Bergs Timber
Annual Report 2012

Plain-text annual report

Annual report 2012 Breville Group Limited Annual report 2012 Contents: Chairman’s review CEO’s review Markets and brands Financial report Shareholder information Company information 1 3 5 11 82 84 Annual general meeting Wednesday 14 November 2012 at 10am Building 1, Port Air Industrial Estate, 1A Hale Street, Botany, New South Wales, 2019. cover image: the Kinetix® Control With 7 task controls and timer Chairman’s review “The Breville Group remains firmly focused on its strategy of delivering sustainable growth by leveraging its product innovation, brand management and distribution capabilities across an international platform” During the 2012 financial year, the Breville Group again delivered a strong result driven by continued growth in the group’s international business and an encouraging performance in Australia. Net profit after tax for the year ended 30 June 2012 increased by 44.9% to $46.0m. This growth in earnings and well managed working capital has further strengthened the group’s balance sheet providing a solid foundation to drive future growth especially in international markets. At 30 June 2012 the group had a net cash position of $47.0m compared to $27.3m at the same time last year. The group has delivered strong shareholder returns, with return on equity increasing to 25.9% in the 2012 financial year compared to 15.9% just 4 years ago. Since 2008, earnings per share have increased at a compound annual growth rate (“CAGR”) of 21.0%. This financial performance, together with our strong cash position enabled the board to increase dividends for the year by 46.0% to 24.0 cents per share fully franked (2011: 16.50 cents per share, 11.0 cents franked). Since 2008, dividends per share have increased at a CAGR of 23.0%. The group’s diversity policy aims to ensure a corporate culture that supports workplace excellence. We value diversity and understand that it enables us to differentiate our offering and compete more effectively and efficiently. Similarly, our management remuneration policies are aligned with further improving shareholder returns and the achievement of key strategic objectives. I would like to thank my board colleagues, our experienced and dedicated management and staff, suppliers, customers and shareholders for their continued support. I trust that you will find this annual report informative and helpful. I, together with my board and management colleagues, look forward to meeting as many of you as possible at the AGM in November. John Schmoll Non-executive chairman Return on equity^ Earnings and dividends per share % E O R 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% e r a h s r e p s t n e c 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 FY08 FY09 FY10 FY11 FY12 FY08 FY09 FY10 FY11 FY12 ^ ROE is calculated based on NPAT for the 12 months ended 30 June each year divided by the shareholders’ equity at balance sheet date. Earnings per share (basic) Dividends per share Breville Group Limited annual report 2012 1 the Smart Scoop™ Ice cream maker with automatic hardness settings 2 2 Breville Group Limited annual report 2012 Breville Group Limited annual report 2012 CEO’s review Financial summary $ Millions except where indicated 30 June 2012 30 June 2011 Revenue EBITDA Net profit after tax Earnings per share (cents) Return on equity (%) 427.9 72.5 46.0 35.4 25.9 393.6 52.0 31.7 24.5 20.7 The Breville Group made significant progress in delivering on its strategy, with strong profit growth in the 2012 financial year. Group revenue increased by 8.7% to $427.9m. Excluding the FY11 exit from the North American non-electrical homewares category, Group revenue increased by 13.3%. Continued momentum and growth from the international operations saw international revenues increase 17.6% to $226.2m. Australian revenue finished slightly up on the prior year after showing good growth of 9.9% in the second half. Importantly, EBITDA from international business units increased by 44.9% to $52.0m, representing 71% of group EBITDA. Group EBITDA increased by 39.3% to $72.5m. Key highlights of the year included: • A strong performance from the group’s international operations particularly in North America; • An encouraging performance in Australia despite difficult and competitive retail trading conditions; • A positive response to new higher value Breville designed product launches in all markets; • An expanded product range in North America within existing premium customers; • Expansion of the Breville branded distribution business internationally; • Continued focus on operational cost control and working capital management and a reinvestment in growth driving marketing activities; • Strong shareholder returns with a higher return on equity and dividend growth; and • A strong balance sheet with a higher net “in cash” position. The strong international result was underpinned by successful new product launches, strong juicer sales and continued strong growth of the Keurig distribution business in Canada. In Australia, the business was impacted in the first half by competitive changes in the retail landscape and an increasing house brand presence. The improved second half performance was as a result of further focus on the premium department store and specialist electrical channels and the launch of higher value Breville designed products. Our ongoing investment in developing high quality innovative products and the extension of our geographic reach, positions the group well to compete effectively in a global marketplace. As our products become more sophisticated, the importance of online consumer research, reviews and communication increases. Breville has embraced and continues to invest in both digital and traditional media and is actively supporting the growing online segment. On a personal note, I would like to thank the board and the entire Breville Group team for their ongoing support and assistance. Jonathan Lord Chief executive officer Breville Group Limited annual report 2012 3 CRANBERRY BLACK SESAME SHERBET Comprehensive Colour Premium Range 4 Breville Group Limited annual report 2012 Markets and brands Breville - Thought for food™ As the Breville brand prepares to celebrate its 80th birthday, it does so from a position of strength unrivalled in its history. In both of its more established markets of Australia and New Zealand, Breville reinforced its premium market position during the financial year. In international markets, Breville performed well, expanding its branded presence to more countries. In North America, the Breville brand achieved strong sales growth, cementing itself as a leader in the premium segment of the market. Most significantly, in all of its key markets, the Breville brand continues to build a deeper relationship with its customers, centred around Food Thinking, and developing products that empower people to do things more impressively or easily than they thought possible in their own kitchens. The main driver of the Breville brand’s growing customer acceptance continues to be its investment in, and focus on, quality, design and innovation in its product development. Breville has continued to deepen its understanding of food, and how the consumer interacts with it, applying this to solving problems in ways that are both valuable to people, and differentiated from competitors. Breville is actively protecting this customer value through investment in product development and intellectual property protection, developing a portfolio of products for sustainable growth. In 2012, we continued to build upon our range of flagship products. These products are core to Breville’s growth, as well as its strategic market position as a differentiated, quality focused brand. Some of the more notable launches during the year were: The Kitchen Wizz Pro Food Processor The big mouth food processor with finer more even slicing (2011 Australian Design Award winner, 2012 German Red Dot Design Award winner) The YouBrew Drip Coffee Maker The coffee maker with adjustable flavour and strength that brews directly into a cup, travel mug or carafe (2012 Australian International Design Award, 2012 German Red Dot Design Award winner) The Dual Boiler Espresso Machine For precision extraction and simultaneous steam (2012 Australian Good Design Award winner) The Control Grip Hand Blender The hand blender with ergonomic control, full power and reduced suction The Kinetix Control Blender Kinetix blender with a one piece, ultra light jug and seven task controls and timer The Smart Scoop Ice Cream Maker Ice cream maker with hardness control and ‘keep cool’ (2012 Australian Good Design Award winner) The Thermal Pro Frypans High quality electric frypans with thermally tested even heat distribution Leveraging off its product development capabilities, Breville increased its marketing investment in key geographies with national television campaigns across the U.S., New Zealand, Canada and Australia. Running throughout the year, the campaigns focused on ‘seeing is believing’ and showcasing Breville’s flagship innovations. Each campaign delivered strong results and further strengthened consumer perception of the brand. Breville’s strategy of Food Thinking and creativity continues to gain momentum. The strategy continues to centre around: • Deeper consumer understanding; • Protectable innovation; • Superior quality and design; and • Increased marketing communication. With the Breville brand voted the most trusted kitchen appliance brand in Australia and New Zealand*, Breville’s product range continues to build brand strength. * Reader’s Digest Most Trusted brand awards, 2012, Australia, New Zealand. Breville Group Limited annual report 2012 5 Markets and brands continued Kambrook - The Smarter Choice™ Kambrook has become synonymous with quality, durable products at an affordable price. The ever-expanding product range encompasses appliances for the kitchen, living room, laundry and bedroom. Kambrook highlights the durability of its appliances and the rigorous testing process that each new product undergoes. Each product is subjected to extensive laboratory and quality testing before receiving the Kambrook seal of approval. Philips The group is the exclusive distributor for Philips’ personal care and garment care appliances in Australia and New Zealand. Our relationship with Philips is now in its 12th year and we continue to work collaboratively to grow sales and market share. Key markets Australia Revenues of $201.7m were marginally up on the prior year, with second half revenues growing 9.9% on the previous corresponding period. EBITDA for the year was also in line with the prior year. The Australian business’ multi-brand strategy contributed to its resilient FY12 performance. Breville focused on strengthening its position at upper and premium price points in the kitchen appliance category. By upgrading its product range and focussing on premium department stores and specialist electrical channels it successfully increased its average sales price. The strong performance in the second half of the financial year was driven by the success of these new high value product launches and targeted product specific marketing activity. The Breville brand was voted Australia’s most trusted kitchen appliance brand*, highlighting that the brand is as powerful and relevant in Australia today as ever. * Reader’s Digest Most Trusted brand awards, 2012, Australia, New Zealand. Why don’t they make ‘em LIKE THEY USED TO? the Classic ‘74™ Durable stainless steel jaffle maker 6 6 Breville Group Limited annual report 2012 Key markets continued In a challenging retail environment, Kambrook performed well by expanding existing product ranges and entering new categories. The business continues to invest in brand marketing and each new product is supported by a public relations campaign. Philips continued to set the benchmark for innovation and performance with its flagship shaver range and it also made strong inroads into the steam-generator iron market, with its first of a kind PerfectCare steam system. North America Total revenue increased by 22.4% to $152.2m (2011: $124.4m) in AUD. Excluding North American homewares (fully exited in FY11), total revenue increased by 40.2%. The Breville brand’s revenue grew by 34.5% driven by the release of new higher value flagship products in both new and existing categories, through the group’s premium and specialist retail customers. The Keurig “single serve” coffee distribution business in Canada also performed very well with commission income before operating costs growing from $9.9m to $19.5m. North America delivered a significant increase in EBITDA of 76.1% to $34.7m (2011: $19.7m). This increase in profitability resulted from not only the revenue growth, but also from the FY11 exit of the lower margin, non-electrical homewares category and the full year benefit of the restructured lower operating cost base. How can you get a HOT, BOLD, SINGLE CUP from a drip coffee machine? the YouBrew™ With built-in grinder & adjustable flavour control Breville Group Limited annual report 2012 7 Markets and brands continued Key markets continued New Zealand International Distributors International Distributors reported revenue of $47.3m (2011: $44.2m) an increase of 7.0%, and an EBITDA of $13.7m (2011: $13.5m). The group is focused on broadening its distributor network, especially across the important Asia-Pacific region and accelerating the launches of Breville designed products in these markets. New Zealand again produced a very pleasing result with revenue increasing by 12.8% and EBITDA by 33.3% to $3.6m. This growth was driven principally by the success of recently launched higher value Breville-designed products and the Philips distribution business. The Breville brand was voted New Zealand’s most trusted kitchen appliance brand*. * Reader’s Digest Most Trusted brand awards, 2012, Australia, New Zealand. How do you control the BLEND, MASH, CHOP & SLICE all in the one station? the All In One™ Blend, mash & processing station with control grip. 8 8 Breville Group Limited annual report 2012 People - creativity and food thinkers We enjoy the benefits of a highly experienced and talented team across all departments and geographies. Integrated through our food thinking culture, the passion, creativity and insight of our team has helped us continue to deliver world class, innovative products to our customers. The team continues to be awarded both domestically and internationally with multiple design awards, and recognition through all media including print, broadcast and online. How do you KEEP THE HEAT UP when cold food hits the pan? Breville Group invests in the training and education of its team, building strong collaborative links with world experts in food thinking and technology. We are strongly committed to our core values of creativity, simplicity, insight and excellence in all departments, and we recruit, train, assess and reward employees on this basis. With a team anchored around these common values, we are able to foster a workplace that stimulates idea generation, is passionate about learning, and continually searches for new and better solutions. Breville is committed to ensuring a safe workplace. Our employees participate in regular Work Health and Safety audits and the organisation promotes and encourages a proactive safety culture. Breville advocates diversity in our workforce. We value diversity and understand the insight and creativity that it brings to our business. the Thermal Pro Grill™ with 2400W fast recovery element Breville Group Limited annual report 2012 Breville Group Limited annual report 2012 9 9 9 Sustainability and social responsibility The Breville Group is committed to ethical, responsible and sustainable conduct across the entire business. We remain determined to build a culture, through the commitment of our employees which reduces our impact on the environment and increases our contribution to society. The Group selects its suppliers and partners with its social, ethical and sustainability commitments top of mind, and is developing a system of regular audits to ensure ongoing compliance. As a signatory to the Australian Packaging Covenant, an action plan was developed in 2012 with the key goal to reduce the amount of product packaging that ends up in landfill by designing better, longer lasting products, and by using packaging materials that can either be reused or recycled. the Smart Toast™ 4 slice motorised diecast long slot toaster How do you toast ANY TYPE OF BREAD and get it JUST THE WAY YOU LIKE IT? 10 10 Breville Group Limited annual report 2012 Breville Group Limited Financial report 2012 Contents: Directors’ report Corporate governance statement Income statement Statement of comprehensive income Statement of financial position Statement of changes in equity Cash flow statement Notes to the financial statements Directors’ declaration Independent audit report Auditor’s independence declaration 12 24 28 29 30 31 32 33 78 79 81 Breville Group Limited annual report 2012 11 Directors’ report The board of directors of Breville Group Limited (company) has pleasure in submitting its report in respect of the year ended 30 June 2012. Board of directors The names and details of the company’s directors in office during the year and until the date of this report are as below. Directors were in office for this entire period. John Schmoll Non-executive chairman B.Com, FCA, FAICD Mr Schmoll completed his executive career on his retirement in 2002 as Chief Financial Officer of Coles Myer Ltd. Prior to this he held senior corporate and professional roles in Australia and South Africa including Arthur Young and Edgars Stores Ltd (South Africa’s largest apparel and homewares retailer). Since his retirement he has accepted various non-executive director positions and undertaken some executive coaching roles. Accordingly, he brings to Breville over 35 years of experience in finance, investor relations, information technology and corporate governance, primarily in the distribution and financial sectors. During the last three years he has served as a director of the following other listed companies: • OrotonGroup Ltd # • Patties Foods Ltd # • AWB Limited (March 2005 – December 2010) # denotes current directorship Prior to this he was also a non-executive director of Australian Leisure and Hospitality Limited, Chandler Macleod Ltd and Golden Circle Ltd. Steven Fisher Non-executive director B.ACC, CA(SA) Mr Fisher has more than 25 years experience in general management positions in the wholesale consumer goods industry and is currently chief executive of the Voyager Group. Prior to entering into the consumer goods industry Mr Fisher was a practicing chartered accountant having qualified in South Africa with a Bachelor of Accounting degree. In addition, Mr Fisher serves on various private company boards. During the last three years he has not served as a director of any other listed company. Dean Howell Non-executive director FCA, FTIA Mr Howell has had an extensive career in accounting, spanning some 40 years, and accordingly has a wealth of commercial and advisory experience. He was the former senior partner of a Melbourne firm of chartered accountants and also served on that firm’s national and international boards. He is currently a consultant with Grant Thornton. He is also a director of Peter MacCallum Cancer Foundation Ltd. Mr Howell is chairman of the audit & risk committee. During the last three years he has not served as a director of any other listed company. Steven Klein Non-executive director LLB, B.Com Mr Klein is a Principal of SBA Law. He has had over 20 years experience acting on behalf of both public and private companies in merger and acquisition transactions. During the last three years he has not served as a director of any other listed company. Samuel Weiss Non-executive director AB, Harvard University; MS, Columbia Business School; FAICD Mr Weiss has had a long corporate career in the United States, Europe and Australia with leading consumer brand companies such as Nike, Gateway Computers and Sheridan. He devotes considerable time and energy to education, the arts and disadvantaged communities through his work as a past president of the Harvard Club of Australia, president of The Benevolent Society and as a director of The Sydney Festival. Mr Weiss is chairman of the people and performance committee. During the last three years he has served as a director of the following other listed companies: • Altium Limited # • iProperty Group Ltd # • OrotonGroup Ltd # • GLG Corp Limited # denotes current directorship 12 Breville Group Limited annual report 2012 Company secretaries Performance indicators The names and details of the company’s company secretaries in office during the year and until the date of this report are as below. The company secretaries were in office for this entire period as indicated below. Management and the board monitor the financial performance of the company by measuring actual results against expectations as developed through an annual business planning and budgeting process. Michelle Waters – appointed 15 March 2012 B.Com, CA Ms Waters is a chartered accountant and has over 7 years experience in senior finance roles in print media production and consumer products companies. Prior to the senior finance roles, Ms Waters was a practicing chartered accountant. Shiraz Khan – resigned 15 March 2012 B.Bus, CPA Mr Khan is a certified practicing accountant and has over 20 years experience in senior finance roles in a number of manufacturing and consumer products companies in Australia and New Zealand. Reporting currency and rounding The financial report is presented in Australian dollars and all amounts have been rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the company under ASIC class order 98/100. The company is an entity to which the class order applies. Principal activities During the year, the principal activities of the consolidated entity were the innovation, development, marketing and distribution of small electrical appliances in the consumer products industry. The consolidated entity operated in the principal markets of Australia, North America, New Zealand and Hong Kong. Company overview Appropriate key performance indicators (KPI’s) are used to monitor operating performance and management effectiveness. Review of results and operations Revenue of the consolidated entity for the year to 30 June 2012 was $427,940,000 which was 9% higher than the consolidated revenue for the previous corresponding year of $393,589,000. The group’s profit after income tax attributable to shareholders for the year to 30 June 2012 was $45,982,000. This was a 45% increase on the previous corresponding year result of $31,735,000. The basic earnings per share for the consolidated entity was 35.35 cents per share (2011: 24.47 cents per share). Financial position Operating cash flow for the year was $51,111,000 (2011: $46,997,000) and proceeds were used to pay dividends. Net cash at year end was $47,019,000 (2011: $27,332,000). Risk management The company’s risk management is discussed in the corporate governance statement on page 24. Dividends The following dividends have been paid, declared or recommended since the end of the preceding year. $’000 Cents per ordinary share 11.5 14,961 The underlying strategic intent of the company is a stated commitment to innovative product development, to drive growth in sales and profits in the principal markets in which it operates. In line with this intent, the company has: Final dividends recommended: • built and staffed a world class product development Dividends paid in the year: centre in Sydney; • maintained an efficient procurement and quality assurance centre in Hong Kong; • employed experienced marketing and sales executives in its key markets around the world; and • maintained effective administration processes to support growth initiatives on an international platform. Interim FY12 dividend paid Final FY11 dividend paid 12.5 16,262 7.0 9,107 Breville Group Limited annual report 2012 13 Directors’ report continued Significant changes in the state of affairs There were no significant changes in the state of affairs of the consolidated entity that occurred during the year that have not otherwise been disclosed in this report or the consolidated financial statements. Directors’ interests As at the date of this report, the interests of the directors in the shares or other instruments of Breville Group Limited were: J. Schmoll S. Fisher D. Howell S. Klein S. Weiss Ordinary shares 100,000 50,288 100,000 117,189 121,775 Remuneration report (audited) This remuneration report outlines the compensation arrangements in place for directors and executives (collectively “key management personnel”) of Breville Group Limited. For the purposes of this report, key management personnel (KMP) of the group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the group, directly or indirectly. Details of key management personnel (i) Directors: J. Schmoll Non-executive chairman S. Fisher Non-executive director D. Howell Non-executive director and chairman of audit and risk committee S. Klein Non-executive director S. Weiss Non-executive director and chairman of people and performance committee (ii) Executives: S. Audsley Group chief executive officer (KMP to 9 November 2011) S. Brady General manager global marketing M. Cohen Group chief financial officer C. Dais J. Lord Group general manager - business development and operations (KMP from 28 November 2011) Acting group chief executive officer (Group general manager marketing and product development to 9 November 2011) Other than the appointment of J. Lord to the position of group chief executive officer on 23 August 2012, there were no other changes of key management personnel after reporting date. Compensation philosophy The performance of the company depends, in part, upon the quality of its directors and executives. The company must attract, retain, motivate and develop highly skilled directors and executives in order to secure the short and long term success of the business so to enhance shareholder value. Based on this philosophy, the company’s compensation strategy and framework embodies two interrelated outcomes: improved business results and building a culture of high performance. The following principles define the compensation framework: • Provide competitive rewards (for fixed and variable compensation) to attract high calibre employees; • Link reward to sustained growth in shareholder value from dividends and growth in share price and the delivery of a consistent return on assets; • Link rewards with the strategic goals and performance of the company; and • Reinforce a competitive business strategy to deliver organisational success and enhanced shareholder value. People and performance committee The people and performance committee of the board of directors of the company is responsible for reviewing and recommending to the board executive and employee remuneration arrangements and executive succession as set out in the people and performance committee charter. The people and performance committee assesses the appropriateness of the nature and amount of compensation of executives and employees on an annual basis by reference to relevant individual and company performance and market conditions. The people and performance committee is responsible for the engagement of any external compensation consultants for work on executive remuneration. 14 Breville Group Limited annual report 2012 Remuneration report (audited) continued Compensation structure Structure In accordance with best practice corporate governance, the structure of non-executive director and executive compensation is separate and distinct. Non-executive director compensation Objective The board seeks to set compensation at a level which provides the company with the ability to attract and retain directors of high calibre whilst maintaining a level commensurate with companies of a similar size and type. Structure The Constitution and the ASX Listing Rules specify that the aggregate compensation of non-executive directors shall be determined from time to time by general meeting. The aggregate compensation of $950,000 per year was approved by shareholders at the annual general meeting held in November 2010. The compensation of non-executive directors is reviewed annually. Each director receives a fee for being a director of the company. An additional fee is also paid to each director who also acts as chairman of a board committee. The payment of additional fees for acting as chairman of a committee recognises the additional time commitment required by the director to facilitate the running of the committee. The compensation of non-executive directors for the year ended 30 June 2012 is detailed in Table 1 on page 19 of this report. Executive compensation Objective The company aims to remunerate and reward executives with a level and mix of compensation commensurate with their positions and responsibilities within the company and to: • Reward executives for company and individual performance against specific targets set with reference to business objectives and results; • Align the interest, focus and performance of the executives with those of the shareholders; • Attract, retain and motivate high performing executives; and • Ensure total compensation is competitive by market standards. In determining the level and make-up of executive compensation, the people and performance committee may engage an external consultant as appropriate, to provide independent advice detailing market related levels of compensation. No such external consultants were engaged for the year ended 30 June 2012. The group chief executive officer makes recommendations to the people and performance committee for consideration. Employment contracts are entered into with executives. Details of the contracts are provided on page 21. Compensation consists of the following key elements: • Fixed compensation • Variable compensation • Short term incentive (STI); and • Long term incentive (LTI). The proportion of the fixed compensation and variable compensation (potential short term and long term incentives) is established for each executive by the people and performance committee and approved by the board. Table 3 on page 21 of this report details the components (%) of the compensation of key management personnel of the group. Fixed compensation Objective The level of fixed compensation is set so as to provide a base level of compensation which is appropriate to the position and responsibility and is competitive in the market. Fixed compensation is reviewed annually by the people and performance committee. The process consists of reviewing company and individual performance, relevant comparative market compensation, internal relativities and, where appropriate, external advice on policies and practices. Structure Executives are given the opportunity to receive their fixed compensation in a variety of forms including cash and other non-cash benefits. Breville Group Limited annual report 2012 15 Directors’ report continued Remuneration report (audited) continued Variable compensation – short term incentive (STI) Objective The objective of the STI plan is to reward executives and other employees on the achievement of company and individual value adding performance objectives established annually, providing them with the opportunity to earn over and above their fixed compensation should the agreed objectives be achieved. Depending upon their position and seniority in the organisation, executives and other employees are eligible for a STI award of between 20-40% of their fixed or base annual remuneration. The incentive payment is based on the achievement of financial and non financial objectives, with the former dependant upon a multiplier in accordance with a sliding scale. Objectives for each participant are determined on an individual basis aligned to enhance shareholder value. The principle objectives of the plan are: • To ensure that the company delivers its primary financial results and achieves its targets every year to deliver sustainable performance and continued organisational growth; • To achieve business goals through rewarding value adding individual performance; • To contribute to the development of a performance culture across the company; and On an annual basis, after consideration of performance against the established targets/objectives, incorporating both company financial targets and individual objectives, the group chief executive officer recommends to the people and performance committee an amount, if any, of the STI payment each executive (excluding the group chief executive officer) is eligible to receive. This recommendation, together with a recommendation by the people and performance committee of an amount if any, of the STI payment the group chief executive officer is eligible to receive, is then put to the board for approval. The group chief executive officer may also award discretionary bonuses to recognise and reward key contributions from high performing employees. All discretionary bonuses are presented as recommendations to the people and performance committee for approval. The aggregate of the annual STI payments available for executives across the company are subject to the approval of the people and performance committee and the board and payments are typically paid as a cash bonus. The minimum amount of the STI payments assuming that no executives meet their respective targets/objectives (including company financial targets and individual objectives) for the 2012 financial year is nil (2011: nil). Variable compensation – long term incentive (LTI) • To promote and facilitate the concept of shared Objective ownership whereby executives and employees who contribute to the success of the company will also share in that success. The total potential STI available is set at a level to provide an incentive to the executives and employees to achieve and exceed personal, financial and operational targets. Structure Actual STI payments are determined on the basis of the achievement of specific targets and objectives set at the commencement of the year. Financial performance targets include net profit before tax. Individual objectives are aligned to the non financial components of the group strategy. The company has predetermined financial performance benchmarks which must be met in order to trigger payments under the STI plan and these are varied on a yearly basis in line with the annual budgeting process. The objective of the LTI plan is to reward executives and other employees in a manner that aligns this element of compensation with the creation of shareholder value. The LTI plan is only made available to executives and other employees who are able to influence the generation of shareholder value and have a direct impact on the company’s performance against relevant long term performance hurdles. Depending upon their position and seniority in the organisation, executives and other employees are eligible for a LTI award of between 20-40% of their fixed annual compensation. Structure – performance rights plan From April 2009, LTI grants to executives and other employees (collectively “participants”) were provided in the form of performance rights awards issued in accordance with the Breville Group Limited Performance Rights Plan (PRP). LTI grants to participants (excluding the group chief executive officer) are recommended by the group chief executive officer to the people and performance committee. This recommendation, together with a recommendation by the people and performance committee of a LTI grant to the group chief executive officer, is then put to the board for approval. An offer under the PRP grants a participant the right to a certain number of fully paid ordinary shares in the company. Upon satisfaction of the performance hurdles, the right will vest and be convertible into shares. 16 Breville Group Limited annual report 2012 The options vest if and when the group’s underlying EPS increases by at least 10% per annum compounded annually over the term. If the EPS growth condition is not achieved in any financial year, the EPS growth for that financial year will be carried forward and recalculated at the end of each following financial year until the end of the term of the options. As a result, options may still vest and become exercisable where the vesting conditions are satisfied in a subsequent financial year. If this increase is not met within three years from the date of grant, the options are forfeited. EPS represents the earnings per share from operations adjusted for non-trading items. The use of EPS ensures an alignment between shareholder return and reward for participants. There are no cash alternatives. The options cannot be transferred and are not quoted on the ASX. Other The number of ordinary shares in the company which could be acquired by executives and other employees holding performance rights and options if all outstanding performance rights and options were vested shall not exceed 5% of the total number of issued shares of the company. Remuneration report (audited) continued Variable compensation – long term incentive (LTI) continued The company uses time-based and financial-based hurdles. Earnings per share (EPS) is the financial-based performance hurdle for the LTI plan. EPS represents the earnings per share from operations adjusted for non- trading items. The use of EPS ensures an alignment between shareholder return and reward for participants. In addition to the grant of performance rights awards which are subject to an EPS performance hurdle, performance rights awards also may be granted in accordance with the PRP as a retention award where the performance condition is continued employment with the company to vesting date. If the performance hurdle is not met or if the participant ceases to be employed by the company, any unvested performance rights will lapse unless otherwise determined by the board. There are no cash alternatives. The performance rights cannot be transferred and are not quoted on the ASX. Holders of performance rights are not entitled to notice of, or attend, a meeting of shareholders of the company, or receive any dividends declared by the company, until the rights have vested and then converted into shares. Once allocated, disposal of shares is subject to restrictions whereby board approval is required to sell the shares granted within three years of the shares being allocated to the participant or; if the participant ceases to be employed by the company, within twelve months of the date employment ceases; or such other date as the board determines. In the event of a takeover bid where the bidder and its associates become entitled to at least 50% of the voting shares of the company, any performance rights granted will vest where the board, in its absolute discretion, is satisfied that pro rata performance is in line with any performance condition applicable to those performance rights. Any performance rights which do not vest will immediately lapse, unless otherwise determined by the board. Structure – second senior executive option plan Prior to April 2009, LTI grants to participants were provided in the form of options issued in accordance with the second senior executive option plan. No further options are intended to be granted under the second senior executive option plan. Options, whether vested or unvested will be forfeited if the participant ceases to be employed by the company on or before the date of exercise, unless otherwise determined by the board. Breville Group Limited annual report 2012 17 Directors’ report continued Remuneration report (audited) continued Variable compensation – long term incentive (LTI) continued Relationship of rewards to performance The table below shows the details of LTI plans for which compensation has been included in the remuneration tables on pages 19 to 21 of this report. Number outstanding 30 June 2012 (Executive only) Number outstanding 30 June 2011 (Executive only) - 100,000 LTI Plan (for the year ended) Options June 2009 Performance hurdles/conditions Issued for nil consideration. - - Exercise price - $1.12 - based on volume weighted average price of all the company’s shares traded on ASX on the five trading days up to/including the issue date plus a premium of 11%. - Term of four years and are exercisable in equal tranches on the first three anniversaries of the date of issue as follows: • 1/3 of options, any time during the one year period commencing one year after the issue; • 1/3 of options, any time during the one year period commencing two years after the issue; • 1/3 of options, any time during the one year period commencing three years after the issue. - To vest, the group’s underlying EPS must increase by at least 10% per annum compounded annually over the four year term off the base year underlying EPS of 16.58 cents per share. - 100% of issued options vested and exercised at 30 June 2012. Performance rights June 2009 Issued for nil consideration. - - Exercise price is $0. - To vest, the group’s underlying EPS for the year ended 30 June 2011 must be at least - 870,000 21.00 cents per share. - 100% vested at 30 June 2012. Performance rights June 2010 Issued for nil consideration. - - Exercise price is $0. - Term of three years and there are 2 performance hurdles each representing 50% of the 151,000 294,000 total number of performance rights: (a) Base EPS hurdle – to vest, group’s underlying EPS for the year ending 30 June 2012 must be at least 26.50 cents per share. (b) Stretch EPS hurdle – to vest, the group’s underlying EPS for the year ending 30 June 2012 must be at least 29.00 cents per share. - 0% vested at 30 June 2012. Performance rights June 2011 Issued for nil consideration. - - Exercise price is $0. - Term of three years and there are 2 performance hurdles each representing 50% of the 135,000 261,000 total number of performance rights: (a) Base EPS hurdle – to vest, group’s underlying EPS for the year ending 30 June 2013 must be at least 30.00 cents per share. (b) Stretch EPS hurdle – to vest, the group’s underlying EPS for the year ending 30 June 2013 must be at least 33.00 cents per share. - 0% vested at 30 June 2012. Issued for nil consideration. - - Exercise price is $0. - Term of three years and to vest, the group’s underlying EPS for the year ending 30 June 2013 must be at least 37.00 cents per share. - 0% vested at 30 June 2012. 47,000 91,000 Performance rights June 2012 Issued for nil consideration. - - Exercise price is $0. - Term of three years and there are 2 performance hurdles each representing 50% of the 152,000 total number of performance rights: (a) Base EPS hurdle – to vest, group’s underlying EPS for the year ending 30 June 2014 must be at least 33.50 cents per share. (b) Stretch EPS hurdle – to vest, the group’s underlying EPS for the year ending 30 June 2014 must be at least 36.50 cents per share. - 0% vested at 30 June 2012. Issued for nil consideration. - - Exercise price is $0. - Term of up to twenty four months: (a) 50% of the performance rights to vest, participants must be employed by the company on 3 December 2012. (b) 50% of the performance rights to vest, participants must be employed by the company on 2 December 2013. - 0% vested at 30 June 2012. 69,000 - - 18 Breville Group Limited annual report 2012 Remuneration report (audited) continued Group performance The table below shows the performance of the group over the past five years. Year ended Underlying basic earnings per share (cents) Basic earnings per share (cents) Total dividends (cents) Share price at 30 June ($) 30 June 2008 15.37 16.50 10.50 1.05 30 June 2009 13.32 9.08 5.50 0.92 30 June 2010 30 June 2011 30 June 2012 21.98 17.44 11.00 2.14 27.61 24.47 16.50 3.30 35.35 35.35 24.00 4.38 Remuneration of key management personnel Table 1: Remuneration for the year ended 30 June 2012 Short-term employee benefits Post-em- ployment benefits Long- term employee benefits Salary & fees Cash bonuses Other Super- annuation Long service leave Share- based payment Per- formance rights / options $ 175,776 107,489 112,790 105,795 112,790 614,640 212,243 $ - - - - - - - $ - - - - - - - $ 15,820 2,012 10,151 - 10,151 38,134 $ - - - - - - $ - - - - - - Total $ 191,596 109,501 122,941 105,795 122,941 652,774 18,519 2,670 (139,369) 94,063 296,105 107,065 31,154 28,799 8,250 129,217 600,590 341,057 139,894 31,154 25,000 10,381 190,458 737,944 228,823 61,005 466,002 209,730 - - - - 14,942 304,770 41,940 8,748 263,270 989,690 Non-executive directors J. Schmoll – chairman S. Fisher D. Howell S. Klein (a) S. Weiss Sub-total non-executive directors Other key management personnel S. Audsley (b) S. Brady M. Cohen C.Dais (c) J. Lord Sub-total executive KMP 1,544,230 517,694 62,308 114,258 30,049 458,518 2,727,057 Totals Notes 2,158,870 517,694 62,308 152,392 30,049 458,518 3,379,831 (a) S. Klein was a principal of the legal firm SBA Law from 1 August 2011. Up until 30 June 2011, S. Klein was partner of a legal firm Arnold Bloch Leibler. His director’s fees from 1 August 2011 were paid to SBA Law and prior to that, to Arnold Bloch Leibler. These fees are subject to GST. The amounts shown above are net of GST. (b) S. Audsley did not meet the definition of key management personnel after 9 November 2011. Total remuneration reflected is to 9 November 2011. Share-based payment represents reversal of related non-cash expenditure following cessation of employment and the forfeiture and lapse of unvested performance rights. (c) C.Dais did not meet the definition of key management personnel for the 2011 financial year but became key management personnel on 28 November 2011. Total remuneration is reflected from 28 November 2011. Breville Group Limited annual report 2012 19 Directors’ report continued Remuneration report (audited) continued Remuneration of key management personnel continued Table 2: Remuneration for the year ended 30 June 2011 Short-term employee benefits Post-em- ployment benefits Long- term employee benefits Share- based payment Per- formance rights / options $ - - - - - - Total $ 182,749 104,188 116,833 104,188 116,833 624,791 Long service leave $ - - - - - - Salary & fees Cash bonuses $ 167,660 95,585 107,186 104,188 107,186 581,805 $ - - - - - - 533,828 244,400 Other $ Super- annuation $ 15,089 8,603 9,647 - 9,647 42,986 - - - - - - - 47,051 9,983 224,558 1,059,820 280,945 103,813 29,999 27,355 5,888 102,894 550,894 322,725 123,513 30,000 25,000 5,613 130,738 637,589 426,892 148,096 - 38,420 7,602 115,684 736,694 269,788 93,747 28,499 27,324 5,643 101,545 526,546 197,023 73,632 23,250 15,836 3,027 57,823 370,591 Non-executive directors J. Schmoll – chairman S. Fisher D. Howell S. Klein (a) S. Weiss Sub-total non-executive directors Other key management personnel S. Audsley S. Brady M. Cohen J. Lord M. Melis H. Silver (b) Sub-total executive KMP 2,031,201 787,201 111,748 180,986 37,756 733,242 3,882,134 Totals Notes 2,613,006 787,201 111,748 223,972 37,756 733,242 4,506,925 (a) S. Klein’s fees were paid to Arnold Bloch Leibler, a firm of which he was a partner of until 30 June 2011. These fees are subject to GST. The amounts shown above are net of GST. (b) H. Silver ceased to meet the definition of key management personnel on 31 March 2011. Total remuneration reflected is to 31 March 2011. 20 Breville Group Limited annual report 2012 Remuneration report (audited) continued Table 3: Key management personnel compensation mix Name Non-executive directors J. Schmoll S. Fisher D. Howell S. Klein S. Weiss Fixed compensation Short term incentive Long term incentive (a) 2012 2011 2012 2011 2012 2011 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% - - - - - - - - - - - 23.06% - - - - - - - - - - - 21.19% 18.68% 20.51% - Other key management personnel S. Audsley (b) 100.00% 55.75% S. Brady M. Cohen C.Dais (c) J. Lord 60.65% 62.48% 17.83% 18.84% 21.52% 55.23% 60.12% 18.96% 19.37% 25.81% 75.08% - 20.02% - 4.90% 52.21% 64.20% 21.19% 20.10% 26.60% 15.70% (a) LTI values are based on the accounting value of performance rights in 2012 and performance rights and options in 2011 based on 100% proportion of performance rights and options. (b) S. Audsley did not meet the definition of key management personnel after 9 November 2011. Total remuneration reflected is to 9 November 2011. (c) C.Dais did not meet the definition of key management personnel for the 2011 financial year but became key management personnel on 28 November 2011. Total remuneration is reflected from 28 November 2011. Employment contracts None of the key management personnel have fixed term employment contracts. Amounts payable on termination vary from a minimum statutory entitlement to a maximum of 12 months based on a calculation of total fixed remuneration (which includes base salary, superannuation and allowances (if applicable)). In accordance with the terms of the performance rights plan and the second senior executive option plan, any performance rights or options not vested at the date of termination will be forfeited and shall lapse, unless otherwise determined by the board. Prohibition on hedging by key management personnel The group has adopted a policy which prohibits key management personnel and their closely related parties from entering into an arrangement that has the effect of limiting the exposure of a member of the key management personnel to risk relating to an element of that member’s compensation. The policy complies with the requirements of section 206J of the Corporations Act 2001. Breville Group Limited annual report 2012 21 Directors’ report continued Remuneration report (audited) continued Performance rights and compensation options Table 4: Performance rights granted The terms and conditions of each grant of performance rights affecting remuneration of key management personnel in this financial year or future reporting years are as follows: Grant Date * First exercise date Last exercise date Expiry date Exercise price 20 Apr 09 (a) 1 Sept 11 3 Oct 11 3 Oct 11 22 Dec 10 (b) 3 Sept 12 5 Oct 12 5 Oct 12 22 Dec 10 (c) 2 Sept 13 4 Oct 13 4 Oct 13 20 Apr 11 (d) 2 Sept 13 4 Oct 13 4 Oct 13 12 Oct 11 (e) 1 Sept 14 3 Oct 14 3 Oct 14 23 Dec 11 (f) 3 Dec 12 4 Jan 13 4 Jan 13 23 Dec 11 (g) 2 Dec 13 3 Jan 14 3 Jan 14 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Fair value per performance right at grant date ($) (Note 27) Vested and exercised 30 June 2012 Vested and exercised 30 June 2011 0.57 2.64 2.54 3.32 2.41 2.47 2.33 100% - - - - - - - - - - - - - Performance rights relating to two financial years were granted in the financial year ended 30 June 2011. For details of performance rights grants to key management personnel, refer to note 29. (a) There is one performance hurdle representing 100% of the total number of performance rights granted - group underlying EPS for the year ending 30 June 2011 is at least 21.00 cents per share. (b) There are two performance hurdles each representing 50% of the total number of performance rights granted - Base EPS (group underlying EPS for the year ending 30 June 2012 is at least 26.50 cents per share) and Stretch EPS (group underlying EPS for the year ending 30 June 2012 is at least 29.00 cents per share). (c) There are two performance hurdles each representing 50% of the total number of performance rights granted - Base EPS (group underlying EPS for the year ending 30 June 2013 is at least 30.00 cents per share) and Stretch EPS (group underlying EPS for the year ending 30 June 2013 is at least 33.00 cents per share). (d) Group underlying EPS for the year ending 30 June 2013 is at least 37.00 cents per share. (e) There are two performance hurdles each representing 50% of the total number of performance rights granted - Base EPS (group underlying EPS for the year ending 30 June 2014 is at least 33.50 cents per share) and Stretch EPS (group underlying EPS for the year ending 30 June 2014 is at least 36.50 cents per share). (f) Performance condition being that participants must be employed by the company on 3 December 2012. (g) Performance condition being that participants must be employed by the company on 2 December 2013. * In addition to the EPS performance hurdle, the participant must be employed by the company on the vesting date. Table 5: Shares issued on exercise of compensation options during the year ended 30 June 2012 30 June 2012 M. Cohen Options exercised/shares issued Price paid per share Number 100,000 100,000 $ 1.12 Table 6: Shares issued on exercise of compensation options during the year ended 30 June 2011 30 June 2011 M. Cohen M. Cohen Options exercised/shares issued Price paid per share Number 100,000 200,000 300,000 $ 2.36 1.12 22 Breville Group Limited annual report 2012 Directors’ meetings Corporate governance The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director was as follows: Full board Audit & risk (A&RC) People and performance 13 13(c) 13 13 13 13 4 4 3 4(c) 4 4 4 4 3 4 4 4(c) Number of meetings J. Schmoll S. Fisher D. Howell S. Klein S. Weiss (c) Designates the current chairman of the board or committee. Committee membership As at the date of this report, the company had an audit & risk committee and a people and performance committee of the board of directors. The details of the functions and memberships of the committees of the board are presented in the corporate governance statement. Indemnification of directors and officers The directors and officers of the company are indemnified by the company against losses or liabilities which they may sustain or incur as an officer of the company in the proper performance of their duties. During the financial year, the company paid premiums in respect of contracts to insure the directors of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of liability and the amount of the premiums. Likely developments and expected results Disclosure of information as to likely developments in the operations of the consolidated entity and expected results of those operations would be prejudicial to the interests of the consolidated entity. Accordingly, such information has not been included in this report. Environmental regulations and performance The consolidated entity is not involved in any activities that have a marked influence on the environment within its area of operation. In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Breville Group Limited support the principles of good corporate governance. The company’s corporate governance statement is on page 24. Share options and performance rights Unissued shares As at the date of this report and the reporting date, there were nil unissued ordinary shares under options (2011: 100,000) and 727,000 potential unissued shares under performance rights (2011: 1,039,000). Refer to note 27 of the financial report for further details of the options and performance rights outstanding. Option and performance right holders do not have any right, by virtue of the option or performance right, to participate in any share issue of the company. Shares issued as a result of the exercise of options During the year, 100,000 options were exercised to acquire fully paid ordinary shares in Breville Group Limited (2011: 480,000). Lapse of unvested performance rights During the year, 598,000 unvested performance rights lapsed following the cessation of employment of employees or executives (2011: nil). Auditor’s declaration of independence Attached is a copy of the auditor’s declaration provided under section 307C of the Corporations Act 2001 in relation to the audit for the year ended 30 June 2012. This auditor’s declaration forms part of this directors’ report. Non-audit services During the financial year ended 30 June 2012 the company’s primary auditor, Ernst & Young Australia did not provide any non-audit services. Significant events after year end No matters or circumstances have arisen since the end of the year which significantly affected or may affect the operations of the consolidated entity. Signed in accordance with a resolution of directors. John Schmoll Non-executive chairman Sydney 23 August 2012 Breville Group Limited annual report 2012 23 Corporate governance statement The board of directors is responsible for the corporate governance practices of the company and is committed to adhering to the Australian Stock Exchange (‘ASX’) Corporate Governance Council (‘council’) ‘Corporate Governance Principles and Recommendations’. The ASX principles that have been adopted are outlined below. The company’s corporate governance practices throughout the year ended 30 June 2012 were compliant with the council’s principles and recommendations, except for those differences disclosed and explained in this statement. The following documents are available on the investor relations, corporate governance section of the company’s website brevillegroup.com • selection and appointment of directors • criteria for assessing independence • code of conduct • continuous disclosure policy • share trading policy • shareholder communications policy • board charter • audit and risk committee charter • people and performance committee charter • diversity policy The term of the current directors as at the date of this annual report are as follows: Director John Schmoll (chairman) Steven Fisher Dean Howell Steven Klein Samuel Weiss Appointed Term in office Non- executive Independent Last elected 2004 2004 2008 2003 2008 8 years 8 years 4 years 9 years 4 years Yes Yes Yes Yes Yes Yes No Yes No Yes 2009 2010 2011 2011 2011 In accordance with the requirements of the company’s constitution, Mr Schmoll will seek re-election at the company’s AGM later this year. Principle 1: Lay solid foundations for management and oversight Role of the board and management The board guides and monitors the business and affairs of the company on behalf of the shareholders, by whom it is elected and to whom it is accountable. The board has adopted formal guidelines for board operation and membership. These guidelines outline the roles and responsibilities of the board and its members and establish the relationship between the board and management. The board is responsible for approving the strategic direction of the company, establishing goals for management, monitoring the achievement of those goals and establishing a sound system of risk oversight and management. The board will regularly review its performance and the performance of its committees. Evaluating the performance of key executives The performance of key executives is reviewed against specific and measurable qualitative and quantitative performance criteria and includes: • financial measures of the company’s performance; • development and achievement of strategic objectives; • development of management and staff; • compliance with legislative and company policy requirements; and • achievement of key performance indicators. Performance evaluation All key executives were subject to a performance review as described above during the reporting period. 24 Breville Group Limited annual report 2012 Principle 2: Structure the board to add value Board composition The company’s constitution states that there must be a minimum of three directors and contains detailed provisions concerning the tenure of directors. The board currently comprises five non-executive directors. The directors’ report, on page 12, outlines the relevant skills, experience and expertise held by each director in office at the date of this report. Director independence In considering whether a director is independent, the board refers to the company’s “Criteria for assessing independence of directors” which is consistent with the council’s recommendations. Independent directors of the company are those that are not involved in the day-to-day management of the company and are free from any real or reasonably perceived business or other relationship that could materially interfere with the exercise of their unfettered and independent judgement. In accordance with the definition of independence above, and the materiality thresholds outlined in the company’s policy ‘Criteria for assessing independence of directors’, it is the board’s view that Mr Dean Howell, Mr John Schmoll and Mr Samuel Weiss are independent directors. The following directors are not independent directors: • Mr Steven Fisher (non-executive director) is employed by an entity associated with a substantial shareholder of the company; and • Mr Steven Klein (non-executive director) is a principal of SBA Law which is a professional adviser to the company. Regardless of whether directors are defined as independent, all directors are expected to bring independent views and judgement to board deliberations. Majority independence Of the five directors, two are considered not to be independent for the reasons noted above. The majority of the board is considered to be independent. Independent chairman Mr John Schmoll was non-executive chairman throughout the year. Mr Schmoll is considered to be an independent chairman. Material personal interest requirement The Corporations Act provides that unless agreed by the board, where any director has a material personal interest in a matter, the director will not be permitted to be present during discussions, or to vote on the matter. Access to independent advice There are procedures in place to enable directors, in connection with their duties and responsibilities as directors, to seek independent professional advice at the expense of the company. Prior written approval of the chairman is required, which will not be unreasonably withheld. Board committees The board has established the audit and risk committee and people and performance committee to assist in the execution of its duties and to allow detailed consideration of complex issues. Each of these committees is comprised of all the directors. Nomination committee During the year ended 30 June 2012, the company did not have a separately established nomination committee. All duties and responsibilities typically delegated to such a committee are the responsibility of the full board. Although the council’s recommendation 2.4 recommends that a nomination committee can be a more efficient mechanism for the detailed examination of selection and appointment practices, particularly in larger companies, the board does not believe at this time that any marked efficiencies or enhancements would be achieved by the creation of a separate nomination committee. Evaluating the performance of the board There is no formal review process of the performance of the board, its committees and individual directors. Currently, the chairman informally assesses the performance of committees and individual directors and their contribution to board affairs. Principle 3: Promote ethical and responsible decision-making Code of conduct The board has formally adopted a code of conduct (“code”) for all employees (including directors). The code aims at maintaining the highest ethical standards, corporate behaviour and accountability across the group. These obligations are also consistent with the duties imposed on directors by the Corporations Act. In addition, directors are obliged to be independent in judgement and to ensure that all reasonable steps are taken to be satisfied as to the soundness of board decisions. Diversity policy The company is an equal opportunity employer and values differences such as gender, age, culture, disability, ethnicity and lifestyle choices. The company’s diversity policy aims to ensure a corporate culture that supports workplace diversity whilst providing access to equal opportunities at work based on merit. This policy is available on the company’s website at the investor relations, corporate governance section and is subject to periodic review by, and may be changed by resolution of the Board. The policy has no contractual effect. Breville Group Limited annual report 2012 25 Corporate governance statement continued Principle 3: Promote ethical and responsible decision-making continued Principle 4: Safeguard integrity in financial reporting Diversity policy objectives Audit and risk committee The objectives set by the board in accordance with the diversity policy and progress towards achieving them are: • Representation of women trained in recruitment and selection panels: Further progress was made in Australia during the year and the program was expanded to other regions; • Issuing the company equal opportunity statement to recruiting agencies: This was achieved in Australia during the year and the program was expanded across other regions; • Explicit requirement of recruiting agencies to provide a gender balance of suitable, qualified, shortlisted candidates for interview: This initiative achieved further progress during the year as the program was expanded across other regions; • Promoting a safe workplace free from harassment or discrimination of any kind: Training and education programs which included topics on harassment, bullying, victimisation and discrimination were conducted in Australia and North America during the year; • Enhancing the gender balance of women in succession plans in senior and managerial roles through a mentoring program; and • Continue flexible working arrangements where operationally appropriate. The proportion of women employees in the company and the current targets are as follows: 30 June 2011 30 June 2012 Target by June 2015 0% 18% 50% 0% 15% 18% 20% 53% 50% Women on the board Women in senior roles Women in company To assist the board in fulfilling its responsibilities in relation to diversity, the implementation of these objectives is overseen by the people and performance committee. The people and performance committee shall: • • report to the board at least annually, on the company’s progress in achieving the objectives set for achieving gender diversity; regularly oversee a review of the relative proportion of women across the company and their relative positions; and • consider other initiatives to promote diversity in the workplace. The board has an audit and risk committee (A&RC), which operates under a charter approved by the board. It is the board’s responsibility to ensure that an effective internal control framework exists within the consolidated entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes, the safeguarding of assets, the maintenance of proper accounting records and the reliability of financial information. The board has delegated the responsibility for the establishment and maintenance of a framework of internal control and ethical standards of the company to the A&RC. Among its responsibilities, the A&RC: • ensures that company accounting policies and practices are in accordance with current and emerging accounting standards; • • reviews all accounts of the group to be publicly released; recommends to the board the appointment and remuneration of the external auditors; • reviews the scope of external audits; • assesses the performance and independence of the external auditors, including procedures governing partner rotation; • reviews corporate governance practices; and • monitors and assesses the systems for internal compliance and control, legal compliance and risk management. Composition of committee The current members of the A&RC are: • Mr Dean Howell (chairman) • Mr Steven Fisher • Mr Steven Klein • Mr John Schmoll • Mr Samuel Weiss The directors’ report, on page 23, outlines the number of A&RC meetings held during the year and the names of the attendees at those meetings. It also outlines the qualifications of A&RC members on page 12. The group chief executive officer; company secretary; group chief financial officer; the external auditors and any other persons considered appropriate may attend meetings of the A&RC by invitation. The committee also meets from time to time with the external auditors independent of management. In accordance with the council’s recommendation 4.2, the A&RC is structured so that it: • comprises only non-executive directors; • comprises a majority of independent directors; 26 Breville Group Limited annual report 2012 Principle 4: Safeguard integrity in financial reporting continued • is chaired by an independent chair, who is not chair of the board; and • has at least three members. The majority of the A&RC is considered to be independent as at the date of this report, although of the five committee members, Mr Steven Fisher and Mr Steven Klein are considered not to be independent for the reasons noted above. Principle 5: Make timely and balanced disclosure The company’s continuous disclosure policy complies with the council’s recommendation 5.1. This policy is available on the company’s website at the investor relations, corporate governance section. Principle 6: Respect the rights of shareholders Communication policy The company is committed to providing all shareholders with comprehensive, timely and equal access to information about its activities to enable them to make informed investment decisions. The company’s shareholder communication policy is available on the company’s website at the investor relations, corporate governance section. Electronic communication The company’s website displays recent ASX announcements and contains information about the company. Briefings The company keeps a record for internal use of one to one briefings held with investors and analysts, including a record of those present and the time and place of the meeting. Principle 7: Recognise and manage risk The company is committed to the identification, monitoring and management of risks associated with its business activities including financial, operational, compliance, ethical conduct, brand and product quality risks. The company has embedded in its management and reporting systems a number of risk management controls. These include: • guidelines and limits for approval of capital expenditure; • policies and procedures for the management of financial risk and treasury operations including exposures to foreign currencies and movements in interest rates; • annual budgeting and monthly reporting systems for all businesses which enable the monitoring of progress against performance targets and the evaluation of trends; • policies and procedures which enable management of the company’s material business risks; • formal strategic planning sessions; and • presentation of periodic reports to the board and the A&RC identifying items that represent a potential risk and the manner in which these are being managed and responded to. Management is ultimately responsible to the board for the system of internal control and risk management and has reported to the board as to the effectiveness of the company’s management of its material business risks. The A&RC assists the board in monitoring this function. In accordance with the council’s recommendation 7.3 the group chief executive officer and group chief financial officer provided the board with a written declaration confirming that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system operated effectively in all material respects. Principle 8: Remunerate fairly and responsibly People and performance committee The board has a people and performance committee, comprising the following directors: • Mr Samuel Weiss (chairman) • Mr Steven Fisher • Mr Dean Howell • Mr Steven Klein • Mr John Schmoll In accordance with the council’s recommendation 8.1, the people and performance committee comprises: • an independent chairman; and • at least three members. The majority of the people and performance committee is considered to be independent as at the date of this report, although of the five committee members, Mr Steven Fisher and Mr Steven Klein are considered not to be independent for the reasons noted above. For details on the number of meetings of the people and performance committee held during the year and the attendees at those meetings, refer to the directors’ report on page 23. Remuneration disclosure For details of the company’s remuneration philosophy and framework, and the remuneration received by directors and executives in the current period, please refer to the remuneration report contained in the directors’ report on pages 14 to 22. Breville Group Limited annual report 2012 27 Income statement for the year ended 30 June 2012 Revenue Cost of sales Gross profit Other income Employee benefits expenses Onerous lease expense Premises, lease & utilities expenses Advertising expenses Other expenses Earnings before interest, tax, depreciation & amortisation (EBITDA) Depreciation & amortisation expense Earnings before interest and tax (EBIT) Finance costs Profit before income tax Income tax expense Net profit after income tax for the year attributable to members of Breville Group Limited Note 2(a) 2(b) 2(c) 2(f) 2(d) 2(g) 30 June 2012 $’000 30 June 2011 $’000 427,940 (267,304) 160,636 449 (46,966) - (11,836) (16,817) (12,999) 72,467 (6,887) 65,580 (913) 64,667 393,589 (255,000) 138,589 376 (45,711) (5,366) (10,321) (12,771) (12,788) 52,008 (6,705) 45,303 (1,694) 43,609 3 (18,685) (11,874) 45,982 31,735 Cents Cents Earnings per share for profit attributable to the ordinary equity holders of Breville Group Limited: - basic earnings per share - diluted earnings per share 4 4 35.35 35.35 24.47 24.44 The accompanying notes form an integral part of this income statement. 28 Breville Group Limited annual report 2012 Statement of comprehensive income for the year ended 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Net profit after income tax for the year 45,982 31,735 Other comprehensive income/(loss) Foreign currency translation differences Net change in fair value of cash flow hedges Income tax on other comprehensive income/(loss) and other items taken directly to equity Other comprehensive income/(loss) for the year, net of income tax 20(a) 20(c) 3 956 3,236 (5,122) (5,345) (616) 1,819 3,576 (8,648) Total comprehensive income for the year attributable to members of Breville Group Limited 49,558 23,087 The accompanying notes form an integral part of this income statement. Breville Group Limited annual report 2012 29 Statement of financial position as at 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 6 7 8 9 3 10 11 3 12 13 15 16 3 17 18 16 3 17 19 20 21 53,095 73,579 61,596 479 476 3,298 192,523 3,875 12,462 45,298 24,558 86,193 27,768 67,272 57,870 21 1,678 1,504 156,113 5,096 11,966 45,417 24,558 87,037 278,716 243,150 63,679 57 9,580 7,120 17 80,453 6,019 6,251 8,581 20,851 101,304 177,412 138,760 (14,783) 53,435 177,412 59,084 242 6,735 5,921 2,896 74,878 194 6,372 8,128 14,694 89,572 153,578 135,642 (14,886) 32,822 153,578 Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Current tax assets Other assets Total current assets Non-current assets Plant and equipment Deferred tax assets Intangible assets – other Intangible assets – goodwill Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Current tax liabilities Provisions Other financial liabilities Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Equity attributable to equity holders of the parent Issued capital Reserves Retained earnings Total equity The accompanying notes form an integral part of this income statement. 30 Breville Group Limited annual report 2012 Statement of changes in equity for the year ended 30 June 2012 Issued capital $’000 Note Reserves $’000 Retained earnings $’000 Total equity $’000 At 1 July 2010 137,653 (7,306) 19,876 150,223 Foreign currency translation reserve Cash flow hedges Income tax on items taken directly to equity Net income recognised directly in equity Profit for the year Total recognised (loss)/income for the year Dividends paid Issue of ordinary shares – exercise of options Ordinary shares acquired by the Trustee of the Breville Group Performance Share Plan Trust Repayment of non-recourse senior executive option plan loans Share-based payments At 30 June 2011 Foreign currency translation reserve Cash flow hedges Income tax on items taken directly to equity Net income recognised directly in equity Profit for the year Total recognised income for the year Dividends paid Issue of ordinary shares – exercise of options Ordinary shares acquired by the Trustee of the Breville Group Performance Share Plan Trust Transferred to participants of the performance rights plan Share-based payments At 30 June 2012 20(a) 20(c) 3 5(a) 19(a) 19(b) 19(c) 20(b) 20(a) 20(c) 3 5(a) 19(a) 19(b) 19(b) 20(b) - - - - - - - 842 (4,296) 1,443 - 135,642 - - - - - - - 112 (1,290) 4,296 - (5,122) (5,345) 1,819 (8,648) - - - - (5,122) (5,345) 1,819 (8,648) - 31,735 31,735 (8,648) 31,735 23,087 - - - - 1,068 (14,886) 956 3,236 (616) 3,576 (18,789) (18,789) - - - - 842 (4,296) 1,443 1,068 32,822 153,578 - - - - 956 3,236 (616) 3,576 - 45,982 45,982 3,576 45,982 49,558 - - - (4,296) 823 (25,369) (25,369) - - - - 112 (1,290) - 823 138,760 (14,783) 53,435 177,412 The accompanying notes form an integral part of this income statement. Breville Group Limited annual report 2012 31 Cash flow statement for the year ended 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Finance costs paid Income tax paid Finance income received Net cash flows from operating activities 6(b) Cash flows used in investing activities Purchase of plant and equipment Proceeds from sale of plant and equipment Purchase of intangible assets Net cash flows used in investing activities Cash flows used in financing activities Net proceeds/(repayment) of borrowings Proceeds from issue of shares Irretrievable cash contributions paid to the Trustee of the Breville Group Performance Share Plan Trust to acquire ordinary shares Proceeds from repayment of senior executive option plan loans Equity dividends paid Net cash flows used in financing activities 19(a) 19(b) 19(c) 5(a) Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Net foreign exchange difference Cash and cash equivalents at end of the year 6(a) The accompanying notes form an integral part of this income statement. 576,021 (510,309) (1,998) (13,587) 984 51,111 (745) 23 (4,297) (5,019) 5,839 112 (1,290) - (25,369) (20,708) 25,384 27,564 134 53,082 420,541 (366,891) (2,533) (4,622) 502 46,997 (461) 89 (5,936) (6,308) (4,035) 842 (4,296) 1,443 (18,709) (24,755) 15,934 13,509 (1,879) 27,564 32 Breville Group Limited annual report 2012 Notes to the financial statements for the year ended 30 June 2012 Note 1. Summary of significant accounting policies Breville Group Limited is a for profit company limited by shares incorporated in Australia. Breville Group Limited shares are quoted on the Australian Stock Exchange. This financial report covers the consolidated entity comprising Breville Group Limited and its subsidiaries (company or group). A description of the group’s operations and of its principal activities is included in the review of results and operations and principal activities in the directors’ report on page 13. The directors’ report is unaudited (except for the remuneration report) and does not form part of the financial report. (a) Basis of preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial report has also been prepared on a historical cost basis, except for derivative financial instruments which have been measured at fair value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the company under ASIC class order 98/100. The company is an entity to which the class order applies. (b) Statement of compliance The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the group for the annual reporting period ended 30 June 2012. The amendments to standards and interpretations not yet adopted are not expected to have a material impact on the group in the period of initial application. (c) Basis of consolidation The consolidated financial statements comprise the financial statements of Breville Group Limited and its subsidiaries as at 30 June each year. Subsidiaries are all those entities over which the group has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. The financial statements of subsidiaries are prepared for the same reporting period, using consistent accounting policies. In preparing the consolidated financial statements, all inter-group balances and transactions, income and expenses and profit and loss resulting from intra-group transactions have been eliminated in full. Subsidiaries are fully consolidated from the date on which control is obtained by the group and cease to be consolidated from the date on which control is transferred out of the group. The acquisition of subsidiaries is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. (d) Significant accounting judgements, estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Impairment of goodwill & intangibles with indefinite useful lives The group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash generating units to which the goodwill and intangibles with indefinite useful lives are allocated. The assumptions used in this estimation of recoverable amount and the carrying amount of goodwill and intangibles with indefinite useful lives are discussed in note 14. Share-based payment transactions The group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using either the Black-Scholes or binomial option pricing model, using the assumptions detailed in note 27. Onerous lease provision The onerous lease provision represents the present value of the future lease payments that the consolidated entity is presently obligated to make in respect of onerous lease contracts under non-cancellable operating lease agreements, less revenue expected to be earned on the lease including estimated future sub-lease revenue, where applicable. The calculation of this provision requires various assumptions associated with the sub-letting of the premises. The related carrying amounts are disclosed in note 17. Breville Group Limited annual report 2012 33 Notes to the financial statements for the year ended 30 June 2012 Note 1. Summary of significant accounting policies continued (d) Significant accounting judgements, estimates and assumptions continued Taxes Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective group company’s domicile. As the group assesses the probability for litigation and subsequent cash outflow with respect to taxes as remote, no contingent liability has been recognised. Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. Warranty and faulty goods Provision for warranty and faulty goods is recognised at the date of sale of the relevant products, at the group’s best estimate of the expenditure required to settle the group’s liability. Factors that could impact the estimated claim information include the success of the group’s productivity and quality initiatives, as well as parts and labour costs. The related carrying amounts are disclosed in note 17. Provision for make-good The provision for make-good represents the value of expected future payments to be made in respect of restoration of leased premises under contracts that have clauses potentially requiring these premises to be restored to their original condition at the conclusion of the lease. The estimate may vary as a result of negotiations between the parties at the end of the lease term. The related carrying amounts are disclosed in note 17. (e) Business combinations All identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of the business combination over the net fair value of the group’s share of the identifiable net assets acquired is recognised as goodwill. Any transaction costs incurred in connection with a business combination are expensed as incurred. (f) Operating segments An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including certain inter- group revenues and expenses, whose operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. Operating segments have been identified based on the information provided to the chief operating decision makers being the group chief executive officer and board of directors. Operating segments that meet the quantitative criteria as prescribed by AASB 8 Operating Segments are reported separately. However, an operating segment that does not meet the quantitative criteria is still reported separately where information about the segment would be useful to the users of the financial report. (g) Foreign currency translation (i) Functional and presentation currency Both the functional and presentation currency of Breville Group Limited and its Australian subsidiaries are Australian dollars (AUD or A$). Each entity in the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. (ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. 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. 34 Breville Group Limited annual report 2012 Note 1. Summary of significant accounting policies continued (g) Foreign currency translation continued (ii) Transactions and balances continued The functional currency of the foreign subsidiaries is either: • USD - United States dollars (Breville Holdings USA, Inc. and Breville USA, Inc.); • HKD - Hong Kong dollars (HWI International Limited, Gannet Holdings Limited and Breville Export Limited); • CAD - Canadian dollars (HWI Canada, Inc., Holdings HWI Canada, Inc. and Anglo-Canadian Housewares, L.P.); and • NZD - New Zealand dollars (Breville New Zealand Limited). As at the reporting date the assets and liabilities of these foreign subsidiaries are translated into the presentation currency of Breville Group Limited. They are translated at the rate of exchange ruling at the balance sheet date and the income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the retranslation of the financial statements of foreign subsidiaries are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. (h) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. For the purposes of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. (i) Trade and other receivables Trade receivables, which generally have 30-60 day terms, are initially recognised at fair value and subsequently measured at amortised cost. Bad debts are written off when incurred. An allowance for uncollectible receivables is established when there is objective evidence that the group will not be able to collect all amounts due. The amount of the allowance is recognised in the income statement. (j) Inventories Inventories are valued at the lower of cost and net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. This includes the transfer from equity of gains and losses on qualifying cash flow hedges of purchases of finished goods. Costs are assigned to individual items of inventory on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. (k) Derivative financial instruments and hedging The group uses derivative financial instruments such as forward exchange contracts, foreign exchange option contracts and interest rate swaps to hedge its risks associated with foreign currency and interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to fair value. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives, except for those that qualify for hedge accounting, are taken directly to the income statement for the year. The fair value of forward exchange contracts and foreign exchange option contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles and where applicable exercise prices. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. For the purposes of hedge accounting, hedges are classified as cash flow hedges when they hedge exposure to variability in cash flows that is attributable either to a particular risk associated with a recognised asset or liability or to a forecast transaction. At the inception of a hedge relationship, the group formally designates and documents the hedge relationship to which the group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Breville Group Limited annual report 2012 35 Notes to the financial statements for the year ended 30 June 2012 Note 1. Summary of significant accounting policies continued (k) Derivative financial instruments and hedging continued When accounting for foreign exchange option contracts, the intrinsic value of the option is the only component subject to the hedging relationship. The time value of money is excluded from the hedge relationship. Hedges that meet the strict criteria for hedge accounting are accounted for as follows: Cash flow hedges Cash flow hedges are hedges of the group’s exposure to variability in cash flows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and that could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when hedged income or expenses are recognised or when a forecast purchase occurs. When the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to the income statement. A hedge of the foreign currency risk of a firm commitment is accounted for as a cash flow hedge. (l) Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation on plant and equipment is calculated on a straight line basis over the estimated useful life of between 2 and 10 years. The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each year end. An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset at the time of derecognition) is included in the income statement in the year in which they arise. (m) Intangible assets - goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the group’s cash generating units, or groups of cash generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represents the lowest level within the group at which the goodwill is monitored for internal management purposes. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. When the recoverable amount of a cash generating unit is less than the carrying amount, an impairment loss is recognised. When goodwill forms part of a cash generating unit and an 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 manner is measured based on the relative values of the operation disposed of and the portion of the cash generating unit retained. Impairment losses recognised for goodwill are not subsequently reversed. (n) Intangible assets - other Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. 36 Breville Group Limited annual report 2012 Note 1. Summary of significant accounting policies continued (n) Intangible assets – other continued Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Research and development costs Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefits from the related project. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually or more frequently when an indication of impairment arises during the reporting period. A summary of the policies applied to the group’s intangible assets is as follows: Brand names Internally generated or Acquired Useful lives Acquired Indefinite Amortisation method used No amortisation Impairment test Annually and more frequently when an indication of impairment exists. Computer software Internally generated or Acquired Acquired Useful lives Finite Amortisation method used Amortised over the useful life, not exceeding 3 years, on a straight line basis. When an indication of impairment exists. The amortisation method is reviewed at each year end. Internally generated Impairment test Development costs Internally generated or Acquired Useful lives Finite Amortisation method used Amortised over the period Impairment test of expected future sales, not exceeding 3 years, from the related project on a straight line basis. Annually and more frequently when an indication of impairment exists. The amortisation method is reviewed at each year end. 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 recognised in the income statement when the asset is derecognised. Breville Group Limited annual report 2012 37 Notes to the financial statements for the year ended 30 June 2012 Note 1. Summary of significant accounting policies continued (o) Impairment of non-financial assets other than goodwill Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment; or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non-financial assets other than goodwill that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. (p) Investments and other financial assets Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables or held-to-maturity investments, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through the income statement, directly attributable transactions costs. The group determines the classification of its financial assets after initial recognition and, when allowed and appropriate, re-evaluates this designation at each year end. All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the marketplace. (i) Financial assets at fair value through the income statement Financial assets classified as held for trading are included in the category ‘financial assets at fair value through the income statement’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on investments held for trading are recognised in the income statement. (ii) Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation process. (iii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. (iv) Available-for-sale investments Available-for-sale investments are those non-derivative financial assets that are designated as available-for- sale or are not classified as any of the three preceding categories. After initial recognition available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in the income statement. The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments with no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions; reference to the current market value of another instrument that is substantially the same; discounted cash flow analysis and option pricing models. 38 Breville Group Limited annual report 2012 Note 1. Summary of significant accounting policies continued (q) Trade and other payables Trade and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the group prior to the end of the year that are unpaid and arise when the group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non- monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in trade and other payables in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Contributions to the defined contribution fund are recognised as an expense as they become payable. (r) Share-based payment transactions Equity settled transactions The group provides benefits to employees (including key management personnel) in the form of share-based payments, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). Refer to note 27 for details. The charge to the income statement for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding entry to equity. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (see note 4). (s) Provisions The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value has been determined by an external valuer using a Black Scholes or binomial model, further details of which are given in note 27. Provisions are recognised when the group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Breville Group Limited (market conditions), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). At each subsequent reporting date until vesting, the cumulative charge to the income statement is the product of (i) the grant date fair value of the award; (ii) the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and (iii) the expired portion of the vesting period. Where the group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. Provisions are measured as the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Breville Group Limited annual report 2012 39 Notes to the financial statements for the year ended 30 June 2012 Note 1. Summary of significant accounting policies continued (s) Provisions continued Onerous contracts (u) Contributed equity (i) Ordinary shares An onerous contract is considered to exist when the group has a contract under which the unavoidable cost of meeting the contractual obligations exceed the economic benefits estimated to be received. Present obligations arising under onerous contracts are recognised as a provision to the extent that the present obligation exceeds the economic benefit estimated to be received. Warranties and faulty goods Provision for warranty and faulty goods are recognised at the date of sale of the relevant products, at the group’s best estimate of the expenditure required to settle the group’s liability. Employee leave benefits - long service leave The liability for long service leave is recognised as a provision and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to the expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using appropriate market yields at the reporting date to estimate the future cash outflows. Provision for make-good The provision for make-good represents the value of expected future payments to be made in respect of restoration of leased premises under contracts that have clauses potentially requiring these premises to be restored to their original condition at the conclusion of the lease. The estimate may vary as a result of negotiations between the parties at the end of the lease term. (t) Borrowings All borrowings, including cash advance facilities, are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, borrowings, including cash advance facilities, are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. (ii) Ordinary shares held by the Breville Group Performance Share Plan Trust Ordinary shares held by the Breville Group Performance Share Plan Trust in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan are deducted from equity. No gain or loss is recognised in the income statement on the purchase of the group’s equity instruments by the Breville Group Performance Share Plan Trust. (v) Revenue recognition Revenue is recognised at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (i) Sale of goods Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably. Risks and rewards are considered passed to the buyer at the earlier of delivery of the goods or the transfer of legal title to the buyer. Revenue is measured at the fair value of the consideration received or receivable, net of returns, allowances, trade discounts and volume rebates. (ii) Commission income Where an agency relationship exists, the amount included in revenue represents the commission received or receivable. (iii) Finance revenue Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. (iv) Dividends Revenue is recognised when the group’s right to receive the payment is established. 40 Breville Group Limited annual report 2012 Note 1. Summary of significant accounting policies continued Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax assets and unused tax losses can be utilised, except: • when the deferred income tax asset relating to the deductible temporary difference 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 nor taxable profit or loss; or • when the deductible temporary difference is associated with investments in subsidiaries in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes in relation to items recognised directly in equity are recognised in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. (w) Borrowing costs Borrowing costs are recognised as an expense when incurred. (x) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. (i) Group as a lessee Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term. Any lease incentives are recognised in the income statement as an integral part of the total lease expense. (ii) Group as a lessor In some instances the group sub leases surplus operating lease space. Rentals received under sub leases are recognised as a reduction in operating lease expense. Future rentals to be received under non- cancellable sub leases are disclosed in note 24. (y) Income tax and other taxes (i) Current tax Current tax assets and liabilities for the current and prior periods are measured at the amounts 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 or substantively enacted by the balance sheet date. (ii) Deferred tax Deferred income tax is provided on all temporary differences between the tax bases of assets/liabilities and their carrying amounts at balance sheet date for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: • when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • when the taxable temporary difference is associated with investments in subsidiaries and 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. Breville Group Limited annual report 2012 41 Notes to the financial statements for the year ended 30 June 2012 Note 1. Summary of significant accounting policies continued (y) Income tax and other taxes continued (z) Earnings per share (iii) Tax consolidation legislation Breville Group Limited and its wholly-owned Australian resident controlled entities (excluding the Breville Group Performance Share Plan Trust) have implemented the tax consolidated legislation as of 1 July 2003. The head entity, Breville Group Limited and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone tax payer in its own right. Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit or loss attributable to members of the parent, adjusted for: • cost of servicing equity (other than dividends); • the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and In addition to its own current and deferred tax amounts, Breville Group Limited also recognises: (a) the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group; and • other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (aa) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (b) assets or liabilities arising for Breville Group Limited under the tax funding agreement as amounts receivable from or payable to other entities in the group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. (iv) Other taxes Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) or value added tax (VAT) except: • where the GST/VAT incurred on the purchase of goods and services is not recoverable from the taxation authority, in which case the GST/VAT is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • receivables and payables, which are stated with the applicable amount of GST/VAT included. The net amount of GST/VAT recoverable/payable is included in receivables/payables in the statement of financial position. Cash flows are included in the cash flow statement on a gross basis and the GST/VAT component of cash flows arising from investing and financing activities are classified as operating cash flows. Commitments and contingencies are disclosed net of recoverable/payable GST/VAT. 42 Breville Group Limited annual report 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 2. Revenue and expenses (a) Revenue Sale of goods Commission income Total revenue (b) Cost of sales Costs of inventories recognised as an expense [includes write- down of inventory to net realisable value (note 8)] Costs of delivering goods to customers Warranty provision Total cost of sales (c) Other income Other income Total other income (d) Depreciation and amortisation expense Depreciation – plant and equipment Amortisation – computer software Amortisation – development costs Total depreciation and amortisation expense 11 12(b) 2(h) (e) Lease payments and other expenses included in income statement Included in premises, lease & utilities expenses: • Minimum lease payments – operating lease (excludes onerous leases) Included in other expenses: • Net loss/(profit) on disposal of plant and equipment • Impairment of plant and equipment • Doubtful debts • Bad debts written off • Net foreign exchange (gain)/loss • Other product related costs (f) Employee benefits expenses Wages & salaries, leave and other employee related benefits Defined contribution plan expense Share-based payments expense Total employee benefits expenses 408,476 19,464 427,940 237,016 17,234 13,054 267,304 449 449 2,170 241 4,476 6,887 383,665 9,924 393,589 227,841 16,466 10,693 255,000 376 376 2,373 251 4,081 6,705 8,983 7,937 494 - (157) 402 (182) (66) 494 291 - 866 1,727 1,470 44,097 2,046 823 46,966 42,621 2,022 1,068 45,711 Breville Group Limited annual report 2012 43 Notes to the financial statements for the year ended 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 2. Revenue and expenses continued (g) Finance costs Finance costs paid or payable on borrowings and bank overdrafts: - interest - other borrowing costs Finance revenue Interest rate swap gain Total finance costs (h) Research and development costs Amortisation of previously capitalised development costs included in amortisation expense Research and development costs charged directly to the income statement Total research and development costs Note 3. Income tax The major components of income tax expense are: Income statement Current income tax Current income tax charge Adjustments in respect of current income tax of previous years Deferred income tax Relating to the origination and reversal of temporary differences Total income tax expense reported in the income statement Statement of changes in equity Deferred income tax related to items charged or credited directly to equity Foreign currency translation differences Employee equity benefits reserve Net gain/(loss) on revaluation of cash flow hedges Income tax expense/(benefit) reported in equity A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the parent entity’s applicable income tax rate is as follows: Profit before income tax At the parent entity’s statutory income tax rate of 30% (2011: 30%) • adjustments in respect of current income tax of previous years • effect of different rates of tax on overseas income • expenditure not allowable for income tax purposes • other 412 1,586 (984) (101) 913 2(d) 4,476 6,613 11,089 20,075 (156) (1,234) 18,685 (197) (276) 1,089 616 64,667 19,400 (156) (719) 203 (43) 573 2,132 (582) (429) 1,694 4,081 5,065 9,146 10,872 (827) 1,829 11,874 516 (828) (1,507) (1,819) 43,609 13,083 (827) (601) 360 (141) Income tax expense reported in the income statement 18,685 11,874 44 Breville Group Limited annual report 2012 Note 3. Income tax continued Deferred income tax Deferred income tax at 30 June relates to the following: Deferred tax liabilities Brand names Development costs Foreign currency translation reserve Gross deferred income tax liabilities Deferred tax assets Losses available for offset against future taxable income Provisions and accruals Unrealised foreign exchange gains and losses Employee benefits Revaluation of inventories Cash flow hedge reserve Employee equity benefits reserve Other Gross deferred income tax assets Deferred tax income/(expense) Current income tax Current tax asset Current tax liabilities Statement of financial position Income statement 30 June 2012 $’000 30 June 2011 $’000 30 June 2012 $’000 30 June 2011 $’000 1,875 3,957 419 6,251 - 7,686 (85) 2,831 748 (157) 404 1,035 12,462 1,875 3,972 525 6,372 - 7,766 (140) 1,850 504 884 269 833 11,966 - 15 - - (80) 55 981 244 50 (233) 202 - (538) - (88) (672) (147) 101 66 - (971) 420 1,234 (1,829) 30 June 2012 $’000 30 June 2011 $’000 476 9,580 1,678 6,735 At 30 June 2012, there is no recognised or unrecognised deferred income tax liability (2011: $nil) for taxes that would be payable on the unremitted earnings of certain of the group’s subsidiaries, as the group has no current intention of distributing existing retained earnings in jurisdictions where liability for additional taxation exists should such amounts be remitted. Breville Group Limited annual report 2012 45 Notes to the financial statements for the year ended 30 June 2012 Note 3. Income tax continued Tax consolidation Breville Group Limited and its 100% owned Australian resident subsidiaries (excluding the Breville Group Performance Share Plan Trust) have formed a tax consolidated group with effect from 1 July 2003. The head entity, Breville Group Limited, and each subsidiary in the tax consolidated group are required to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand alone tax payer in its own right. In addition to its own current and deferred tax amounts, Breville Group Limited also recognises: (a) the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group; and (b) assets or liabilities arising for Breville Group Limited under the tax funding agreement as amounts receivable from or payable to other entities in the group. Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement supports the calculation of current tax liabilities (and assets) and deferred tax assets/liabilities on a stand-alone basis. Calculation is performed in accordance with AASB 112 Income Tax. The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the subsidiaries’ intercompany accounts with the tax consolidated group head company, Breville Group Limited. No amounts have been recognised in the financial statements in respect of the tax sharing agreement should the head entity default on its tax payment obligations on the basis that the possibility of default is remote. 30 June 2012 $’000 30 June 2011 $’000 Note 4. Earnings per share The following reflects the income and share data used in the basic and diluted earnings per share computations: Earnings used in calculating basic and diluted earnings per share: Net profit attributable to ordinary equity holders of Breville Group Limited 45,982 31,735 Thousands Thousands Weighted average number of shares: Weighted average number of ordinary shares for basic earnings per share 130,077 129,687 Effect of dilution: • share options Weighted average number of ordinary shares adjusted for the effect of dilution 12 181 130,089 129,868 Weighted average number of exercised, forfeited or expired potential ordinary shares included in diluted earnings per share 12 120 There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these financial statements. 46 Breville Group Limited annual report 2012 Note 30 June 2012 $’000 30 June 2011 $’000 (i) (ii) (i) (ii) Note 5. Dividends (a) Dividends on ordinary shares declared and paid during the year: Final fully franked dividend for 2011 of 7.0 cents per share (2011: final unfranked dividend for 2010 of 5.0 cents per share) • Paid in cash • Retained as interest income Final dividend Fully franked interim dividend for 2012 of 12.5 cents per share (2011: partially franked interim dividend for 2011 of 9.5 cents per share (4.0 cents franked)) • Paid in cash • Retained as interest income Interim dividend Total fully franked dividends declared and paid during the year of 19.5 cents per share (2011: 14.5 cents per share (4.0 cents franked)) (i) Total dividends paid in cash (ii) Total dividends retained as interest income Total dividends (b) Dividends on ordinary shares proposed and not recognised as a liability: Final franked dividend for 2012 of 11.5 cents per share (2011: final fully franked dividend for 2011 of 7.0 cents per share) (c) Franking credit balance The amount of franking credits in the parent available for the subsequent year are: • franking account balance as at the end of the year at 30% (2011: 30%) • franking credits that will arise from the payment of income tax payable as at the end of the year The amount of franking credits in the parent available for future reporting periods: • impact on the franking account of dividends proposed or declared before the financial report was authorised for issue but not recognised as distribution to equity holders during the period Total franking credit balance The tax rate at which dividends are franked is 30% (2011: 30%). 9,107 - 9,107 16,262 - 16,262 25,369 - 25,369 6,445 31 6,476 12,264 49 12,313 18,709 80 18,789 14,961 9,107 1,674 5,550 7,224 1,526 5,612 7,138 (6,412) 812 (3,900) 3,238 Breville Group Limited annual report 2012 47 Notes to the financial statements for the year ended 30 June 2012 Note 6. Cash and cash equivalents Cash at bank and on hand (a) 53,095 27,768 Note 30 June 2012 $’000 30 June 2011 $’000 Notes: (a) Cash at bank earns interest at floating rates based on daily bank deposit rates. (b) At 30 June 2012, the Group had available $28,424,000 (2011: $71,886,000) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. (c) The fair value of cash and cash equivalents is $53,095,000 (2011: $27,768,000). (a) Reconciliation of cash flow statement: For the purposes of the cash flow statement, cash and cash equivalents comprise the following at 30 June: Cash and cash equivalents Bank overdraft Total cash and cash equivalents, net 16 53,095 (13) 53,082 27,768 (204) 27,564 (b) Reconciliation of net profit after tax for the year to net cash flows from operating activities Net profit for the year Adjustments for: Depreciation and amortisation Share-based payments Net loss/(gain) on disposal of plant and equipment Impairment of plant and equipment Interest rate swap gain Foreign exchange (gains)/losses Dividend retained as interest income Changes in assets and liabilities: (Increase)/decrease in: Trade and other receivables Inventories Prepayments Other current assets Non-current assets Increase in: Current liabilities Non-current liabilities Net cash flows from operating activities (c) Disclosure of financing facilities Refer to note 16. 48 Breville Group Limited annual report 2012 45,982 31,735 6,887 823 494 - (101) (182) - (5,372) (3,174) (1,783) 1,131 (1,217) 7,196 427 51,111 6,705 1,068 (66) 494 (429) 866 (80) (4,114) 1,839 (305) 288 693 4,313 3,990 46,997 Note 7. Trade and other receivables Current Trade receivables Allowance for uncollectible receivables Trade receivables, net Other receivables Total current trade and other receivables Notes: Note 30 June 2012 $’000 30 June 2011 $’000 (a) (b) 73,659 (470) 73,189 390 73,579 66,978 (614) 66,364 908 67,272 (a) Trade receivables are non-interest bearing and are generally on 30-60 day terms. An allowance for uncollectible receivables is made when there is objective evidence on a case by case basis that a trade receivable is impaired. A reversal of $157,000 (2011: $291,000 charge) has been recognised by the group as an expense in ‘other expenses’ for the current year for specific debtors for which such evidence exists. The amount of the allowance/ impairment loss has been measured as the difference between the carrying amount of the trade receivables and the estimated future cash flows expected to be received from the relevant debtors. Movements in the allowances for uncollectible receivables are as follows: Balance at beginning of year (Reversal)/charge for the year Net foreign exchange Amounts utilised Balance at end of year 30 June 2012 $’000 30 June 2011 $’000 614 (157) 2 11 470 405 291 (26) (56) 614 At 30 June 2012 an ageing analysis of those trade receivables which are past due but not impaired are as follows: 1 – 30 days overdue 31 – 60 days overdue 61+ days overdue Total past due but not impaired 30 June 2012 $’000 30 June 2011 $’000 18,624 262 10 18,896 7,070 229 269 7,568 Trade receivables past due but not impaired amount to $18,896,000 (2011: $7,568,000). Of this balance, $15,565,000 (2011: $5,474,000) is covered by insurance to be used in the event of default of payment. In all instances each operating unit has been in contact with the relevant debtor and is satisfied that payment will be received in full. (b) Non-trade other receivables are non-interest bearing and have repayment terms between 30 and 60 days. Balances within other receivables do not contain impaired assets and are not past due. It is expected that these balances will be received when due. The carrying value and estimated net fair values of the trade and other receivables is assumed to approximate their fair value, being the amount at which the asset could be exchanged between willing parties. Details regarding the effective interest rate and credit risk of current receivables are disclosed in note 23. Breville Group Limited annual report 2012 49 Notes to the financial statements for the year ended 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 8. Inventories Finished goods (at lower of cost and net realisable value) (a) Stock in transit (at cost) Total inventories Notes: 50,093 11,503 61,596 47,888 9,982 57,870 (a) Total net finished goods provision movements recognised in the income statement totalled a $304,000 expense (2011: $726,000 credit) for the group. This net expense (2011: credit) is included in the cost of inventories line in the cost of sales. Note 9. Other financial assets Derivative assets Forward exchange contracts – cash flow hedges Total other financial assets Notes: Note 30 June 2012 $’000 30 June 2011 $’000 479 479 21 21 Derivative assets represent the fair value receivable arising from forward exchange contracts disclosed in note 18. Note 10. Other assets Insurance claim receivable Prepayments Total other assets Note 11. Plant and equipment At the beginning of the year At cost (gross carrying amount) Accumulated depreciation and impairment Net carrying amount At the end of the year At cost (gross carrying amount) Accumulated depreciation and impairment Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions Disposals Depreciation Impairment Net exchange difference Carrying amount at the end of year 50 Breville Group Limited annual report 2012 Note 30 June 2012 $’000 30 June 2011 $’000 1,777 1,521 3,298 - 1,504 1,504 (i) (i) 2(d) 2(e) 30,213 (25,117) 5,096 30,948 (27,073) 3,875 5,096 1,454 (517) (2,170) - 12 3,875 32,218 (24,506) 7,712 30,213 (25,117) 5,096 7,712 689 (23) (2,373) (494) (415) 5,096 Note 12. Intangible assets – other Development costs Computer software Brand names Total intangible assets - other Notes: Note 30 June 2012 $’000 30 June 2011 $’000 (a) (b) (c) 13,190 305 31,803 45,298 13,242 372 31,803 45,417 Development costs are internally generated and have been capitalised at cost. This intangible asset has been assessed as having a finite life and is amortised using the straight line method over a maximum period of 3 years. If an impairment indication arises, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying amount. Computer software is purchased computer software that has been capitalised into other intangible assets at cost. Brand names include intangible assets acquired through previous business combinations. These intangible assets have been determined to have indefinite useful lives as the economic benefits which are obtained from them are expected to be ongoing. The cost model is utilised for their measurement. These assets were tested for impairment as at 30 June 2012 (see note 14). Note 30 June 2012 $’000 30 June 2011 $’000 (a) Development costs At the beginning of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount At the end of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions – internal development Amortisation Carrying amount at the end of year (b) Computer software At the beginning of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount At the end of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount 27,418 (14,176) 13,242 31,843 (18,653) 13,190 13,242 4,424 (4,476) 13,190 3,481 (3,109) 372 3,695 (3,390) 305 21,628 (10,095) 11,533 27,418 (14,176) 13,242 11,533 5,790 (4,081) 13,242 3,759 (3,124) 635 3,481 (3,109) 372 (i) (i) 2(d) (i) (i) Breville Group Limited annual report 2012 51 Notes to the financial statements for the year ended 30 June 2012 Note 12. Intangible assets – other continued (b) Computer software continued (i) Reconciliation of the carrying amount Carrying amount at the beginning of year Additions Amortisation Net exchange difference Carrying amount at the end of year (c) Brand names At the beginning and at the end of the year Net carrying amount Note 13. Intangible assets – goodwill At the beginning and at the end of the year Net carrying amount Note 30 June 2012 $’000 30 June 2011 $’000 2(d) 372 170 (241) 4 305 635 86 (251) (98) 372 31,803 31,803 24,558 24,558 52 Breville Group Limited annual report 2012 Note 14. Impairment testing of goodwill and intangibles with indefinite lives Goodwill and brand names acquired through business combinations have been allocated to cash generating units for impairment testing as follows: • Breville Group Limited • Breville Pty Limited • North America Distribution • New Zealand Distribution • International Distributors In all cases the recoverable amount of the individual cash generating unit has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management. The discount rate applied to cash flow projections is 16.6% (2011: 15.2%). Cash flows beyond the approved 30 June 2013 budgets are extrapolated using a 2.0% growth rate (2011: 2.0%), which is the same as the long-term average growth rate for the wholesale consumer products industry generally. Management has performed sensitivity testing by cash generating unit (CGU), based on assessing the effect of changes in revenue growth rates as well as discount rates. Management consider any reasonable likely combination of changes in these key assumptions would not result in the carrying value of the goodwill exceeding the recoverable amount. Note 30 June 2012 $’000 30 June 2011 $’000 Carrying amount of goodwill and brand names allocated to each of the cash generating units Breville Group Limited - brand names with indefinite useful lives Breville Pty Limited - goodwill - brand names with indefinite useful lives North America Distribution - goodwill New Zealand Distribution - goodwill International Distributors - goodwill All cash generating units - goodwill - brand names with indefinite useful lives Total carrying amount of goodwill and brand names 13 12(c) 13,800 13,800 20,277 18,003 38,280 20,277 18,003 38,280 1,764 1,764 276 276 2,241 56,361 24,558 31,803 56,361 2,241 56,361 24,558 31,803 56,361 Key assumptions used in value in use calculations for the cash generating units for 30 June 2012 and 30 June 2011 The following describes each key assumption on which management has based its cash flow projections when determining the value in use of the cash generating units. • Budgeted gross margins – the basis used to determine the value assigned to the budgeted gross margins is based on past performance and expectations for the future. • Bond rates – the yield on a ten-year government bond rate at the beginning of the budgeted year is used. Breville Group Limited annual report 2012 53 Notes to the financial statements for the year ended 30 June 2012 Note 15. Trade and other payables Current Trade payables – unsecured Employee benefits Total current trade and other payables Note 30 June 2012 $’000 30 June 2011 $’000 (a) 28 59,929 3,750 63,679 55,675 3,409 59,084 Terms and conditions relating to the above financial instruments: (a) Trade payables are non-interest bearing and are normally settled on 30 day terms. The carrying value and estimated net fair values of the trade and other payables is assumed to approximate their fair value, being the amount at which the liability could be settled in a current transaction between willing parties. Details regarding interest rate, foreign exchange and liquidity risk exposure are disclosed in note 23. Note 16. Borrowings Current Bank overdrafts – on demand Other loans: - Term loan Total current borrowings Non-current Other loans: - Cash advance facilities - Term loan Total non-current borrowings Terms and conditions Note 30 June 2012 $’000 30 June 2011 $’000 6(a) 13 44 57 5,859 160 6,019 204 38 242 - 194 194 The group operates under one primary facility with Australia and New Zealand Banking Group Limited (ANZ) enabling all jurisdictions to borrow under one global facility. The facility agreement has a number of financial covenants all of which have been fully complied with as at the years ended 30 June 2012 and 30 June 2011. The Australia and New Zealand financing facilities are secured by a first ranking fixed and floating registered charge (or general security for Breville New Zealand Limited), over all the assets and undertakings of Thebe International Pty Limited, Breville Pty Limited, Breville Holdings Pty Limited, Breville R&D Pty Limited and Breville New Zealand Limited and are guaranteed by Breville Group Limited. The Hong Kong facility is secured via a security agreement over the assets and undertakings of HWI International Limited. The day to day Canadian transactional banking facilities (HSBC) are secured by a standby letter of credit from ANZ (NY). Breville Group Limited has issued a corporate guarantee in favour of the local bank (HSBC) which provides the day to day US transactional banking facilities. A security agreement in favour of ANZ is in existence over the assets and undertakings of Breville USA, Inc. Borrowings may include Australian dollar, US dollar, Canadian dollar and New Zealand dollar denominated amounts. Fair value The carrying value and estimated net fair values of the borrowings is assumed to approximate their fair value, being the amount at which the liability could be settled in a current transaction between willing parties. Details regarding interest rate, foreign exchange and liquidity risk are disclosed in notes 18 and 23. 54 Breville Group Limited annual report 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 16. Borrowings continued Financing facilities available At reporting date, the following financial facilities have been negotiated and were available to the group: Facilities used at the reporting date Facilities unused at the reporting date Total facilities (a) Facilities used at the reporting date: - Non-current cash advance facilities - Current cash advance facilities - Trade finance facilities - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Facilities used as at reporting date (b) Facilities unused at the reporting date: - Non-current cash advance facilities - Current cash advance facilities - Trade finance facilities - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Facilities unused as at reporting date (c) Total facilities: - Non-current cash advance facilities - Current cash advance facilities - Trade finance facilities - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Total facilities Seasonal facility (a) (b) (c) 8,764 32,170 40,934 5,859 - - 13 488 1,756 648 8,764 8,709 4,395 2,882 12,438 488 - 3,258 32,170 14,568 4,395 2,882 12,451 976 1,756 3,906 40,934 3,881 74,612 78,493 - - - 204 485 1,702 1,490 3,881 26,665 30,133 2,861 12,227 486 - 2,240 74,612 26,665 30,133 2,861 12,431 971 1,702 3,730 78,493 Under the primary facility with ANZ, the group also has a seasonal facility available between October 2012 - January 2013 (2011: October 2011 – January 2012) of $26,000,000 (2011: $22,000,000). This facility is under the same terms and conditions as described above. Borrowings may include Australian dollar, US dollar and Canadian dollar denominated amounts. Breville Group Limited annual report 2012 55 Notes to the financial statements for the year ended 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 17. Provisions Current Warranty and faulty goods Employee benefits – long service Onerous lease contracts Total current provisions Non-current Employee benefits – long service Provision for make-good Onerous lease contracts Total non-current provisions 28 (a) 28 (a) 4,495 1,597 1,028 7,120 880 935 6,766 8,581 Warranty and faulty goods $’000 Employee benefits - long service $’000 Provision for make-good $’000 Onerous lease contracts $’000 2,503 1,374 2,044 5,921 972 - 7,156 8,128 Total $’000 (a) Movement in provisions Carrying amount at the beginning of the year: Current Non-current Total 2,503 - 2,503 Movement in provisions during the year: Additional provisions made in the year Amounts utilised during the year Net exchange differences Net movement 13,054 (11,086) 24 1,992 Carrying amount at the end of the year: Current Non-current Total 4,495 - 4,495 Warranty and faulty goods 1,374 972 2,346 262 (136) 5 131 1,597 880 2,477 - - - 935 - - 935 - 935 935 2,044 7,156 9,200 5,921 8,128 14,049 691 14,942 (2,120) (13,342) 23 (1,406) 1,028 6,766 7,794 52 1,652 7,120 8,581 15,701 A provision for warranty and faulty goods represents the present value of the best estimate of the future sacrifice of economic benefits expected that will be required for warranty and faulty goods claims on products sold. This estimate is based on the historical trends experienced on the level of repairs and returns. It is expected that these costs will be incurred in the next year. Assumptions used to calculate the provision for warranty and faulty goods were based on the level of warranty and faulty goods claims experienced during the last year. 56 Breville Group Limited annual report 2012 Note 17. Provisions continued Employee benefits – long service The provision for employee benefits represents the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to the expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using appropriate market yields at the reporting date to estimate the future cash outflows. Provision for make-good The provision for make-good represents the value of expected future payments to be made in respect of restoration of leased premises under contracts that have clauses potentially requiring these premises to be restored to their original condition at the conclusion of the lease. The estimate may vary as a result of negotiations between the parties at the end of the lease term. Onerous lease contracts The provision for onerous lease contracts represents the present value of the future lease payments that the consolidated entity is presently obligated to make in respect of onerous lease contracts under non-cancellable operating lease agreements, less revenue expected to be earned on the lease including estimated future sub-lease revenue, where applicable. The estimate may vary as a result of changes in the utilisation of the leased premises and sub-lease arrangements where applicable. Note 30 June 2012 $’000 30 June 2011 $’000 Note 18. Other financial liabilities Derivative liabilities Forward exchange contracts – cash flow hedges Interest rate swap contracts – held for trading Total other financial liabilities Instruments used by the group (i) (ii) 17 - 17 2,796 100 2,896 Derivative financial instruments are used by the group in the normal course of business in order to hedge exposures to fluctuations in interest and foreign exchange rates. Breville Group Limited annual report 2012 57 Notes to the financial statements for the year ended 30 June 2012 Note 18. Other financial liabilities continued (i) Forward exchange contracts - cash flow hedges The majority of the group’s inventory purchases from suppliers are denominated in US dollars (US$). The group also has other payments, included in the calculation of commission received, denominated in US$. In order to manage exchange rate movements and to manage the inventory costing process, the group has entered into forward exchange contracts to purchase US$. These contracts are hedging highly probable forecasted purchases and highly probable forecasted payments and they are timed to mature when settlement of purchases or the payments are scheduled to be made. The cash flows are expected to occur between 0-5 months from 1 July 2012 (2011: 0-12 months) and the cost of sales and where applicable the sale of goods within the income statement will be affected in the next financial year as the inventory is sold or the payments are made. At balance date, the details of outstanding contracts are: 30 June 2012 30 June 2011 Average exchange rate A$’000 Average exchange rate A$’000 Buy US$ / Sell Australian $ Buy US$ - maturity 0-5 months (2011: 0-11 months) 13,184 1.0349 22,102 0.9751 Buy US$ / Sell New Zealand $ Buy US$ - maturity 0-5 months (2011: 0-12 months) 2,832 0.8072 6,715 0.7610 Buy US$ / Sell Canadian $ Buy US$ - maturity 0-4 months (2011: 0-6 months) 24,414 0.9898 27,977 0.9837 The cash flow hedges of the forecast purchases and forecast payments are considered to be highly effective and any gain or loss on the contracts is taken directly to equity. Where the contracts are hedging highly probable forecasted inventory purchases, when the inventory is received the amount recognised in equity is adjusted to the inventory account in the balance sheet. Where the contracts are hedging highly probable forecasted payments, when the payments are made the amount recognised in equity is adjusted to the income statement. During the year $3,122,000 (2011: $6,675,000) was charged to inventory and $1,523,000 (2011: $1,036,000) was charged to the income statement in respect of the group. In addition, during the year $993,000 was credited (2011: $13,055,000 debited) to equity in respect of the group. (ii) Interest rate swap contracts – held for trading Borrowings of the group currently bear an average variable interest rate including margin of 1.4% (2011: 3.6%). In order to protect against rising interest rates the group had entered into interest rate swap contracts under which it has a right to receive interest at variable rates and to pay interest at fixed rates. At 30 June 2012, the group did not have any interest rate swap agreements in place. At 30 June 2011 the group had interest rate swap agreements in place with a notional amount of $25,000,000 whereby it received a variable rate equal to the BBSW on the notional amount and pays an average fixed rate of interest of 6.59%. The swaps were used to hedge the exposure in the fair value of the cash advance facilities and commercial bills. The swaps in place at 30 June 2011 were in excess of the cash advances. In 2012, a pre tax gain of $101,000 (2011: $429,000) is included in the income statement in respect of these contracts. The interest rate swaps required settlement of net interest receivable or payable each 120 days. The swaps are measured at fair value and all gains and losses are taken directly to the income statement. At 30 June, the notional principal amounts and period of expiry of the interest rate swap contracts are as follows: <1 year 1-2 years 30 June 2012 $’000 30 June 2011 $’000 - - - 25,000 - 25,000 58 Breville Group Limited annual report 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 19. Issued capital Ordinary shares – issued Ordinary shares – held by the Breville Group Performance Share Plan Trust Ordinary shares – reserved under SEOP Total contributed equity (a) (b) (c) 140,050 139,938 (1,290) - (4,296) - 138,760 135,642 Ordinary shares are held by the Breville Group Performance Share Plan Trust in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan. The ordinary shares held by the Breville Group Performance Share Plan Trust are yet to be allocated to LTI participants. They will be allocated to participants once performance rights vest and they are exercised. The ordinary shares held by the Breville Group Performance Share Plan Trust have the right to receive dividends as declared and, in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. The ordinary shares held by the Breville Group Performance Share Plan Trust entitle their holder to one vote, either in person or by proxy, at a meeting of the company. Details are provided in note 25(b) and note 27. Ordinary shares issued and reserved under the senior executive option plan (SEOP) have the right to receive dividends as declared and, in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the company. 30 June 2012 30 June 2011 Note Number of shares $’000 Number of shares $’000 (a) Movements in ordinary issued shares: Beginning of the year Movements during the year 129,995,322 139,938 129,515,322 139,096 Exercise of options - cash (i) 100,000 112 480,000 842 End of the year 130,095,322 140,050 129,995,322 139,938 (i) During the year 100,000 options were exercised (2011: 480,000) resulting in the issue of ordinary shares. The average value placed on these issues was $1.12 per share (2011: $1.75). Details are provided in note 27. Breville Group Limited annual report 2012 59 Notes to the financial statements for the year ended 30 June 2012 30 June 2012 30 June 2011 Note Number of shares $’000 Number of shares $’000 Note 19. Issued capital continued (b) Movements in ordinary shares held by the Breville Group Performance Share Plan Trust: Beginning of the year Movements during the year Transferred to participants of the Breville Group Limited Performance Rights Plan Ordinary shares acquired by the Breville Group Performance Share Plan Trust during the year - cash End of the year (1,282,000) (4,296) (i) 1,282,000 4,296 - - - - (ii) (303,000) (303,000) (1,290) (1,282,000) (1,290) (1,282,000) (4,296) (4,296) (i) During the year the Trustee of the Breville Group Performance Share Plan Trust transferred 1,282,000 ordinary company shares (2011: nil) to participants in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan. 30 June 2012 30 June 2011 Note Number of shares $’000 Number of shares $’000 (c) Movements in ordinary reserved shares: Beginning of the year Movements during the year Ordinary reserved share loans repaid during the year - cash (i) End of the year - - - - - - (777,000) (1,443) 777,000 - 1,443 - (i) There were no loans outstanding in relation to ordinary reserved shares. (2011: loans relating to 777,000 ordinary reserved shares were repaid). The average value placed on these original issues was $nil (2011: $1.85). The average amount repaid equalled $nil (2011: $1.85). (d) Options and performance rights over ordinary shares: The company has a share-based payment option scheme and performance rights scheme under which options and rights to subscribe for the company’s shares have been granted to certain executives and other employees (refer note 27). At the end of the year there were 727,000 (2011: 1,139,000) potential unissued ordinary shares in respect of performance rights that were outstanding (2011: options and performance rights). 60 Breville Group Limited annual report 2012 Note 20. Reserves Foreign currency translation reserve Employee equity benefits reserve Cash flow hedge reserve Total reserves (a) Movement in foreign currency translation reserve Balance at beginning of year Currency translation differences Tax effect of foreign currency translation reserve Balance at end of year (b) Movement in employee equity benefits reserve Balance at beginning of year Share-based payments expense Transferred to participants of the performance rights plan Tax effect of employee equity benefits reserve Balance at end of year (c) Movement in cash flow hedge reserve Balance at beginning of year Net gains/(losses) on cash flow hedges Tax effect of net (gains)/losses on cash flow hedges Balance at end of year Nature and purpose of reserves Foreign currency translation reserve Note 30 June 2012 $’000 30 June 2011 $’000 (a) (b) (c) (14,893) (147) 257 (14,783) (16,046) 956 197 (14,893) 3,050 823 (4,296) 276 (147) (1,890) 3,236 (1,089) 257 (16,046) 3,050 (1,890) (14,886) (10,408) (5,122) (516) (16,046) 1,154 1,068 - 828 3,050 1,948 (5,345) 1,507 (1,890) This reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. Employee equity benefits reserve This reserve is used to record the value of equity benefits provided to employees as part of their remuneration. Refer to note 27 for further details of these plans. Cash flow hedge reserve This reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. Breville Group Limited annual report 2012 61 Notes to the financial statements for the year ended 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 21. Retained earnings Balance at beginning of the year 32,822 19,876 Net profit for the year attributable to members of Breville Group Limited Dividends Balance at end of the year Note 22. Operating segments 5(a) 45,982 (25,369) 53,435 31,735 (18,789) 32,822 The group has identified its operating segments based on the internal reports that are reviewed by the chief operating decision makers (group chief executive officer and board of directors) in assessing performance and in determining the allocation of resources. The Australia Distribution, North America Distribution and New Zealand Distribution operating segments distribute primarily small electrical appliances to retail customers in their geographical locations. The International Distributors operating segment distributes primarily small electrical appliances to retail customers in international locations. Other is not an operating segment and comprises the short term incentive plan and group functions including product development and supply chain. The accounting policies of the operating segments are the same as those described in note 1. Transfer prices between operating segments are set at arms length basis in a manner similar to transactions with third parties. The segment revenue and segment result include certain transfers between operating segments. Those transfers are eliminated on consolidation. Segment profit before income tax excludes certain transfer prices and includes an allocation of head office costs. The following tables present the revenue and profit information regarding operating segments for the years ended 30 June 2012 and 30 June 2011. Year ended 30 June 2012 Revenue Sale of goods Commission income Inter-segment revenue Australia Distribution $’000 North America Distribution $’000 New Zealand Distribution $’000 International Distributors $’000 201,726 132,705 26,768 47,277 - 231 19,464 - - - - 5,980 53,257 Total segment revenue 201,957 152,169 26,768 Other $’000 Total $’000 - - 19,987 19,987 408,476 19,464 26,198 454,138 (26,198) 427,940 Inter-segment elimination Total consolidated revenues Results EBITDA Depreciation & amortisation EBIT Finance revenue Finance costs 21,325 (1,195) 20,130 831 (909) 34,702 3,579 13,745 (884) 72,467 (439) (20) (11) 34,263 3,559 13,734 67 (763) 85 (175) 3,469 1 (151) (5,222) (6,106) 101 - (6,887) 65,580 1,085 (1,998) Profit before income tax 20,052 33,567 13,584 (6,005) 64,667 Other segment information Capital expenditure 387 77 3 9 978 1,454 62 Breville Group Limited annual report 2012 Note 22. Operating segments continued Year ended 30 June 2011 Revenue Sale of goods Commission income Inter-segment revenue Australia Distribution $’000 North America Distribution $’000 New Zealand Distribution $’000 International Distributors $’000 201,311 114,435 23,721 44,198 - 240 9,924 - - - - 5,326 49,524 Total segment revenue 201,551 124,359 23,721 Inter-segment elimination Total consolidated revenues Results EBITDA 21,539 19,710 2,685 13,520 Depreciation & amortisation (1,342) (597) (24) (17) Other $’000 Total $’000 - - 17,106 17,106 383,665 9,924 22,672 416,261 (22,672) 393,589 (5,446) (4,725) 52,008 (6,705) EBIT Finance revenue Finance costs 20,197 19,113 2,661 13,503 (10,171) 45,303 504 11 (1,374) (1,006) 65 (182) 2 (143) 429 - 1,011 (2,705) Profit before income tax 19,327 18,118 2,544 13,362 (9,742) 43,609 Other segment information Capital expenditure 121 15 12 9 532 689 Breville Group Limited annual report 2012 63 Notes to the financial statements for the year ended 30 June 2012 Note 23. Financial risk management objectives and policies The group’s principal financial instruments, other than derivatives, comprises cash advances, bank overdrafts, cash at bank and short-term deposits. The main purpose of these financial instruments is to raise finance for the group’s operations. The group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The group also enters into derivative transactions, including interest rate swaps, forward exchange contracts and at times foreign exchange option contracts. The purpose is to manage the interest rate and currency risks arising from the group’s business operations and its sources of finance. It is the group’s policy that no speculative trading in derivatives shall be undertaken. The main risks arising from the group’s financial instruments are cash flow interest rate risk, foreign currency risk and credit risk. The board reviews and agrees policies for managing each of these risks and they are summarised below. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1 to the financial statements. The fair value of the interest rate swap and forward exchange contracts is estimated using market observable inputs. The fair values of these financial instruments are disclosed in notes 9 and 18. Interest rate risk The group is exposed to interest rate risk on its borrowings, cash balances and derivative financial instruments. The group’s policy is to manage its interest rate risk using a mix of fixed and variable rate debt. Historically, fixed rate debt was achieved through the use of interest rate swaps in which the group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. Cash advance facilities have short term fixed interest rates with maturities ranging between 1 and 3 months, therefore within the financial year they are exposed to interest rate risk. At 30 June 2012, the group has the following exposure to interest rate risk: Cash at bank Bank overdraft – on demand Cash advance facilities Term loan Net exposure 30 June 2012 $’000 30 June 2011 $’000 53,095 27,768 (13) (5,859) (204) 47,019 (204) - (232) 27,332 At 30 June 2012, 0% of the group’s borrowings (2011: 0%) are at a fixed rate of interest. The remaining 100% (2011: 100%) is exposed to floating rates. On a principal net receivable of $47,019,000 (2011: $27,332,000), at an average payable rate including margin of 2.1% (2011: 1.4%) and average receivable rate of 2.1% (2011: 2.1%), an increment of 0.5% in the market rates would result in a decrease in finance costs of $247,000 (2011: $135,000), conversely a decrement of 0.5% in the market rates would result in an increase in finance costs of $296,000 (2011: $114,000). The group’s net exposure to interest rate risk calculated as at 30 June 2012 is not representative of its exposure during the financial year due to seasonality in the volume of sales such that financial performance is historically weighted in favour of the half to 31 December. This seasonality results in a higher level of receivable and inventory balances and a consequent increase in working capital requirements. All of the group’s borrowings during the year (2011 average borrowings: 92%) are at a floating rate of interest. On an average principal net receivable during the year of $41,002,000 (2011: $11,826,000), at an average payable rate including margin of 2.1% (2011: 1.4%) and average receivable rate of 2.1% (2011: 2.1%), an increment of 0.5% in the market rates would result in a decrease in finance costs of $205,000 (2011: $59,000), conversely a decrement of 0.5% in the market rates would result in a decrease in finance costs of $164,000 (2011: $24,000). Interest rate swap contracts outlined in note 18, with a group fair value liability of $nil (2011: $100,000), are exposed to fair value movements if interest rates change. The group classifies interest rate swaps as held for trading. An increment of 0.5% in the market rate would result in a decrease in non-trading items – finance costs of $nil (2011: $31,000). A decrement of 0.5% in the market rate would result in an increase in non-trading items – finance costs of $nil (2011: $31,000). 64 Breville Group Limited annual report 2012 Note 23. Financial risk management objectives and policies continued Foreign currency risk The group undertakes certain transactions denominated in foreign currently and is exposed to foreign exchange rate fluctuations. Such exposure arises primarily from purchases of inventory by an operating unit in currencies other than the unit’s functional currency (purchases are predominately US dollar denominated). Other foreign exchange risk only arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. To hedge exposure arising from the purchase of inventories or payments in currencies other than the business unit’s functional currency, a combination of forward exchange contracts and foreign exchange option contracts may be utilised. At inception these hedge contracts are designated as cash flow hedges to hedge the exposure to the variability in cash flows arising as a result of movements in exchange rates below contracted exchange rates for options and for movements above or below a contracted exchange rate for forward exchange contracts. Also, as a result of the group’s investment in its overseas operations, the group’s balance sheet can be affected significantly by movements in the exchange rates of the jurisdictions it operates within. At 30 June 2012, the group has the following financial assets and liabilities exposed to foreign currency risk: Cash at bank Trade and other receivables Trade and other payables Highly probable forecast purchases Forward exchange contracts Net exposure 30 June 2012 $’000 30 June 2011 $’000 66 1,022 (449) (41,400) 41,400 639 47 - (773) (48,770) 48,770 (726) At 30 June 2012, the group had hedged 57% (2011: 59%) of its foreign currency purchases and payments that are highly probable extending to November 2012 (2011: June 2012). The remaining 43% (2011: 41%) is exposed to foreign exchange risk. Of the total net exposure above, an increment of 10% in the foreign exchange rates would result in a decrease in other expenses of $58,000 (2011: $66,000). A decrement of 10% in the foreign exchange rates would result in an increase in other expenses of $71,000 (2011: $81,000). Capital management The board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. The board monitors the group’s gearing ratio and compliance with debt covenants on a regular basis. The group’s gearing ratio at 30 June 2012 and 30 June 2011 is nil due to the group being in a net cash position. The gearing ratio is defined as group net borrowings divided by capital employed (net borrowings plus shareholders’ equity). Breville Group Limited annual report 2012 65 Notes to the financial statements for the year ended 30 June 2012 Note 23. Financial risk management objectives and policies continued Credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The credit risk on financial assets, excluding investments, of the group that has been recognised on the balance sheet is the carrying value amount, net of any uncollectible receivables. The group trades only with recognised, creditworthy third parties. It is the group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In certain instances, where deemed appropriate, receivable insurance is acquired to offset the group’s exposure to credit risk. In addition, receivable balances are monitored on an ongoing basis with the result that the group’s exposure to bad debts is not significant. There are no significant concentrations of credit risk across the group. With respect to credit risk arising from the other financial assets of the group, which comprise cash and cash equivalents and certain derivative instruments, the group’s exposure to credit risk arises from default of the counter party with a maximum exposure equal to the carrying amount of these instruments. These counter parties are large multi-national banks. Since the group trades only with recognised third parties, there is no requirement for collateral. Liquidity risk The group’s objective is to maintain a balance between continuity of funding and flexibility through the use of cash advances and bank overdrafts. The group’s bank facilities carry between a one and two year term in Australia, USA and Canada. As at 30 June 2012, 99% of the group’s borrowings will mature in greater than one year (2011: 44%) and 1% (2011: 56%) in less than one year. Management monitors rolling forecasts of the group’s liquidity reserve on the basis of expected cash flows. See note 16 for details of available facilities. At 30 June 2012, the remaining contractual maturities of the group’s financial liabilities are: Less than 1 year Between 1 and 5 years Total financial liabilities 30 June 2012 $’000 30 June 2011 $’000 63,852 6,043 69,895 62,238 241 62,479 The table below analyses the group’s remaining contractual maturities by the type of financial liability. The amounts disclosed are the contractual undiscounted cash flows. 30 June 2012 Less than 1 year $’000 Between 1 and 5 years $’000 Trade and other payables 63,679 Borrowings Other financial liabilities 156 17 - 6,043 - Total $’000 63,679 6,199 17 30 June 2011 Less than 1 year $’000 Between 1 and 5 years $’000 59,084 258 2,896 - 241 - 241 Total $’000 59,084 499 2,896 62,479 Total 63,852 6,043 69,895 62,238 Contractual maturities disclosed in the tables above include contracted interest payments. Total borrowings disclosed in note 16 exclude such contracted interest payments. 66 Breville Group Limited annual report 2012 Note 24. Commitments and contingencies Operating lease commitments – group as lessee Operating leases are entered into mainly as a means of acquiring access to commercial property and storage facilities and the use of minor items of plant and equipment. Rental payments are generally fixed; however certain property leases contain a rental inflation escalation clause, an agreed rental percentage increase clause, a market rental review clause or a mix of these clauses over the term of the operating lease. Future minimum rentals payable under non-cancellable operating leases as at 30 June are as follows: Within one year After one year but not later than five years More than five years Total future minimum rentals payable 30 June 2012 $’000 30 June 2011 $’000 10,186 25,097 2,745 38,028 10,352 23,906 5,590 39,848 Contingent rentals are determined with reference to known existing rental payments and known rental increases during the existing term of each operating lease. No purchase options exist in relation to operating leases and no operating lease contains restrictions on financing or other leasing activities. Certain property leases contain renewal option clauses. Operating lease commitments receivable – group as lessor The group has entered into commercial property leases for certain surplus office and warehouse space. Rental charges under operating leases with sub lease tenants are generally fixed; however certain property leases contain a rental inflation escalation clause, an agreed rental percentage increase clause, a market rental review clause or a mix of these clauses over the term of the operating lease. Future minimum rentals receivable under non-cancellable operating leases as at 30 June are as follows: Within one year After one year but not later than five years More than five years Total future minimum rentals receivable Contingencies 30 June 2012 $’000 30 June 2011 $’000 1,718 6,083 50 7,851 1,780 4,071 653 6,504 Indemnity agreements have been entered into with certain officers of the group in respect of expenses and liabilities they incur in their official capacities. No monetary limit applies to these agreements and no known obligations have emerged as a result of these agreements. Cross guarantees given by Breville Group Limited, Thebe International Pty Limited, Breville Holdings Pty Limited and Breville Pty Limited are described in note 25(a). Breville Group Limited has issued a corporate guarantee in favour of the local bank (HSBC) which provides the day to day US transactional banking facilities. Breville Group Limited annual report 2012 67 Notes to the financial statements for the year ended 30 June 2012 Note 25. Related party disclosure The consolidated financial statements include the financial statements of Breville Group Limited and the subsidiaries listed in the following table. Legal entity Thebe International Pty Limited Investments not held directly by Breville Group Limited: Breville Holdings Pty Limited Breville Pty Limited Breville R&D Pty Limited Breville Group Performance Share Plan Trust Breville New Zealand Limited HWI International Limited Gannet Holdings Limited HWI Export Limited Breville Holdings USA, Inc. (formerly Thebe International, Inc.) Breville USA, Inc. (from 22 July 2011, formerly Metro/ Thebe, Inc.) Holding HWI Canada, Inc HWI Canada, Inc Anglo-Canadian Housewares, L.P. Country of incorporation Note 30 June 2012 % 30 June 2011 % Equity interest (a) (a) (a) (b) Australia Australia Australia Australia Australia New Zealand Hong Kong Hong Kong Hong Kong USA USA Canada Canada Canada 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 Breville Group Limited, a company incorporated in Australia is the ultimate parent of the group. (a) Entities subject to class order relief Pursuant to class order 98/1418, relief has been granted to Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited from the Corporations Act 2001 requirements for preparation, audit and lodgement of their financial reports. As a condition of the class order, Breville Group Limited and Thebe International Pty Limited entered into a Deed of Cross Guarantee on 4 November 1999. This deed was subsequently assumed by Breville Pty Limited and Breville Holdings Pty Limited under an assumption deed dated 19 December 2001. The effect of the deed is that Breville Group Limited has guaranteed to pay any deficiency in the event of winding up of either controlled entity or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Breville Group Limited is wound up or if it does not meet its obligation under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The entities comprising the class order “closed group” are Breville Group Limited, Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited. The consolidated statement of financial position and income statement of the entities that are members of the “closed group” are detailed in notes 25(i) and 25(ii). (b) Breville Group Performance Share Plan Trust A trust fund has been established with the appointment of an independent Trustee. The trust will be funded by funds irretrievably contributed to it by the company and the Trustee will then use these funds to either subscribe for a new issue of shares in the company or purchase shares on the ASX in order to fulfil its obligations under the Breville Group Limited Performance Rights Plan. The trust does not form part of the Breville Group Limited Australian tax consolidation group. During the financial year ended 30 June 2012, the Trustee acquired 303,000 company shares (2011: 1,282,000). The average value placed on these acquisitions was $4.26 per share (2011: $3.35). 68 Breville Group Limited annual report 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 25. Related party disclosure continued (i) Consolidated statement of financial position for class order closed group Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Other assets Total current assets Non-current assets Other financial assets Plant and equipment Intangible assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Current tax liabilities Other financial liabilities Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 21,867 47,990 37,095 241 243 15,771 40,860 40,537 - 788 107,436 97,956 32,750 2,762 55,650 8,458 99,620 207,056 39,020 13 5,550 - 4,732 49,315 6,251 7,141 13,392 62,707 32,753 3,762 55,617 9,053 101,185 199,141 36,277 29 5,612 1,848 4,258 48,024 6,372 7,924 14,296 62,320 144,349 136,821 25(ii) 138,760 (5,094) 10,683 144,349 135,642 (2,943) 4,122 136,821 Breville Group Limited annual report 2012 69 Notes to the financial statements for the year ended 30 June 2012 Note 30 June 2012 $’000 30 June 2011 $’000 Note 25. Related party disclosure continued (ii) Consolidated income statement for class order closed group Profit from ordinary activities before income tax expense Income tax expense relating to ordinary activities Net profit Accumulated profits/(losses) at the beginning of the year Dividends paid or reinvested Accumulated profits at the end of the year 25(i) (a) Ultimate controlling entity The ultimate controlling entity of the group in Australia is Breville Group Limited. (b) Wholly owned group transactions 45,453 (13,523) 31,930 4,122 (25,369) 10,683 35,941 (10,770) 25,171 (2,260) (18,789) 4,122 During the financial period, loans were advanced and repayments received on inter-group accounts with subsidiaries in the wholly owned group. These transactions were undertaken on commercial terms and conditions. (c) Key management personnel Details relating to key management personnel, including remuneration paid, are included in note 29. 30 June 2012 $’000 30 June 2011 $’000 Note 26. Parent entity information As at and throughout the financial year ended 30 June 2012 the parent company of the group was Breville Group Limited. Results of the parent entity Profit of the parent entity Total comprehensive income of the parent entity Financial position of the parent entity Current assets Total assets Current liabilities Total liabilities Net assets Equity attributable to the equity holders of the parent Issued capital Employee equity benefits reserve Retained earnings Total shareholders’ equity 25,756 25,756 68,379 145,037 (5,552) (5,552) 139,485 19,358 19,358 74,450 144,860 (5,683) (5,683) 139,177 138,759 135,642 (147) 873 3,050 485 139,485 139,177 70 Breville Group Limited annual report 2012 Note 26. Parent entity information continued Contingencies The parent company has guaranteed under the terms of an ASIC class order any deficiency of funds if Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited are wound up. No such deficiency currently exists. The parent company has issued a corporate guarantee in favour of the local bank (HSBC) which provides the day to day US transactional banking facilities. Note 27. Share-based payment plans Second senior executive option plan An option plan exists where executives and other employees of the group (collectively “participants”) are issued with options over the ordinary shares of Breville Group Limited. The options, issued for nil consideration, are issued in accordance with performance hurdles approved by the directors of Breville Group Limited. The options are issued for a term of four years and are exercisable in equal tranches on the first three anniversaries of the date of issue as follows: • 1/3 of the options issued, any time during the one year period commencing one year after the issue date; • 1/3 of the options issued, any time during the one year period commencing two years after the issue date; • 1/3 of the options issued, any time during the one year period commencing three years after the issue date. The exercise price of the options is generally based on the volume weighted average price of all the company’s shares traded on the ASX on the five trading days up to and including the issue date plus a premium of 11%. The options vest if and when the group’s underlying EPS increases by at least 10% per annum compounded annually over the term. If the EPS growth condition is not achieved in any financial year, the EPS growth for that financial year will be carried forward and recalculated at the end of each following financial year until the end of the term of the options. As a result, options may still vest and become exercisable where the vesting conditions are satisfied in a subsequent financial year. If this increase is not met within three years from the date of grant, the options are forfeited. The contractual life of each option granted is four years. There are no cash alternatives. The options cannot be transferred and are not quoted on the ASX. At 30 June 2012 there are nil (2011: 100,000) options outstanding under this plan. No further options are intended to be granted under this plan. Performance rights plan Under the performance rights plan participants are issued with performance rights over the ordinary shares of Breville Group Limited issued in accordance with the Breville Group Limited Performance Rights Plan (PRP). An offer under the PRP grants a participant the right to a certain number of fully paid ordinary shares in the company. Upon satisfaction of the performance hurdle, the right will vest and be convertible into shares. The company uses time-based and financial-based hurdles. Earnings per share (EPS) is the financial-based performance hurdle for the LTI plan. EPS represents the earnings per share from operations adjusted for non trading items. The use of EPS ensures an alignment between shareholder return and reward for participants. In addition to the grant of performance rights awards which are subject to an EPS performance hurdle, performance rights awards also may be granted in accordance with the PRP as a retention award where the performance condition is continued employment with the company to vesting date. If the performance hurdle is not met or if the participant ceases to be employed by the company, any unvested performance rights will lapse unless otherwise determined by the board. There are no cash alternatives. The performance rights cannot be transferred and are not quoted on the ASX. Holders of performance rights are not entitled to notice of, or attend, a meeting of shareholders of the company, or receive any dividends declared by the company, until the rights have vested and then converted into shares. Once allocated, disposal of shares is subject to restrictions whereby board approval is required to sell the shares granted within three years of the shares being allocated to the participant or; if the participant ceases to be employed by the company, within twelve months of the date employment ceases; or such other date as the board determines. In the event of a takeover bid where the bidder and its associates become entitled to at least 50% of the voting shares of the company, any performance rights granted will vest where the board, in its absolute discretion, is satisfied that pro rata performance is in line with any performance condition applicable to those performance rights. Any performance rights which do not vest will immediately lapse, unless otherwise determined by the board. At 30 June 2012 there are 1,030,000 (2011: 2,321,000) performance rights outstanding under this plan. Breville Group Limited annual report 2012 71 Notes to the financial statements for the year ended 30 June 2012 Note 27. Share-based payment plans continued Options and performance rights granted under the second senior executive option plan and the performance rights plan The expense recognised in the income statement in relation to share-based payments is disclosed in note 2(f). The following table illustrates the number and weighted average exercise prices (“WAEP”) of and movements in share options and performance rights issued during the year: 30 June 2012 30 June 2011 Number of options / performance rights Note Number of options / performance rights WAEP WAEP Outstanding at the beginning of the year 2,421,000 0.0463 1,902,000 0.5396 Performance rights granted during the year Performance rights and options exercised during the year Performance rights forfeited during the year Outstanding at the end of the year (a) 1,030,000 Exercisable at the end of the year - Notes (a) The outstanding balance as at 30 June 2012 is represented by: 589,000 0.0000 1,039,000 0.0000 (1,382,000) 0.0810 (480,000) 1.7533 (598,000) 0.0000 0.0000 - (40,000) 2,421,000 - 1.8200 0.0463 - Number of performance rights Note * Grant date Vesting date Expiry date WAEP $ Fair value at grant date ($) 153,000 150,000 138,000 132,000 47,000 175,000 166,000 34,500 34,500 1,030,000 (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) 22 Dec 10 22 Dec 10 22 Dec 10 22 Dec 10 20 Apr 11 3 Sep 12 3 Sep 12 2 Sep 13 2 Sep 13 2 Sep 13 5 Oct 12 5 Oct 12 4 Oct 13 4 Oct 13 4 Oct 13 12-Oct-11 1-Sep-14 3-Oct-14 12-Oct-11 1-Sep-14 3-Oct-14 23-Dec-11 3-Dec-12 4-Jan-13 23-Dec-11 2-Dec-13 3-Jan-14 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 2.64 2.64 2.54 2.54 3.32 2.41 2.41 2.47 2.33 (i) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2012 is at least 26.50 cents per share. (ii) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2012 is at least 29.00 cents per share. (iii) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2013 is at least 30.00 cents per share. (iv) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2013 is at least 33.00 cents per share. (v) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2013 is at least 37.00 cents per share. (vi) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2014 is at least 33.50 cents per share. (vii) These performance rights vest if the group’s underlying EPS for the year ending 30 June 2014 is at least 36.50 cents per share. (viii) Performance condition is that the participants must be employed by the company on 3 December 2012. (ix) Performance condition is that the participants must be employed by the company on 2 December 2013. * In addition to the EPS performance hurdle, the participant must be employed by the company on the vesting date. 72 Breville Group Limited annual report 2012 Note 27. Share-based payment plans continued The average remaining contractual life for the performance rights outstanding at 30 June 2012 is between 1 and 3 years (2011: 1 and 3 years). The exercise price for performance rights outstanding at the end of the year was $0.00. There were no options outstanding. (2011: exercise price for performance rights and options outstanding range of $0.00 to $1.12). The weighted average fair value of performance rights granted during the year was $2.41 (2011: $2.66). The fair value of the equity-settled share options and performance rights granted under the second senior executive option plan and the performance rights plan respectively, is estimated as at the date of grant using either a binomial or Black-Scholes option-pricing model, taking into account the terms and conditions upon which the options and performance rights were granted. The following table lists the inputs to the model used for the grants during the year ended 30 June 2012 and 30 June 2011: 30 June 2012 30 June 2011 (Black- Scholes) (Black- Scholes) (Black- Scholes) (Black- Scholes) (Black- Scholes) (Black- Scholes) 12 Oct 11 23 Dec 11 23 Dec 11 22 Dec 10 22 Dec 10 20 Apr 11 30 Jun 14 30 Jun 13 30 Jun 14 30 Jun 12 30 Jun 13 30 Jun 13 5.00 35.00 35.00 3.68 6.00 35.00 35.00 3.54 6.00 35.00 35.00 3.35 4.00 35.00 35.00 5.02 4.00 35.00 35.00 5.22 4.00 35.00 35.00 4.95 2.9 years 1.0 year 2.0 years 1.8 years 2.8 years 2.4 years 0.00 2.77 0.00 2.75 0.00 2.75 0.00 2.82 0.00 2.82 0.00 3.64 Grant date Year ending Dividend yield (%) Expected volatility (%) Historical volatility (%) Risk-free interest rate (%) Expected life of performance right (years) Performance right exercise price ($) Weighted average share price at grant date ($) The expected life of the performance rights is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of performance rights granted were incorporated into the measurement of fair value. Note 28. Employee benefits The aggregate employee benefit liability is comprised of: Trade and other payables (current) Provisions – long service (current) Provisions – long service (non-current) Total employee benefits Note 30 June 2012 $’000 30 June 2011 $’000 15 17 17 3,750 1,597 880 6,227 3,409 1,374 972 5,755 Breville Group Limited annual report 2012 73 Notes to the financial statements for the year ended 30 June 2012 Note 29. Key management personnel (a) Compensation of key management personnel Compensation by category: key management personnel Short-term Post employment Other long-term Share-based payment Total Note 30 June 2012 $’000 30 June 2011 $’000 (i) 2,739 152 30 459 3,380 3,512 224 38 733 4,507 (i) This includes defined contribution plans expense of $152,000 (2011: $224,000). (b) Performance rights and options holdings of key management personnel 30 June 2012 Executives S. Audsley (d) S. Brady M. Cohen C. Dais (e) J. Lord Total 30 June 2011 Executives S. Audsley S. Brady M. Cohen J. Lord M. Melis H. Silver (f) Total Balance 30 June 2011 Granted as remuneration (a) Vested and exercised Other (b) Balance 30 June 2012 506,000 245,000 391,000 - 233,000 1,375,000 81,000 35,000 56,000 31,000 99,000 (274,000) (163,000) (279,000) - (94,000) (313,000) - - - - 302,000 (810,000) (313,000) - 117,000 168,000 31,000 238,000 554,000 Balance 30 June 2010 Granted as remuneration (c) Vested and exercised Other (b) Balance 30 June 2011 274,000 163,000 579,000 94,000 160,000 147,000 1,417,000 232,000 82,000 112,000 139,000 81,000 75,000 721,000 - - (300,000) - - - (300,000) - - - - - (222,000) (222,000) 506,000 245,000 391,000 233,000 241,000 - 1,616,000 (a) Save for a tranche of performance rights granted to J. Lord (52,000) and M. Cohen (17,000) where the performance hurdle is time-based, all performance awards granted during the year are subject to EPS performance hurdles. (b) Includes lapses and forfeitures. (c) Performance rights granted during the year are subject to EPS performance hurdles and remaining in employment until date of vesting. (d) S. Audsley did not meet the definition of key management personnel after 9 November 2011. (e) C. Dais did not meet the definition of key management personnel for the 2011 financial year but became key management personnel on 28 November 2011. (f) H. Silver ceased to meet the definition of key management personnel during the year. Refer note 27 and remuneration report (contained within the directors’ report designated as audited) for details on the above options and performance rights. 74 Breville Group Limited annual report 2012 Note 29. Key management personnel continued (c) Shareholdings of key management personnel Ordinary shares held* in Breville Group Limited (number) 30 June 2012 Directors J. Schmoll S. Fisher D. Howell S. Klein S. Weiss Executives S. Audsley (b) S. Brady M. Cohen J. Lord Total Balance at 1 July 2011 Granted as remuneration On exercise of options/ performance rights Net change other (a) Balance at 30 June 2012 82,294 50,288 85,000 117,189 80,775 102,133 137,645 30,000 40,000 725,324 - - - - - - - - - - - - - - - 274,000 163,000 279,000 94,000 810,000 17,706 - 15,000 - 41,000 (376,133) - (30,000) - 100,000 50,288 100,000 117,189 121,775 - 300,645 279,000 134,000 (332,427) 1,202,897 Ordinary shares held* in Breville Group Limited (number) 30 June 2011 Balance at 1 July 2010 Granted as remuneration On exercise of options Net change other (a) Balance at 30 June 2011 Directors J. Schmoll S. Fisher D. Howell S. Klein S. Weiss Executives S. Audsley S. Brady M. Cohen J. Lord M. Melis Total 82,294 50,288 85,000 117,189 80,775 102,133 137,645 - 40,000 20,000 715,324 - - - - - - - - - - - - - - - - - - - - - - - - - 300,000 (270,000) - - - - 82,294 50,288 85,000 117,189 80,775 102,133 137,645 30,000 40,000 20,000 300,000 (270,000) 745,324 * Held directly, indirectly or beneficially. (a) All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the group would have adopted if dealing at arm’s length. (b) S. Audsley did not meet the definition of key management personnel after 9 November 2011. Breville Group Limited annual report 2012 75 Notes to the financial statements for the year ended 30 June 2012 Note 29. Key management personnel continued (d) Other transactions and balances with key management personnel and their related parties Services Mr Klein was a principal of the legal firm SBA Law from 1 August 2011. Up until 30 June 2011, Mr Klein was partner of a legal firm Arnold Bloch Leibler. His directors fees from 1 August 2011 were paid to SBA Law and prior to that, to Arnold Bloch Leibler. These fees are subject to GST. Fees totalling $184,138 (inclusive of GST), including litigation related legal fees and Mr Klein’s directors fees were invoiced by SBA Law during the current year and by Arnold Bloch Leibler during the prior year (2011: $353,899 inclusive of GST). These fees were all on arms length terms. In addition, other recharges from non-related third- parties, such as Counsel’s fees and other costs, were billed during the year totalling $22,170 (2011: $58,510). Total amounts recognised at the reporting date in relation to other transactions and balances with key management personnel: Liabilities Current liabilities Total liabilities Revenues & expenses Employee expenses (directors fees) Other expenses - Litigation related - Non-litigation related Total expenses The amounts shown above are GST exclusive. (i) Amounts exclude recharges of non-related third-party costs. Note 30 June 2012 $’000 30 June 2011 $’000 21 21 97 - 71 168 9 9 104 29 189 322 (i) 76 Breville Group Limited annual report 2012 Note 30. Auditor’s remuneration Amounts received or due and receivable from the entity and any other entity in the consolidated entity: Ernst & Young Australia – primary auditors - an audit or review of the financial report Ernst & Young Australia’s affiliates – primary auditors 30 June 2012 $’000 30 June 2011 $’000 319,000 339,000 - an audit or review of the financial report 205,000 120,000 RSM Richter LLP – other auditors (Canada only) - an audit or review of the financial report - other services - non-audit related - - 109,000 6,000 Total auditor’s remuneration 524,000 574,000 Note 31. Significant events after year end No matters or circumstances have arisen since the end of the year which significantly affected or may affect the operations of the consolidated entity. The financial report of Breville Group Limited for the year ended 30 June 2012 was authorised for issue in accordance with a resolution of the directors on 23 August 2012. Breville Group Limited annual report 2012 77 Directors’ declaration In accordance with a resolution of the directors of Breville Group Limited, I state that: 1. In the opinion of the directors: (a) the financial report and the additional disclosures included in the directors’ report designated as audited, of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2012 and of its performance for the year ended on that date; and (ii) complying with Accounting Standards and Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the directors in accordance with sections 295A of the Corporations Act 2001 for the year ended 30 June 2012. 3. In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the closed group identified in note 25(a) will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. 4. The financial report complies with International Financial Reporting Standards as issued by the International Accounting Standards Board. On behalf of the board John Schmoll Non-executive chairman Sydney 23 August 2012 78 Breville Group Limited annual report 2012 Independent audit report Independent auditor’s report to the members of Breville Group Limited Report on the financial report We have audited the accompanying financial report of Breville Group Limited (the “Company”), which comprises the consolidated statement of financial position as at 30 June 2012, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. Liability limited by a scheme approved under Professional Standards Legislation Breville Group Limited annual report 2012 79 Independent audit report continued Opinion In our opinion: a. the financial report of Breville Group Limited is in accordance with the Corporations Act 2001, including: i giving a true and fair view of the consolidated entity’s financial position as at 30 June 2012 and of its performance for the year ended on that date; and ii complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the remuneration report We have audited the Remuneration Report included in pages 14 to 22 of the directors’ report for the year ended 30 June 2012. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Breville Group Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act 2001. Ernst & Young Colleen Hosking Partner Sydney 23 August 2012 80 Breville Group Limited annual report 2012 Auditor’s independence declaration Auditor’s Independence Declaration to the Directors of Breville Group Limited In relation to our audit of the financial report of Breville Group Limited for the financial year ended 30 June 2012, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young Colleen Hosking Partner 23 August 2012 Liability limited by a scheme approved under Professional Standards Legislation Breville Group Limited annual report 2012 81 Shareholder information Substantial shareholders as at 4 September 2012 The following information is extracted from the company’s register of substantial shareholder notices: Name S. Lew Custodians Pty Limited Perpetual Limited and subsidiaries National Australia Bank Limited and its associated entities Commonwealth Bank of Australia and its subsidiaries Number of ordinary shares % of issued ordinary shares 39,297,151 9,663,775 8,546,273 7,964,737 30.21% 7.43% 6.57% 6.12% Distribution of shareholdings as at 4 September 2012 Size of holding 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total shareholders Number of ordinary shareholders with less than a marketable parcel Voting rights All ordinary shares issued by Breville Group Limited carry one vote per share without restriction. Ordinary shareholders 577 1,045 370 310 50 2,352 77 82 Breville Group Limited annual report 2012 Twenty largest shareholders as at 4 September 2012 Name Premier Investments Limited National Nominees Limited BNP Paribas Noms Pty Ltd J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Dancetown Pty Ltd Citicorp Nominees Pty Limited JP Morgan Nominees Australia Limited Lew Family Investments Pty Ltd RBC Investor Services Australia Nominees Pty Limited Lew Family Investments Ltd Leonar Equities Ltd Josseck Pty Limited Bond Street Custodians Limited S L Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited Nofusa Pty Limited BNP Paribas Noms Pty Ltd Total Shares 33,452,910 16,598,014 % IC 25.71% 12.76% 9,214,668 8,809,070 8,414,459 7,907,411 7,515,211 3,000,000 2,163,028 2,060,205 1,891,461 1,694,630 1,535,718 1,248,681 775,567 735,000 711,667 655,311 650,000 594,500 7.08% 6.77% 6.47% 6.08% 5.78% 2.31% 1.66% 1.58% 1.45% 1.30% 1.18% 0.96% 0.60% 0.56% 0.55% 0.50% 0.50% 0.46% 109,627,511 84.27% Breville Group Limited annual report 2012 83 Company information ABN Breville Group Limited ABN 90 086 933 431 Share register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Enquiries within Australia: (02) 8280 7111 Enquiries outside Australia: (+61 2) 8280 7111 Website: linkmarketservices.com.au Auditors Ernst & Young 680 George Street Sydney NSW 2000 Bankers Australia and New Zealand Banking Group Limited 20 Martin Place Sydney NSW 2000 Directors John Schmoll Non-executive chairman Steven Fisher Non-executive director Dean Howell Non-executive director Steven Klein Non-executive director Samuel Weiss Non-executive director Company secretary Michelle Waters Registered office and principal place of business Building 2 Port Air Industrial Estate 1A Hale Street Botany NSW 2019 Telephone (+61 2) 9384 8100 Company websites brevillegroup.com breville.com kambrook.com.au 84 Breville Group Limited annual report 2012 This report is printed on Impact: an FSC certified stock made from 100% post consumer waste recycled fibre with a carbon neutral manufacturing process. It has ISO 14001 EMS, NAPM and Nordic Swan accredittion. Design: Buzzsaw cut-through branding. Print: Hogan Print breville.com 

Continue reading text version or see original annual report in PDF format above