued a waiver on the breach of the loan covenants in its letters to 2GO dated December 28, 2012.
In 2013, NN Groups net loss after tax amounted to P=255.4 million from a loss of P=89.0 million in 2012. In June 2013, the Group refinanced its original long-term debt with counter-party bank with a new loan agreement having revised terms and conditions such as: (1) two years grace period, (2) with fixed and variable interest rate components that are based on market and (3) ballooned principal repayments in 2017 and 2018. With this, the Group was able to meet the minimum current ratio, maximum debt to equity ratio and minimum DSCR as required in the debt covenant.
In 2013, NNs shareholders infused $41.7 million (of which $28.3 million has been remitted in 2012) as additional capital to NN primarily to support working capital requirements and to pay off certain maturing obligations of the Group.
In 2014, the Groups net profit after tax increased by 116% to P569 million from P510 million for the same period last year owing largely to the transformation of the group into a total logistics enterprise from a generally shipping company. The Groups logistics arm has been rapidly expanding, further increasing its percentage to total revenues to 41% from 38% last year.
The Group has metamorphosed its business model into a complete supply chain solutions provider capitalizing on the strengths of its various business units. The Group can carry the lightest parcel to the heaviest equipment by land, by sea and by air, be it domestic or international. It will continue to undertake serious steps to further solidify our competitive position by rapidly expanding our logistics arm with the objective of increasing customer traffic and solidifying our leading position within the areas where we operate.
2. Summary of Significant Accounting and Financial Reporting Policies
Basis of Preparation The consolidated financial statements of the Group are prepared on a historical cost basis, except for quoted available-for-sale (AFS) investments which are measured at fair value. The consolidated financial statements are presented in Philippine peso (Peso), which is the Parent Companys functional and presentation currency. All amounts are presented to the nearest thousands, except when otherwise indicated.
The consolidated financial statements provide comparative information in respect of the previous period. In addition, the Group presents an additional consolidated balance sheet at the beginning of the earliest period presented when there is a retrospective application of an accounting policy, a retrospective restatement, or a reclassification of items in the consolidated financial statements. An - 3 -
2GO SEC Form 17-Q Second Quarter 2014 additional consolidated balance sheet as at January 1, 2012 is presented in the consolidated financial statements due to retrospective application of certain accounting policies (see Changes in Accounting Policies and Disclosures).
Statement of Compliance The consolidated financial statements of the Group are prepared in accordance with Philippine Financial Reporting Standards (PFRS).
Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PFRS, Philippine Accounting Standards (PAS) and Philippine Interpretations based on the Interpretations of the International Financial Reporting Standards Interpretation Committee (IFRIC) which were adopted as of January 1, 2013.
PFRS 10, Consolidated Financial Statements, replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standard Interpretations Committee (SIC) 12, Consolidation - Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10
require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27.
A reassessment of control was performed by the Company on all its subsidiaries, associates and joint ventures in accordance with the provisions of PFRS 10. Following the reassessment, the Company determined that there are no additional entities that need to be fully consolidated nor are there subsidiaries that need to be deconsolidated.
Amendments to PAS 27, Separate Financial Statements. As a consequence of the issuance of the new PFRS 10 and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in the separate financial statements. The adoption of the amended PAS 27 has no significant impact on the separate financial statements of the Company.
PFRS 11, Joint Arrangements, replaces PAS 31, Interests in Joint Ventures, and SIC 13, Jointly- controlled Entities - Non-monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method.
Interest in Joint Ventures The application of PFRS 11 affected the accounting for the Groups interests in KLN Holdings (KLN). As disclosed in Note 12, the Group entered into an InvestorsAgreement (Agreement) with a third-party to form KLN. Prior to transition to PFRS 11, KLN was classified as a jointly controlled entity and the Groups share of the assets, liabilities, revenue, income and expenses was proportionately consolidated in the consolidated financial statements. Upon adoption of PFRS 11, the Group has determined that its interest in KLN should be classified as a joint venture under PFRS 11 and it is, therefore, required to be accounted for using the equity method (see Note 12). The transition was applied retrospectively as required by PFRS 11 and the opening balances at January 1, 2012 and the comparative information for the years ended December 31, 2013 and 2012 have been restated. The effect of applying PFRS 11 on the Groups consolidated financial statements is as follows: - 4 -
2GO SEC Form 17-Q Second Quarter 2014
Consolidated Balance Sheets
December 31, 2012 January 1, 2012 (In Thousands) Increase (Decrease) in Assets Cash and cash equivalents (P=4,100) (P=12,741) Trade and other receivable (58,656) (45,753) Other current assets (2,233) (1,982) Property and equipment (2,811) (1,489) Investment in associates and joint ventures 23,052 20,428 Deferred income tax assets - net (1,352) (770) Total assets (P=46,100) (P=42,307) (In Thousands) Decrease in Liabilities Loans payable (P=4,900) P= Trade and other payables (39,388) (41,285) Accrued retirement benefits (1,812) (1,022) (P=46,100) (P=42,307)
Consolidated Statements of Income
December 31, 2012 January 1, 2012 (In Thousands) Impact on Profit or Loss Service fees P=219,105 P=183,053 Operating expenses (192,130) (148,642) Overhead expenses (22,467) (22,634) Other income (charges) 569 (449) Equity in net earnings of associates and joint ventures 2,624 7,934 Income before income tax 2,453 3,394 Provision for income tax (2,453) (3,394) Net income P= P=
Consolidated Statements of Cash Flows
December 31, 2012 January 1, 2012 (In Thousands) Impact on Cash Flows
Cash and cash equivalents at beginning of period (P=12,741) (P=2,667) Operating 10,949 (11,433) Investing 2,314 1,164 Financing (4,622) 195 Net effect on cash (P=4,100) (P=12,741) - 5 -
2GO SEC Form 17-Q Second Quarter 2014 The transition did not have a significant impact on the basic/diluted earnings per share for the years ended December 31, 2012 and 2011.
Interest in Joint Operations The Group also assessed its existing ownership in United South Dockhandlers, Inc. (USDI). The Group has a 48% interest in USDI. Prior to transition to PFRS 11, the Group considered USDI as an associate and accounted for its ownership in USDI under the equity method. Upon adoption of PFRS 11, the Group has determined that it has control over USDIs specific assets and liabilities. As a result, the assets and liabilities that were identified as being controlled by the Group, as well as the resulting revenues and expenses, were consolidated and such consolidation have been retrospectively recognized in the consolidated financial statements of the Group.
The effect of applying PFRS 11 on the Groups consolidated financial statements is as follows:
Consolidated Balance Sheets
December 31, 2012 January 1, 2012 (In Thousands) Increase (Decrease) in Assets Cash and cash equivalents P=1,959 P=6,251 Trade and other receivables 50,901 23,836 Inventories 446 109 Other current assets 6,601 3,775 Property and equipment 443 680 Investment in associates and joint ventures (22,909) (13,623) 37,441 21,028 Increase in Liabilities Trade and other payables 27,148 9,980 Accrued retirement benefits 1,041 28,189 9,980 Net Increase in Equity P=9,252 P=11,048 Equity attributable to: Parent company P=8,170 P=9,757 Non-controlling interest 1,082 1,291
Consolidated Statements of Income December 31 2012 2011 Impact on Profit or Loss (In Thousands) Service fees P=65,325 P=40,055 Operating expenses (43,589) (23,278) Overhead expenses (10,815) (9,206) Equity in net earnings of associates and joint ventures (9,286) (2,566) Net income P=1,635 P=5,005 Net income attributable to: Parent company P=1,443 P=4,420 Non-controlling interest 192 585 Increase in basic/diluted earnings per share 0.0005 0.0014
- 6 -
2GO SEC Form 17-Q Second Quarter 2014 Consolidated Statements of Cash Flows December 31 2012 2011 Impact on Statements of Cash Flows (In Thousands) Operating P=2,160 P=6,556 Investing (201) (305) Net effect on cash and cash equivalents P=1,959 P=6,251
PFRS 12, Disclosure of Interests in Other Entities, sets out the requirements for disclosures relating to an entitys interests in subsidiaries, joint arrangements, associates and structured entities. The requirements in PFRS 12 are more comprehensive than the previously existing disclosure requirements for subsidiaries (for example, where a subsidiary is controlled with less than a majority of voting rights).
The adoption of PFRS 12 affects disclosures only and has no impact on the Groups financial position or performance. The additional disclosures required are presented in Note 12 to the consolidated financial statements.
Amendments to PAS 28, Investments in Associates and Joint Ventures. As a consequence of the new PFRS 11 and PFRS 12, PAS 28, Investment in Associates, has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The adoption of this amendment has no impact on the Groups consolidated financial statements.
Amendments to PAS 19, Employee Benefits, requires all actuarial gains and losses for the defined benefits plan to be recognized in other comprehensive income (OCI) and unvested past service costs previously recognized over the average vesting period to be recognized immediately in the statement of income when incurred. Prior to adoption of the revised standard, the Group followed a systematic method that resulted in faster recognition of actuarial gains and losses, which were recognized in profit or loss in the period they occur. Further, past service cost was recognized as an expense on a straight-line basis over the average period until the benefits become vested. Upon adoption of the revised standard, the Group changed its accounting policy to recognize all actuarial gains and losses in OCI and all past service costs in the consolidated statement of income in the period they occur. In addition, the Revised PAS 19 replaced the interest cost and expected return on plan assets with the concept of net interest on defined benefit liability or asset, which is calculated by multiplying the net defined benefit liability or asset at the beginning of the year by the discount rate used to measure the defined benefit obligation, each at the beginning of the annual period. The revised standard also amended the definition of short-term employee benefits and requires employee benefits to be classified as short-term based on expected timing of settlement rather than the employees entitlement to the benefits. It also modifies the timing of recognition for termination benefits, where termination benefits are recognized at the earlier of when the offer cannot be withdrawn or when the related restructuring costs are recognized. The changes in the definition of short-term employee benefits did not have any impact to the Groups financial position and performance.
The opening balance sheet of the earliest comparative period presented (January 1, 2012) and the comparative figures have been restated accordingly. The effects of adoption on the consolidated financial statements follow: - 7 -
2GO SEC Form 17-Q Second Quarter 2014 Consolidated Balance Sheets December 31 January 1, 2013 2012 2012 (In Thousands) Increase (decrease) in: Accrued retirement benefits P=58,853 P=78,613 P=109,443 Deferred income tax assets -net (11,630) 23,716 32,833 (Forward) December 31 January 1, 2013 2012 2012 (In Thousands) Other comprehensive loss, net of deferred income tax effect P=91,884 P=74,420 P=81,322 Deficit (21,401) (19,523) (4,712)
Consolidated Statements of Comprehensive Income Years Ended December 31 2013 2012 2011 (In Thousands) Impact on profit or loss: Operating expenses (P=213) (P=4,228) (P=1,238) Terminal expenses (744) (6,069) (3,088) Overhead expenses (1,727) (10,862) (2,761) Income before income tax 2,684 21,159 7,087 Benefit from income tax 806 6,348 2,126 Increase in net income 1,878 14,811 4,961 Impact on other comprehensive loss:
Remeasurement gains (losses) on accrued retirement benefits (24,949) 9,860 (38,330) Income tax effect 7,485 (2,958) 11,499 Other comprehensive loss for the year, net of deferred income tax effect (17,464) 6,902 (26,831) Increase (decrease) in total comprehensive income (P=15,586) P=21,713 (P=21,870)
The transition did not have a significant impact on the consolidated statements of cash flows and earnings per share for the years ended December 31, 2012 and 2011.
Remeasurement losses on accrued retirement benefits are presented separately under other comprehensive loss. The Revised PAS 19 also requires more extensive disclosures which are presented in Note 28 to the consolidated financial statements.
PFRS 13, Fair Value Measurement, establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. PFRS 13 also requires additional disclosures.
As a result of the guidance in PFRS 13, the Group reassessed its policies for measuring fair values. The Group has assessed that the application of PFRS 13 did not materially impact its fair value measurement. Additional disclosures, where required, are provided in the individual notes relating to the assets and liabilities whose fair values were determined.
- 8 -
2GO SEC Form 17-Q Second Quarter 2014 PFRS 7, Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities, these amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set-off in accordance with PAS 32, Financial Instruments: Presentation and Disclosures. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period:
a) The gross amounts of those recognized financial assets and recognized financial liabilities; b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the consolidated balance sheet; c) The net amounts presented in the consolidated balance sheet; d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and ii. Amounts related to financial collateral (including cash collateral); and e) The net amount after deducting the amounts in (d) from the amounts in (c) above.
The amendment affects disclosures only and has no impact on the Groups financial position or performance.
Amendments to PAS 1, Financial Statement Presentation - Presentation of Items of Other Comprehensive Income, change the grouping of items presented in OCI. Items that could be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendments affect presentation only and therefore have no impact on the Groups financial position or performance.
Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine, applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine (production stripping costs) and provides guidance on the recognition of production stripping costs as an asset and measurement of the stripping activity asset. This interpretation is not relevant to the Group as the Group is not involved in any mining activities.
Amendments to PFRS 1, First-time Adoption of International Financial Reporting Standard- Government Loans, require first-time adopters to apply the requirements of PAS 20, Accounting for Government Grants and Disclosure of Government Assistance, prospectively to government loans existing at the date of transition of PFRS. However, entities may choose to apply the requirements of PAS 39, Financial Instruments: Recognition and Measurement, and PAS 20 to government loans restrospectively if the information needed to do so had been obtained at the time of initially accounting for those loans. These amendments are not relevant to the Group as the Group is not a first time adopter of PFRS.
Annual Improvements to PFRSs (2009-2011 cycle) The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively.
- 9 -
2GO SEC Form 17-Q Second Quarter 2014 PFRS 1, First-time Adoption of PFRS - Borrowing Costs, clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs inaccordance with its previous generally accepted accounting principle, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Cost. The amendment does not apply to the Group as it is not a first-time adopter of PFRS. PAS 1, Presentation of Financial Statements - Clarification of the Requirements for Comparative Information, clarifies the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The amendments affect disclosures only and have no impact on the Groups financial position or performance.
PAS 16, Property, Plant and Equipment - Classification of Servicing Equipment, clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment has no impact on thr Groups financial position or performance.
PAS 32, Financial Instruments: Presentation - Tax Effect of Distribution to Holders of Equity Instruments, clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes. The Group assessed that this amendment has no impact on its financial position or performance.
PAS 34, Interim Financial Reporting - Interim Financial Reporting and Segment Information for Total Assets and Liabilities, clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entitys previous annual financial statements for that reportable segment. The amendment affects the interim financial reporting disclosures only and has no impact on the Groups financial position or performance.
New Accounting Standards, Amendments and Interpretations to Existing Standards Effective Subsequent to December 31, 2013 . The Group will adopt the standards, interpretations and amendments enumerated below when these become effective. The Group continues to assess the impact of the following new and amended accounting standards and interpretations. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRSs and Philippine Interpretations to have significant impact on its consolidated financial statements. The relevant disclosures will be included in the notes to the consolidated financial statements when these become effective.
- 10 -
2GO SEC Form 17-Q Second Quarter 2014 Effective in 2014 Amendments to PFRS 10, PFRS 12 and PAS 27 - Investment Entities, provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under PFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment will be relevant to the Group since none of the entities in the Group will qualify as an investment entity under PFRS 10. Amendments to PAS 32, Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities, clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments will affect presentation only and will have no impact on the Groups financial position or performance.
Amendments to PAS 36, Impairment of Assets - Recoverable Amount Disclosures for Nonfinancial Assets, remove the unintended consequence of PFRS 13 on the disclosures required under PAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or cash-generating units (CGUs) for which impairment loss has been recognized or reversed during the period. The Group did not early adopt these amendments. These amendments will affect disclosures only and will have no impact on the Groups financial position or performance.
PAS 39, Financial Instruments: Recognition and Measurement - Novation of Derivatives and Continuation of Hedge Accounting, provides relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after January 1, 2014. The amendments are not expected to have an impact on the Groups financial position or performance.
Philippine Interpretation IFRIC 21, Levies, clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. The Group does not expect that IFRIC 21 will have a material financial impact on its future financial statements.
Effective in 2015 Amendments to PAS 19, Employee Benefits - Defined Benefit Plans: Employee Contributions, apply to contributions from employees or third parties to defined benefit plans. Contributions that are set out in the formal terms of the plan shall be accounted for as reductions to current service costs if they are linked to service or as part of the remeasurements of the net defined benefit asset or liability if they are not linked to service. Contributions that are discretionary shall be accounted for as reductions of current service cost upon payment of these contributions to the plans. The amendments will not have any significant impact on the financial statements of the Group as majority of its retirement plans are noncontributory. Further, the employee contributions from the contributory defined benefit plan is currently recognized as reduction against total retirement costs.
Annual Improvements to PFRSs (2010-2012 cycle) The Annual Improvements to PFRSs (2010-2012 cycle) contain non-urgent but necessary amendments to the following standards:
- 11 -
2GO SEC Form 17-Q Second Quarter 2014 PFRS 2, Share-based Payment - Definition of Vesting Condition, revised the definitions of vesting condition and market condition and added the definitions of performance condition and service condition to clarify various issues. This amendment does not apply to the Group as it has no share-based payments.
PFRS 3, Business Combinations - Accounting for Contingent Consideration in a Business Combination, clarifies that a contingent consideration that meets the definition of a financial instrument should be classified as a financial liability or as equity in accordance with PAS 32. Contingent consideration that is not classified as equity is subsequently measured at fair value through profit or loss whether or not it falls within the scope of PFRS 9 (or PAS 39, if PFRS 9 is not yet adopted). The Group shall consider this amendment for future business combinations.
PFRS 8, Operating Segments - Aggregation of Operating Segments and Reconciliation of the Total of the Reportable Segments Assets to the Entitys Assets, requires entities to disclose the judgment made by management in aggregating two or more operating segments. This disclosure should include a brief description of the operating segments that have been aggregated in this way and the economic indicators that have been assessed in determining that the aggregated operating segments share similar economic characteristics. The amendments also clarify that an entity shall provide reconciliations of the total of the reportable segments assets to the entitys assets if such amounts are regularly provided to the chief operating decision maker are applied retrospectively. The amendments will affect disclosures only and will have no impact on the Groups financial position or performance.
PFRS 13, Fair Value Measurement - Short-term Receivables and Payables, clarifies that short- term receivables and payables with no stated interest rates can be held at invoice amounts when the effect of discounting is immaterial. This amendment is effective immediately. The amendments will have no impact on the Groups financial position and performance.
PAS 16, Property, Plant and Equipment - Revaluation Method - Proportionate Restatement of Accumulated Depreciation, clarifies that, upon revaluation of an item of property, plant and equipment, the carrying amount of the asset shall be adjusted to the revalued amount, and the asset shall be treated in one of the following ways:
a. The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The accumulated depreciation at the date of revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account any accumulated impairment losses. b. The accumulated depreciation is eliminated against the gross carrying amount of the asset.
The amendments shall apply to all revaluation recognized in annual periods beginning on or after the date of initial application of this amendment and in the immediately preceding annual period. The amendment will have no impact on the Groups financial position or performance since the Group does not have any related revalued property, plant and equipment.
PAS 24, Related Party Disclosures - Key Management Personnel, clarifies that an entity is a related party of the reporting entity if the said entity, or any member of a group for which it is a part of, provides key management personnel services to the reporting entity or to the parent company of the reporting entity. The amendments also clarify that a reporting entity that obtains management personnel services from another entity (also referred to as management entity) is not required to disclose the compensation paid or payable by the management entity to its employees or directors. The reporting entity is required to disclose the amounts incurred for the - 12 -
2GO SEC Form 17-Q Second Quarter 2014 key management personnel services provided by a separate management entity. The amendments will affect disclosures only and will have no impact on the Groups financial position or performance.
PAS 38, Intangible Assets - Revaluation Method - Proportionate Restatement of Accumulated Amortization, clarifies that, upon revaluation of an intangible asset, the carrying amount of the asset shall be adjusted to the revalued amount, and the asset shall be treated in one of the following ways:
a. The gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying amount of the asset. The accumulated amortization at the date of revaluation is adjusted to equal the difference between the gross carrying amount and the carrying amount of the asset after taking into account any accumulated impairment losses. b. The accumulated amortization is eliminated against the gross carrying amount of the asset.
The amendments also clarify that the amount of the adjustment of the accumulated amortization should form part of the increase or decrease in the carrying amount accounted for in accordance with the standard. The amendments will have no impact on the Groups financial position or performance.
Annual Improvements to PFRSs (2011-2013 cycle) The Annual Improvements to PFRSs (2011-2013 cycle) contain non-urgent but necessary amendments to the following standards:
PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Meaning of Effective PFRSs, clarifies that an entity may choose to apply either a current standard or a new standard that is not yet mandatory, but that permits early application, provided either standard is applied consistently throughout the periods presented in the entitys first PFRS financial statements. This amendment is not applicable to the Group as it is not a first-time adopter of PFRS.
PFRS 3, Business Combinations - Scope Exceptions for Joint Arrangements, clarifies that PFRS 3 does not apply to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself. This amendment will not have any impact on the Groups financial position or performance.
PFRS 13, Fair Value Measurement - Portfolio Exception, clarifies that the portfolio exception in PFRS 13 can be applied to financial assets, financial liabilities and other contracts. The amendment has no significant impact on the Groups financial position or performance.
PAS 40, Investment Property, clarifies the interrelationship between PFRS 3 and PAS 40 when classifying property as investment property or owner-occupied property. The amendment stated that judgment is needed when determining whether the acquisition of investment property is the acquisition of an asset or a group of assets or a business combination within the scope of PFRS 3. This judgment is based on the guidance of PFRS 3. The amendment will have no significant impact on the Groups financial position or performance.
New Standard with No Mandatory Effective Date PFRS 9, Financial Instruments, as issued, reflects the first and third phases of the project to replace PAS 39 and applies to the classification and measurement of financial assets and liabilities and hedge accounting, respectively. Work on the second phase, which relate to - 13 -
2GO SEC Form 17-Q Second Quarter 2014 impairment of financial instruments, and the limited amendments to the classification and measurement model is still ongoing, with a view to replace PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through OCI or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For liabilities designated as at FVPL using the FVO, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change relating to the entitys own credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward to PFRS 9, including the embedded derivative bifurcation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Groups financial assets, but will potentially have no impact on the classification and measurement of financial liabilities.
On hedge accounting, PFRS 9 replaces the rules-based hedge accounting model of PAS 39 with a more principles-based approach. Changes include replacing the rules-based hedge effectiveness test with an objectives-based test that focuses on the economic relationship between the hedged item and the hedging instrument, and the effect of credit risk on that economic relationship; allowing risk components to be designated as the hedged item, not only for financial items, but also for nonfinancial items, provided that the risk component is separately identifiable and reliably measurable; and allowing the time value of an option, the forward element of a forward contract and any foreign currency basis spread to be excluded from the designation of a financial instrument as the hedging instrument and accounted for as costs of hedging. PFRS 9 also requires more extensive disclosures for hedge accounting.
PFRS 9 currently has no mandatory effective date. PFRS 9 may be applied before the completion of the limited amendments to the classification and measurement model and impairment methodology. The Group will not adopt the standard before the completion of the limited amendments and the second phase of the project. The Group shall conduct another impact evaluation in early 2014 using the consolidated financial statements for the year ended December 31, 2014.
Deferred Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The Philippine SEC and the Financial Reporting Standards Council (FRSC) have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. The adoption of the interpretation when it becomes effective will not have any impact on the consolidated financial statements of the Group.
- 14 -
2GO SEC Form 17-Q Second Quarter 2014 Basis of Consolidation The consolidated financial statements comprise the financial statements of the Parent Company and the following wholly-owned and majority-owned subsidiaries, all incorporated in the Philippines, as at December 31 of each year:
Percentage of ownership Nature of business 2013 2012 2011 Supercat Fast Ferry Corp. (SFFC) Transporting passenger 100.0 100.0 100.0 Special Container and Value Added Services, Inc. (SCVASI) (1) Transportation/logistics 100.0 100.0 2GO Express, Inc. (2GO Express) Transportation/logistics 100.0 100.0 100.0 2GO Logistics, Inc. (2GO Logistics) Transportation/logistics 100.0 100.0 100.0 Scanasia Overseas, Inc. (SOI)
Distribution 100.0 100.0 100.0 Hapag-Lloyd Philippines, Inc. (HLP) (2) Transportation/logistics 100.0 85.0 85.0 WRR Trucking Corporation (WTC)
Transportation 100.0 100.0 100.0 NN-ATS Logistics Management and Holding Co., Inc. (NALMHCI) (3) Holding and logistics management 100.0 100.0 100.0 J&A Services Corporation (JASC) Vessel support services 100.0 100.0 100.0 Red.Dot Corporation (RDC) Manpower services 100.0 100.0 100.0 North Harbor Tugs Corporation (NHTC) Tug assistance 58.9 58.9 58.9 Super Terminals, Inc. (STI) (4) Passenger terminal operator 50.0 50.0 50.0 Sungold Forwarding Corporation (SFC) Transportation/logistics 51.0 51.0 51.0 Supersail Services, Inc. (SSI) Manpower provider and vessel support services 100.0 100.0 100.0 Astir Engineering Works, Inc. (AEWI) (5) Engineering services 100.0 100.0 85.0 United South Dockhandlers Inc. (USDI) (6) Arrastre and Stevedoring 48.0 48.0 48.0 W G & A Supercommerce, Inc. (WSI) (7) Vessels hotel management 100.0 100.0 100.0 (1) SCVASI was incorporated on March 9, 2012 and started its commercial operation on January 1, 2013. (2) In 2013, 2GO Express acquired additional 15% ownership interest in HLP, thus, making HLP a 100%-owned subsidiary. (3) On November 22, 2011, NALMHCI, a wholly-owned subsidiary of 2GO, was incorporated to be the holding company of JASC, RDC, NHTC, STI, SFC and SSI effective December 1, 2011. (4) NALMHCI has control over STI since it has the power to cast the majority of votes at the BODs meeting and the power to govern the financial and reporting policies of STI. (5) In 2013, NN ownership in AEWI was transferred to NALMHCI. (6) In 2013, upon adoption of PFRS 11, USDI being a joint operation with 48% interest is now being consolidated (7) WSI ceased operations in February 2006.
The financial statements of the subsidiaries are prepared for the same reporting year as the Company using consistent accounting policies.
Subsidiaries are all entities over which the Group has control. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect that return through its power over the investee. Specifically, the Group controls an investee if and only if the Group has:
Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns
When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Groups voting rights and potential voting rights
- 15 -
2GO SEC Form 17-Q Second Quarter 2014 The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included or excluded in the consolidated financial statements from the date the Group gains control or until the date the Group ceases to control the subsidiary.
Non-controlling interest represents a portion of profit or loss and net assets of subsidiaries not held by the Group, directly or indirectly, and are presented separately in the consolidated statement of income and within the equity section in the consolidated balance sheet and consolidated statement of changes in equity, separately from the Companys equity. However, the Group must recognize in the consolidated balance sheet a financial liability (rather than equity) when it has an obligation to pay cash in the future (e.g., acquisition of non-controlling interest is required in the contract or regulation) to purchase the non-controllings shares, even if the payment of that cash is conditional on the option being exercised by the holder. The Group will reclassify the liability to equity if a put option expires unexercised.
Non-controlling interest shares in losses, even if the losses exceed the non-controlling equity interest in the subsidiary. Changes in the controlling ownership interest, i.e., acquisition of non-controlling interest or partial disposal of interest over a subsidiary that do not result in a loss of control, are accounted for as equity transactions.
Consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions that are recognized in assets, liabilities and equities, are eliminated in full on consolidation.
A change in ownership interest in a subsidiary without a loss of control is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:
Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any non-controlling interest Derecognizes the related other comprehensive income like cumulative translation differences, recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in profit or loss Reclassifies the parents share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities.
Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquirees identifiable net assets. Acquisition-related costs are expensed as incurred and are included in operating expenses.
- 16 -
2GO SEC Form 17-Q Second Quarter 2014 When the Group acquires a business, it assesses the financial assets and financial liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.
If the business combination is achieved in stages, the acquisition date fair value of the acquirers previously held equity interest in the acquiree is remeasured to fair value at the acquisition date through profit or loss.
Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration, which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in profit or loss or as a change to OCI. If the contingent consideration is not within the scope of PAS 39, it is measured in accordance with the appropriate PFRS. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity.
Goodwill acquired in a business combination is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interest, and any previous interest held, over the fair values of net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the Group reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the re-assessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Groups cash-generating units (CGU) that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill forms part of a CGU or a group of CGUs and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained.
When subsidiaries are sold, the difference between the selling price and the net assets plus any other comprehensive income, and fair value of retained interest is recognized in profit or loss.
Where there are business combinations in which all the combining entities within the Group are ultimately controlled by the same ultimate parties before and after the business combination and that the control is not transitory (business combinations under common control), the Group accounts for such business combinations under the acquisition method of accounting, if the transaction was deemed to have substance from the perspective of the reporting entity. In determining whether the business combination has substance, factors such as the underlying purpose of the business combination and the involvement of parties other than the combining entities such as the non- controlling interest, shall be considered.
- 17 -
2GO SEC Form 17-Q Second Quarter 2014 In cases where the business combination has no substance, the Group accounts for the transaction similar to a pooling of interests. The assets and liabilities of the acquired entities and that of the Company are reflected at their carrying values. Comparatives shall be restated to include balances and transactions as if the entities had been acquired at the beginning of the earliest period presented and as if the companies had always been combined.
Investments in Associates and Joint Ventures The following are the associates and joint ventures of the Group as at December 31, 2013 and 2012:
Effective percentage of Ownership Nature of Business 2013 2012 Associates: MCC Transport Philippines (MCCP) Container transportation 33.0% 33.0% Hansa-Meyer ATS Projects, Inc. (HATS)
Project logistics and consultancy 50.0% 50.0 % Joint Ventures: KLN Holdings (KLN) (1) Holding Company 78.4% 78.4% Kerry-ATS Logistics, Inc. (KALI) International freight and cargo forwarding 62.5% 62.5% (1) KLN is 78.4% owned by 2GO Express.
An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but has no control or joint control over those policies.
A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. A joint venture is a type of joint arrangement where the parties that have joint control of the arrangement and have rights over the net assets of the joint venture.
The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries.
Investments in associates and joint ventures (investee companies) are accounted for under the equity method of accounting. An investment is accounted for using the equity method from the day it becomes an associate or joint venture. On acquisition of investment, the excess of the cost of investment over the investors share in the net fair value of the investees identifiable assets, liabilities and contingent liabilities is accounted for as goodwill and included in the carrying amount of the investment and not amortized. Any excess of the investors share of the net fair value of the investees identifiable assets, liabilities and contingent liabilities over the cost of the investment is excluded from the carrying amount of the investment, and is instead included as income in the determination of the share in the earnings of the investees.
Under the equity method, the investments in the investee companies are carried in the consolidated balance sheet at cost plus post-acquisition changes in the Groups share in the net assets of the investee companies, less any impairment in values. The consolidated statement of income reflects the share of the results of the operations of the investee companies. The Groups share of post- acquisition movements in the investees equity reserves is recognized directly in equity. Profits and losses resulting from transactions between the Group and the investee companies are eliminated to the extent of the interest in the investee companies and for unrealized losses to the extent that there is no evidence of impairment of the asset transferred. Dividends received are treated as a reduction of the carrying value of the investment.
- 18 -
2GO SEC Form 17-Q Second Quarter 2014 The Group discontinues applying the equity method when their investments in investee companies are reduced to zero. Accordingly, additional losses are not recognized unless the Group has guaranteed certain obligations of the investee companies. When the investee companies subsequently report net income, the Group will resume applying the equity method but only after its share of that net income equals the share of net losses not recognized during the period the equity method was suspended.
The reporting dates of the investee companies and the Group are identical and the investee companies accounting policies conform to those used by the Group for like transactions and events in similar circumstances.
Upon loss of significant influence over the associate, the Group measures and recognizes any retaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retaining investment and proceeds from disposal is recognized in the consolidated statement of income.
Interest in a Joint Operation The Group has an interest in a joint operation which is a jointly controlled entity, whereby the joint venture partners have a contractual arrangement that establishes joint control over the economic activities of the entity. Upon adoption of PFRS 11, the assets, liabilities, revenues and expenses relating to its interest in the joint operation have been retrospectively recognized in the consolidated financial statements of the Group.
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, and are subject to an insignificant risk of change in value. Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a nonfinancial asset takes into account a market participants ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
- 19 -
2GO SEC Form 17-Q Second Quarter 2014 All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognized in the consolidated financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the assets or liability and the level of the fair value hierarchy.
Financial Instruments Initial recognition Financial assets and financial liabilities are recognized in the consolidated balance sheet when the Group becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way purchases or sales) are recognized on the trade date, i.e., the date that the Group commits to purchase or sell the asset.
Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). If part of consideration given or received is for something other than the financial instrument, the fair value of the financial instrument is estimated using a valuation technique. The initial measurement of financial instruments, except for those financial assets and liabilities at fair value through profit or loss (FVPL), includes transaction costs.
Classification of financial instruments On initial recognition, the Group classifies its financial assets in the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) investments and AFS investments. The Group also classifies its financial liabilities into FVPL and other financial liabilities. The classification depends on the purpose for which the investments are acquired and whether they are quoted in an active market. Management determines the classification of its financial assets and financial liabilities at initial recognition and, where allowed and appropriate, reevaluates such designation at the end of each reporting period.
Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends, gains and losses relating to a financial instrument or a component that is a financial liability are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity, net of any related income tax benefits.
The Group has no financial assets classified as FVPL and HTM investments.
- 20 -
2GO SEC Form 17-Q Second Quarter 2014 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, they are not entered into with the intention of immediate or short-term resale and are not designated as AFS investments or financial assets at FVPL. Loans and receivables are carried at amortized cost using the effective interest method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process. Loans and receivables are included in current assets if maturity is within 12 months from the end of reporting period.
As of June 30, 2014 and December 31, 2013, financial assets included under this classification are the Groups cash in banks, cash equivalents, trade and other receivables and refundable deposits (presented as part of Other noncurrent assets in the consolidated balance sheet).
AFS investments AFS investments are those non-derivative financial assets which are designated as such or do not qualify to be classified as financial assets designated at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS investments are measured at fair value with unrealized gains or losses recognized in the consolidated statement of comprehensive income and consolidated statement of changes in equity in the Unrealized gain or loss on AFS investments until the AFS investments is derecognized, at which time the cumulative gain or loss recorded in equity is recognized in profit or loss. Assets under this category are classified as current assets if expected to be realized within 12 months from the end of reporting period and as noncurrent assets if maturity date is more than a year from the end of reporting period.
As of June 30, 2014 and December 31, 2013, the Groups AFS investments include investments in quoted and unquoted shares of stock and club shares.
Other financial liabilities This classification pertains to financial liabilities that are not designated as at FVPL upon the inception of the liability. Included in this category are liabilities arising from operations or borrowings.
The financial liabilities are recognized initially at fair value and are subsequently carried at amortized cost, taking into account the impact of applying the effective interest method of amortization (or accretion) for any related premium (discount) and any directly attributable transaction costs.
As of June 30, 2014 and December 31, 2013, financial liabilities included in this classification are the Groups loans payable, trade and other payables, long-term debts, obligations under finance lease, restructured debts, redeemable preferred shares of a subsidiary and other noncurrent liabilities.
Classification of Financial Instruments between Debt and Equity Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest relating to a financial instrument or a component that is a financial liability is reported as expenses.
A financial instrument is classified as debt if it provides for a contractual obligation to:
deliver cash or another financial asset to another entity; or
- 21 -
2GO SEC Form 17-Q Second Quarter 2014 exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Group; or satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares.
If the Group does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.
The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.
Redeemable preferred shares (RPS) The component of the RPS that exhibits characteristics of a liability is recognized as a liability in the consolidated balance sheet, net of transaction costs. The corresponding dividends on those shares are charged as interest expense in profit or loss. On issuance of the RPS, the fair value of the liability component is determined using a market rate for an equivalent non-convertible bond and this amount is carried as a long term liability on the amortized cost basis until extinguished on conversion or redemption.
Day 1 Difference Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit and loss) in profit or loss unless it qualifies for recognition as some other type of asset. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 profit or loss amount.
Offsetting of Financial Instruments Financial assets and financial liabilities are offset and the net amount reported i n the consolidated balance sheet if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented at gross amounts in the consolidated balance sheet.
Derecognition of Financial Assets and Liabilities Financial asset A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized when:
the rights to receive cash flows from the asset have expired; or the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to recline 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 - 22 -
2GO SEC Form 17-Q Second Quarter 2014 retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Groups continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.
In such case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Financial liability A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired.
When 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 the end of each reporting period whether a financial asset or group of financial assets is impaired.
Loans and receivables For loans and receivables carried at amortized cost, the Group first assesses individually whether objective evidence of impairment exists for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.
If there is an objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. Interest income continues to be accrued on the reduced carrying amount based on the original effective interest rate of the financial asset. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realized or has been transferred to the Group. If, in a subsequent period, the amount of the impairment loss increases or decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is increased or decreased by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.
- 23 -
2GO SEC Form 17-Q Second Quarter 2014 Assets carried at cost If there is an objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.
AFS investments For AFS investments, the Group assesses at the end of each reporting period whether there is objective evidence that an investment or group of investment is impaired.
In the case of equity investments classified as AFS investments, objective evidence of impairment would include a significant or prolonged decline in the fair value of the investments below its cost. The Group treats significant generally as 20% or more and prolonged as greater than 12 months for quoted equity securities. Where there is evidence of impairment, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss) is removed from equity and recognized in profit or loss. Impairment losses on equity investments are not reversed through profit or loss. Increases in fair value after impairment are recognized in OCI.
In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of Interest income in profit or loss. If, in subsequent period, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through profit or loss.
Inventories Inventories are valued at the lower of cost and net realizable value (NRV). Cost comprises all cost of purchase and other costs incurred in bringing the inventories to their present location or condition. Cost is determined using weighted average method for trading goods, moving average method for materials, parts and supplies, flight equipment, expendable parts and supplies, and the first-in, first- out method for truck and trailer expendable parts, fuel, lubricants and spare parts. NRV of the trading goods is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. NRV of materials and supplies is the current replacement cost. An allowance for inventory obsolescence is provided for damaged goods based on analysis and physical inspection.
Asset Held for Sale and Discontinued Operation Assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Noncurrent assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify for recognition as a completed sale within 12 months from the date of classification.
Property and equipment once classified as held for sale are not depreciated or amortized. If there are changes to a plan of sale, and the criteria for the asset or disposal group to be classified as held for sale are no longer met, the Group ceases to classify the asset or disposal group as held for sale - 24 -
2GO SEC Form 17-Q Second Quarter 2014 and it shall be measured at the lower of: (a) its carrying amount before the asset was classified as held for sale adjusted for any depreciation, amortization or revaluations that would have been recognized had the asset not been classified as held for sale, and (b) its recoverable amount at the date of the subsequent decision not to sell.
The Group includes any required adjustment to the carrying amount of a noncurrent asset or disposal group that ceases to be classified as held for sale in profit or loss from continuing operations in the period in which the criteria for the asset or disposal group to be classified as held for sale are no longer met. The Group presents that adjustment in the same caption in profit or loss used to present a gain or loss recognized, if any.
In the consolidated statement of income of the reporting period, and of the comparable period of the previous year, income and expenses from discontinued operations are reported separately from normal income and expenses down to the level of profit after taxes, even when the Group retains a non-controlling interest in the asset after the sale. The resulting profit or loss (after taxes) is reported separately in profit or loss.
Property and Equipment Property and equipment, other than land, are carried at cost, less accumulated depreciation, amortization and impairment losses, if any. The initial cost of property and equipment consists of its purchase price and costs directly attributable to bringing the asset to its working condition for its intended use. When significant parts of property and equipment are required to be replaced in intervals, the Group recognizes such parts as individual assets with specific useful lives and depreciation, respectively. Land is carried at cost less accumulated impairment losses.
Subsequent expenditures relating to an item of property and equipment that have already been recognized are added to the carrying amount of the asset when the expenditure have resulted in an increase in future economic benefits, in excess of the originally assessed standard of performance of the existing asset, that will flow to the Group. Expenditures for repairs and maintenance are charged to the operations during the year in which they are incurred.
Drydocking costs, consisting mainly of engine overhaul, replacement of steel plate of the vessels hull and related expenditures, are capitalized as a separate component of Vessels in operations. When significant drydocking costs are incurred prior to the end of the amortization period, the remaining unamortized balance of the previous drydocking cost is charged against profit or loss.
Vessels under refurbishment, if any, include the acquisition cost of the vessels, the cost of ongoing refurbishments and other direct costs. Construction in progress represents structures under construction and is stated at cost. This includes cost of construction and other direct costs. Borrowing costs that are directly attributable to the refurbishment of vessels and construction of property and equipment are capitalized during the refurbishment and construction period. Vessels under refurbishment and construction in progress are not depreciated until such time the relevant assets are complete and available for use. Refurbishments of existing vessels are capitalized as part of vessel improvements and depreciated at the time the vessels are put back into operation.
Vessel on lay-over, if any, represents vessel for which drydocking has not been done pending availability of the necessary spare parts. Such vessels, included under the Property and equipment account in the consolidated balance sheet are stated at cost less accumulated depreciation and any impairment in value.
- 25 -
2GO SEC Form 17-Q Second Quarter 2014 Depreciation and amortization are computed using the straight-line method over the following estimated useful lives of the property and equipment:
Number of Years Vessels in operation, excluding drydocking costs and vessel equipment and improvements 15 - 30 Drydocking costs 2 - 5 Vessel equipment and improvements 3 - 5 Containers and reefer vans 5 - 10 Terminal and handling equipment 5 - 10 Furniture and other equipment 3 - 5 Land improvements 5 - 10 Buildings and warehouses 5 - 20 Transportation equipment 5 - 10 Leasehold improvements are amortized over their estimated useful lives of 5-20 years or the term of the lease, whichever is shorter. Flight equipment is depreciated based on the estimated number of flying hours.
Depreciation or amortization commences when an asset is in its location or condition capable of being operated in the manner intended by management. Depreciation or amortization ceases at the earlier of the date that the item is classified as held for sale in accordance with PFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations, and the date the asset is derecognized.
The assets residual values, useful lives and depreciation and amortization methods are reviewed at each reporting period, and adjusted prospectively if appropriate.
When property and equipment are sold or retired, their cost and accumulated depreciation and amortization and any allowance for impairment in value are eliminated from the accounts and any gain or loss resulting from their disposal is included in profit or loss. Fully depreciated assets are retained in the accounts until these are no longer in use.
Investment Property Investment property, consisting of a parcel of land of 2GO Express, is measured at cost less any impairment in value. The Group used the fair value of the land as the cost in the consolidated financial statements at the date the Company acquired 2GO Express.
Subsequent costs are included in the assets carrying amount only when it is probable that future economic benefits associated with the asset will flow to the Group and the cost of the item can be measured reliably.
Derecognition of an investment property will be triggered by a change in use or by sale or disposal. Gain or loss arising on disposal is calculated as the difference between any disposal proceeds and the carrying amount of the related asset, and is recognized in the consolidated statement of income. Transfers are made to investment property when, and only when, there is change in use, evidenced by cessation of owner-occupation, commencement of an operating lease to another party or completion of construction or development, transfers are made from investment property when, and only when, there is a change in used, evidenced by commencement of owner-occupation or commencement of development with a view to sale.
- 26 -
2GO SEC Form 17-Q Second Quarter 2014 Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of the acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is reflected in profit or loss in the year in which the expenditure is incurred.
The useful lives of intangible assets are assessed to be either finite or indefinite.
Software development costs Software development costs are initially recognized at cost. Following initial recognition, the software development costs are carried at cost less accumulated amortization and any accumulated impairment in value.
The software development costs is amortized on a straight-line basis over its estimated useful economic life of three to five years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization commences when the software development costs is available for use. The amortization period and the amortization method for the software development costs are reviewed at each reporting period. Changes in the estimated useful life is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense is recognized in profit or loss in the expense category consistent with the function of the software development costs.
Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually either individually or at the cash generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in profit or loss when the asset is derecognized.
Impairment of Nonfinancial Assets The Group assesses at the end of each reporting period whether there is an indication that nonfinancial asset may be impaired. If any such indication exists, or when annual impairment testing for nonfinancial asset is required, the Group makes an estimate of the assets recoverable amount. An assets estimated recoverable amount is the higher of an assets or CGUs fair value less costs of disposal and its value in use (VIU) 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. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing VIU, 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. In determining fair value less costs of disposal, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. Impairment losses of continuing operations are recognized in profit or loss in those expense categories consistent with the function of the impaired asset.
- 27 -
2GO SEC Form 17-Q Second Quarter 2014 A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation or amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation or amortization expense is adjusted in future periods to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
The Groups nonfinancial assets consist of creditable withholding taxes (CWTs), input value added tax (VAT), prepaid expenses, other current assets, assets held for sale, property and equipment, investment property, investments in associates and joint ventures, software development costs, deferred input VAT and retirement benefit asset.
Goodwill Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGU) to which the goodwill relates. Where the recoverable amount of CGU (or group of CGUs) is less than their carrying amount, an impairment loss is recognized immediately in profit or loss of the CGU (or the group of CGUs) to which goodwill has been allocated. Impairment losses relating to goodwill cannot be reversed in future periods.
Provisions and Contingencies Provisions are recognized when: (a) the Group has a present obligation (legal or constructive) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation.
Contingent liabilities are not recognized in the consolidated 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 consolidated financial statements but disclosed in the notes to consolidated financial statements when an inflow of economic benefits is probable.
Equity Share capital is measured at par value for all shares issued. When the Parent Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax.
Additional paid-in capital (APIC) is the difference between the proceeds and the par value when the shares are sold at a premium. Contributions received from shareholders are recorded at the fair value of the items received with the credit going to share capital and any excess to APIC.
Retained earnings (deficit) represents the cumulative balance of net income or loss, net of any dividend declaration and other capital adjustments.
Treasury shares are own equity instruments that are reacquired. Treasury shares are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issuance or cancellation of the Groups own equity instruments. Any difference between the - 28 -
2GO SEC Form 17-Q Second Quarter 2014 carrying amount and the consideration, if reissued, is recognized as APIC. Voting rights related to treasury shares are nullified for the Group and no dividends are allocated to them.
Other comprehensive income comprises items of income and expenses that are not recognized in profit or loss for the year. Other comprehensive income of the Group includes net changes in fair value of AFS investments, share in other comprehensive income of an associate and remeasurement gains (losses) on accrued retirement benefits.
Revenue Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable, excluding discounts, rebates, VAT or duties. The Group assesses its revenue arrangement against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements. The specific recognition criteria for each type of revenue are as follows:
Freight and passage revenues are recognized when the related services are rendered. Customer payments for services which have not yet been rendered are classified as unearned revenue under Trade and other payables in the consolidated balance sheet.
Service fees are recognized when the related services have been rendered. Service fees are also recognized when cargos are received by either shippers or consignee for export and import transactions. These amounts are presented, net of certain costs which are reimbursed by customers.
Revenue from sale of goods is recognized when the significant risks and rewards of ownership of the goods have passed to the buyer, which is upon delivery of the goods and acceptance of the buyer and the amount of revenue can be measured reliably.
Revenue from sale of food and beverage is recognized upon delivery and acceptance by customers.
Vessel lease revenues from short-term leasing arrangements are recognized in accordance with the terms of the lease agreements.
Manning and crewing services revenue is recognized upon embarkation of qualified ship crew based on agreed rates and when the corresponding training courses have been conducted.
Arrastre and stevedoring revenue is recognized when related services are rendered.
Management fee is recognized when the related services are rendered.
Commissions are recognized as revenue in accordance with the terms of the agreement with the principal and when the related services have been rendered.
Rental income arising from operating leases is recognized on a straight-line basis over the lease term.
Interest income is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. - 29 -
2GO SEC Form 17-Q Second Quarter 2014 Dividend income is recognized when the shareholders right to receive the payment is established.
Costs and Expenses Costs and expenses are recognized in profit or loss when decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably.
Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if any 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 and extension granted, unless the term of the 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.
When a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances give rise to the reassessment for scenarios (a), (c) or (d) and at the date of renewal or extension period for scenario (b).
The Group as a lessee Finance leases, which transfer to the Group substantially all the risks and rewards incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized directly in profit or loss.
Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.
Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in profit or loss on a straight-line basis over the lease term.
The Group as a lessor Leases where the Group does not transfer substantially all the risks and rewards of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized over the lease term on the same bases as rental income. Contingent rents are recognized as revenue in the period in which they are earned.
Borrowing Costs Borrowing costs are capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Capitalization of borrowing costs commences when the activities necessary to prepare the asset for intended use are in progress and expenditures and borrowing costs are being incurred. Borrowing costs are capitalized until the asset is available for their intended use. If the resulting carrying amount of the asset exceeds its recoverable amount, an impairment loss is - 30 -
2GO SEC Form 17-Q Second Quarter 2014 recognized. Borrowing costs include interest charges and other costs incurred in connection with the borrowing of funds, as well as exchange differences arising from foreign currency borrowings used to finance these projects, to the extent that they are regarded as an adjustment to interest costs. All other borrowing costs are expensed as incurred.
Retirement Benefits The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets (if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.
The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method.
Defined benefit costs comprise the following: - Service cost - Net interest on the net defined benefit liability or asset - Remeasurements of net defined benefit liability or asset
Service costs which include current service costs, past service costs and gains or losses on non- routine settlements are recognized as expense in profit or loss. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by independent qualified actuaries.
Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on government bonds to the net defined benefit liability or asset. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss.
Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in other comprehensive income in the period in which they arise. Remeasurements are not reclassified to profit or loss in subsequent periods.
Taxes Current income tax Current income tax assets and liabilities for the current periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted at the end of each reporting period, in the countries where the Group operates and generates taxable income.
Current income tax relating to items recognized directly in equity is recognized in equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
- 31 -
2GO SEC Form 17-Q Second Quarter 2014 Deferred income tax Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the financial reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax assets are recognized for deductible temporary differences, carryforward benefits of unused tax credits from excess of minimum corporate income tax (MCIT) over regular corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient future taxable profits will be available against which the deductible temporary differences, carryforward benefits of unused tax credits from excess of MCIT over RCIT and unused NOLCO can be utilized. Deferred income tax liabilities are recognized for all taxable temporary differences.
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 profit or loss nor taxable profit or loss.
Deferred income tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries, associates and interest in joint ventures. With respect to investments in other subsidiaries, associates and interests in joint ventures, deferred income tax liabilities are recognized except when 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 income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient future taxable income will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that sufficient future taxable profits will allow the deferred income tax asset to be recovered. It is probable that sufficient future taxable profits will be available against which a deductible temporary difference can be utilized when there are sufficient taxable temporary difference relating to the same taxation authority and the same taxable entity which are expected to reverse in the same period as the expected reversal of the deductible temporary difference. In such circumstances, the deferred income tax asset is recognized in the period in which the deductible temporary difference arises.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rate and tax laws that have been enacted or substantively enacted at the end of the reporting period.
Deferred income tax relating to items recognized in OCI or directly in equity is recognized in the consolidated statement of comprehensive income and consolidated statement of changes in equity and not in profit or loss.
Deferred income tax assets and liabilities are offset, if there is a legally enforceable right to offset current income tax assets against current income tax liabilities and they relate to income taxes levied by the same tax authority and the Group intends to settle its current income tax assets and liabilities on a net basis.
VAT Revenue, expenses, assets and liabilities are recognized, net of the amount of VAT, except where the VAT incurred as a purchase of assets or service is not recoverable from the tax authority, in - 32 -
2GO SEC Form 17-Q Second Quarter 2014 which case VAT is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable.
The net amount of VAT recoverable from, or payable to, the tax authority is included as part of Other current assets or Trade and other payables in the consolidated balance sheet.
Creditable withholding taxes Creditable withholding taxes (CWT), included in Other current assets account in the consolidated balance sheet, are amounts withheld from income subject to expanded withholding taxes (EWT). CWTs can be utilized as payment for income taxes provided that these are properly supported by certificates of creditable tax withheld at source subject to the rule on Philippine income taxation. CWTs which are expected to be utilized as payment for income taxes within 12 months are classified as current assets.
Foreign Currency-denominated Transactions and Translations The Groups consolidated financial statements are presented in Philippine Peso, which is the Companys functional and presentation currency. Each entity in the Group determines its own functional currency and items included in the consolidated financial statements of each entity are measured using that functional currency.
Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the end of the reporting period. All differences are taken to the profit or loss except for the exchange differences arising from translation of the balance sheets of subsidiaries and associates which are considered foreign entities into the presentation currency of the Company (Peso) at the closing exchange rate at the end of the reporting period and their statements of income translated using the weighted average exchange rate for the year. These are recognized in OCI until the disposal of the net investment, at which time they are recognized in profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in equity.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions and are not retranslated. 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.
Earnings Per Common Share Basic earnings per common share are determined by dividing net income by the weighted average number of common shares outstanding, after retroactive adjustment for any stock dividends and stock splits declared during the year.
Diluted earnings per common share amounts are calculated by dividing the net income for the year attributable to the ordinary equity holders of the parent by the weighted average number of common shares outstanding during the year plus the weighted average number of ordinary shares that would be issued for any outstanding common share equivalents. The Group has no potential dilutive common shares.
Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from retained earnings when approved by the respective shareholders of the Company and subsidiaries. Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period.
- 33 -
2GO SEC Form 17-Q Second Quarter 2014 Segment Reporting The Groups operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business segments is presented in Note 4.
Events After the Reporting Period Post year events that provide evidence of conditions that existed at balance sheet date are reflected in the consolidated financial statements. Subsequent events that are indicative of conditions that arose after reporting period are disclosed in the notes to consolidated financial statements when material.
3. Significant Judgments, Accounting Estimates and Assumptions
The preparation of the consolidated financial statements in compliance with PFRS requires management to make judgments, accounting estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The judgments, estimates and assumptions are based on managements evaluation of relevant facts and circumstances as of the date of the consolidated financial statements. Actual results could differ from these estimates and assumptions used.
Judgments In the process of applying the Groups accounting policies, management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the consolidated financial statements:
Determination of functional currency Based on the economic substance of the underlying circumstances relevant to the Group, the functional currency is determined to be the Peso. It is the currency that mainly influences the sale of services and the cost of rendering the services.
Determination if significant influence or control exists in an investee company Control is presumed to exist when the parent company owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Management has determined that despite only having 50% ownership in Super Terminal, Inc. (STI), it has control by virtue of its power to cast the majority votes at meetings of STIs BOD and control of the entity is by that BOD.
Classification of financial instruments The Group classifies a financial instrument, or its component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual agreement and the definitions of a financial asset, a financial liability or an equity instrument. The substance of a financial instrument, rather than its legal form, governs its classification in the consolidated balance sheet. The Groups classification of financial instruments is presented in Note 33.
Classification of leases - the Group as lessee The Group has entered into commercial property leases on its distribution warehouses, sales outlets, trucking facilities and administrative office locations. Based on an evaluation of the terms and conditions of the arrangements, management assessed that there is no transfer of - 34 -
2GO SEC Form 17-Q Second Quarter 2014 ownership of the properties by the end of the lease term and the lease term is not a major part of the economic life of the properties. Thus, the Group does not acquire all the significant risks and rewards of ownership of these properties and so account for it as operating leases.
The Group has also entered into a finance lease agreements covering certain property and equipment. The Group has determined that it bears substantially all the risks and benefits incidental to ownership of said properties based on the terms of the contracts (such as existence of bargain purchase option, present value of minimum lease payments amount to at least substantially all of the fair value of the leased asset). As at June 30, 2014 and December 31, 2013, the carrying amount of the property and equipment under finance lease amounted to P=129.3 million and P=135.4 million, respectively (see Note 20).
Classification of leases - the Group as lessor The Group has entered into short-term leases or chartering arrangements, which provide no transfer of ownership to the lessee. Based on an evaluation of the terms and conditions of the arrangements, the Group determined that it retains all the significant risks and rewards of ownership of these equipment and so accounts for it as operating leases.
Classification and valuation of assets held for sale Management assessed whether its existing vessels met the criteria as assets held based on the following: (1) the related assets are available for immediate sale; (2) preliminary negotiations with willing buyers were executed; and (3) the sale is expected to be completed within 12 months from the end of reporting period.
As at December 31, 2012, management assessed that the two of its existing vessels would remain as assets held for. In June 2013, the Group sold one of the vessels held for sale for total cash proceeds of P=85.3 million, which resulted to a loss amounting to P=51.0 million (see Note 10). In December 2013, the Group decided to put back into operation the remaining vessel held for sale to property and equipment due to certain incidents which happened in 2013 that have a significant impact on the passage and cargo capacity of the Group (see Note 13). Thus, as of December 31, 2013 and June 30, 2014 there were no vessels classified as held for sale.
Classification of redeemable preferred shares (RPS) The Group has RPS which is redeemable at any time, in whole or in part, within a period not exceeding 10 years from the date of issuance. If not redeemed, the RPS may be converted to a bond over prevailing treasury bill rate to be issued by the Company. The Company classified this RPS amounting to P=6.6 million and P=6.7 million as liability as of June 30, 2014 and December 31, 2013, respectively (see Note 21).
Evaluation of legal contingencies The Group is a party to certain lawsuits or claims arising from the ordinary course of business. The Groups management and legal counsel believe that the eventual liabilities under these lawsuits or claims, if any, will not have material effect on the consolidated financial statements. Accordingly, no provision for probable losses arising from legal contingencies was recognized in 2014 and 2013 (see Note 22).
Evaluation of events after the reporting period Management exercises judgment in determining whether an event, favorable or unfavorable occurring between the end of the reporting period and the date when the financial statements are authorized for issue, is an adjusting event or non-adjusting event. Adjusting events provide evidence of conditions that existed at the end of the reporting period whereas non-adjusting events are events that are indicative of conditions that arose after the reporting period. - 35 -
2GO SEC Form 17-Q Second Quarter 2014
Estimates and Assumptions The following are the key assumptions concerning the future and other key sources of estimation uncertainty, at the end of reporting period that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year:
Determination of fair value of financial instruments Where the fair value of financial assets and liabilities recorded in the consolidated balance sheet cannot be derived from active markets, they are determined using valuation techniques including the discounted cash flows model. The inputs to the models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing the fair values. The judgments include considerations of inputs such as liquidity risk and credit risk. Changes in assumptions about these factors could affect the reported fair value of financial instruments.
The carrying values and corresponding fair values of financial assets and financial liabilities and the manner in which fair values were determined are described in Note 34.
Estimation of allowance for doubtful receivables The Group maintains an allowance for impairment losses on trade and other receivables at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by the Group on the basis of factors that affect the collectability of the accounts. These factors include, but are not limited to, the length of the Groups relationship with debtors, their payment behavior and other known market factors. The Group reviews the age and status of the receivables, and identifies accounts that are to be provided with allowance on a continuous basis. The amount and timing of recorded expenses for any period would differ if the Group made different judgment or utilized different estimates. An increase in the Groups allowance for impairment losses would increase the Groups recorded expenses and decrease current assets.
The main considerations for impairment assessment include whether any payments are overdue or if there are any known difficulties in the cash flows of the counterparties. The Group assesses impairment in two levels: individually assessed allowances and collectively assessed allowances.
The Group determines allowance for each significant receivable on an individual basis. Among the items that the Group considers in assessing impairment is the inability to collect from the counterparty based on the contractual terms of the receivables. Receivables included in the specific assessment are the accounts that have been endorsed to the legal department, non-moving account receivables, accounts of defaulted agents and accounts from closed stations.
For collective assessment, allowances are assessed for receivables that are not individually significant and for individually significant receivables where there is no objective evidence of individual impairment. Impairment losses are estimated by taking into consideration the age of the receivables, past collection experience and other factors that may affect collectibility.
As at June 30, 2014 and December 31, 2013, trade and other receivables amounted to P=3,599.6 million and P=3,949.8 million, respectively, net of allowance for doubtful receivables of P=379.8 million and P=379.4 million, respectively (see Note 7).
Determination of NRV of inventories The Groups estimates of the NRV of inventories are based on the most reliable evidence available at the time the estimates are made, of the amount that the inventories are expected to be realized. These estimates consider the fluctuations of price or cost directly relating to events - 36 -
2GO SEC Form 17-Q Second Quarter 2014 occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period. A new assessment is made of NRV in each subsequent period. When the circumstances that previously caused inventories to be written down below cost no longer exist or when there is a clear evidence of an increase in NRV because of change in economic circumstances, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised NRV.
As at June 30, 2014 and December 31, 2013, the carrying values of inventories amounted to P=488.2 million and P=422.0 million, net of allowance for inventory obsolescence amounting to P=54.6 million and P=55.7 million, respectively (see Note 8).
Estimation of useful lives of property and equipment The useful life of each of the Groups item of property and equipment is estimated based on the period over which the asset is expected to be available for use until it is derecognized. Such estimation is based on a collective assessment of similar businesses, internal technical evaluation and experience with similar assets. The estimated useful life of each asset is reviewed periodically and updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the asset. It is possible, however, that future results of operations could be materially affected by changes in the amounts and timing of recorded expenses brought about by changes in the factors mentioned above. A reduction in the estimated useful life of any item of property and equipment would increase the recorded depreciation expenses and decrease the carrying value of property and equipment. There were no changes in the estimated useful lives of property and equipment in 2014 and 2013.
As at June 30, 2014 and December 31, 2013, property and equipment amounted to P=5,346.6 million and P=5,054.9 million, net of accumulated depreciation, amortization and impairment loss of P= 6,548.9 million and P=6,171.2, respectively (see Note 13).
Estimation of residual value of property and equipment The residual value of the Groups property and equipment is estimated based on the amount that would be obtained from disposal of the asset, after deducting estimated costs of disposal, if the assets are already of the age and in the condition expected at the end of its useful life. Such estimation is based on the prevailing price of scrap steel. The estimated residual value of each asset is reviewed periodically and updated if expectations differ from previous estimates due to changes in the prevailing price of scrap steel.
There is no change in the estimated residual value of property and equipment in 2014, 2013 and 2012.
Estimation of useful life of software development costs The estimated useful life used as a basis for amortizing software development costs was determined on the basis of managements assessment of the period within which the benefits of these costs are expected to be realized by the Group.
As at June 30, 2014 and December 31, 2013, the carrying value of software development costs amounted to P=16.7 million and P=15.4 million, respectively (see Note 15).
Impairment assessment of AFS investments The Group considers AFS investments as impaired when there has been a significant or prolonged decline in the fair value of such investments below their cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgment. The Group treats significant generally as 20% or more and prolonged as greater than 12 months. - 37 -
2GO SEC Form 17-Q Second Quarter 2014 In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and future cash flows and discount factors for unquoted equities in determining the amount to be impaired.
At June 30, 2014 and December 31, 2013, the carrying value of AFS investments amounted to P=6.9 million (see Note 11). No impairment loss was recognized in 2014, 2013 and 2012.
Estimation of probable losses on prepaid taxes The Group makes an estimate of the provision for probable losses on its CWT and input VAT. The aggregate carrying values of CWT, input VAT and deferred input VAT amounting to P=1,091.8 million and P=1,028.9 million as of June 30, 2014 and December 31, 2013, respectively, are fully recoverable (see Notes 9 and 16).
Assessment of impairment of nonfinancial assets and estimation of recoverable amount The Group assesses at the end of each reporting period whether there is any indication that the nonfinancial assets listed below may be impaired. If such indication exists, the entity shall estimate the recoverable amount of the asset, which is the higher of an assets fair value less costs of disposal and its value-in-use. In determining fair value less costs of disposal, an appropriate valuation model is used, which can be based on quoted prices or other available fair value indicators. In estimating the value-in-use, the Group is required to make an estimate of the expected future cash flows from the CGU and also to choose an appropriate discount rate in order to calculate the present value of those cash flows.
Determining the recoverable amounts of nonfinancial assets, which involves the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the use of estimates and assumptions that can materially affect the consolidated financial statements. Future events could indicate that these nonfinancial assets are impaired. Any resulting impairment loss could have a material adverse impact on the financial condition and results of operations of the Group.
The preparation of estimated future cash flows involves significant judgment and estimations. While the Group believes that its assumptions are appropriate and reasonable, significant changes in these assumptions may materially affect its assessment of recoverable values and may lead to future additional impairment changes under PFRS.
Assets that are subject to impairment testing when impairment indicators are present (such as obsolescence, physical damage, significant changes to the manner in which the asset is used, worse than expected economic performance, a drop in revenues or other external indicators) are as follows:
2014 2013 (In Thousands) Property and equipment - net (Note 13) P= 5,346,606 P=5,054,932 Investment property (Note 14) 9,763 9,763 Investments in associates (Note 12) 188,979 181,976 Software development costs (Note 15) 16,706 15,379
The Group recognized provision for impairment losses on property and equipment and assets held for sale amounting to P=234.8 million and P=223.6 million in 2013 and 2011, respectively (see Note 13). As of June 30, 2014, no impairment loss was recognized on property and equipment.
- 38 -
2GO SEC Form 17-Q Second Quarter 2014 As of June 30, 2014 and December 31, 2013, no impairment losses were recognized on the Groups investment property, investment in associates and joint ventures and software development costs as their recoverable values are higher than their carrying values.
As of June 30, 2014 and December 31, 2013, the Group did not recognize impairment on other nonfinancial assets.
Impairment of goodwill The Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the CGUs to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the CGU and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The significant assumptions used in the estimation of the recoverable amount of goodwill are described in Note 5.
The carrying amount of goodwill as of June 30, 2014 and December 31, 2013 amounted to P=250.5 million (see Note 5).
Estimation of retirement benefits costs and obligation The determination of the obligation and cost for pension and other retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions were described in Note 28 and include among others, discount rate and rate of compensation increase. While it is believed that the Groups assumptions are reasonable and appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the Groups pension and other retirement obligations.
The discount is determined based on the market prices prevailing on that date, applicable to the period over which the obligation is to be settled.
As of June 30, 2014 and December 31, 2013, the Groups pension asset amounted to P=2.7 million and P=1.4 million while the Groups accrued retirement benefits amounted to P=161.7 million and P= 167.2 million, respectively (see Notes 16 and 28).
Recognition of deferred income tax assets The carrying amount of deferred income tax assets is reviewed at the end of each reporting period
As of December 31, 2013 and 2012, the Group has recognized deferred income tax assets on its temporary differences, carryforward benefits of NOLCO and excess MCIT amounting to P=481.9 million and P=824.1 million, respectively (see Note 29). Tax effect of the temporary differences and carryforward benefits of unused NOLCO and MCIT for which no deferred income tax assets were recognized amounted to P=454.4 million and P=366.5 million as of December 31, 2013 and 2012, respectively (see Note 29).
4. Operating Segment Information
Operating segments are components of the Group: (a) that engage in business activities from which they may earn revenue and incur expenses (including revenues and expenses relating to transactions with other components of the Group); (b) whose operating results are regularly reviewed by the Groups BOD to make decisions about resources to be allocated to the segment and assess its performance; and (c) for which discrete financial information is available. The Groups Chief Operation Decision Maker is the Parent Companys BOD.
- 39 -
2GO SEC Form 17-Q Second Quarter 2014 For purposes of management reporting, the Group is organized into business units based on their products and services. The Group has the following segments:
The shipping segment renders passage transportation and cargo freight services. The non-shipping segment provides logistics services and supply chain management.
The Groups BOD regularly reviews the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements.
The Group has only one geographical segment as all its assets are located in the Philippines. The Group operates and devices principally all its revenue from domestic operations. Thus, geographical business information is not required.
Transfer prices between operating segments are on an arms length basis in a manner similar to transactions with third parties. Segment revenue includes transfer of goods and services between operating segments. Such transfers are eliminated in the consolidation. Further, there were no revenue transactions with a single customer that accounts for 10% or more of total revenue.
Further, the measurement of the segments is the same as those described in the summary of significant accounting and financial reporting policies, except for the land property of 2GO Express, which is carried at cost in the Companys consolidated financial statements but was measured to fair value in the NNs consolidated financial statements at the date of the business combination of the Company and NN.
Segment revenue, expenses, results, assets, liabilities and other information about the business segments follows:
2014 Shipping Non-shipping Eliminations/ adjustments Consolidated balances (I n Thousands) Revenues P= 4,914,799 P= 2,864,016 (P=532,942) P= 7,245,873 Costs and Expenses Operating 3,382,236 1,339,614 (253,623) 4,468,227 Terminal 778,969 (150,929) 628,040 Cost of goods sold 924,857 924,857 Overhead 343,184 229,687 (103,389) 469,482 Total Cost and Expenses 4,504,389 2,494,158 (507,942) 6,490,605 Operating income (loss) before interest and others 662,707 104,625 (12,063) 755,268 Interest and financing charges (166,352) (14,868) 20,387 (160,833) Others net 37,146 21,161 (32,451) 25,856 Income before income tax 534,203 110,215 (24,127) 620,291 Provision for income tax 25,152 26,169 51,322 Segment profit (loss) P= 509,051 P= 84,046 (P=24,127) P= 568,970 Segment assets P= 11,761,316 P= 3,472,420 (P=2,416,065) P= 12,817,670 Segment liabilities (8,475,370) (2,663,609) 1,970,144 (9,168,835) Other information: Depreciation and amortization 393,894 29,568 423,462 Investments in associates and joint ventures 119,250 69,729 188,979 Equity in net earnings of associates and joint ventures 7,003 7,003
- 40 -
2GO SEC Form 17-Q Second Quarter 2014 2013 Shipping Non-shipping Eliminations/ adjustments Consolidated balances (In Thousands) Revenues P=8,556,276 P=6,103,731 (P=1,286,814) P=13,373,193 Operating Costs and Expenses Operating 6,174,827 3,523,627 (1,124,313) 8,574,141 Terminal 1,401,229 1,472 (45,842) 1,356,859 Cost of goods sold 1,720,991 1,720,991 Overhead 777,967 569,625 (116,484) 1,231,108 Total Cost and Expenses 8,354,023 5,815,715 (1,286,639) 12,883,099 Operating income (loss) before interest and others 202,253 288,016 (175) 490,094 Interest and financing charges (364,728) (53,721) 49,435 (369,014) Others net 573,688 84,116 (66,111) 591,693 Income before income tax 411,213 318,411 (16,851) 712,773 Provision for income tax 418,076 67,616 485,692 Segment profit (loss) (P=6,863) P=250,795 (P=16,851) P=227,081 Segment assets P=11,201,978 P=3,560,781 (P=2,240,855) P=12,521,904 Segment liabilities (8,777,183) (2,543,062) 1,881,357 (9,438,888) Other information: Depreciation and amortization 966,167 76,064 (5,640) 1,036,591 Reversal of vessel impairment loss 60,606 60,606 Investments in associates and joint ventures 16,500 62,473 103,004 181,977 Equity in net earnings of associates and joint ventures 32,427 12,419 44,846
2012 (As restated, Note 2) Shipping Non-shipping Eliminations/ adjustments Consolidated balances (In Thousands) Revenues P=9,001,320 P=5,038,263 (P=385,952) P=13,653,631 Operating Costs and Expenses Operating 7,377,773 2,519,046 (298,711) 9,598,108 Terminal 1,112,223 1,551 (48,009) 1,065,765 Cost of goods sold 1,761,564 1,761,564 Overhead 723,596 422,221 (39,111) 1,106,706 Total Cost and Expenses 9,213,592 4,704,382 (385,831) 13,532,143 Operating income (loss) before interest and others (212,272) 333,881 (121) 121,488 Interest and financing charges (403,949) (46,027) 49,504 (400,472) Others net 172,130 33,230 (24,232) 181,128 Income (loss) before income tax (444,091) 321,084 25,151 (97,856) Provision for income tax 175,047 82,852 257,899 Segment profit (loss) (P=619,138) P=238,232 P=25,151 (P=355,755) Segment assets P=10,124,742 P=3,003,620 (P=1,833,423) P=11,294,939 Segment liabilities (7,691,263) (2,170,596) 1,487,645 (8,374,214) Other information: Depreciation and amortization 861,888 62,889 924,777 Investments in associates and joint ventures 16,500 55,827 68,188 140,515 Equity in net earnings of associates and joint ventures 28,713 8,981 37,694
- 41 -
2GO SEC Form 17-Q Second Quarter 2014 5. Business Combinations
Acquisition of SOI and Impairment Testing of Goodwill On June 3, 2008, 2GO Express acquired 100% ownership in SOI in line with the Groups business strategy to provide total supply chain solutions to clients and to further improve the effectiveness and efficiency of its delivery services. Goodwill resulting from this acquisition amounted to P=250.5 million.
Impairment Testing of Goodwill The amount of goodwill acquired from the acquisition of SOI has been attributed to CGU. The recoverable amount of goodwill has been determined based on a VIU calculation using cash flow projections based on financial budgets approved by senior management covering a five-year period. The discount rate applied to cash flow projections is 11.1% and 10.2% in 2013 and 2012. Cash flows beyond the five-year period are extrapolated using a zero percent growth rate.
Key assumptions used in value in use calculations The following describes each key assumption on which management has based its cash flow projections to undertake impairment testing of goodwill.
Budgeted EBITDA Budgeted EBITDA has been based on past experience adjusted for the following:
Revenue growth rate. Management expects a 13% increase in revenue in 2014 and in subsequent years. The expected growth is based on managements strategic plan to expand its supply chain operations. Variable expenses. Management expects variable expenses to increase by 13% in 2014 and subsequent years. Fixed operating expenses. Management expects an increase in fixed operating expenses of 15% in 2014 and 9% to 10% increase in subsequent years. Foreign exchange rates. The assumption used to determine foreign exchange rate is a fluctuating Peso exchange rate of P=43.0 to a dollar starting 2013 until the fifth year. Materials price inflation. The assumption used to determine the value assigned to the materials price inflation is 5.00%, which then increased by 0.20% on the second year, another increase of 0.40% on the third year and remains steady until the fifth year. The starting point of 2014 is consistent with external information sources.
Budgeted capital expenditure Budgeted capital expenditure is based on managements plan to expand the Groups supply chain segment.
Sensitivity to changes in assumptions Other than as disclosed above, management believes that any reasonably possible change in any of the above key assumptions would not cause the carrying value of any CGU to exceed its recoverable amount.
As at June 30, 2014 and December 31, 2013, 2012, the Group has not recognized any impairment in goodwill on SOI.
- 42 -
2GO SEC Form 17-Q Second Quarter 2014 6. Cash and Cash Equivalents
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Cash on hand and in banks P=735,776 P=869,215 Cash equivalents 201,595 49,430 P=937,371 P=918,645
Cash in banks earns interest at the respective bank deposit rates. Cash equivalents are made for varying periods of up to three months depending on the immediate cash requirements of the Group, and earn interest at the respective short-term investment rates.
Total interest income earned by the Group from cash in banks and cash equivalents amounted to P=0.5 million in 2014, P=1.8 million in 2013, and P=5.5 million in 2012 (see Note 25).
7. Trade and Other Receivables
March 2014 (Unaudited) December 2013 (Audited) (In Thousands) Trade (Note 23): Freight P= 1,607,965 P=1,403,534 Passage 42,900 46,037 Service fees 517,709 586,874 Distribution 291,867 281,738 Others 564,428 503,068 Nontrade 568,298 573,847 Insurance and other claims (Note 13) 354,781 908,358 Advances to officers and employees 31,432 25,746 3,979,380 4,329,202 Less allowance for doubtful receivables 379,771 379,383 P= 3,599,608 P=3,949,819
a. Trade receivables are non-interest bearing and are normally on 30 days term.
b. Nontrade receivables also include advances to supplier, passage bonds and receivable from trustee fund. These receivables are non-interest bearing and payable on demand.
c. Insurance and other claims receivables pertain to the Groups claims for reimbursement of losses against insurance coverage for hull and machinery, spare parts, cargo, and personal accidents. In 2013, the Group recognized recovery from insurance claims receivables relating to the sunk and damaged vessels amounting to P=943.3 million, of which P=559.3 million was collected as of June 30, 2014 (see Note 13).
d. Freight and passage receivables of the NN Group amounting to P=1,706.4 million and P=1,589.5 million as of December 31, 2013 and 2012, respectively, were assigned to secure the long-term debts (see Note 19).
e. Trade and other receivables that are individually determined to be impaired at the end of reporting period relate to debtors with significant financial difficulties and who have defaulted - 43 -
2GO SEC Form 17-Q Second Quarter 2014 on payments and whose accounts are under dispute and legal proceedings. These receivables are not secured by any collateral or credit enhancements.
The following tables set out the rollforward of the allowance for doubtful receivables as follows:
June 2014
Trade Nontrade Insurance and other claims Total Freight Service fees Distribution Others (In Thousands) Beginning P= 175,643 P= 117,907 P=15,344 P=8,037 P=11,077 P=51,375 P=379,383 Provisions (Note 25) (46) 508 (80) 6 388 Accounts written off / reclassifications Ending P= 175,597 P= 117,907 P=15,344 P= 8,545 P= 10,997 P= 51,381 P=379,771
December 2013
Trade Nontrade Insurance and other claims Total Freight Service fees Distribution Others (In Thousands) Beginning P= 126,086 P= 114,396 P=15,344 4,768 P=6,665 P=51,375 P=318,634 Provisions (Note 25) 49,557 3,511 3,461 4,431 60,960 Accounts written off / reclassifications (192) (19) (211) Ending P= 175,643 P=117,907 P=15,344 P=8,037 P=11,077 P=51,375 P=379,383
The following table sets out the analysis of collective and individual impairment of trade and other receivables:
2014 2013
Collectively impaired Individually impaired Total Collectively impaired Individually impaired Total (In Thousands) Trade P= 20,663 P= 296,489 P= 317,152 P=48,901 P=268,030 P=316,931 Nontrade 10,997 10,997 11,077 11,077 Insurance and other claims 51,381 51,381 51,375 51,375 P= 20,663 P= 358,947 P= 379,530 P=48,901 P=330,482 P=379,383
8. Inventories
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) At NRV: Trading goods P= 211,792 P=194,026 Materials, parts and supplies 140,006 102,761 At cost - fuel, oil and lubricants 136,398 125,170 P= 488,195 P=421,957
The allowance for inventory obsolescence as at June 30, 2014 and December 31, 2013 amounted to P=54.6 million and P=55.7 million, respectively.
The cost of inventories recognized as Cost of goods sold in the consolidated statements of income pertains to the trading goods sold by the non-shipping segment and food and beverages sold by the - 44 -
2GO SEC Form 17-Q Second Quarter 2014 shipping segment totaling to P=924.9 million in June 2014 and P=1,721.0 million in December 2013 (see Note 25).
9. Other Current Assets
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) CWT P= 911,877 P=881,693 Prepaid expenses 250,582 107,274 Input VAT 90,701 38,304 Others 42,213 27,138 P= 1,295,374 P=1,054,409
a. Outstanding CWT pertains mainly to the amounts withheld from income derived from freight, sale of goods and service fees for logistics and other services. The CWTs can be applied against any income tax liability of a company in the Group to which the CWTs relate. Others pertain to current portion of recoverable deposit.
b. Prepaid expenses include prepaid insurance and prepaid taxes.
10. Assets Held for Sale
In December 2011, in line with the Groups integration and vessels route rationalization, the Groups BOD approved the sale of five of the Groups vessels within the next 12 months. Accordingly, the net carrying values of these vessels amounting to P=692.6 million were reclassified from property and equipment to assets held for sale in the 2011 consolidated balance sheet. In 2011, the Group recognized impairment loss amounting to P=223.6 million, representing the excess of carrying value over the fair value less cost to sell of the vessels. The recoverable values of the assets held for sale as at December 31, 2011 are based from quotations obtained from prospective buyers, net of estimated costs to sell.
On June 2, 2012, the Group sold two of the five vessels held for sale and the related spare parts, fuel and lubricants inventories on board, for a total cash proceeds amounting to P=152.0 million which resulted to loss amounting to P=201.7 million (included in Others - net in the consolidated statement of income, see Note 26).
In December 2012, the Group reclassified one vessel from assets held for sale to property and equipment as management decided to use the vessel in consideration of the change in the Groups operational requirements which would increase the vessels utilization. Consequently, the Group assessed that the vessel will be recovered through continuing use rather than through sale. The Group recorded depreciation of P=16.8 million as if the Group had not classified the vessel as assets held for sale.
As of December 31, 2012, the recoverable values of the remaining two vessels classified as assets held for sale amounting to P=359.2 million approximate the assets fair values less cost to sell which are based from quotations obtained from prospective buyers, net of estimated costs to sell.
In June 2013, the Group sold one of its remaining vessels held for sale for total cash proceeds of P=85.3 million and which resulted to a loss amounting to P=51.0 million (see Note 26). - 45 -
2GO SEC Form 17-Q Second Quarter 2014 In December 2013, the Group reclassified the remaining vessel from assets held for sale to property and equipment in consideration of the change in the Groups operations requirements which was significantly affected by the incidents on the damaged and sunken vessels in 2013. Consequently, the Group assessed that the vessel will be recognized through continuing use rather than through sale. The Group recorded depreciation of P=131.6 million as if the Group had not classified the vessel as asset held for sale. Further, the Group reversed a portion of the previously recognized impairment loss amounting to P=73.5 million on the basis that the value in use of the vessel is higher than its carrying value as if it was not previously reclassified to assets held for sale.
11. AFS Investments
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Unquoted equity investments - at cost P=6,267 P=6,267 Quoted equity investments - listed shares of stocks 640 640 P=6,907 P=6,907
a. Listed shares of stocks are carried at market value. Unrealized gains or losses on AFS investments are recognized in the consolidated statements of comprehensive income and included in the Equity section of the consolidated balance sheets.
b. Unquoted shares of stocks pertain to fixed number of shares that are subject to mandatory redemption every year.
c. In 2011, the Group recognized realized gain on sale of these AFS investments amounting to P=17.7 million (see Note 26).
12. Investments in Associates and Joint Ventures
The Group has the power to participate in the financial and operating policy decisions in MCCP and HATS, which does not constitute control or joint control. The Group also has interest in KLN and KALI, which are joint ventures.
The Groups investments in its associates and joint ventures are accounted for using equity method of accounting as of:
Details of investment in associates and joint ventures are as follows: - 46 -
2GO SEC Form 17-Q Second Quarter 2014
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Acquisition - at beginning of year P=28,175 P=28,175 Accumulated equity in net earnings: Balances at beginning of year 148,757 109,520 Equity in net earnings during the year 7,003 44,846 Dividends received (5,609) Balances at end of year 155,759 148,757 Share in remeasurement loss on retirement benefits of associates and joint ventures (249) (249) Share in cumulative translation adjustment of associates 5,294 5,294 P= 188,979 P=181,977
Associates In 2011, the Group sold its investment in Catena Security, Inc., an associate, for a total cash consideration of P=19.2 million resulting to a gain on disposal of investment amounting to P=2.9 million, included under Others - net in the consolidated statements of income (see Note 26).
Joint Ventures On March 18, 2009, 2GO Express and KLN Investments Holdings Philippines, Inc. (KLN Investments) formed KLN Logistics Holdings Philippines, Inc. (KLN Holdings), a joint venture. In accordance with the Joint Venture Agreement, 2GO Express and KLN Investments (the venturers) will hold ownership interests of 78.4% and 21.6%, respectively, in KLN Holdings. However, the venturers exercise joint control over the financial and operating policies of KLN Holdings.
On March 30, 2009, KLN Holdings and KLN Investments formed another joint venture entity, Kerry-ATS Logistics, Inc. (KALI) to engage in the business of international freight and cargo forwarding. In accordance with the Joint Venture Agreement, KLN Holdings and KLN Investments will hold 62.5% and 37.5% interest in KALI, respectively, thus giving the Group a 49.0% indirect ownership interest in KALI.
Summarized financial information of the associates and joint ventures, based on their financial statements, the reconciliation with the carrying amount of the investment in the consolidated financial statements are set out below.
2013 Associates Joint Ventures MCCP HATS KLN/KALI Total (In Thousands) Current assets P=188,080 P=128,129 160,906 P=477,115 Noncurrent assets 414,963 7,084 9,162 431,209 Current liabilities 311,674 81,198 108,953 501,825 Noncurrent liabilities 6,691 1,296 4,642 12,629 Equity 284,678 52,719 56,473 393,870 Revenue 1,254,268 348,907 591,976 2,195,151 Net income 98,264 9,961 15,934 124,159 Group share of net income for the year 32,427 4,693 7,726 44,846
- 47 -
2GO SEC Form 17-Q Second Quarter 2014
2012 Associates Joint Ventures MCCP HATS KLN/KALI Total (In Thousands) Current assets P=397,089 P=127,379 P=64,989 P=589,457 Noncurrent assets 529,856 8,753 4,163 542,772 Current liabilities 473,288 77,977 44,288 595,553 Noncurrent liabilities 258,916 8,314 1,812 269,042 Equity 194,741 49,841 23,052 267,634 Revenue 1,197,558 314,489 219,105 1,731,152 Net income 86,752 13,493 2,624 102,869 Group share of net income for the year 28,628 6,488 2,578 37,694
- 48 -
2GO SEC Form 17-Q Second Quarter 2014 13. Property and Equipment
June 30, 2014
Vessels in Operation (Notes 19 and 20) Containers and Reefer Vans (Note 20) Terminal and Handling Equipment Flight Equipment Furniture and Other Equipment Land Improvements Buildings and Warehouses Transportation Equipment Leasehold Improvements
Vessels in Operation (Notes 19 and 20) Containers and Reefer Vans (Note 20) Terminal and Handling Equipment Flight Equipment Furniture and Other Equipment Land Improvements Buildings and Warehouses Transportation Equipment Leasehold Improvements Construction in Progress Total (In Thousands) Cost Beginning P=6,160,707 P=1,529,443 P=1,289,930 P=4,999 P=771,929 P=410,685 P=261,470 P=103,709 P=365,773 P=49,042 P=10,947,687 Additions 1,357,487 73,954 16,769 37,922 8,250 10,523 199,826 28,395 54,654 1,787,780 Disposals (1,149,283) (20,524) (50,159) (25,666) (219) (13,597) (2,525) (1,261,973) Retirements/reclassifications (1,205,301) 4,138 (4,999) 1,716 (3,349) 2,507 (1,205,288) Reclassification from assets held for sale (Note 10) 1,037,858 (79,942) 957,916 Ending 6,201,468 1,582,873 1,260,678 785,901 418,935 268,425 289,938 394,150 23,754 11,226,122 Accumulated Depreciation and Amortization Beginning 2,499,697 1,326,051 1,203,895 4,781 679,654 104,790 190,255 65,538 295,720 6,370,381 Depreciation and amortization (Note 25) 849,929 25,108 43,542 39,161 7,852 17,349 30,611 23,039 1,036,591 Disposals (808,995) (19,446) (50,157) (26,458) (113) (10,834) (2,410) (918,413) Retirements/Reclassifications (1,205,301) 4,053 (4,781) 1,015 (359) 82 (1,205,291) Reclassification from assets held for sale (Note 10) 653,161 653,161 Impairment for the year 234,761 234,761 Ending 2,223,252 1,331,713 1,201,333 693,372 112,642 207,132 85,315 316,431 6,171,190 Net Book Value P=3,978,216 P=251,160 P=59,345 P= P=92,529 P=306,293 P=61,293 P=204,623 P=77,719 P=23,754 P=5,054,932 - 49 -
2GO SEC Form 17-Q Second Quarter 2014 Noncash additions - property and equipment under finance lease Vessels in operations, containers and reefer vans, include units acquired under finance lease arrangements (see Note 20). In June 30, 2014 and December 31, 2013, noncash additions include costs of those leased assets amounting to P=18.5 million and P=90.9 million, respectively. The related depreciation of the leased containers amounting to P=12.1 million in 2013, P=10.0 million in 2012 and P=16.3 million in 2011 were computed on the basis of the Groups depreciation policy for owned assets.
Capitalization of drydocking costs Vessels in operation also include capitalized drydocking costs incurred amounting to P=182.8 million and P=733.8 million for the four vessels drydocked in June 30, 2014 and December 31, 2013, respectively. No drydrocking cost for capitalization was incurred in 2011. The related depreciable life of drydocking costs ranges from two to five years.
Disposal, retirement and impairment of property and equipment In 2013 and 2012, the Group disposed certain property and equipment for net cash proceeds of P=4.8 million and P=160.8 million resulting to net gains of P=99.0 million in 2012 (see Note 26).
In July 2013, one of the Groups operating passenger-cargo vessels was damaged. Thus, the Group wrote off the carrying value of the damaged vessels engine and the related component parts amounting to P=221.9 million (see Note 26), which represents the estimated repair cost of the damaged vessel. As of March 31, 2014, the damaged vessel has yet to be put back into operation.
In August 2013, a passenger-cargo vessel of the Group sunk after colliding with a cargo vessel. As a result, the carrying value of the sunk vessel as of that date amounting to P=227.7 million was written off (see Note 26).
Subsequent to the above incidents which happened in 2013, management filed the insurance claims with the insurance company to recover the insured values of the damaged vessel and sunken vessel and cargoes on board, and other related expenses which were incurred by the Group as a result of the incidents. The total recovery from the insurance company amounting to P=943.3 million in 2013 is included under Others - net in the consolidated statements of income (see Note 26).
In 2013, the Group also recognized impairment loss of P=12.9 million (included under Reversal of (provision for) impairment loss on assets held for sale and property and equipment - net) on two non-operating vessels to write down their carrying values to their salvage values.
Depreciation and amortization Depreciation and amortization were recognized and presented in the following accounts in the consolidated statements of income (see Note 25): June 2014 June 2013 (In Thousands) Operating expenses P=353,872 P=408,677 Terminal expenses 50,778 38,174 Overhead expenses 18,812 34,679 P=423,462 P=481,531 Property and equipment held as collateral As of December 31, 2013 and 2012, the Groups vessels in operations and assets held for sale with total carrying value of P=3,661.0 million and P=4,020.0 million are mortgaged to secure certain obligations (see Note 19). As of December 31, 2013 and 2012, containers and other equipment held as collateral for finance lease amounted to P=135.4 million and P=182.6 million, respectively (see Note 20). - 50 -
2GO SEC Form 17-Q Second Quarter 2014 Fair value of vessels in operation The Groups vessels in operation are appraised for the purpose of determining their market values. Based on the latest appraisal with various dates from July 2012 to January 2013 made by independent appraisers, the related vessels in operation have an aggregate market value of P=4,855.0 million against net book value of P=3,978.2 million (see Note 34).
14. Investment Property
The Groups investment property amounting to P=9.8 million pertains to a parcel of land not currently being used in operations. The fair value of the investment property as of December 20, 2011, the latest appraisal report, amounted to P=66.9 million. This was determined based on the valuation performed by independent appraisers using the Market Data Approach. Under the Market Data Approach, the value of the land is based on sales and listings of comparable property registered within the vicinity. The technique of this approach requires the establishment of comparable property by reducing reasonable comparative sales and listings to a common denominator. This is done by adjusting the differences between the subject property and those actual sales and listings regarded as comparable. The properties used as basis of comparison are situated within the immediate vicinity of the subject property.
The Group assessed that the fair value determination for the investment properties as Level 3 since significant unobservable inputs were used in the valuation. Significant increase (decrease) in estimated price per square meter in isolation would result in a significantly higher (lower) fair value (see Note 34).
15. Software Development Costs
Software development costs amounted to P=16.7 million and P=15.4 million, net of accumulated amortization of P=594.5 million and P=578.8 million as at June 30, 2014 and December 31, 2013, respectively.
The Group recognized additions to software amounting to P=2.6 million in 2014 and P=7.2 million in 2013 and amortization of software costs included under Overhead expenses in the consolidated statements of income amounting to P=0.6 million, P=5.6 million in 2013, and P=11.2 million in 2012 (see Note 25).
16. Other Noncurrent Assets
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Deferred input VAT P= 89,172 P=108,896 Refundable deposits 71,948 65,788 Pension asset (Note 28) 2,657 1,354 Others 8,952 4,552 P= 172,729 P=180,590
a. Deferred input VAT relates mainly to the acquisition of vessels and related component parts.
b. Noncurrent refundable deposits consist of amounts recoverable beyond one year arising from rental deposits which can be applied as rental payments at the end of the lease term or can be paid out in cash upon termination of the lease. - 51 -
2GO SEC Form 17-Q Second Quarter 2014
17. Loans Payable
As at June 30, 2014 and December 31, 2013, the loans payable amounting to P=1,263.2 million and 1,344.9 million, respectively, pertain to unsecured short-term peso-denominated notes payable obtained by the Group from local banks with annual interest rates ranging from 5.0% to 7.0% in June 2014 and 4.5% to 7.9% in December 2013.
Loans payable outstanding as of June 30, 2014 will mature on various dates in 2015. Total interest expense incurred by the Group for the loans amounted to P=33.6 million in June 2014, P=90.6 million in December 2013, and P=89.1 million in December 2012 (see Note 26).
18. Trade and Other Payables
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Trade (Note 23) P= 2,278,471 P=2,166,704 Accrued expenses (Note 23) 974,848 1,213,333 Nontrade (Note 23) 751,712 787,063 Unearned revenue - net of deferred discounts 5,794 22,144 P= 4,010,825 P=4,189,244
a. Trade and other payables are non-interest bearing and are normally on 30-45 days term except for advances to related parties which are classified under nontrade payables and are payable on demand.
b. Nontrade payables consist of customers deposits, and payables due to government agencies.
c. Provision for cargo losses and damages refers to the cost of claims for breakages, cargo losses, cargo short weight or passenger claims which are not covered by insurance. In 2013, 2012 and 2011, provisions recognized amounted to P=22.7 million, P=24.9 million and P=41.3 million (see Note 25) while actual claims during the year amounted to P=4.8 million, P=51.3 million and 21.9 million, respectively.
19. Long-term Debts
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Omnibus Loan and Security Agreement (OLSA) Banco de Oro Unibank, Inc. (BDO) P= 3,619,952 P=3,619,952 RCBC Savings Bank 1,366 1,863 Unamortized debt arrangement fees (21,286) (23,946) 3,600,032 3,597,869 Current portion (373) P= 3,600,032 P=3,597,496
- 52 -
2GO SEC Form 17-Q Second Quarter 2014 Omnibus Loan and Security Agreement dated February 24, 2011 The Company, NN, SFFC and HLP entered into an Omnibus Loan and Security Agreement dated February 24, 2011 (2011 Omnibus Loan) with BDO, which consists of term loans of P=4.0 billion and omnibus line of P=400.0 million. In March 2011, the Company availed the P=4.0 billion term loans, which was used for the refinancing of its short-term loans payable (see Note 17) and the early redemption of its long-term debt on March 15, 2011 in accordance with the provision of the 2011 Omnibus Loan. The omnibus loan, on the other hand, amounting to P=400.0 million shall be used by the Company and HLP for working capital requirements and to secure their obligations with BDO.
The P=4.0 billion term loans consist of Series A and Series B Term Loans amounting to P=2.0 billion each. The interest on each of the Series A and Series B Term Loans is a combination of fixed and floating rates. Fifty percent (50%) of the principal amount of each of the Series A Term Loan and Series B Term Loan, respectively, have a fixed interest rate, and the remaining fifty percent (50%) have a quarterly floating annual interest rate, provided, such floating interest rate shall have a minimum of 5.0% per annum. The principal of the loans is subject to 16 quarterly amortizations which commenced at the end of the third quarter from the drawdown date until March 2016.
Prior to the refinancing as assessed below, the Company paid the principal of the loan amounting to P=800.0 million in 2012.
2011 Omnibus Loan - Suretyship agreement, mortgage trust indenture and assignment of receivables In accordance with the 2011 Omnibus Loan, the Company and NN executed a Continuing Suretyship in favor of BDO. As a result, upon the happening of an event of default, the creditor shall have the right to set-off or apply to payment of the credit facility any and all moneys of the sureties which may be in possession or control of the creditor bank. Further, the creditor bank shall likewise have the full power against all the sureties properties upon which the creditor bank has a lien. The Continuing Suretyship also applies with respect to the Facility Agreement entered by NN and the creditor bank on January 26, 2011.
The Company, NN and SFFC also executed a Mortgage Trust Indenture (MTI) under the OLSA whereby the Group creates and constitutes a first ranking mortgage on the collaterals for the benefit of BDO. The Group shall at all times maintain the required collateral value, which is equivalent to 200% of the obligations.
Further, as required by the OLSA, the Company, NN and SFFC shall assigned customer receivables sufficient to cover the availed credit facility in excess of P=3.66 billion. Notwithstanding such assignment, the Company, NN and SFFC shall have the right to collect the assigned customer receivables and appropriate the proceeds therefrom for their benefit, provided that the assignors shall replace the collected receivables in accordance with the required terms and condition and there is no happening of an event of default under the OLSA. The customer receivables shall refer to all outstanding receivables of the assignors as of the date of the execution of the OLSA, and the future customer receivables of the assignors, which shall be valued at 50% of their face value expressed in Peso.
As of December 31, 2013 and 2012, the Company, NN and SFFC collateralized their vessels under MTI with carrying value amounting to P=3,490.6 million and P=4,305.6 million assets held for sale amounting to P=75.4 million and P=359.2 million and certain outstanding customers receivables amounting to P=1,706.4 million and P=1,589.5 million, respectively (see Notes 7 and 13).
- 53 -
2GO SEC Form 17-Q Second Quarter 2014 2011 Omnibus Loan covenants The OLSA is subject to certain covenants such as but not limited to:
Maintenance of the following required financial ratios of the Company: minimum quarterly current ratio of 1:1; maximum quarterly debt-to-equity ratio of 2.5:1 for the first year and 2:1 for the succeeding years; and, minimum yearly debt service coverage ratio (DSCR) of 1.2:1 for the first and second years and 1.5:1 for the succeeding years, provided, however, that the consolidated yearly DSCR of the Company and NN shall not fall below 1.5:1 for the first and second years, and 1.75:1 for the succeeding years; Prohibition on any change in control in the Company or its business or majority ownership of its capital stock (except with respect to the majority investors in the case of NN) or a change in the Chief Executive Officer; Prohibition to declare or pay any dividends to its common and preferred stockholder or make any other capital or asset distribution to its stockholders, unless the financial ratios above are fully satisfied; Prohibition to sell, lease, transfer or otherwise dispose of its properties and assets, divest any of its existing investments therein, or acquire all or substantially all of the properties or assets of any other third party, except those in the ordinary course of business.
As of December 31, 2012, the Company breached the minimum current ratio, maximum debt-to- equity ratio and minimum DSCR, which likewise constitute events of default. Due to the cross- default provisions in accordance with the NN/BDO Facility Agreement, this resulted in an event of default also on the long-term debt of NN.
The Company obtained a letter from BDO dated December 28, 2012, which states that the Company shall not be declared in default by BDO should there be breach in minimum current ratio of 1.0, maximum debt to equity ratio of 2.0 and maximum DSCR of 1.2 and that the Company is given 12 months from December 31, 2012 to remedy the default. In view of this, the noncurrent portion of the loans remained as noncurrent liability in the consolidated balance sheet as of December 31, 2012.
Refinancing of the Companys 2011 Omnibus Loan with 2013 Omnibus Loan and Security Agreement dated June 11, 2013 On June 13, 2013, the Company, as borrower and assignor, and BDO, as lender, and NN, SOI, 2GO Express, 2GO Logistics, as sureties and assignors, and SFFC, as assignor, executed an Omnibus Loan and Security Agreement (2013 Omnibus Loan) effective June 11, 2013 (i) to refinance the Companys existing loan with the lender with original maturity date on March 15, 2016 under the 2011 Omnibus Loan and (ii) to fund various capital expenditures such as, but not limited to, drydocking, major repairs of various vessel, and other capital expenditures related to the Companys supply chain business, as well as other general corporate requirements of the Company.
In June 2013, the Company availed of P=3.6 billion of the P=4.0 billion term loans, which was used for the early redemption of its outstanding long-term debt based on the 2011 Omnibus Loan.
The P=4.0 billion term loans consist of Series A and Series B Term Loans amounting to P=2.0 billion each. The interest on each of the Series A and Series B Term Loans is a combination of fixed and floating rates. Fifty percent (50%) of the principal amount of each of the Series A Term Loan and Series B Term Loan, respectively, have a fixed interest rate, and the remaining fifty percent (50%) have a quarterly floating annual interest rate, provided, such floating interest rate shall have a minimum of 5.0% per annum. The principal of the loans is subject to 16 quarterly - 54 -
2GO SEC Form 17-Q Second Quarter 2014 amortizations which commenced at the end of the third quarter from the drawdown date until March 2016.
2013 Omnibus Loan - Supplemental Indenture to the suretyship agreement, mortgage trust indenture and assignment of receivables The Borrower and the parties to the MTI executed a Supplemental Indenture to (i) include in the 2013 Omnibus Loan as part of the obligations covered and secured by the MTI, (ii) to include the vessels based on the revised list as collateral under the MTI, and (iii) ensure that the Secured Obligations enjoyed the same ranking as the obligations under the term loan of the 2013 Omnibus Loan with respect to the collateral under the MTI.
The Borrower and the parties to the MTI also executed a Second Supplemental Indenture to include the real properties as collateral under the MTI.
Further, as required by 2013 Omnibus Loan, in the event the availed amount of the long-term debt exceeds the loan value of the collaterals under the MTI, as determined by the lender, each of the Assignors assigns, conveys, sets over and transfers unto the Lender the absolutely and unconditionally all of its respective rights, title, and interest in and to the Customers Receivables to cover the availment of the long-term debt that exceeds the loan value of the collaterals under the MTI. All other conditions with respect to the assignment of receivables under the 2013 omnibus loan are the same with the assignment provisions under the 2011 Omnibus Loan.
2013 Omnibus Loan covenants In accordance with the Section 7 of the 2013 Omnibus Loan, the Group is now required to maintain the following financial ratios based on NN consolidated financial statements at each testing date: minimum current ratio of 1.0 times; maximum debt-to-equity ratio of 2.2 times; and, minimum DSCR. Testing date means (i) with respect to any December 31 consolidated audited financial statements of the Company, April 30 of the succeeding year, (ii) with respect to any June 30 consolidated unaudited financial statements of the Company, September 30 of the same year. As of June 30, 2014 and December 31, 2013, the Group is compliant with its loan covenants.
Interests from long-term borrowings of the Group recognized as expense amounted to P=210.9 million in 2013, P=263.7 million in 2012 and P=266.2 million in 2011 (see Note 26).
In 2013 and 2011, the Group incurred debt transaction costs amounting to P=26.6 million and P=48.9 million, respectively. Amortization of these debt transaction costs included under interest and financing charges amounted to P=1.3 million in March 2014 and P=26.7 million in December 2013 (see Note 26).
20. Obligations Under Finance Lease
The Group has various finance lease arrangements with third parties for the lease of vessels, containers and reefer vans denominated in US dollars. The lease agreements provide for the transfer of ownership to the Group at the end of the lease term, which among other considerations met the criteria for a finance lease. Therefore, the leased assets were capitalized.
The future minimum lease payments under finance lease, together with the present value of minimum lease payments are as follows:
- 55 -
2GO SEC Form 17-Q Second Quarter 2014
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Minimum lease payments due within one year P= 30,598 P=19,618 Beyond one year but not later than five years 81,237 103,448 Total minimum lease obligation 111,835 123,066 Less amount representing interest 4,886 5,282 Present value of minimum lease payment 106,948 117,784 Less current portion 24,054 28,592 Noncurrent portion P= 82,894 P=89,192
The net carrying values of property and equipment held by the Group under finance lease are summarized as follows (see Note 13).
June 2014 (Unaudited) December 2013 (Audited) (In Thousands) Cost P= 187,225 P=181,032 Less accumulated depreciation 57,904 45,611 Net book value P= 129,322 P=135,421
The interest expense recognized related to these leases amounted to P=4.9 million in 2014 and P=5.3 million in 2013 (see Note 26).
21. Redeemable Preferred Shares (RPS)
On January 7, 2003, the Company issued 374,520,487 RPS in the form of stock dividends out of capital in excess of par value at the rate of one share for every four common shares held by the shareholders.
The RPS has the following features:
non-voting; preference on dividends at the same rate as common share; redeemable at any time, in whole or in part, as may be determined by the BOD within a period not exceeding 10 years from the date of issuance at a price of not lower than P=6 per share as may be determined by the BOD. The shares must be redeemed in the amount of at least P=250,000 per calendar year; if not redeemed in accordance with the foregoing, the RPS may be converted to a bond bearing interest at 4% over prevailing treasury bill rate to be issued by the Parent Company; and preference over assets in the event of liquidation.
On June 15, 2006, the Philippine SEC approved 2GOs application for the amendment of its Articles of Incorporation to add a convertibility feature to the RPS so as to allow holders of RPS, at their option, to convert every RPS into two (2) common shares of 2GO. During the Conversion Period from September 1 to October 13, 2006, a total of 70,343,670 preferred shares or 93.91% were converted to common shares.
As at December 31, 2011, 4,560,417 outstanding RPS with remaining carrying value of P=25.9 million are shown under Current liabilities section of the consolidated balance sheets, which are carried - 56 -
2GO SEC Form 17-Q Second Quarter 2014 at amortized cost, accretion of interest is nil for 2013, P=1.4 million in 2012 and P=3.1 million in 2011 (see Note 26).
On October 25, 2012, the BOD of the Company approved the redemption of all remaining outstanding RPS held by each eligible stockholder of such shares at a price of P=6.00 per share. As of December 31, 2012, unredeemed RPS amounted to P=6.9 million.
On March 27, 2013, the BOD approved the retirement of 4,564,330 RPS due to the mandatory redemption by the Company of the RPS. On the same date, the BOD also approved the amendment of the Articles of Incorporation of the Company to decrease its authorized capital stock as a result of the retirement of the RPS. As of June 30, 2014 and December 31, 2013, unredeemed RPS amounted to P= 6.6 and P=6.7 million.
22. Provisions and Contingencies a. There are certain legal cases filed against the Group in the normal course of business. Management and its legal counsel believe that the Group has substantial legal and factual bases for its position and are of the opinion that losses arising from these cases, if any, will not have a material adverse impact on the consolidated financial statements.
b. The Company has pending insurance claims (presented as part of Insurance and other claims) amounting to P=908.4 million and P=248.2 million as at December 31, 2013 and 2012, respectively, which management believes is virtually certain of collection (see Note 7).
23. Related Party Disclosures
In the normal course of business, the Group has transacted with the following related party:
Relationship Name Ultimate Parent Negros Holdings & Management Corporation (NHMC) Intermediate Company KGLI-NM Holdings, Inc. (KGLI-NM) Parent Company NN Significant stockholder China-ASEAN Marine B.V. (CAMBV) Subsidiaries of the Parent Company Negrense Marine Integrated Services, Inc. (NMISI) Brisk Nautilus Dock Integrated Services, Inc. (BNDISI) Subsidiaries of the Parent Company Sea Merchants Inc.(SMI) Bluemarine Inc. (BMI) 2GO Express, Inc. (Express) 2GO Logistics, Inc. (Logistics) Subsidiary ScanAsia Overseas, Inc. (SOI) Hapag-Lloyd Philippines, Inc. (HLP) Reefer Van Specialist, Inc. (RVSI) WRR Trucking Corporation (WTC) The Supercat Fast Ferry Corporation (SFFC) Special Container and Value Added Services, Inc. (SCVASI) NN-ATS Logistics Management and Holdings, Inc. (NALMHCI) Super Terminal, Inc. (STI) J&A Services Corporation (J&A) Red Dot Corporation (RDC) North Harbor Tugs Corporation (NHTC) Sungold Forwarding Corporation (SFC) Supersail Corporation (SSI) Astir Engineering Works, Inc. (AEWI) United South Dockhandlers, Inc. (USDI) - 57 -
2GO SEC Form 17-Q Second Quarter 2014 W G & A Supercommerce, Inc. (WSI) Associates MCC Transport Philippines, Inc. (MCCP) Hansa-Meyer ATS Projects, Inc. (HATS) Vestina Securities Services, Inc. (VSSI)
The following are the revenue and income (costs and expenses) included in the consolidated statements of income with related parties which are not eliminated:
Nature 2013 2012 (In Thousands) Parent Company Interest income P= P=40,099 Vessel leasing (527,759) (804,193) Outside services (58,535) Associates Freight income 1,488 17,214 Shared cost 11,464 5,309 Freight expense (523) (157) Trucking income 1,413 Rent income 7 Outside services (38,792) Service income 44,322 Entities Under Common Control Rent 1,875 332 Outside services (194,330) (154,992) Repairs and maintenance (38,466) (72,573) Professional and management fee 2,250 (53,354) Arrastre and stevedoring (2,769) (9,971) Steward supplies (26,571) (7,409)
Food and subsistence (28) (5,456) Rent expense (2,378) Hustling and shifting (5,396) (1,150) Transportation and delivery (1,018) (93) Key Management Personnel Short-term employee benefits 40,673 36,803 Post-employment benefits 4,343 2,818
The consolidated balance sheets include the following amounts with respect to the balances with related parties:
Financial Statement Account Terms and Conditions 2013 2012
(In Thousands) Parent Company Trade receivables 30 to 60 days; noninterest-bearing P=3,061 P= Due from related parties On demand; noninterest-bearing 146,068 9 Nontrade receivables On demand; noninterest-bearing 61,653 23,621 Trade payables 30 to 60 days; noninterest-bearing (450,923) (80,287) Accrued expenses 30 to 60 days; noninterest-bearing (35,791) (48,866) Due to related parties On demand; noninterest-bearing (29,507) (28,366) Nontrade payables On demand; noninterest-bearing (26,229) Associate Trade receivables 30 to 60 days; noninterest-bearing 26,162 7,200 Due from related parties On demand; noninterest-bearing 13,293 32,811 Nontrade receivables On demand; noninterest-bearing 33,966 Trade payables 30 to 60 days; noninterest-bearing (5,980) Accrued expenses 30 to 60 days; noninterest-bearing (12,611) Due to related parties On demand; noninterest-bearing (148) Nontrade payables On demand; noninterest-bearing (400) Entities Under Common Control Trade receivables 30 to 60 days; noninterest-bearing 316 Due from related parties On demand; noninterest-bearing 57 17,715 Nontrade receivables On demand; noninterest-bearing 69,925 91,710 Trade and other payables 30 to 60 days; noninterest-bearing (51,909) (62,827) Accrued expenses 30 to 60 days; noninterest-bearing (56,514) (32,415) Due to related parties On demand; noninterest-bearing (1,699) (2,946) Nontrade payables 30 to 60 days; noninterest-bearing (1,223)
The outstanding related party balances are unsecured and settlement occurs in cash, unless otherwise indicated. The Group has not recorded any impairment of receivables relating to amounts owed by - 58 -
2GO SEC Form 17-Q Second Quarter 2014 related parties. This assessment is undertaken each financial year through examining the financial position of the related parties and the market in which these related parties operate.
Other terms and conditions related to the above related party balances and transactions are as follows:
Transactions with NN Transactions with NN in 2011 include joint services and co-loading arrangements whereby the Company and NN share vessel space for the shipment of customer cargoes. Each of the parties, whoever is the actual vessel-operating carrier, charged the other party for the shared space on a per container basis. Effective December 1, 2011, the Company entered into a vessel lease arrangement with NN involving six of NNs vessels at a fixed daily rate for a period of one year. In 2013, vessel lease rates are based on agreed monthly rates (see Note 32). In 2011, the Company has granted NN an interest-bearing loan amounting to P=657.5 million, which was fully paid by NN in 2012. NN charges shared cost to the Company and its subsidiaries. Transactions with associates and other related parties under common control NMISI charges agency fee to the Company based on an agreed rate for its manpower services and for its management of the Companys food and beverage business effective August 2011. Negrense also provides housekeeping and manpower pooling services to the Company and SFFC. BNDISI provides container repairs, cargo handling and trucking services to the Company. Transactions with other associates and related companies consist of shipping services, charter hire, management services, ship management services, purchases of steward supplies, availment of stevedoring, arrastre, trucking, and repair services and rental.
Transactions and balances with related parties eliminated during consolidation The following are the transactions and balances among related parties which are eliminated in the consolidated financial statements:
SCVASI 2GO On demand; Noninterest bearing 3,398 8,104
The Companys transactions with 2GO Express Group include shipping and forwarding services, commission and trucking services. The Company provided management services to SFFC, 2GO Express, 2GO Logistics, HLP, KALI and SOI at fees based on agreed rates. 2GO Express provides management services to the Companys loose cargo business at fees based on an agreed rate.
24. Equity
a. Share capital
Details of share capital considered as equity as of June 30, 2014 and December 31, 2013 follows:
Number of shares Amount (In Thousands) Authorized common shares 4,070,343,670 P=4,070,344 Issued and outstanding common shares of P=1.00 per value each 2,446,136,400 P=2,446,136
- 60 -
2GO SEC Form 17-Q Second Quarter 2014 Movements in authorized capital stocks follow: Number of shares Date Activity Common shares Preferred shares (Note 21) Total May 26, 1949 Authorized capital stocks as of incorporation date 5,000 5,000 December 10, 1971 Increase in authorized capital stocks 5,000 5,000 October 21, 1975 Increase in authorized capital stocks 4,990,000 4,990,000 September 3, 1982 Increase in authorized capital stocks 5,000,000 5,000,000 August 18, 1989 Increase in authorized capital stocks 10,000,000 10,000,000 December 29, 1993 Increase in authorized capital stocks 20,000,000 20,000,000 September 8, 1994 Increase in authorized capital stocks 60,000,000 60,000,000 November 21, 1994 Increase in authorized capital stocks 900,000,000 900,000,000 October 26, 1998 Increase in authorized capital stocks 1,000,000,000 1,000,000,000 December 6, 2002 Reclassification of common shares to preferred shares (375,000,000) 375,000,000 November 18, 2003 Redemption of preferred shares (224,712,374) (224,712,374) September 6, 2004 Increase in authorized capital stocks 750,000,000 750,000,000 November 22, 2004 Redemption of preferred shares (74,904,026) (74,904,026) October 24, 2005 Increase in authorized capital stocks 1,624,524,400 1,624,524,400 October 24, 2005 Reclassification of preferred shares to common shares 475,600 (475,600) August 7, 2008 Reclassification of preferred shares to common shares 70,343,670 (70,343,670) 4,070,343,670 4,564,330 4,074,908,000
Movements in issued and outstanding capital stocks follow:
Number of shares Date Activity Issue price Common shares Preferred shares (Note 21) Total May 26, 1949 Issued capital stocks as of incorporation date P=1,000.00 1,002 1,002 December 10, 1971 to October 26, 1998 Increase in issued capital stocks 1,000.00 1,496,597,636 1,496,597,636 December 6, 2002 Reclassification of common shares to preferred shares 1.00 40,000,000 374,520,535 414,520,535 February 10, 2003 Issuance of preferred shares before redemption 1.00 (48) (48) November 18, 2003 Redemption of preferred shares 6.67 (224,712,374) (224,712,374) September 6, 2004 Issuance of common shares by way of stock dividends 1.00 393,246,555 - 393,246,555 November 22, 2004 Redemption of preferred shares 6.67 (74,904,026) (74,904,026) December 31, 2004 Issuance of common shares prior to reorganization 1.00 (756) (756) October 24, 2005 Issuance of common shares through share swap transactions 1.76 414,121,123 414,121,123 August 22 to October 13, 2006 Conversion of redeemable preferred shares to common shares 3.20 140,687,340 (70,343,670) 70,343,670 December 6 -31, 2012 Redemption of redeemable preference share 6.00 (3,413,467) (3,413,467) 2,484,652,900 1,146,950 2,485,799,850 December 31, 2001 Treasury shares* 1.50 (38,516,500) (38,516,500) 2,446,136,400 1,146,950 2,447,283,350 * The carrying value of treasury shares is inclusive of P =0.9 million transaction cost.
Issued and outstanding common shares are held by 1,932 and 1,940 equity holders as of June 30, 2014 and December 31, 2013, respectively.
b. Deficit Deficit is net of undistributed earnings amounting to P=202.6 million in 2013 and P=274.3 million in 2012, representing accumulated equity in net earnings of subsidiaries and associates, which are not available for dividend declaration until received in the form of dividends from such subsidiaries and associates. Deficit is further restricted to the extent of the cost of the shares held in treasury and deferred income tax assets recognized as of December 31, 2013 and 2012. - 61 -
2GO SEC Form 17-Q Second Quarter 2014
On January 12, 2011, the Companys fully paid cash dividend amounting to fifteen centavos (P= 0.15) for every common and preferred share outstanding as of December 15, 2010 or a total dividend declaration of P=367.6 million.
c. Excess of cost over net asset value of investments - net
The pooling of interest method was applied to account for the following acquisitions since these involved entities under common control:
On August 30, 2007, the Company acquired SFFC from its affiliate, Accuria, Inc. for a total consideration of P=13.7 million. The excess of cost over SFFCs net assets during the time of acquisition, amounting to P=11.7 million is recorded in equity as Excess of cost over net assets of investments.
On December 1, 2011, NALHMCI acquired from NN, six of its subsidiaries for a total consideration of P=29.4 million. These subsidiaries are J&A, RDC, NHTC, STI, SFC and SSI. The excess of the combined net assets of NNs subsidiaries at the time of acquisition over the total cost of the investment amounted to P=0.8 million and is presented under equity as Excess of cost over net assets value of investments.
25. Operating Costs and Expenses
June 2014 (Unaudited) June 2013 (Unaudited and restated) (In Thousands) Operating Expenses Fuel, oil and lubricants P= 1,377,218 P= 1,554,429 Outside services (Note 23) 785,512 935,879 Vessel leasing (Notes 23) 165,925 355,759 Depreciation and amortization (Note 13) 353,872 408,677 Personnel costs (Notes 27 and 28) 231,531 193,397 Rent (Note 23) 180,050 147,590 Repairs and maintenance (Note 23) 108,574 103,341 Insurance 119,265 75,037 Communication, light and water 57,344 66,841 Material and supplies used 55,355 53,074 Food and subsistence 35,997 46,594 Sales concessions 28,756 26,389 Commissions 24,589 10,088 Provision for cargo losses and damages (Note 18) 3,742 9,737 Arrastre and Stevedoring 91,447 61,029 Transshipment 11,316 16,560 Packaging Cost 13,825 8,138 Transportation and Travel 10,895 8,029 Taxes and Licenses 16,111 7,066 Trucking expense 396,367 401,259 Co-loading 123,032 78,816 Others 273,121 214,994 4,468,227 4,782,725 Terminal Expenses Transportation and delivery 193,520 277,786 Outside services (Note 23) 158,205 78,576 Repairs and maintenance 36,962 57,642 Personnel costs (Notes 27 and 28) 61,781 54,373 Rent (Note 23) 47,585 69,751 - 62 -
2GO SEC Form 17-Q Second Quarter 2014
June 2014 (Unaudited) June 2013 (Unaudited and restated) (In Thousands) Depreciation and amortization (Note 13) 50,778 38,174 Fuel, oil and lubricants 39,753 44,327 Others 39,456 62,757 628,040 683,386 Overhead Expenses Personnel costs (Notes 27 and 28) 235,889 224,569 Outside services (Note 23) 44,655 67,711 Advertising and promotions 20,920 70,321 Depreciation and amortization (Notes 13 and 15) 18,812 34,679 Communication, light and water 30,694 37,781 Provision for doubtful accounts (Note 7) 78 3,871 Taxes and licenses 8,978 10,248 Rent (Note 23) 15,416 17,497 Entertainment, amusement and recreation 13,310 11,800 Computer charges 1,140 2,873 Transportation and travel 6,430 7,655 Repairs and maintenance 7,106 10,252 Office supplies 5,307 9,629 Others 59,237 88,675 469,482 600,753 Cost of Goods Sold (Note 8) 924,857 835,162 P=6,490,605 P= 6,902,026
In accordance with the vessel leasing agreement as discussed in Note 23, NN, as the owner of the vessels, is accountable for its vessels drydocking costs, depreciation and amortization, repair and maintenance, personnel, and insurance costs. Included in the vessel costs are the costs incurred by 2GO relating to fuel and lubricants, pilotage, port charges and other variable costs on the leased NNs vessels.
26. Other Income (Charges)
Financing Charges
June 2014 (Unaudited) June 2013 (Unaudited and restated) (In Thousands) Interest expense on: Loans payable (Note 17) P= 33,563 P= 44,988 Long-term debt (Note 19) 103,950 109,155 Amortization of: Debt transaction cost (Note 19) 2,661 25,169 Obligations under finance lease (Note 20) 4,886 7,852 Others 15,772 20,284 P= 160,833 P= 202,919
- 63 -
2GO SEC Form 17-Q Second Quarter 2014 Others - net
June 2014 (Unaudited) June 2013 (Unaudited and restated) (In Thousands) Gain (loss) on disposal of: AFS investments (Note 11) P= P= Assets held for sale (Note 10) (48,842) Property and equipment (Note 13) (4,289) (43,054) Interest income (Notes 6 and 22) 8,693 12,894 Foreign exchange gains (losses) net (3,121) (23) Others - net 17,571 63,908 P=18,854 (P=15,117)
27. Personnel Costs
Details of personnel costs are as follows:
June 2014 (Unaudited) June 2013 (Unaudited and restated) (In Thousands) Salaries and wages P=377,643 P=311,212 Crewing cost 43,663 53,991 Retirement benefits cost (Note 28) 16,532 17,011 Other employee benefits 91,364 90,124 P= 529,202 P= 472,338
28. Retirement Benefits
The Group has funded defined benefits pension plans covering all regular and permanent employees. The benefits are based on employees projected salaries and number of years of service.
The funded status and amounts recognized in the consolidated balance sheets include the retirement benefits of SGF as at December 31, 2013 and of SGF and SOI as at December 31, 2012.
The following tables summarize the components of the net retirement benefits cost recognized in the consolidated statements of income and comprehensive income and the funded status and amounts recognized in the consolidated balance sheets:
2013 Defined Fair Value Accrued Benefit of Plan Retirement Obligation Assets Benefits January 1 P=229,044 (P=97,558) P=131,486 Net retirement benefits cost in profit or loss:
Current service cost 31,331 31,331 Curtailment gain (4,684) (4,684) Net interest cost 12,527 (6,043) 6,484 - 64 -
2GO SEC Form 17-Q Second Quarter 2014 39,174 (6,043) 33,131 Benefits paid (16,281) 10,679 (5,602) Re-measurement losses (gains) in other comprehensive income - actuarial changes arising from changes in: Financial assumptions (11,025) 4,338 (6,687) Demographic assumptions 6,992 6,992 Experience adjustments 24,644 24,644 20,611 4,338 24,949 Actual contributions (18,075) (18,075) December 31 P=272,548 (P=106,659) P=165,889 2012 (As restated, Note 2) Defined Fair Value Accrued Benefit of Plan Retirement Obligation Assets Benefits January 1 P=225,803 (P=72,906) P=152,897 Net retirement benefits cost in profit or loss:
Current service cost 26,784 26,784 Curtailment gain (28,440) (28,440) Settlement cost 1,490 1,490 Net interest cost 16,359 (5,152) 11,207 14,703 (3,662) 11,041 Benefits paid (26,504) 39,341 12,837 2012 (As restated, Note 2) Defined Fair Value Accrued Benefit of Plan Retirement Obligation Assets Benefits Re-measurement losses (gains) in other comprehensive income - actuarial changes arising from changes in: Financial assumptions P=34,508 (P=24,902) P=9,606 Demographic assumptions (24,245) (24,245) Experience adjustments 4,779 4,779 15,042 (24,902) (9,860) Actual contributions (35,429) (35,429) December 31 P=229,044 (P=97,558) P=131,486
The plan assets available for benefits follow:
December 31, 2013 December 31, 2012 (In Thousands) Cash and cash equivalents 11,932 13,899 Receivables 32,760 28,932 Investments in debt securities 56,971 54,181 Others 4,996 546 Fair value of plan assets P=106,659 P=97,558 The principal assumptions used in determining pension benefit obligations for the Groups plans are shown below:
- 65 -
2GO SEC Form 17-Q Second Quarter 2014 December 31 January 1, 2012 2013 2012 Discount rate 6.04% 7.52% 8.29% to 10.53% Future salary increases 7.83% 7.70% 6.00% to 8.00% Turnover rate 17.00% 17.00% 17.00%
The accrued retirement benefits is subject to several key assumptions. Shown below is the sensitivity analysis of the retirement obligation to reasonably possible changes on each significant assumption:
As of December 31, 2013 and 2012, the Group has no transactions with its retirement funds such as loans, investments, gratuities, or surety. The fund also does not have investments in debt or equity securities of the companies in the Group.
The Group expects to contribute approximately P=44.7 million to the defined benefit pension plan in 2014.
29. Income Tax
a. The components of provision for (benefit from) income tax are as follows:
b. The components of the Groups recognized net deferred income tax assets and liabilities are as follows:
2013 2012
Net Deferred Income Tax Assets Net Deferred Income Tax Assets (1)
Net Deferred Income Tax Liabilities (2) (In Thousands) Directly recognized in profit or loss Deferred income tax assets on: NOLCO P=250,370 P=645,828 P= MCIT 23,528 13,576 Allowances for: Impairment of receivables 100,945 84,314 85 Inventory obsolescence 16,698 19,608 - 66 -
2GO SEC Form 17-Q Second Quarter 2014 2013 2012
Net Deferred Income Tax Assets Net Deferred Income Tax Assets (1)
Net Deferred Income Tax Liabilities (2) Investment in stock 75 75 Accrued retirement costs and others 20,456 16,689 663 Accruals and others 40,065 20,803 264 452,137 800,893 1,012 Deferred income tax liabilities: Pension asset (406) (138) Others (4,372) (6,924) (1,213) (4,778) (6,924) (1,351) Directly recognized in equity Deferred income tax asset on remeasurement of retirement costs 29,717 22,232 P=477,076 P=816,201 (P=339) (1) Pertain to the Company, 2GO Express, 2GO Logistics, WTC, J&A, SFFC and AEWI (2) Pertain to HLP
c. Details of the Groups NOLCO and MCIT which can be carried forward and claimed as tax credit against regular taxable income and regular income tax due, respectively, are as follows:
NOLCO
Available Balances as of December 31, 2013 Incurred in Until Amount Applied Expired Amount Tax Effect (In Thousands) 2012 2015 P=851,550 P= P= P=851,550 P=255,465 2011 2014 1,364,384 (30,874) 1,333,510 400,053 2010 2013 1,168,924 (511,919) (657,005) P=3,384,858 (P=542,793) (P=657,005) P=2,185,060 P=655,518 MCIT
Available Balances as of December 31, Incurred in Until Amount Applied Expired 2013 (In Thousands) 2013 2016 P=47,742 P= P= P=47,742 2012 2015 21,919 21,919 2011 2014 3,092 3,092 2010 2013 1,606 (1,606) P=74,359 P= (P=1,606) P=72,753
d. The following are the Groups NOLCO and MCIT for which no deferred income tax assets have been recognized in compliance with PFRS. Management, however, believes that there will be sufficient future taxable income that would substantially utilize the NOLCO in the future.
2013 2012 (In Thousands) NOLCO P=1,350,493 P=1,203,408 MCIT 49,225 5,454
- 67 -
2GO SEC Form 17-Q Second Quarter 2014 e. Reconciliation between the income tax expense (benefit) computed at statutory income tax rates of 30% in the provision for income tax expense as shown in profit or loss is as follows:
2013 2012 (As Restated, Note 2) 2011 (As Restated, Note 2) (In Thousands) Tax effect of income at statutory rates P=213,832 (P=29,357) (P=239,366) Derecognition of deferred income tax asset on NOLCO 381,631 334,877 Income tax effects of: Changes in unrecognized deferred income tax assets 46,571 Income tax holiday (ITH) incentive on registered activities (Note 31) 806 (36,123) 7,093 Gain on sale of investment already subjected to final tax (5,299) 2013 2012 (As Restated, Note 2) 2011 (As Restated, Note 2) (In Thousands) Equity in net (earnings) loss of associates (P=13,454) (P=11,308) P=1,977 Interest income already subjected to a lower final tax (619) (1,449) (1,944) Dividend income (10,987) (903) (84) MCIT derecognized 13,576 624 Application of NOLCO for which no deferred tax asset was recognized (146,787) MCIT incurred for the year for which no deferred tax asset was recognized 39,306 Others 8,388 1,538 (985) Provision for (benefit from) income tax P=485,692 P=257,899 (P=192,037)
30. Earnings (Loss) Per Common Share Basic and diluted earnings per common share were computed as follows:
June 2014 December 2013 December 2012 (As restated, Note 2) (In Thousands, except EPS) Net loss for the year attributable to equity holders of the parent P= 562,358 P=212,044 (P=366,084) Weighted average number of common shares outstanding for the year 2,446,136 2,446,136 2,446,136 Earnings (loss) per common share P=0.2299 P=0.0867 (P=0.1497)
There are no potentially dilutive common shares as at June 30, 2014 and December 31, 2013.
- 68 -
2GO SEC Form 17-Q Second Quarter 2014 31. Registration with the Board of Investments (BOI)
a. With the effectivity of the merger of the Company and ZIP, the Parent Company assumed ZIPs outstanding BOI registration as an expanding operator of logistics service facility on a non- pioneer status under Certificate of Registration No. 2008-179. The ITH incentive for a period of three years, which expired in July 2011, provided that for purpose of availment, a base figure of P=924.1 million will be used in the computation of the ITH for the said expansion.
b. On January 27, 2011, BOI approved the Companys application for registration of the modernization of two (2) second-hand RORO vessels, SuperFerry 20 and SuperFerry 21. The Company was granted ITH incentive for a period of three years from March 2011 or actual start of operations. The ITH incentive shall be limited only to the sales/revenues generated by the registered project.
SFFC is registered with BOI as a New Operator of Domestic Shipping (Passenger Vessel) on a Non-Pioneer status. The Company is entitled to four years ITH from date of registration until February 2012.
32. Agreements and Commitments
a. The Company has a Memorandum of Agreement (Agreement) with Asian Terminals, Inc. (ATI) for the use of ATIs facilities and services at the South Harbor for the embarkation and disembarkation of the Companys domestic passengers, as well as loading, unloading and storage of cargoes. The Agreement shall be for a period of five years, which shall commence from the first scheduled service of the Company at the South Harbor. The Agreement is renewable for another five years under such terms as may be agreed by the parties in writing. If the total term of the Agreement is less than ten years, then the Company shall pay the penalty equivalent to the unamortized reimbursement of capital expenditures and other related costs incurred by ATI in the development of South Harbor. The Agreement became effective on January 14, 2003.
Under the terms and conditions of the Agreement, the Company shall avail of the terminal services of ATI, which include, among others, stevedoring, arrastre, storage, warehousing and passenger terminal. Domestic tariff for such services (at various rates per type of service as enumerated in the Agreement) shall be subject to an escalation of 5% every year.
b. On December 31, 2012, the Company and Manila North Harbour Port, Inc. (MNHPI) entered into an agreement to engage the services of MNHPI to handle all the freight, passenger terminal and allied port services requirements of the former and in particular, to consolidate all its operations at Manila North Harbor. The agreement is effective upon signing and shall remain in effect for 10 years, renewable for another 5 years upon such terms and conditions as the parties may agree.
c. The Group has entered into various operating lease agreements for its office spaces. The future minimum rentals payable under the noncancellable operating leases are as follows:
2013 2012 (In Thousands) Within one year P=175,050 P=223,689 After one year but not more than five years 217,069 184,208 P=392,119 P=407,897 - 69 -
2GO SEC Form 17-Q Second Quarter 2014 d. The Company entered into several vessel leasing agreements for a period ranging from three to 15 months. In 2012, vessel lease rates are based on an agreed daily rate ranging from $3,125 to $9,400. In 2013, vessel lease rates are based on agreed monthly rate of P=26.0 million.
33. Financial Risk Management Objectives and Policies
Risk Management Structure The Groups overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Groups financial performance. It is, and has been throughout the year under review, the Groups policy that no trading in financial instruments shall be undertaken.
Credit Risk Management Objectives and Procedures The Groups principal financial instruments comprise of cash and cash equivalents, loans payable, long-term debt, obligations under finance lease, restructured debts and redeemable preferred shares. The main purpose of these financial instruments is to raise financing for the Groups operations. The Group has other various financial assets and liabilities such as trade and other receivables and trade and other payables, which arise directly from operations.
The main risks arising from the Groups financial instruments are credit risk involving possible exposure to counter-party default, primarily, on its short-term investments and trade and other receivables; liquidity risk in terms of the proper matching of the type of financing required for specific investments and maturing obligations; foreign exchange risk in terms of foreign exchange fluctuations that may significantly affect its foreign currency denominated placements and borrowings; and interest rate risk resulting from movements in interest rates that may have an impact on interest-bearing financial instruments.
Credit risk To manage credit risk, the Group has policies in place to ensure that all customers that wish to trade on credit terms are subject to credit verification procedures and approval of the Credit Committee. In addition, receivable balances are monitored on an ongoing basis to reduce the Groups exposure to bad debts. The Group has policies that limit the amount of credit exposure to any particular customer.
The Group does not have any significant credit risk exposure to any single counterparty. The Groups exposures to credit risks are primarily attributable to cash and collection of trade and other receivables with a maximum exposure equal to the carrying amount of these financial instruments.
As of December 31, 2013 and 2012, the Group did not hold collateral from any counterparty.
The credit quality per class of financial assets that are neither past due nor impaired is as follows:
As at December 31, 2013
- 70 -
2GO SEC Form 17-Q Second Quarter 2014 Neither past due nor impaired Past due and/or impaired
High Medium Low Total (In Thousands) Loans and receivables Cash in banks P=837,089 P= P= P= P=837,089 Cash equivalents 49,430 49,430 Trade and other receivables: Freight 45,734 156,215 291,879 909,706 1,403,534 Passage 11,214 96 34,727 46,037 Services fees 17,550 56,104 94,568 418,652 586,874 Distribution 169,513 112,225 281,738 Others 179,333 49,045 274,690 503,068 Nontrade receivables 5,654 38,978 369,797 414,429 Due from related parties 14,651 144,767 159,418 Insurance and other claims 856,944 39 51,375 908,358 Advances to officers and employees 20,913 2,805 2,028 25,746 AFS investments 6,333 574 6,907 Total P=2,214,358 P=303,856 P=386,447 P=2,317,967 P=5,222,628
As at December 31, 2012
Neither past due nor impaired Past due and/or impaired
High Medium Low Total (In Thousands) Loans and receivables Cash in banks P=662,808 P= P= P= P=662,808 Cash equivalents 82,397 82,397 Trade and other receivables: Freight 43,534 316,285 204,871 744,156 1,308,846 Passage 25,352 52,557 77,909 Services fees 45,490 46,053 29,774 232,290 353,607 Distribution 184,582 102,789 287,371 Others 136,005 21,944 1,663 262,567 422,179 Nontrade receivables 72,324 27,307 268,863 368,494 Due from related parties 50,535 50,535 Insurance and other claims 113,678 4,275 130,293 248,246 Advances to officers and employees 38,639 1,966 726 41,331 AFS investments 8,178 557 8,735 Total P=1,463,522 P=418,387 P=236,308 P=1,794,241 P=3,912,458
High quality receivables pertain to receivables from related parties and customers with good favorable credit standing. Medium quality receivables pertain to receivables from customers that slide beyond the credit terms but pay a week after being past due. Low quality receivables are accounts from new customers and forwarders. For new customers, the Group has no basis yet as far as payment habit is concerned. With regards to the forwarders, most of them are either under legal proceedings or suspended. In addition, their payment habits extend beyond the approved credit terms because their funds are not sufficient to conduct their operations.
The Group evaluated its cash in bank and cash equivalents as high quality financial assets since these are placed in financial institutions of high credit standing. It also evaluated its advances to officers and employees as high grade since these are deductible from their salaries.
The aging per class of financial assets that were past due but not impaired is as follows:
As at December 31, 2013 - 71 -
2GO SEC Form 17-Q Second Quarter 2014
Neither past due nor impaired Past due but not impaired Impaired financial assets Total Less than 30 days 31 to 60 days 61 to 90 days Over 90 days (In Thousands) Loans and receivables: Cash in banks P=837,089 P= P= P= P= P= P=837,089 Cash equivalents 49,430 49,430 Trade and other receivables: Freight 493,828 222,759 142,977 84,483 283,844 175,643 1,403,534 Passage 11,310 11,274 14,427 3,791 5,235 46,037 Service fees 168,222 93,562 58,029 34,337 114,817 117,907 586,874 Distribution 169,513 38,946 15,974 6,859 35,102 15,344 281,738 Others 228,378 91,560 57,546 99,675 17,872 8,037 503,068 Nontrade receivables 44,632 2,517 5,748 5,955 344,500 11,077 414,429 Due from related parties 14,651 4,047 2,931 2,014 135,775 159,418 Insurance and other claims 856,983 51,375 908,358 Advances to officers and employees 23,718 836 597 403 192 25,746 AFS investments 6,907 6,907 Total P=2,904,661 P=465,501 P=298,229 P=237,517 P=937,337 P=379,383 P=5,222,628
As at December 31, 2012 (As restated, Note 2)
Neither past due nor impaired Past due but not impaired Impaired financial assets Total Less than 30 days 31 to 60 days 61 to 90 days Over 90 days (In Thousands) Loans and receivables: Cash in banks P=662,808 P= P= P= P= P= P=662,808 Cash equivalents 82,397 82,397 Trade and other receivables: Freight 564,690 199,960 110,497 75,740 231,873 126,086 1,308,846 Passage 25,352 26,723 195 10,338 15,301 77,909 Service fees 121,317 45,916 18,118 12,540 41,320 114,396 353,607 Distribution 184,582 69,625 16,456 673 691 15,344 287,371 Others 159,612 144,027 34,675 28,814 50,283 4,768 422,179 Nontrade receivables 99,631 3,949 4,640 4,181 249,428 6,665 368,494 Due from related parties 50,535 50,535 Insurance and other claims 117,953 1,084 77,834 51,375 248,246 Advances to officers and employees 40,605 601 7 118 41,331 AFS investments 8,735 8,735 Total P=2,118,217 P=491,885 P=184,588 P=132,286 P=666,848 P=318,634 P=3,912,458
Liquidity risk The Group manages its liquidity profile to be able to finance its capital expenditures and service its maturing debt by maintaining sufficient cash during the peak season of the passage business. The Group regularly evaluates its projected and actual cash flow generated from operations.
The Groups existing credit facilities with various banks are covered by the Continuing Suretyship for the accounts of the Group.
The liability of the Surety is primary and solidary and is not contingent upon the pursuit by the bank of whatever remedies it may have against the debtor or collaterals/liens it may possess. If any of the secured obligations is not paid or performed on due date (at stated maturity or by acceleration), the Surety shall, without need for any notice, demand or any other account or deed, immediately be liable therefore and the Surety shall pay and perform the same. - 72 -
2GO SEC Form 17-Q Second Quarter 2014 The following table summarizes the maturity profile of the Groups financial assets and financial liabilities based on contractual repayment obligations and the Groups cash to be generated from operations and the Groups financial assets as at December 31:
2013
Less than 1 year 1 to 5 years Over 5 years Total (In Thousands) Financial Liabilities Trade and other payables* P=3,839,604 P= P= P=3,839,604 Loans payable 1,344,927 1,344,927 Long-term debts 373 3,597,496 3,597,869 Obligations under finance lease 28,592 89,192 117,784 Redeemable preferred shares 6,680 6,680 Other noncurrent liabilities 9,369 9,369 P=5,220,176 P=3,696,057 P= P=8,916,233 *Excludes nonfinancial liabilities amounting to P =349.6 million as of December 31, 2013.
2013
Less than 1 year 1 to 5 years Over 5 years Total (In Thousands) Financial Assets Cash and cash equivalents P=918,645 P= P= P=918,645 Trade and other receivables 3,949,819 3,949,819 AFS investments 6,907 6,907 P=4,875,371 P= P= P=4,875,371
2012
Less than 1 year 1 to 5 years Over 5 years Total (In Thousands) Financial Liabilities Trade and other payables* P=3,092,712 P= P= P=3,092,712 Loans payable 1,379,230 1,379,230 Long-term debts 993,319 2,185,297 3,178,616 Obligations under finance lease 77,724 44,857 122,581 Redeemable preferred shares 6,882 6,882 Other noncurrent liabilities 9,030 9,030 P=5,549,867 P=2,293,184 P= P=7,789,051 Financial Assets Cash and cash equivalents P=786,856 P= P= P=786,856 Trade and other receivables 2,839,884 2,839,884 AFS investments 8,735 8,735 P=3,635,475 P= P= P=3,635,475 *Excludes nonfinancial liabilities amounting to P =443.0 million as of December 31, 2012.
Trade and other payables and maturing other liabilities are expected to be settled using cash to be generated from operations, drawing from existing and new credit lines and additional capital contribution of the shareholders.
Foreign exchange risk Foreign currency risk arises when the Group enters into transactions denominated in currencies other than their functional currency. Management closely monitors the fluctuations in exchange rates so as to anticipate the impact of foreign currency risks associated with the financial instruments. To mitigate the risk of incurring foreign exchange losses, the Group maintains cash in banks in foreign currency to match its financial liabilities.
- 73 -
2GO SEC Form 17-Q Second Quarter 2014 The Groups significant foreign currency-denominated financial assets and financial liabilities as of December 31 are as follows:
The Group has recognized foreign exchange revaluation gains amounting to P=1.3 million in 2013 and P=0.5 million in 2012 and foreign exchange loss in 2010 amounting to P=12.9 million.
The following table demonstrates the sensitivity to a reasonably possible change in the foreign currency exchange rates, with all other variables held constant, of the Groups profit before tax as at December 31, 2013 and 2012.
Appreciation/ (Depreciation) of Foreign Currency Effect on Income Before Tax 2013 2012 (In Thousands) Australian Dollar (AUD) +5% (P=126) (P=595) -5% 126 595 Euro (EUR) +5% (347) 130 -5% 347 (130) New Zealand Dollar (NZD) +5% 16 (767) -5% (16) 767 US Dollar (USD) +5% (1,083) 550 -5% 1083 (550) Danish Kroner (DKK) +5% (218) -5% 218
There is no other impact on the Groups equity other than those already affecting profit or loss.
- 74 -
2GO SEC Form 17-Q Second Quarter 2014 Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of the Groups financial instruments will fluctuate because of changes in market interest rates.
Borrowings issued at fixed rates exposes the Group to fair value interest rate risk. The Groups borrowings are subject to fixed interest rates ranging from 4.5% to 8.5% for 10 years in 2013 and 2.3% to 9.7% for 10 years in 2012.
The Groups P=4.0 billion loans under the OLSA includes P=2.0 billion loans which bear variable interest rates and exposes the Group to cash flow interest rate risk.
The sensitivity of the consolidated statement of income is the effect of the assumed changes in interest rates on the consolidated income before income tax for one year, based on the floating rate non-trading financial liabilities held at December 31, 2013 with other variables held constant:
Changes in Effect on income before tax interest rates 2013 2012 (In Thousands) For more than one year +80 basis points (P=28,762) (P=10,523) -80 basis points 28,762 10,523
Changes in Effect on equity interest rates 2013 2012 (In Thousands) For more than one year +80 basis points (P=20,133) (P=7,366) -80 basis points 20,133 7,366
Equity price risk Equity price risk is the risk that the fair value of traded equity instruments decreases as the result of the changes in the levels of equity indices and the value of the individual stocks.
As at December 31, 2013 and 2012, the Groups exposure to equity price risk is minimal.
The effect on equity (as a result of a change in fair value of equity instruments held as AFS investments as of December 31, 2013 and 2012) due to reasonably possible change in equity indices, with all other variables held constant, follows:
Increase (decrease) in PSE index Effect on equity (In Thousands) 2013 55% P=352 (55%) (352) 2012 34% 212 (34%) (212)
The impact on the Groups equity excludes the impact of transactions affecting the consolidated statements of comprehensive income.
Capital Risk Management Objectives and Procedures The Groups capital management objectives are to ensure the Groups ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for others - 75 -
2GO SEC Form 17-Q Second Quarter 2014 stakeholders and produce adequate and continuous opportunities to its employees; and to provide an adequate return to shareholders by pricing products/services commensurately with the level of risk.
The Group sets the amount of capital in proportion to risk. It manages the capital structure and makes adjustments in the light of changes in economic conditions and the risk characteristics of the underlying assets, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.
The Group considers its total equities as its capital. The Group monitors capital on the basis of the carrying amount of equity as presented on the face of the balance sheet. The capital ratios are as follows:
As of December 31, 2013 and 2012, the Group met its capital management objectives.
34. Fair Value of Financial Instruments and Nonfinancial Assets
The table below presents a comparison by category of the carrying amounts and fair values of the Groups financial instruments as at December 31, 2013 and 2012. Financial instruments with carrying amounts reasonably approximating their fair values are no longer included in the comparison.
2013 2012
Carrying Amount Fair Value Carrying Amount Fair Value (In Thousands) Financial Liabilities Long-term debts P=3,597,869 P=4,111,311 P=3,178,616 P=3,475,112 Obligations under finance lease 117,784 125,164 122,581 94,283 P=3,715,653 P=4,236,475 P=3,301,197 P=3,569,395 Nonfinancial Assets Vessels in operations P=3,978,216 P=4,855,000 P=3,661,010 P=4,715,000 Investments property 9,763 66,900 9,763 66,900 The following methods and assumptions are used to estimate the fair value of each cash flow of financial instruments and nonfinancial assets: Financial Instruments Cash and cash equivalents, trade and other receivables, trade and other payables, refundable deposits and RPS The carrying amounts of these financial instruments approximate their respective fair values due to their relatively short-term maturities. Loans payable - 76 -
2GO SEC Form 17-Q Second Quarter 2014 The carrying value of loans payable that reprice every three (3) months, approximates their fair value because of recent and regular repricing based on current market rate. For fixed rate loans, the carrying value approximates fair value due to its short term maturities, ranging from three months to twelve months. AFS investments The fair values of AFS investments are based on quoted market prices, except for unquoted equity shares which are carried at cost since fair values are not readily determinable.
Long-term debts Discount rates of 2.6% and 4.7% were used in calculating the fair value of the long term debt as of December 31, 2013 and 2012, respectively. Obligations under finance lease The fair values of obligation under finance lease are based on the discounted net present value of cash flows using discount rates of 3.5% to 3.7% as at December 31, 2013 and 1.45% to 4.82% as at December 31, 2012.
Nonfinancial Assets The fair values of the Groups vessels in operations and investment property have been determined by the appraisal method by independent external appraisers based on the highest and best use of property being appraised.
Vessels in operations The fair values of the vessels in operations are determined using the replacement fixed asset approach. This method requires an analysis of the vessels by breaking them down into major components. Bills of quantities for each component using the appropriate basic unit are prepared and related to the unit cost for each component developed on the basis of current costs of materials, labor, plant and equipment prevailing in the locality to arrive at the direct costs of the components. Accrued depreciation was based on the observed condition.
Investment property The fair value of the investment property is determined using the Market Data Approach, which is a process of comparing the subject property being appraised to similar comparable properties recently sold or being offered for sale.
Fair Value Hierarchy Only the Groups AFS investments, which are classified under Level 1, are measured at fair value. During the year ended December 31, 2013 and 2012, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.
- 77 -
2GO SEC Form 17-Q Second Quarter 2014
2GO GROUP, INC. AND SUBSIDIARIES
ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
77
2GO SEC Form 17-Q Second Quarter 2014 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the Second Quarter of 2014
KEY PERFORMANCE INDICATORS (KPI)
The following KPIs are used to evaluate the financial performance of 2GO Group and its subsidiaries. The amounts are in millions of pesos except for the financial ratios.
a. Revenues 2GO Shipping revenues are mainly composed of freight and passage revenues. The revenues of the Non-Shipping Group (Logistics Group) are composed of service fees, sale of goods, and others. They are recognized when the related services are rendered. Total Revenue for the second quarter ended June 30, 2014 is P7.25 billion.
b. Net Income (Loss) before income tax (NIBT) is the earnings of the company before income (loss) tax expense. The Income before income tax as of June 30, 2014 is P620 million.
c. Net Income (Loss) after income tax (NIAT) is the earnings of the company after income (loss) tax expense. The Income after income tax as of June 30, 2014 is P569 million.
d. Debt-to-equity ratio is determined by dividing total liabilities over stockholders equity. 2GO Group debt-to-equity ratio for the second quarter of 2014 is 2.51:1.00. Total liabilities decreased by P270 Million mainly due to the decrease in loans payable, and trade and other payables. Total equity stood at P3.65 billion or 18% higher compared to 2013 due to net income incurred for the two quarters of 2014.
e. Current ratio is measured by dividing total current assets by total current liabilities. The Companys current ratio as of June 30, 2014 is 1.19:1:00. Total current assets is P6.3 billion, or lower by P24 million than the same period in 2013 due to decrease in trade & other receivables. Total current liabilities is P5.31 billion or 5% lower compared to second quarter of 2013. This is mainly due to the decrease in loans payable, and trade and other payables.
The following table shows comparative figures of the Top Five key performance indicators (KPI) for the second quarter of 2014 versus 2013 (amounts in millions except for the financial ratios) based on the consolidated financial statements of 2GO Group, Inc and its subsidiaries formerly known as ATS Consolidated (ATSC), Inc.:
Note: The figures above are in PMM except otherwise indicated.
2014 2013 Revenues 7,245,873 7,682,784 NIBT 620,291 586,950 NIAT 568,970 509,906 Debt-to-Equity ratio 2.51:1.00 3.06:1.00 Current Ratio 1.19:1.00 1.14:1.00 Consolidated 2GO and Subsidiaries Period Ended June 30 78
2GO SEC Form 17-Q Second Quarter 2014 CONSOLIDATED INCOME STATEMENT
The Groups net profit after tax increased by 12% to P569 million from P510 million for the same period last year owing largely to the transformation of the group into a total logistics enterprise from a generally shipping company. The Groups logistics arm has been rapidly expanding, further increasing its percentage to total revenues to 41% from 38% last year. Scanasia, the distribution arm of the group, posted an 11% increase in revenue during the period.
The Groups consolidated revenues for the period ending June 30, 2014 decreased by P436.91 million or a 6% against last year in the term of revenue mix, the shipping business accounted for 59% of the total revenues, while non-shipping business contributed the balance of 41%. The shipping revenues were driven by the peak season wave of the Passage business during the second quarter of 2014.
The Groups sea travel and passenger business slightly increased despite a 20% reduction in carrying capacity of the inter-island vessels mainly due to higher average selling price. The cutthroat competition and rate cutting practices of the discount airlines during the period dampened the performance of the passage business but not enough to pull down the revenue numbers. The reduction in freight revenues is caused largely by the reduction in carrying capacity. In P' Thousands 2014 2013 '14 vs '13 % Inc (Dec) 2014 2013 REVENUES Frei ght 2,420,332 2,852,471 (432,139) (15%) 33% 37% Passage 1,880,716 1,876,477 4,239 0% 26% 24% Servi ce fees 1,285,964 1,304,774 (18,811) (1%) 18% 17% Sal e of goods 1,108,314 1,002,936 105,378 11% 15% 13% Others 550,548 646,126 (95,578) (15%) 8% 8% 7,245,873 7,682,784 (436,911) (6%) 100% 100% COSTS AND EXPENSES Operati ng 4,468,227 4,782,725 (314,498) (7%) 62% 62% Termi nal 628,040 683,386 (55,347) (8%) 9% 9% Overhead 469,482 600,753 (131,272) (22%) 6% 8% Cost of goods sol d 924,857 835,162 89,695 11% 13% 11% 6,490,605 6,902,026 (411,421) (6%) 90% 90% OTHER INCOME (CHARGES) Interest and fi nanci ng charges (160,833) (202,919) 42,087 (21%) (2%) (3%) Equi ty i n net earni ngs (l osses) of associ ates 7,003 24,229 (17,226) (71%) 0% 0% Others - net 18,854 (15,117) 33,971 (225%) 0% (0%) (134,977) (193,808) 58,831 (30%) (2%) (3%) INCOME (LOSS) BEFORE TAX 620,291 586,950 33,341 (6%) 9% 8% PROVISION FOR (BENEFIT FROM) INCOME TAX Current 51,322 89,841 (38,519) (43%) 1% 1% Deferred 0 (12,796) 12,796 (100%) 0% (0%) 51,322 77,044 (25,722) (33%) 1% 1% NET INCOME (LOSS) FROM CONTINUING OPERATIONS 568,970 509,906 59,064 12% 8% 7% NET INCOME (LOSS) 568,970 509,906 59,064 12% 8% 7% ATTRIBUTABLE TO: Equity holders of the parent 562,306 501,920 60,385 12% 8% 7% Minority interests 6,664 7,986 (1,322) -17% 0% 0% 568,970 509,906 59,064 12% 8% 7% Basic/Diluted Income (Loss) Per Common Share 0.2326 0.2085 0.0241 12% Period Ended Jun 30 % to Revenue 79
2GO SEC Form 17-Q Second Quarter 2014
During the first half of the year, its non-shipping businesses, largely logistics and supply chain solutions, continue to perform well due to the various service upgrade initiatives and deliberate focus on key domestic and international accounts. During the period, 2GO Express partnership with FedEx has shifted to high gear. Moreover, Scanasia and 2GO Logistics has strengthened their customer base by adding more top 1000 corporations to their roster of clients.
The costs and expenses for the Group decreased by P411.42 million, or a 6% decrease over the same period last year. The favorable result that can be attributed mainly to the decrease in fuel cost over previous year as well as stringent cost management. These improved costs can also be attributable to the realization of synergies from the integration.
The Group has metamorphosed its business model into a complete supply chain solutions provider capitalizing on the strengths of its various business units. 2GO Group, Inc. can carry the lightest parcel to the heaviest equipment by land, sea and air, be it domestic or international. It will continue to undertake serious steps to further solidify our competitive position by rapidly expanding our logistics arm with the objective of increasing customer traffic and solidifying our leading position within the areas where we operate.
The 2GO Group is the countrys only total logistics solutions provider that has a full range of capabilities and unmatched resources including warehousing, inventory management, domestic and international express mail and courier services, sales distribution and merchandising, domestic freight services for full/ less container load shipments, ISO tank, reefer and cold chain services, heavy lift and project logistics, regular liner passenger service, corporate/ leisure travel and package tours, and international freight forwarding and brokerage - all through its two main strategic business units namely: Shipping and Logistics.
Earnings per Share
Earnings Per Share is computed by dividing Net Income (Loss) Attributable to Equity Holders of the Parent over weighted average number of common shares outstanding for the year. Earnings per share as of June 30, 2014 stood at 0.2326/share, up by 12% compared to 0.2085/share for the same period last year due to the continued improvement in operational performance of the Group.
Other changes (+/-5% or more) in the financial statement not covered in the above discussion
2Q 2014 vs. 2Q 2013 Revenue 1% or P19 million decrease in service fees 15% or P96 million decrease in other revenues Costs & Expenses 22% or P131 million decrease in overhead costs 8% or P55 million decrease in terminal costs 11% or P90 million increase in cost of goods sold Other Income / (Charge) 21% or P42 million decrease in financing cost 71% or P17 million decrease in equity in net earnings (losses) of associates 225% or P34 million increase in Others net 80
2GO SEC Form 17-Q Second Quarter 2014 BALANCE SHEETS
Unaudi ted Audi ted In P' Thousands Jun 2014 Dec 2013 Amount % 2014 2013 ASSETS Current Assets Cash and cash equi val ents 937,371 918,645 19 2% 7% 7% Trade and other recei vabl es 3,599,608 3,949,819 (350) (9%) 28% 32% Inventori es 488,195 421,957 66 16% 4% 3% Other current assets 1,295,374 1,054,409 241 23% 10% 8% Total Current Assets 6,320,548 6,344,830 (24) (0%) 49% 51% Noncurrent Assets Investments i n associ ates 188,979 181,977 7 4% 1% 1% Investment Property 9,763 9,763 (0) (0%) 0% 0% Avai l abl e-for-sal e i nvestments 6,907 6,907 0 0% 0% 0% Property and equi pment 5,346,606 5,054,932 292 6% 42% 40% Deferred tax assets 504,982 477,076 28 6% 4% 4% Goodwi l l 250,450 250,450 0 0% 2% 2% Software devel opment costs 16,706 15,379 1 9% 0% 0% Other noncurrent assets 172,729 180,590 (8) (4%) 1% 1% Total Noncurrent Assets 6,497,122 6,177,074 320 5% 51% 49% TOTAL ASSETS 12,817,670 12,521,904 296 2% 100% 100% LIABILITIES AND EQUITY Current Liabilities Loans payabl e 1,263,181 1,344,927 (82) (6%) 10% 11% Trade and other payabl es 4,010,825 4,189,244 (178) (4%) 31% 33% Current porti on of: Long-term debt 0 373 (0) (100%) 0% 0% Obl i gati ons under fi nance l ease 24,054 28,592 (5) (16%) 0% 0% Redeemabl e preferred shares 6,640 6,680 (0) (1%) 0% 0% Income tax payabl e 10,106 5,772 4 75% 0% 0% Total Current Liabilities 5,314,806 5,575,588 (261) (5%) 41% 45% Noncurrent Liabilities Long-term debt - net of current porti on 3,600,032 3,597,496 3 0% 28% 29% Obl i gati ons under fi nance l ease - net of current porti on 82,894 89,192 (6) (7%) 1% 1% Accrued reti rement benefi ts 161,734 167,243 (6) (3%) 1% 1% Other noncurrent l i abi l i ti es 9,368 9,369 (0) (0%) 0% 0% Total Noncurrent Liabilities 3,854,029 3,863,300 (9) (0%) 30% 31% Total Liabilities 9,168,835 9,438,888 (270) (3%) 72% 75% Equity Attributable to Equity Holders of the Parent Company: Share capi tal 2,484,653 2,484,653 (0) (0%) 19% 20% Addi ti onal pai d-i n capi tal 910,901 910,901 (0) (0%) 7% 7% Unreal i zed gai n on avai l abl e-for-sal e i nvestments 486 434 0 12% 0% 0% Share i n cumul ati ve transl ati on adjustments of associ ates 5,294 5,294 (0) (0%) 0% 0% Excess of cost over net asset val ue of i nvestments -10,912 -9,835 (1) 11% (0%) (0%) Acqui si ti ons of non-control l i ng i nterests -3,093 -3,243 0 (5%) (0%) (0%) Retai ned earni ngs 382,992 -179,314 562 (314%) 3% (1%) Other Comprehensi ve Income -92,133 -92,133 0 (0%) (1%) (1%) Treasury shares -58,715 -58,715 0 (0%) (0%) (0%) 3,619,473 3,058,042 561 18% 28% 24% Non-controlling Interests 29,362 24,974 4 18% 0% 0% Total Equity 3,648,835 3,083,016 566 18% 28% 25% TOTAL LIABILITIES AND EQUITY 12,817,670 12,521,904 295,766 13% 100% 100% 0.00 (0.43) Inc/(Dec) % to TOTAL 81
2GO SEC Form 17-Q Second Quarter 2014 The Groups total assets for the second quarter ending June 30, 2014 was P12.82 billion, 2% higher than P12.52 billion as of December 31, 2013.
Current assets as of June 30, 2014 stayed at almost the same level as in December 31, 2013. Trade and other receivables decreased by 9% or P350 million primarily due to much-improved collection efficiencies. Inventories increased by P66 million or 16% due to business expansion with new principals. Other current assets increased by P241 million or 23%.
Non-current assets increased by P320 million or 5% largely due to the acquisition of additional vessel which was put into commission in March 2014. The additional vessel has an annual capacity of 407,405 passengers and 36,432 TEUs. Investment in associates increased by 4% or P7 million due to the strong performance of its associates during the period.
Total liabilities plummeted 3% or P270 million compared to December 31,2013 primarily due to the decrease in loans payable by 6% or P82 million and trade and other payables by 4% or P178 million.
Total equity increased by 18% to P3.65 billion as of June 30, 2014 versus P3.08 billion in December 31, 2013 due to the strong performance of the Group during the first half of 2014.
CONSOLIDATED CASHFLOW STATEMENTS
The Groups cash and cash equivalents increased by P19 million compared to P63 million decrease last year. Net cash flows from operating activities decreased by P172 million owing largely to the updating of trade payables. Net cash flows used in investing activities is 61% lower compared to last year. Additions in property equipment, including the acquisition and refurbishment costs of the additional vessel, are cushioned by the net proceeds from the insurance claims. Net cash used in financing activities is almost the same as last year.
Other Information
i. Other material events and uncertainties known to management that would address the past and would have an impact on 2GOs future operations are discussed below.
ii. Total fuel/lubes expense is a major component of 2GOs total costs and expenses. 2GO is constantly looking for ways to reduce fuel consumption to lessen the impact of the increasing fuel prices on the bottom line.
2014 2013 Net cash provided by operating activities 396,190 567,950 Net cash used in investing activities (157,189) (400,881) Net cash provided (used in) financing activities (220,275) (229,938) EFFECT OF FOREIGN EXCHANGE LOSS ON CASH AND CASH EQUIVALENTS NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,726 (62,869) Period Ended June In P' MM 82
2GO SEC Form 17-Q Second Quarter 2014 iii. Except as disclosed in the management discussion and notes to the financial statements, there are no other known events that will trigger direct or contingent financial obligation that is material to 2GO, including any default or acceleration of an obligation. There are also no other known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable or unfavorable impact on revenues or income from operations.
iv. All significant elements of income or loss from continuing operations are already discussed in the management discussion and notes to financial statements. Likewise any significant elements of income or loss that did not arise from 2GO continuing operations are disclosed either in the management discussion or notes to financial statements.
v. There is no material off-balance sheet transaction, arrangement, obligation, and other relationships of 2GO with unconsolidated entities or other persons created during the reporting period.
vi. Seasonal aspects of the business are considered in 2GOs financial forecast.
vii. 2GO does not expect any liquidity or cash problem within the next twelve months. Capital expenditures are funded through cash generated from operations and additional borrowings.
Company Outlook
2GO Group has metamorphosed its business model into a complete supply chain solutions provider, capitalizing on the strengths of its various business units. During the past few months, the logistics group (non-shipping) grew so much that its revenue almost matched that of the shipping group. The shipping business contributed 59% of the revenues while the non-shipping business contributed 41%. This shows that the supply chain group is rapidly growing and transforming to drive the Group to become a total logistics solutions provider. The share of the non-shipping group is expected to increase in the months to come.
Shipping business begins its transformation into its new role as an enabler, which help propel the Supply Chain group to its desired growth levels.
2GO Group capitalizes its distinct competitive advantage, a Shipping component that other logistics companies do not have. This allows the Group to gain the confidence of customers by assuring them of reliability in meeting their desired schedules. Likewise, with the varied companies under it, the Group had the widest reach --- for both domestic and international transactions.
The Group will continue to improve its management reporting system to closely monitor the financial results and operating performance of the business units. This ensures better analysis that serve as a tool for management to properly guide the company to its target profitability.
83
2GO SEC Form 17-Q Second Quarter 2014
2GO GROUP, INC. AND SUBSIDIARIES FINANCIAL SOUNDNESS INDICATORS FOR THE PERIOD ENDED JUNE 30, 2014 AND DECEMBER 31, 2013
June December 2014 2013 1 Debt-to-Equity Total Liabilities 9,168,835 9,438,888 Total Stockholders' Equity 3,648,835 3,083,016 Debt-to-Equity Ratio 2. 51 3. 06 2 Current Ratio Total Current Assets 6,320,548 6,344,830 Total Current Liabilities 5,314,806 5,575,587 Current Ratio 1. 19 1. 14 3 Quick Ratio Total Quick Assets (Cash, MS, Receivables) 4,536,979 4,868,464 Total Current Liabilities 5,314,806 5,575,587 Quick Ratio 0. 85 0. 87 4 Solvency Ratio Total Assets 12,817,670 12,521,904 Total Liablities 9,168,835 9,438,888 1. 40 1. 33 5 Debt-to-Asset Ratio / Debt Ratio Total Liabilities 9,168,835 9,438,888 Total Assets 12,817,670 12,521,904 Debt-to-Asset Ratio 0. 72 0. 75 6 Asset-to-Equity Ratio Total Assets 12,817,670 12,521,904 Total Stockholders' Equity 3,648,835 3,083,016 Equity-to-Asset Ratio 3. 51 4. 06 7 Return On Assets or "ROA" Net Income 568,970 227,081 Average Total Assets 12,669,787 11,908,421 ROA 0. 04 0. 02 8 Return on Equity or "ROE" Net Income 568,970 227,081 Average Total Stockholders' Equity 3,365,926 3,001,871 ROE 0. 17 0. 08 9 Gross Profit Margin Sales 7,245,873 13,373,193 Cost of Services (Direct Costs) 6,021,124 11,651,991 Gross Profit 1,224,750 1,721,202 0. 17 0. 13 10 Net Profit Margin Net Profit 568,970 227,081 Sales 7,245,873 13,373,193 0. 08 0. 02 11 Price per Earnings Ratio Price Per Share 2.51 1.70 Earnings per Common Share 0.23 0.09 10. 79 19. 61 12 I nterest Coverage Ratio EBIT 781,124 1,081,787 Interest Expense 160,833 369,014 Interest Coverage Ratio 4. 86 2. 93 84
2GO SEC Form 17-Q Second Quarter 2014 2GO GROUP, INC. AND SUBSIDIARIES MAP OF THE CONGLOMERATE OR GROUP OF COMPANIES OF THE REGISTRANT JUNE 30, 2014
68% 32% 60% 39% 100% 100% 88.31% 100% 100% 100% 100% 100% 33% 100% 100% 100% 100% 100% 50% 78.40% 100% 80% 80% 58.96% 50% 51.14% 100% 100% 48% 62.50% 20% 20% Legend: KGLI BV KGL Investment BV NALMHCI NN-ATS Logistics Management & Holdings Co., Inc. KGLI -NM KGLI-NM Holdings, Inc. SCVASI Special Container and Value Added Services, Inc. BNDISI Brisk Nautilus Dock Integrated Services, Inc. LOGISTICS 2GO Logistics, Inc. NMISI Negrense Marine Integrated Services, Inc. SOI Scanasia Overseas, Inc. 2GO 2GO Group, Inc. HLP Hapag Lloyd Philippines, Inc. SMI Sea Merchants, Inc. HMPPI Hansa Meyer Projects Philippines, Inc. BMI Bluemarine (BMI) Inc. KLN KLN Logistics Holdings Philippines, Inc. AEWI Astir Engineering Works, Inc. WRR WRR Trucking Corporation USDI United South Dockhandlers, Inc. KALI Kerry-ATS Logistics, Inc. WSI WG&A Supercommerce Incorporated SSI Supersail Services Inc. EXPRESS 2GO Express, Inc. NHTC North Harbor Tugs Corporation SFFC Supercat Fast Ferry Corporation SFC Sun-Gold Forwarding Corporation MCC MCCP Transport Philippines, Inc. STI Super Terminals, Inc. RDC Red.Dot Corporation J&A J&A Services Corporation AEWI USDI China-ASEAN Marine BV KGLI-NM Negros Holdings Management Corporation KGLI BV Negros Navigation Co., Inc. EXPRESS BNDISI NMISI SCVASI STI SSI SFC WSI SFFC KALI 2GO LOGISTICS SOI HLP HMPPI WRR KLN J&A RDC NHTC BMI SMI NALMHCI MCC 85
2GO SEC Form 17-Q Second Quarter 2014 2GO GROUP, INC. AND SUBSIDIARIES Statement of Retained Earnings Available for Dividend Declaration JUNE 30, 2014
2014 2013 Unappropriated Retained Earnings, Beginning, as adjusted to available for dividends distribution (820,164,179.86) (1,195,293,972.13) Add: Net income actually earned/realized during the period Net income (loss) during the period closed to Retained Earnings 439,533,544.65 45,778,643.95 Less: Non-actual/unrealized income net of tax for the period/accumulated Unrealized foreign exchange gain - net (except those attributable to Cash and Cash Equivalents) Tax benefit (Deferred Tax Asset) during the period - 329,351,148.32 Other unrealized gains or adjustments to the retained earnings as a result of certain transactions accounted for under the PFRS, negative goodwill - - Sub-total 439,533,544.65 375,129,792.27 Add: Non-actual losses Adjustment due to deviation from PFRS/GAAP - loss Fair value adjustment (M2M gains), biological assets, in 2004 offset against losses in 2005. Accretion of interest on RPS under PAS 39 Unrealized foreign exchange gain - net (except those attributable to Cash and Cash Equivalents) in 2004 realized in 2008 - - Sub-total - - Add(Less): Movement during the period Dividend declarations Appropriations of Retained Earnings Reversals of appropriations Treasury shares - - - - TOTAL RETAINED EARNINGS, END, AVAILABLE FOR DIVIDEND (380,630,635.21) (820,164,179.86) (Amount in Philippine Currency ) 2GO GROUP, INC. 15/F Times Plaza Bldg., cor. Taft, UN. Ave., Ermita Manila STATEMENTS OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION MARCH 31, 2014 AND DECEMBER 30, 2013 86
2GO SEC Form 17-Q Second Quarter 2014
2GO GROUP, INC. AND SUBSIDIARIES Accounts Receivable Aging Report JUNE 30, 2014
TOTAL AR CURRENT 1-30 31-60 61-90 91-120 OVER 120 GRAND TOTAL 3,599,608,302 2,094,523,108 377,523,621 244,601,833 214,595,774 313,566,348 354,797,618 87
2GO SEC Form 17-Q Second Quarter 2014
SIGNATURE
Pursuant to the requirements of the Securities Regulation Code, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Registrant 2GO Group, Inc. [formerly ATS Consolidated (ATSC), Inc.]
Signature and Title Rocelie O. Mendoza AVP-Finance