BKW
Annual Report 2012

Plain-text annual report

Brickworks Limited ABN. 17 000 028 526 738 - 780 Wallgrove Road Horsley Park NSW 2175 PO Box 6550 Wetherill Park NSW 1851 Tel Fax +61 2 9830 7800 +61 2 9620 1328 info@brickworks.com.au www.brickworks.com.au 25 October 2012 Australian Securities Exchange Attention: ASX Market Announcements BY ELECTRONIC LODGEMENT Dear Sir/Madam, Please find attached the Brickworks Ltd 2012 Annual Report which will be distributed to shareholders today. Yours faithfully, BRICKWORKS LIMITED IAIN THOMPSON COMPANY SECRETARY ABN 17 000 028 526 ANNUAL REPORT 2012 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 FIVE YEAR SUMMARY 2008 $000 2009 $000 2010 $000 2011 $000 2012 % $000 Growth Total revenue 553,716 593,511 656,538 635,615 556,911 (12%) Building Products revenue 519,986 489,253 580,283 604,915 547,590 (9%) Earnings before interest tax and amortisation Building products Property Waste management Investments Associates Head office and other expenses Total EBITA Borrowing costs Income tax 53,610 91,867 1,792 681 36,247 (6,135) 37,026 38,798 1,841 1,268 94,157 (7,271) 53,379 26,638 1,755 2,434 74,047 (7,729) 42,017 26,662 2,573 1,713 66,182 (7,148) 28,538 16,438 2,571 1,081 66,619 (6,796) (32%) (38%) (0%) (37%) 1% 5% 178,062 165,819 150,524 131,999 108,451 (18%) (37,286) (32,603) (33,314) (18,825) (24,491) (15,851) (21,155) (10,061) (25,215) (4,366) (19%) 57% Net profit after income tax - normal 108,173 113,680 110,182 100,783 78,870 (22%) Significant items Washington H Soul Pattinson & Co. (9,563) 392,882 - 88,686 756 Write down of assets to recoverable value - Property, plant & equipment - Investment property - Investment in associate (BKI) - Building products inventory Remediation provision recognised Borrowing costs Business acquisition costs Costs on closure of manufacturing facility Costs on start up of manufacturing facilities Impairment of goodwill Other significant items Tax on significant items One off tax items Net profit after income tax (incl significant items) - - - - - - - - - - - 2,868 - (43,779) (24,716) (13,674) (8,171) (12,039) (3,036) - - - - (3,489) (92,443) - (2,728) - - (4,750) - - (2,826) (3,482) - - (577) 4,283 38,688 (14,021) - - (1,084) - - (2,751) (8,651) - - (2,511) (17,900) - (4,169) - - (4,192) - - (1,947) (6,927) (4,147) (31,627) (3,885) 7,580 12,992 101,478 305,215 138,790 142,551 43,304 (70%) Basic earnings per share (cents) Normalised earnings per share (cents) 76.5 81.5 229.8 85.6 96.7 76.7 96.7 68.3 29.3 53.4 (70%) (22%) Dividends Ordinary dividends per share (cents) 39.0 39.0 40.0 40.5 40.5 0% Ratios Net tangible assets per share Return on shareholders equity $6.35 9.1% $8.27 22.3% $9.28 8.4% Interest cover ratio 4.8 4.6 6.5 $9.42 8.5% 6.4 $9.44 0% 2.6% (69%) 5.2 (19%) Net debt to capital employed 32.0% 21.8% 12.1% 13.0% 14.6% 12% BRICKWORKS LIMITED A.B.N. 17 000 028 526 A N N U A L R E P O R T 2 0 1 2 REGISTERED OFFICE: 738 - 780 Wallgrove Road Horsley Park NSW 2175 Telephone: (02) 9830 7800 Facsimile: (02) 9620 1328 DIRECTORS: ROBERT D. MILLNER FAICD (Chairman) Director since 1997 MICHAEL J. MILLNER MAICD (Deputy Chairman) Director since 1998 BRENDAN P. CROTTY LS; DQIT; Dip.Bus Admin; MAPI; FAICD; FRICS Director since 2008 DAVID N. GILHAM FCILT; FAIM; FAICD Director since 2003 THE HON. ROBERT J. WEBSTER MAICD; MAIM; JP Director since 2001 MANAGING DIRECTOR: LINDSAY R. PARTRIDGE AM; BSc. Hons.Ceramic Eng; SFCDA; Dip.CD Joined the Company 1985. Director since 2000 CHIEF FINANCIAL OFFICER: ALEXANDER J. PAYNE B.Comm; Dip CM; FCPA; FCIS; FCSA; JP Joined the Company in 1985 COMPANY SECRETARY: IAIN H. THOMPSON B.Ec; CA; Grad Dip CSP; FCIS; FCSA Joined the Company in 1996 AUDITORS: ERNST & YOUNG BANKERS: NATIONAL AUSTRALIA BANK SHARE REGISTER: COMPUTERSHARE INVESTOR SERVICES PTY. LIMITED GPO Box 7045 Sydney NSW 2001 Telephone: 1800 269 981 Facsimile: (02) 8234 5050 PRINCIPAL ADMINISTRATIVE OFFICE: 738 - 780 Wallgrove Road Horsley Park NSW 2175 Telephone: (02) 9830 7800 Facsimile: (02) 9620 1328 1 BRICKWORKS LIMITED A.B.N. 17 000 028 526 DIRECTORS’ REPORT The Directors of Brickworks Limited present their report and the financial report of Brickworks Limited and its controlled entities (referred to as the Brickworks Group or the Group) for the financial year ended 31 July 2012. Directors The names of the Directors in office at any time during or since the end of the year are: Robert D. Millner FAICD (Chairman) Michael J. Millner MAICD (Deputy Chairman) Lindsay R. Partridge AM; BSc. Hons. Ceramic Eng; SFCDA; Dip. CD (Managing Director) Brendan P. Crotty LS; DQIT; Dip.Bus Admin; MAPI; FAICD; FRICS David N. Gilham FCILT; FAIM; FAICD The Hon. Robert J. Webster MAICD; MAIM; JP All Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. Principal activities The principal activities of the Brickworks Group during the year were the manufacture of building products, property realisation and investment. Result of operations The consolidated net profit for the year ended 31 July 2012 of the Brickworks Group after income tax expense, amounted to $43,304,000 compared with $142,551,000 for the previous year. Dividends The Directors recommend that the following final dividend be declared: Ordinary shareholders – 27.0 cents per share (fully franked) Dividends paid during the year under review were: (a) Final ordinary of 27.0 cents per share (fully franked) out of profits for the year ended 31 July 2011 and referred to in the previous Directors’ report; (b) Interim ordinary of 13.5 cents per share (fully franked) paid 15 May 2012 REVIEW OF OPERATIONS Highlights1 • Brickworks normalised NPAT before significant items down 21.8% to $78.9 million ◦ ◦ ◦ Building Products EBIT down 32.1% to $28.5 million Land and Development EBIT down 34.9% to $19.0 million Investments EBIT down 0.3% to $67.7 million • • • • Headline NPAT including significant items down 69.6% to $43.3 million Goodwill impairment of $31.6 million within the Building Products Group Net debt/capital employed of 14.7%, net debt $285.4 million Final dividend of 27.0 cents fully franked Overview Brickworks (ASX: BKW) posted a normalised net profit after tax (‘NPAT’) for the year ended 31 July 2012 of $78.9 million, down 21.8% from $100.8 million for the year ended 31 July 2011. After significant items, Brickworks’ headline NPAT was $43.3 million, down 69.6% from $142.6 million in the previous year. Building Products earnings before interest, tax (‘EBIT’) and significant items was $28.5 million, down 32.1% on the prior year. EBIT in the second half was in line with the first half, despite a further deterioration in residential building activity. This was assisted by internal re-structuring activities and industry rationalisation. Land and Development EBIT was down 34.9% to $19.0 million, as a result of a significant reduction in land sales. Earnings from the Property Trust were up 56.8% on the prior year. Investment EBIT was relatively flat at $67.7 million. Interest cost increased by 2.0% to $20.8 million. In addition the mark to market valuation of interest rate swaps adversely impacted the result by $4.4 million. The impact of significant items was a net expense of $35.6 million, including the cost of re-structuring activities and a goodwill impairment of $31.6 million. 1 Unless otherwise stated all earnings measures exclude significant items 2 Normal earnings per share (‘EPS’) were 53.4 cents, down from 68.3 cents per share for the prior year. Directors have maintained the final dividend of 27.0 cents fully franked, taking the full year dividend to 40.5 cents fully franked, in line with last year. The record date for the final ordinary dividend will be 8 November 2012, with payment being made on 29 November 2012. Financial Analysis Gearing (debt to equity) was 18.0% at 31 July 2012, relatively flat compared to 17.9% at 31 July 2011. Total interest bearing debt (‘TIBD’) was $300.0 million and Net Debt was $285.4 million at 31 July 2012. Net debt to capital employed rose to 14.7% from 13.0% the previous year on a $36.1 million reduction in cash holdings. Brickworks has a working capital facility of $100.0 million that provides head room in the current unstable financial markets for additional financial capacity should an acquisition opportunity arise. Total borrowing costs were $25.2 million, including the loss in mark to market valuation of interest rate swaps of $4.4 million and interest costs of $20.8 million. Interest cover decreased to 5.2 times at 31 July 2012, down from 6.4 times at 31 July 2011. Total net cash flow from operating activities was $64.5 million, down from $89.0 million in the previous year. This was a result of decreased trading revenue from the Building Products business, reduced special dividends from WHSP and no proceeds from land sales. Dividends of 40.5 cents per share, totalling $59.8 million were paid during the year, in line with the previous corresponding period. Capital expenditure decreased to $28.9 million in the year ended 31 July 2012, excluding acquisitions. Stay in business capital expenditure was $14.3 million, representing 57.7% of depreciation. Growth capital expenditure was $13.8 million, including the batching plant for the Wetherill Park precast facility in New South Wales and final building work on the new Wollert West plant in Victoria. Spending on acquisitions totalled $19.9 million for the year, comprising Gunns’ Western Australian Jarrah assets, Boral Masonry’s operation in Cairns, the remaining 50% share of Daniel Robertson Australia Pty Ltd and a small independent precast concrete business in Brisbane. Working capital, excluding assets held for resale, decreased by $43.1 million to $160.7 million, primarily due to a reduction in cash assets. Finished goods inventory increased by $6.5 million to $122.0 million during the year, including $5.5 million related to acquisitions over the period. Work in progress increased by $3.3 million, primarily due to the requirement to rebuild feedstock levels at the acquired Auswest Timbers operations. Net tangible assets (‘NTA’) per share remained relatively flat at $9.44 and Total Shareholders’ Equity decreased $13.1 million to $1.663 billion. Normal tax expense decreased 56.4% to $4.4 million during the year, on reduced Group EBIT. Significant items reduced NPAT by $35.6 million for the full year, with significant restructuring activities undertaken in Austral Bricks’ Victorian, Queensland and Western Australian operations. A non-cash goodwill impairment of $31.6 million is included in significant items, following a detailed bottom-up analysis of future cash flow forecasts across each division, incorporating conservative management projections. An impairment is deemed prudent due to the depressed state of residential building activity and the prospect of a slow recovery in future years. The goodwill impairment includes $16.9 million in the Austral Bricks Western Australian division, where a significant new competitor, closure of manufacturing facilities and an inability to immediately recover the full impact of the carbon tax has resulted in reduced earnings forecasts. An additional $11.2 million impairment has been taken in the Austral Masonry division, where industry profitability has been impacted by excess capacity and extremely depressed conditions in South East Queensland. A breakdown of significant items is shown in the following table. Significant Items ($m)2 Tax adjustment for the carrying value of WHSP Significant transactions by WHSP, after tax Austral Bricks Victoria restructuring Austral Bricks Queensland restructuring Austral Bricks Western Australia restructuring Other businesses restructuring costs Business acquisition costs Corporate project costs Impairment of goodwill in the Building Products Group TOTAL Gross - 0.8 (8.8) (5.2) (5.5) (2.5) (1.9) (1.3) (31.6) (56.1) Tax 13.0 - 2.6 1.5 1.7 0.7 0.6 0.4 - 20.6 Net 13.0 0.8 (6.2) (3.6) (3.9) (1.7) (1.4) (0.9) (31.6) (35.6) 2 “Other business restructuring costs” and “business acquisition” costs relate to the Building Products Group 3 Brickworks’ Building Products Group Market conditions 3 Dwelling Commencements 12 Mths to June 11 12 Mths to June 12 Variance % (Compared to prior year) Total Detached Other Res Total Detached Other Res Total New South Wales Queensland Victoria Western Australia South Australia Tasmania ACT 30,949 26,683 59,171 20,817 10,559 2,998 5,105 15,102 13,718 29,155 17,340 8,851 26,311 (2.5) 0.2 (8.9) (5.3) 29,781 19,569 49,767 (14.6) (17.8) 14,529 2,966 17,548 (14.1) (22.6) 6,687 1,692 1,671 1,980 482 8,688 2,197 (16.5) (20.3) (21.6) (39.1) 2,738 4,420 (10.6) (15.1) Total Australia 157,540 87,463 50,895 139,349 (9.9) (14.2) New Zealand4 13,539 13,883 1,564 15,447 10.8 54.4 (5.8) (1.4) (15.9) (15.7) (17.7) (26.7) (13.4) (11.5) 12.0 Total dwelling commencements for Australia were down 11.5% to 139,349 for the twelve months ended 30 June 2012, from 157,540 in the previous year. Detached houses were down 9.9% and other residential developments were down 14.2% on the 12 months ended 30 June 2011. The decline accelerated in the second half, with commencements for the six months to June 30 2012 of 64,026. At an annualised level of around 128,000, this is approaching historical cyclical low points over the past thirty years. The annual decline was consistent across all regions, with each state experiencing a decline in dwelling commencements compared to the prior year. New South Wales experienced a 5.8% decrease in total dwelling commencements to 29,155, driven by a 8.9% reduction in other residential dwellings and a 2.5% reduction in detached houses. The level of residential building activity remains significantly below the longer term average. Queensland continues to experience declines in residential building activity, with total annualised commencements now at the lowest level since June 2001. A decline of 5.3% in other residential activity and flat detached house commencements resulted in only 26,311 commencements for the year. Victoria suffered a major decline in housing activity, albeit from a record high in the previous corresponding year. Commencements of 49,767 was down 15.9%, with the decline particularly severe in the other residential segment, down 17.8%. Following another decline, Western Australia housing commencements of 17,548 for the year ended 30 June 2012, are now at a ten year low. Detached housing commencements were down 14.1% and other residential commencements were down 22.6% compared to the prior year. In light of record population growth since 2006 and low vacancy rates across most major capitals, the slow response to the Reserve Banks’ move to expansionary monetary policy, commencing in November 2011, is a concern. It is revealing to note that the 1:1 relationship that previously existed between total employment growth and commencements has shifted to a 1:1 relationship between full-time employment growth and commencements since 2006. Furthermore, the latest census data reveals household occupancy has increased, albeit marginally, for the first time. These trends support the view that consumers appear to be stuck in an extended period of pessimism5, with the impact on housing investment perhaps accentuated by tighter lending criteria by banks since the Global Financial Crisis. The value of approvals in the non residential sector in Australia increased by 11.3% to $32.499 billion for the twelve months to 31 July 2012, compared to the prior year. Within the non residential sector, Commercial building approvals decreased by 1.0% to $10.736 billion for the period and Industrial building approvals decreased 3.6% to $3.656 billion. The Educational sub-sector, an important driver for bricks and masonry demand, was down 23.1% to $4.133 billion, as the prior year included the tail end of the BER Program. The primary area of growth was the Healthcare sub-sector, up 81.0% to $5.867 billion for the twelve months to 31 July 2012. The New Zealand housing market is emerging from record low levels, with consents up 12.0% for the year to 30 June 2012. However total consents of 15,447 remain well below the historical average. Building Products’ Results in Detail Revenue for the year ended 31 July 2012 was down 9.5% to $547.6 million compared to $604.9 million for the prior year. EBIT was $28.5 million, down 32.1% on the prior year. EBIT in the second half of $14.1 million was approximately in line with the first half EBIT of $14.4 million, despite the significant decrease in residential commencements. 3 Original data sourced from ABS Cat. 87500.0 Dwelling Unit Commencements, Australia, Preliminary, June 2012. Total data within table includes conversions. 4 Building Consents data sourced from Statistics New Zealand – Building Consents. Data shown is for the year to June 30. 5 The Westpac Melbourne Institute index of Consumer Confidence was 98.2 in September 2012, the seventh consecutive month below 100, the longest run of “sub 100” points since the early 1990’s, excluding the Global Financial Crisis period 4 The second half performance in extremely subdued conditions, is a reflection of the restructuring activities completed during the year. These initiatives include substantial reductions in staff levels and manufacturing capacity in New South Wales, Victoria, Queensland and Western Australian brick operations. Over the year, the majority of the EBIT decline was attributable to two key divisions, Austral Bricks Western Australia and Austral Bricks Victoria. Austral Bricks Western Australia continues to face very challenging conditions with a further deterioration of market activity and the increased competition in this market. Austral Bricks Victoria earnings were well down on the prior year due to the decline in market activity and interruptions related to the integration of the new Wollert plant. The lower EBIT to Sales Margin was impacted by higher unit production costs as intermittent and extended shutdowns throughout the period adversely affected plant efficiency. Rising unit input costs such as gas and electricity placed additional pressure on margins, particularly in the Austral Bricks division. In most divisions, price increases were unable to fully offset the impact of rising costs, including the carbon tax. The Building Products Group continues to evolve into a more diversified national building products business. Acquisitions in Auswest Timbers, Masonry and Precast, resulted in these divisions contributing 29.5% of total Building Products revenue for the year to 31 July 2012, up from 24.3% in the prior year. Over the long term this strategy will reduce exposure to the detached house building cycle, through decreased reliance on the traditional Austral Bricks and Bristile Roofing divisions. Total Employee numbers were increased by 15 over the year, however with an additional 107 employees joining the business due to acquisitions, a total of 92 staff, representing 6.6% of the workforce, left the business. This reduction in employee levels reflects the restructuring activities previously announced. In the second half, employee numbers in Austral Bricks Victoria increased as contractors were converted to full-time employees at Wollert, ahead of full speed production at this site. It was encouraging to note another year free from industrial disputes. Brickworks’ commitment to providing a safe workplace has seen Lost Time Injuries (LTI’s) decrease to a record low of 8 for the year ended 31 July 2012. The Total Reportable Injury Frequency Rate (‘TRIFR’) decreased to 180.5 from 216.1 for the prior year. A particular focus for the Group is the roll-out of best practice national standard occupational health and safety procedures to improve standards across all operations. Divisional Analysis Austral Bricks result was significantly lower than the previous year as market conditions continued to deteriorate. Overall sales revenue for the year ended 31 July 2012 was $281.0 million, down 14.8% compared to the prior year, with most states suffering declines in line with reduced building activity. The rising prices of gas and electricity has become a significant impost on the manufacturing cost of clay bricks. Including the impact of the carbon tax, Austral Bricks have experienced a doubling of gas prices since financial year 2008. Over the same period electricity prices have increased by around 70%. Gas and electricity prices combined now account for over 20% of the total manufacturing cost of clay bricks, up from around 15% in 2008. The price of gas is expected to continue to increase substantially, particularly on the East Coast as increased export opportunities are made available for local LNG suppliers. Brickworks has a strong track record in reducing gas consumption, with investment in modern, energy efficient plants and product re-engineering initiatives placing it in relatively strong position compared to competitors to deal with the impact of rising prices. To further decrease gas consumption Brickworks will implement a number of alternative fuel projects over the coming years. These projects will directly substitute the use of gas with alternative, low cost fuel sources such as landfill gas, sawdust and commercial and industrial waste streams. A number of these projects are well advanced, with implementation of planned projects forecast to partially offset the impact of gas price increases. Restructuring activities have been completed across a number of states. Full speed production at Wollert West in Victoria, planned for the coming months, will mark the completion of a seven year business transition that has seen the closure of old, inefficient kilns at Scoresby, Summerhill and Craigieburn. The investment in new state of the art kilns on one site at Wollert places Austral Bricks Victoria in an excellent long term position. In Queensland, the Riverview plant was closed and operations were consolidated to the more robust and flexible plant at Rochedale, whilst in Western Australia, Plant 3 at Cardup ceased operations in response to the structural changes in that market. The closure of Cardup and transfer of volume to the more modern Malaga manufacturing plant will increase the utilisation and efficiency of this operation. Once stock is depleted at Cardup, the reduced manufacturing footprint comprising Bellevue, Armadale and Malaga will provide a sustainable, efficient and appropriately sized manufacturing operation that will enhance returns in the Western Australian brick business. During the year, significant one-off costs were incurred as a result of these restructuring activities. In Victoria these costs included the closure of Craigieburn, the remediation of Summerhill land and the commissioning of the new Wollert West kiln. There were significant redundancy and write-off costs in Austral Bricks Queensland and Western Australia due to the closure of the Riverview and Cardup plants respectively. In addition to the capacity reduction by Austral Bricks, continued rationalisation of plant capacity by competitors provides some encouragement for an improved industry structure moving forward. The total capacity removed from service since 2009 now stands at an estimated 570 million standard brick equivalents (SBE). In most states industry capacity is now more closely matched with long term supply requirements and this should drive improved manufacturing efficiencies and increased earnings across the cycle. Some progress was made in achieving selling price increases, up 4.0% compared to the prior year, however these were insufficient to cover the impact of the manufacturing slowdown and input cost increases. Most states have successfully implemented price rises, effective from 1 July 2012 with further increases planned throughout the year in an attempt to ensure that margins are not eroded as a result of rising gas prices and other input cost pressures, including the carbon tax. Austral Bricks continues to focus on developing fashionable and market leading products to attract premium prices and consolidate the strong position that bricks hold as the material of choice in detached house walling. 5 Examples of this include the launch of product ranges such as Ultrasmooth in New South Wales, Metallix, Reveal and Luxe in Queensland and Colossus and Ceres in South Australia. In addition, the Daniel Robertson premium brick brand was successfully integrated into the Building Products portfolio in March 2012. These initiatives have contributed to the strong trend back to face brick, as evidenced by face brick featuring in 85% of the 330 display homes built over the last two years in New South Wales, with Austral Bricks securing over 50% of all new display homes in that state. The renaissance of face brick is particularly encouraging for Austral Bricks as these products deliver higher margins than general purpose commons used for rendering, and the differentiated look and low maintenance finish combats the threat of alternative products. Although clay brick continues to uphold its’ dominant share of detached house walling, challenges remain in the multi-residential segment where market share of clay brick has been eroded over many years at the expense of alternatives such as precast concrete and lightweight inter-tenancy walling solutions. Encouragingly, face brick has maintained a strong presence in the lower storeys of high rise apartment developments, as part of the overall trend towards a low maintenance composite look. New South Wales had a relatively strong year, with sales revenue stable compared to the prior year. Earnings were adversely impacted by lower volumes and extended plant shutdowns to reduce stock levels although strong price increases were able to offset these impacts to some extent. The three year retail upgrade strategy is now almost complete with the display centre at Beresfield opening early in financial year 2013. Queensland delivered a negative contribution for the year, although performance improved significantly in the second half following the closure of the Riverview plant in January 2012. Significantly improved pricing outcomes were achieved, however required increases remain challenging, compromised by strong competition in the market. Victoria had a particularly challenging year, as market activity declined sharply from the record high level of the previous year. Volume was also impacted as a result of interruptions in the integration of the new Wollert West plant. Commissioning of the new plant is now nearing completion, including the successful transition of the product range. An enhanced pressed brick product offering and the ramp up to full speed of the new kiln will significantly enhance the performance of Austral Bricks Victoria. Western Australia suffered a significant fall in sales volume and profits as a result of the poor market conditions. In the last quarter in particular, changes to the Western Australian Building Act caused a significant reduction in residential approvals and Austral Bricks sales volume. These changes have meant that a strong increase in house sales has not yet been reflected in approvals data. Furthermore, strong competition in this market compromised the ability of the business to achieve target price increases, although progress has been made with major builders. South Australia earnings were down on the prior period, with significantly lower volumes in line with market activity. Price growth of 5.4% compared to the prior year was unable to fully offset the impact of reduced volumes on manufacturing costs. Tasmania delivered a lower EBIT result, on the back of lower sales revenue, down 15.0%. The exit of K&D Bricks from the Tasmanian market, announced in February, leaves Austral as the only remaining locally based manufacturer. Since the announcement, initiatives have been implemented to increase plant output to meet the expected increase in demand going forward. New Zealand delivered a substantially improved result, driven by the uplift in building activity and increased market share. Results in the second half were particularly encouraging, with a strong position in the South Island allowing it to benefit from the Christchurch re-build. Bristile Roofing earnings were down on the prior year, largely as a result of a decline in sales revenue of 15.7%, to $104.4 million. The exit of a major competitor in Queensland provided a significant boost to sales volume in that state. The Western Australian business delivered a marginally improved result compared to the prior year despite the significant fall in housing starts, due to a re-structure of plant operations completed in the first half. In July 2012 Bristile Roofing was appointed as an exclusive distributor for Spanish manufacturer La Escandella, to supply a premium range of terracotta tiles into the Australian and New Zealand market. On the East Coast, the La Escandella products will compliment the locally manufactured range and provides the business with significant growth opportunities at the higher margin premium end of the market. In Western Australia the La Escandella relationship will facilitate a transition to imported roof tiles from local production. This transition is economical as a result of favourable exchange rates and the escalating costs of local terracotta rooftile manufacture. Local production costs have become uncompetitive due to the limitations of the Caversham plant, poor volumes and the sharp increase of gas and electricity price increases, exacerbated by the impost of the carbon tax. Austral Masonry total sales revenue was down 3.3% to $53.4 million, primarily as a result of decreased volume. After a solid first half result, sales volume declined in the second half as wet weather and strong competition impacted deliveries along the East Coast. The acquisition of the Cairns operation in March has enhanced Austral Masonry’s position in Far North Queensland and together with the existing plant in Ayr, just south of Townsville, places the business in a leading position in this not only growing region, but dominant concrete block market. Austral Masonry continues to expand its’ product range, with the development of new products such as Magnumstone and Cornerestone allowing growth into the engineered retaining wall market. Austral Precast delivered another increase in earnings on the back of a solid increase in sales revenue, up 20.3% to $68.1 million. On the East Coast, the installation of a batching plant at the Wetherill Park in Sydney, enabling 24 hour operation, is nearing completion. This will allow the rationalisation of the current manufacturing footprint and further enhance manufacturing efficiencies. 6 In Queensland, the acquisition of an independent operator in March 2012 will deliver additional scale and manufacturing efficiencies following the consolidation of operations to one site in August. Following a loss in the prior year, the Western Australian operation posted a positive result, on the back of solid price increases, together with improved manufacturing efficiencies resulting from plant upgrades and strong volume increases. Auswest Timbers domestic sales revenue was up 12.4% on the prior year to $40.6 million, and earnings were up 29.4%, due in part to the integration of acquired operations in Western Australia. However export earnings were significantly lower than the prior year as the high Australian dollar adversely impacted demand from Asia. The contribution from acquired assets in Western Australia was supported by another solid contribution from the roof tile batten operation in Fyshwick, where strong cost controls alleviated the impact of lower throughput caused by the current weakness in detached house construction activity. Working capital was impacted by the requirement to re-build feedstock levels in the acquired Gunns business in Western Australia. Despite the short term impact of this stock re-build process, the substantial synergies that this acquisition brings to the Auswest operations in the Pemberton and Manjimup region delivered improved manufacturing efficiencies in the second half. A long term log license agreement is in place in Western Australia, placing operations in that state in a secure position. However uncertainty remains over log supply for the Orbost mill in Victoria, with a final decision from VicForests on future supply arrangements in that state yet to be announced. Land and Development Land and Development produced an EBIT of $19.0 million for the year ended 31 July 2012, down 34.9% from $29.2 million in the prior year. Property Sales were limited, contributing an EBIT of $0.7 million for the year, with the largest transaction being the sale of two hectares at the M7 Business Hub, Eastern Creek into the Property Trust to accommodate the expansion of the existing Toll facility. The Property Trust generated an EBIT of $19.6 million, up from $12.5 million in the year ended 31 July 2011. Net property income distributed from the Trust was $9.0 million for the year, up 26.8% on the prior year due to rental reviews, two new DHL facilities at Oakdale and the extension of the existing Linfox facility at Interlink, Erskine Park. The revaluation profit of stabilised Trust assets totalled $5.3 million, up from $4.7 million in the previous year on flat capitalisation rates and increased income. An EBIT of $4.5 million was contributed through the recognition of unrealised profit on the completion of two new DHL facilities on the Oakdale Estate. In addition, $0.8 million was contributed through the sale, above book value, of two vacant lots from the Heritage Trust. The total value of the Property Trust assets as at 31 July 2012 was $655.4 million, with borrowings of $286.4 million, giving a total net value of $369.0 million. Brickworks share of the Trust’s net asset value was $184.5 million up $0.5 million from $184.0 million at 31 July 2011. Revaluation uplift was offset by the sale of Lot 3 and Lot 5 from the Heritage Trust resulting in a capital distribution to Brickworks. During the year, financing arrangements for the Trust were restructured and diversified, with significant headroom made available to fund additional growth opportunities. Waste Management contributed a profit of $2.5 million from operations at Horsley Park in New South Wales, in line with the previous corresponding period. Property administration expenses totalled $3.8 million for the year to 31 July 2012, significantly higher than the prior year due primarily to increased land tax on the remaining Oakdale property, due to its favourable zoning. Investments The EBIT from total investments was down 0.3% to $67.7 million in the year ended 31 July 2012. Washington H. Soul Pattinson Limited (‘WHSP’) ASX Code: SOL The normalised profit from this investment was $66.6 million for the year, up marginally from $66.2 million in the year ended 31 July 2011. The market value of Brickworks 42.72% shareholding in WHSP was $1.345 billion at 31 July 2012, up 1.7% on the value at 31 July 2011. This investment continues to provide diversity and stability to earnings, with cash dividends totalling $42.9 million received during the year. WHSP has delivered outstanding returns over the short, medium and long term, outperforming the ASX All Ordinaries Accumulation Index by 12.4% p.a. over five years, 6.6% p.a. over ten years and 3.8% p.a. over fifteen years. WHSP maintains a substantial investment portfolio in a number of listed companies including significant holdings in Brickworks, New Hope Corporation, TPG Telecom Limited, API, Clover, Ruralco Holdings, Copper Chem Limited and Souls Private Equity. Items since Balance Date On 1 August a fire at Auswest Timbers’ Deanmill facility in Western Australia destroyed some of the product transfer infrastructure in part of the mill. Jarrah production has been temporarily transferred to Pemberton, whilst repair work is carried out at Deanmill. It is anticipated that Deanmill will return to production by Christmas. On 15 August a fire in the new clay mill at Wollert resulted in a temporary slow down of production, with clay grinding shifted to the less efficient old mill. Repair work is now complete, following a round the clock effort by the Major Projects team to rebuild the mill and return it to full production on Saturday 15th September, exactly one month after the fire. 7 Whilst the Deanmill and Wollert fires are fully covered by insurance policies, additional measures and precautions are being instituted across all sites to reduce the likelihood of future fires. Brickworks have signed a Heads of Agreement with CSR Building Products (NZ) Limited, outlining an intention to establish a Joint Venture arrangement for the sale and distribution of bricks in the New Zealand market. A submission to the New Zealand Commerce Commission was lodged on Monday 3rd September seeking approval for the Joint Venture. Outlook Building Products Group Barring any unforseen external shocks, the latest forward indicators of housing activity indicate that we may be close to the bottom of the residential building cycle. However the recovery in building activity is likely to be patchy over the next twelve months with weak full-time employment growth, low confidence and poor affordability likely to eliminate any impact of cash rate reductions by the Reserve Bank of Australia. Furthermore, varying state government policies are expected to drive diverging outcomes across the major states. The New South Wales government has taken unprecedented measures to revive building activity with extra resources made available to deal with development applications, and funds committed to build roads, sewerage and other infrastructure for new housing sites. The increase in the First Home Owners Grant from October 1, for properties up to $650,000 will also strongly assist. The Victorian government on the other hand has cut the first home owners grant at a time when that state is in the midst of a significant decline in activity, albeit from record high levels. This is likely to result in a further decrease in demand, despite the release of significant parcels of land for development. In Western Australia, a backlog of activity caused by changes to the Building Act in mid 2012, forecast robust employment growth and low vacancy rates support anecdotal evidence of a strong recovery in that state. In Queensland, an increase in activity in the first half is expected as projects signed up prior to the expiry of the Building Boost grant on 30th April 2012 flow through. This work will be largely completed by December 2012. The government has now announced a new incentive for first home buyers, available from October 1, that should support building activity in the second half. On balance, Brickworks anticipates a total of around 140,000 residential commencements for the year ending 31 July 2013, marginally up on the prior year, with increased activity in New South Wales and Western Australia likely to be offset by continuing declines in Victoria. The outlook for the New Zealand market is positive, with the strong increase in building activity in the past six months expected to continue in the 2013 financial year, assisted by the Christchurch rebuild gathering momentum. The majority of internal restructuring activities within the Building Products Group has now been completed, with all businesses now focussed on improving profitability with existing resources, and fully recovering cost imposts. Land and Development Two major Property Trust developments are currently under construction and due for completion in late calendar 2012. This comprises the Reedy Creek development on the M7 Business Hub in Sydney and Interlink, at Erskine Park in Sydney. The conclusion of these projects will provide additional rental returns and capital growth for the Property Trust. The demand for new site developments is improving from a weak base across the broader market. DHL has pre-commited to a new 20,000m2 facility at Oakdale in Sydney (DHL’s third facility on this estate). Toll Holdings has also pre-committed to a 6,000m2 expansion to its existing facility on the M7 Business Hub. Both of these projects are due for completion mid calendar 2013. Land sales are expected to increase in the next twelve months with a strong pipeline of potential sales in place. Sales into the Property Trust during financial year 2013 are forecast to include a 60 hectare parcel of land at the Oakdale South site in Sydney and the first stage of the 30 hectare Rochedale site in Queensland, in both cases pending resolution of council and infrastructure issues. In addition, following the closure of the Riverview brick operation in Queensland, the 12.2 hectare site will be developed, including refurbishment of the former factory building and the sub-division of vacant land, to occur in early calendar 2013. Looking further ahead, a 120 hectare lot at Oakdale West in Sydney is also under review by the Department of Planning, to be rezoned from industrial to residential. If successful, this would bring forward the development of this land as well as increase its value. A response is expected by late calendar 2012. Investments The outlook for the Investments Group is clouded by continued volatility in global investment markets and commodity pricing. However on balance, the diversified nature of WHSP’s investments should continue to deliver stable earnings to Brickworks. Brickworks Group Building Products earnings are expected to recover in the 2013 financial year, following internal restructuring activities completed in 2012. In the medium term, industry rationalisation and improvements in building activity will provide additional impetus to Building Products earnings. A significant increase in land sales is also expected to boost earnings, whilst Investment earnings are expected to remain stable. Significant changes in state of affairs There were no significant changes in the state of affairs of the Brickworks Group during the year, other than those events referred to in the Review of Operations and the financial statements. 8 After balance date events No matters or circumstances have arisen since the end of the financial year that have significantly affected the current financial year, or may significantly affect in subsequent financial years: - the operations of the Brickworks Group; - the results of those operations; or - the state of affairs of the Brickworks Group. Likely developments and expected results of operations The review of operations gives an indication of likely developments and the expected results of operations in subsequent financial years. Further information as to likely developments in the operations of the Group, and the expected results of those operations in subsequent financial years, has not been included in this report because inclusion of such information would be likely to result in unreasonable prejudice to the Group. Safety “There is no task that we undertake that is so important that we can’t take the time to find a safe way to do it”. Brickworks are committed to the health and safety of its employees, contractors and general public. A Brickworks core value is that “We don’t want to make a profit by hurting anybody” and earnestly believe that all injuries are preventable. A safety culture is crucial to our operation’s ongoing OH&S performance. The board of Directors and Senior Managers are fully aware of their responsibilities in the management of Occupational Health and Safety. The Managing Director is briefed weekly on OH&S matters and performance by the Divisional General Managers and issued a full report at the end of each month. An OH&S report is presented to the Board and is an agenda item discussed at each Board meeting. Brickworks have developed robust OH&S management systems, complying with all relevant Australian standards and legal obligations. These systems are designed to meet the needs of its employees, contractors and general public, and are in a class that ably support the Workers Compensation self insurance models operating in New South Wales, Victoria and Western Australia divisions. Brickworks reviews safety performance at all levels of the business, with a view to continuous improvement. Various management and supervisory levels are given responsibilities for safety performance, with relevant staff being held accountable for this. The Group consolidated its safety performance over this last year, with half its divisions not having recorded a lost time injury. The lost time injury frequency rate (LTIFR) was 2.99 injuries per million hours worked, an improvement on last year’s 3.46 and our best result. The number of medical treatments recorded also reduced by 14.2% year on year. Whilst these results are pleasing, and reflect the sustained commitment of all Brickworks personnel to safety issues, there is still further room for improvement, with our ultimate goal being no workplace injuries. The standardisation of the OH&S management systems nationally is progressing well, with gap analysis being performed to identify the level of compliance. External audits are also conducted to ensure the system and meets all relevant legislative requirements. The Environment The Brickworks Group understands and accepts its responsibility for environmental protection which is integral to the conduct of its commercial operations. Brickworks’ objective is to comply with all applicable environmental laws and regulations and community standards in a commercially effective way. We are committed to encouraging concern and respect for the environment and emphasising every employee’s responsibility for environmental performance. During the year, in excess of $1.5 million was spent on capital projects aimed at improving our environmental performance or rehabilitating operational sites. In addition, the new Wollert West factory, a $65.0 million state of the art manufacturing facility was commissioned, replacing two older manufacturing facilities, resulting in substantial energy and emission improvements. When fully operational, overall energy consumption and greenhouse gas emissions are expected to reduce by over 60% at Austral Bricks Victorian operations. The Government legislated a price on carbon with a commencement date of 1 July 2012 via the introduction of a Carbon Tax. The price has been set at $23 per tonne of carbon dioxide for the first year of the scheme. Again preparing the company for the carbon constrained future has been a critical issue facing Brickworks this year. Unlike most energy intensive businesses, Brickworks will not receive compensation under the legislation. However some of its more emissions intensive competitors such as the steel, cement and glass industries will receive 94.5% of their carbon permits for free, distorting the market towards higher emissions products. As all commercial operations, Brickworks intends to fully offset the increased costs associated with operating the business through product price rises. In preparing for the price on carbon, managing energy use, emissions and associated costs have been integral to our operations and reducing the impact of the Carbon tax. Brickworks has two facilities with emissions expected to exceed the 25kT CO2e threshold which will be directly liable under the scheme, namely Wollert (Austral Bricks Vic) and Plant 3 (Austral Bricks NSW). These facilities will be required to surrender permits at $23 for each tonne of CO2e emitted. All remaining facilities which are below the threshold will have the cost of carbon passed through by their suppliers. Being a large natural gas consumer, Brickworks successfully applied for and received an Obligation Transfer Number (OTN) from the Clean Energy Regulator. The OTN provides Brickworks with cashflow incentive by enabling Brickworks to manage the impact of the Carbon Tax on its consumption of natural gas, and surrender its obligation in February 2014 for the first year of the Carbon Tax, rather than receive the pass through costs each month on its Natural Gas Bills at $1.18/GJ commencing on the 1st July 2012. Through the collection of revenue under the carbon tax, the Government has introduced a number of grants aimed at assisting organisation in implementing energy efficiency projects and reducing greenhouse gas emissions. 9 Brickworks is preparing to take advantage of these opportunities, and as of the date of this report has already submitted one application for a fuel switching project that will reduce CO2 emissions by over 60,000t over a 10 year period and reduce operating costs. Brickworks actively participates in energy efficiency and greenhouse gas reporting schemes which have assisted in reducing costs, energy consumption, and greenhouse gas emissions. The programs have also led to measurable improvements of systems and processes for data capture and storage, measuring and calculating emissions and implementing energy saving initiatives. These programs include: • • • • • Energy Efficiency Opportunities (EEO) Act 2006 – this programme encourages large energy users to implement management systems aimed at measuring and analysing energy usage within their plants and identifying and implementing energy reduction strategies. All of the largest Brickworks sites covering over 90% of Brickworks total energy consumption have been assessed and had energy audits undertaken to Level 2 status. National Greenhouse and Energy Reporting (NGER) Act 2007 – this programme requires organisations to measure and report their energy consumption, production and greenhouse gas emissions under strict protocols. Brickworks has been measuring its energy consumption and emissions for some 15 years and this program has assisted Brickworks to streamline its processes for data capture, measuring, calculating and reporting energy and emissions. The data is subsequently collated and reported monthly to Senior Management and the Board. National Pollution Inventory (NPI) – The NPI provides the government, community and industry with information to substances and emissions estimates for 93 toxic substances. Brickworks have been fulfilling its mandatory reporting requirements under this scheme. Environment and Resource Efficiency Program (EREP) – this programme was established by the Environment Protection Act 2006 (Victoria only) to assist the state’s largest energy and water users to achieve financial benefits by assessing their resource use efficiency (energy, water and materials use and waste generation). While many of the energy saving projects are already covered in Brickworks’ EEO submission, water and resource saving and waste reduction initiatives have also been committed to. Energy Saving Action Plans (ESAP) – this program is administered by the NSW Office of Environment & Heritage and requires large energy users in NSW to submit a detailed energy efficiency plan and subsequent annual progress reports. Brickworks are a Housing Industry Australia (HIA) Green Smart Leader and support research on Thermal Performance and Life Cycle Analysis of Australian Housing in association with the University of Newcastle. Brickworks has been actively promoting the benefits of Bricks over lightweight competing products since the release of a publication based on 8 years of research and development with the University of Newcastle which concluded that houses built with Bricks and their inherent thermal mass properties have far superior energy efficiency performance compared to housing constructed from lighter weight materials. Brickworks is subject to significant environmental regulation in respect of its clay building products manufacturing and associated activities as set out below. The Group has manufacturing facilities in each state of Australia. Each site holds a current licence and/or consent in consultation with the local environment protection authorities. Annual returns were completed where required for each licence stating the level of compliance with site operating conditions. Queensland production facilities and mining leases operate and are licensed under the Environmental Protection Act 1994 and Regulations. Each site is regulated by Environmental Management Overview Strategy documentation or plans of operations. Various approvals have also been obtained from Brisbane City Council relating to the operation of the concrete roof tile facility at Wacol. New South Wales production facilities and mine areas are administered under the Protection of the Environment Operations Act 1997, which licences organisations and regulates the level of all discharges into the environment. Load based licensing fees are determined by the Environmental Protection Authority based on the level of discharges. The Environmental Planning and Assessment Act 1979 applies to the approval conditions of the group’s activities. Some sites also operate within additional requirements imposed by local government and NSW Department of Primary Industries. Victorian production sites are licensed under the EPA Act 1970, including various state environmental protection policies and regulations. Mining leases operate under the Extractive Industries Development Act 1995. South Australian production facilities are licensed under the EPA Act 1993, while mining and rehabilitation plans are approved in accordance with Regulations under the Mines and Works Inspection Act 1920. Western Australian operations operate under the Environmental Protection Act 1986. They have licences issued from a number of government agencies, including the Department of Environment and the Department of Mines and Petroleum. A number of our sites also operate under additional requirements issued by local shires and councils. Tasmanian operations and mining leases operate under the Environmental Protection Act of 1973. Audit and assurance programs are an integral aspect of Brickworks environment management systems assisting in measuring performance and mitigating environmental risks. A total of 20 independent annual audits were completed this year, which were supplemented by internal audits carried out by Brickworks environmental personnel. The independent environment auditors complete an environmental compliance audit of all factory sites every two years whilst internal environmental managers audit the sites every other year. The purpose of this is to ensure compliance with all current licences and regulations and identify risks of an adverse environmental event under any other relevant legislation. During the year, results of our environmental management process indicated that some emissions were in excess of licence limits. The Company has investigated all these non-compliances, working closely with the relevant authorities to resolve these issues. There have been no prosecutions arising as a result of these. 10 Information on Directors Robert D. Millner FAICD Chairman Mr R. Millner is the non-executive chairman of the Board. He first joined the Board in 1997 and was appointed chairman in 1999. Mr Millner has extensive corporate and investment experience. He is the Chairman of the Remuneration Committee. Other directorships: Washington H. Soul Pattinson and Co. Ltd Director since 1984 New Hope Corporation Ltd TPG Telecom Ltd BKI Investment Company Ltd Milton Group Director since 1995 Director since 2000 Director since 2003 Director since 1998 Australian Pharmaceutical Industries Ltd Director since 2000 Souls Private Equity Ltd Appointed 2004, Resigned 2012 Michael J. Millner MAICD Deputy Chairman Mr M. Millner is a non-executive Director who was appointed to the Board in 1998. He is a councillor of the Royal Agricultural Society of NSW, including Chair of the Cattle Committee and Chair elect of the RAS Foundation, and has extensive experience in the investment industry. Mr Millner is the deputy chairman of the Board, and a member of the Audit and Risk Committee and the Remuneration Committee. Other directorships: Washington H. Soul Pattinson & Co Ltd Ruralco Holdings Ltd Director since 1997 Director since 2007 Lindsay R. Partridge AM; BSc. Hons. Ceramic Eng; SFCDA; Dip CD Managing Director Mr Partridge is a Ceramic Engineer who worked extensively in all facets of the industry in Australia and the United States of America before joining The Austral Brick Company in 1985. He held various senior management positions at Austral before being appointed Chief Executive Officer in 1999, and was subsequently appointed to the Board in 2000. Since then, Brickworks has grown significantly in terms of size and profitability as its operations have become Australia-wide, with its product range extending beyond bricks to roof tiles, pavers, masonry and precast concrete, and activities expanding into property development. In 2008, Mr Partridge completed the Stanford University Executive Development Program. Mr Partridge has also had extensive industry involvement, and is currently a director of various industry bodies, including the Australian Brick and Blocklaying Training Foundation, and the Clay Brick and Paver Institute (Think Brick Australia). In 2012 he was awarded the Member of the Order of Australia for services to the Building and Construction Industry, particularly in the areas of industry training and career development, and to the community. He is a director of Children’s Cancer Institute Australia. Brendan P. Crotty LS; DQIT; Dip.Bus Admin; MAPI; FAICD; FRICS Director Mr Crotty was appointed to the Board in June 2008 and is a non-executive Director. He brings extensive property industry expertise to the Board, including 17 years as Managing Director of Australand until his retirement in 2007. He is a director of a number of other entities that are involved in the property sector, including Chairman of Western Sydney Parklands Trust and a director of Barangaroo Delivery Authority. He is a Member of the Audit and Risk Committee and the Remuneration Committee. Other directorships: Australand Funds Management Ltd GPT Group Director since 2007 Director since 2009 David N. Gilham FCILT; FAIM; FAICD Director Mr Gilham was appointed to the Board of Brickworks in 2003. He has extensive experience in the building products and timber industries. He was previously General Manager of the Building Products Division of Futuris Corporation and Managing Director of Bristile Ltd from 1997 until its acquisition by Brickworks in 2003, and has been involved with various timber companies. He is a member of the Remuneration Committee. The Hon. Robert J. Webster MAICD; MAIM; JP Director Mr Webster was appointed to the Board in 2001 and is a non-executive Director. He is Senior Client Partner in Korn/Ferry International’s Sydney office. He is the Chairman of the Audit and Risk Committee and a member of the Remuneration Committee. Other directorships: Allianz Australia Insurance Ltd Director since 1997 Viridis Investment Management Ltd Appointed 2005, Resigned 2010 11 Information on Chief Financial Officer and Company Secretary Alexander J. Payne B.Comm; Dip CM; FCPA; FCIS; FCSA; JP Chief Financial Officer Mr Payne is an accountant with significant financial experience, who joined The Austral Brick Company in 1985. In 1987 he was appointed Group Company Secretary, and was appointed Chief Financial Officer in 2003. He is a Director of BKI Investment Company Ltd. In 2011, Mr Payne completed the Stanford University Executive Development Program. Iain H. Thompson B.Ec; CA; Grad Dip CSP; FCIS; FCSA Company Secretary Mr Thompson is a chartered accountant who joined The Austral Brick Company in 1996. He worked in various accounting roles within the Company before being appointed Group Company Secretary in 2003. Meetings of Directors As at the date of this report there is an Audit and Risk Committee and a Remuneration Committee. During the financial year, 15 meetings of Directors (including committees) were held. Attendances were: DIRECTORS’ MEETINGS REMUNERATION COMMITTEE MEETINGS AUDIT AND RISK COMMITTEE MEETINGS Number eligible to attend Number attended Number eligible to attend Number attended Number eligible to attend Number attended R.D. Millner M.J. Millner L.R. Partridge B.P.Crotty D.N. Gilham R.J. Webster 10 10 10 10 10 10 10 10 10 10 10 10 2 2 - 2 2 2 2 2 - 2 2 2 - 3 - 3 - 3 - 3 - 3 - 3 Directors interests As at 20 September 2012, Directors had the following relevant interests in Brickworks shares: R.D. Millner M.J. Millner L.R. Partridge B.P. Crotty D.N. Gilham R.J. Webster Ordinary Shares 5,396,192 5,371,433 251,917 10,209 102,268 15,922 As at 20 September 2012, no Director had relevant interests in debentures of, or interests in a registered scheme made available by Brickworks or a related body corporate. As at 20 September 2012, no Director had any rights or options over shares in debentures of, or interests in a registered scheme made available by Brickworks or a related body corporate. As at 20 September 2012, there were no contracts entered into by Brickworks or a related body corporate to which any Director is party, or under which any Director is entitled to benefit nor were there any contracts which confer any right for any Director to call for or deliver shares in, debentures of, or interests in a registered scheme made available by Brickworks or a related body corporate. 12 REMUNERATION REPORT The remuneration report has been audited. Remuneration committee Brickworks Remuneration Committee operates under the delegated authority of Brickworks’ Board of Directors. A summary of the Remuneration Committee charter is included on the Brickworks website (www.brickworks.com.au). All non-executive Directors of Brickworks are members of the Remuneration Committee. The main functions of the Remuneration Committee are to assist the Board in fulfilling its responsibilities relating to: • • • Ensuring remuneration policies and practices are consistent with Brickworks’ strategic goals and human resources objectives and which enable Brickworks to attract and retain executives and Directors who will create value for shareholders; Equitably, consistently and responsibly rewarding executives having regard to the performance of Brickworks, the performance of the executive and the general pay environment; and Ensuring executive succession planning is adequate and appropriate. Attendance details of the Remuneration committee are included in the Directors’ report. The Committee is authorised by the Board to obtain external professional advice, and to secure the attendance of outsiders with relevant experience and expertise if it considers this necessary. Non-executive Directors Remuneration of non-executive Directors is determined by the full Board after consideration of Company performance and market rates for Directors’ remuneration. Non-executive Director fees are fixed each year, and are not subject to performance based incentives. Brickworks’ non-executive Directors are not employed under an employment contract. The maximum aggregate level of fees which may be paid to non-executive Directors is required to be approved by shareholders in a general meeting. This figure is currently $800,000, and was approved by shareholders at the Annual General Meeting on 31 October 2003. It is not proposed to vary this amount at the 2012 Annual General Meeting. For the year ended 31 July 2012, Brickworks paid non-executive Directors base fees of $100,000 per annum, with the chairman of the Board receiving $200,000 per annum, and the chairman of the Audit and Risk Committee receiving an additional $10,000 per annum. All Directors are entitled to receive superannuation contributions at the statutory rate (9%) on these amounts. The total aggregate fees paid to non-executive Directors during the year was within the maximum approved by shareholders. Brickworks constitution requires that Directors must own a minimum of 500 shares in the Company within two months of their appointment. All Directors complied with this requirement during the year. Executive Directors and executives Board policy for determining remuneration Board policy for determining the nature and amount of remuneration of the executive Director and senior managers (the executives) is set by the Remuneration Committee. This policy is applied consistently across all divisions within the Group. Brickworks’ remuneration policy is to ensure that an executive’s remuneration reflects their duties and responsibilities, as well as ensuring the Company is able to attract and retain key talent. The Board of Brickworks recognises that the Group’s performance is tied to its ability to attract, retain and develop highly skilled and motivated executives. Whilst remuneration is a key factor in achieving this, the Board recognises there are other factors that influence this ability, including the culture and reputation of the group and its employees, the general human resources policies, and professional development opportunities. Executive remuneration is comprised of both fixed and variable remuneration components. The structure of the remuneration is designed to provide an appropriate balance between these components. Fixed remuneration is made up of base salary, superannuation and other benefits (where taken). Fixed remuneration is approved by the Remuneration Committee based on data sourced from external sources, including independent salary survey providers. Variable remuneration is tied to the performance of both the individual and the Company. Any such remuneration earned is available as Brickworks shares purchased through the Brickworks Deferred Employee Share Plan or as cash, at the discretion of the employee. Performance based remuneration Brickworks Incentive Scheme has been designed to focus executives on the necessity to achieve a range of planned targets for their respective businesses. The variable remuneration program is structured around the achievement of annual performance criteria having regard to an individual’s capacity to influence the area of responsibility, and is payable following recommendation by the Managing Director and approval by the Remuneration Committee. Funding for the Incentive Scheme accrues based on divisional and group earnings. Variable remuneration available as a proportion of total salary for an employee increases as that employee gains greater responsibility and has greater capacity to influence the performance of the business as a whole. The proportion of remuneration related to performance for the Managing Director and Chief Financial Officer is at the discretion of the Remuneration Committee. For the other specified executives and senior managers covered by the Incentive Scheme, the potential variable component is up to 37.5% of base salary, adjusted up or down for performance compared against prior years. 13 Total variable remuneration payments for the 2012 financial year reduced further from 2011’s low levels, with a number of senior executives, including the Managing Director and Chief Financial Officer, again receiving no variable remuneration for the year. This scheme covers the Managing Director, Chief Financial Officer, General Managers, and various other senior managers within the group. Seventy percent of variable remuneration is directly tied to achievement of divisional profit results against both prior year and budgeted performance. The Board considers this measure highly appropriate as it is directly linked to the Company’s ability to generate profit and create value for shareholders. This is also appropriate from an executive’s perspective as the executive is assessed against areas of direct responsibility and influence. Comparison of divisional profit is made against both prior year results and Board approved budgets for the current year. This criteria takes into account the aim of continual improvement in shareholders returns, whilst at the same time recognising that there are a number of external factors (such as the cyclical nature of the Australian Building industry) that are outside the control of the executive. Comparison against properly determined and approved budgets that take into account these external factors is aimed at rewarding executives for strong performance in a weaker environment, which assists in reducing the impact of any negative factors on the business as a whole. The remaining thirty percent of variable remuneration is not directly tied to profit performance. The Board considers that there are a number of other areas of business performance that are critical to the success of the Company yet may not be reflected directly in divisional profits in the current year. These are areas of wider corporate responsibility that, if not achieved or improved, have the capacity to damage shareholder value, such as environmental compliance and performance, and occupational health and safety performance. Additionally, an executive’s ability to train, develop and motivate staff, to maintain positive community relations, and to develop the industry we rely on, all have a major impact on the future profitability of the Company. These non-profit factors are assessed against internal targets set in advance and aimed at continual improvement in these areas. Brickworks Employee Share Plan Brickworks Employee Share Plan operates as part of the remuneration structure of the group. All employees of Brickworks with a minimum 3 months service are eligible to join the plan, whereby the employee may salary sacrifice an amount toward the purchase of Brickworks Ordinary shares and the Company contributes a maximum of $3 per employee per week. The plans are aimed at encouraging employees to share in ownership of their Company, and help to align the interests of all employees with that of the shareholders. In addition to the optional salary sacrifice portion of the plans, Brickworks has introduced an employee Alignment and Retention Scheme, whereby salaried staff are entitled to a value of shares each year through the Deferred Employee Share Plan. The value of shares granted is dependent upon the employees position within the group and their base salary, with staff being entitled to shares with a value up to 37.5% of base salary. Under the terms of the scheme, the employee will receive the voting rights and entitlement to any future dividends immediately upon purchase, however they are unable to access the shares to trade unless they satisfy vesting criteria. These shares will become available to the employee at 20% per annum at the end of each of the following five years, providing they continue to be employed by Brickworks. If the employee terminates their employment, they forfeit their entitlement to the unvested shares, except in limited circumstances, such as medical reasons or bona fide retirement. An employee’s right to transact the shares is governed by the trust deed for the Brickworks Employee Share Plans and the Company’s policy regarding trading windows. Brickworks Employee Share Plan is seen as both an employee retention mechanism, due to the service criteria attaching to the vesting of the shares, and a method of aligning employee interests with those of external shareholders. At 31 July 2012, there were 716 employees participating in the share plans, holding 1,283,527 shares (0.87% of issued capital). In accordance with ASX Listing Rule 10.14, the Company contribution to the Brickworks Employee Share Plan is unavailable to Directors of Brickworks. During the year, all monthly share purchases through the Brickworks Employee Share Plans were performed on market, as were all bonus shares granted through the Employee Share Plans. Options No options over unissued shares or interests in Brickworks Limited or a controlled entity were granted during or since the end of the financial year and there were no options outstanding at the date of this report. No shares or interests have been issued during or since the end of the year as a result of the exercise of any option over unissued shares or interests in Brickworks or any controlled entity. Superannuation The Company contributes to a number of superannuation funds for its employees. Company superannuation contributions are as required under the relevant superannuation guarantee legislation, generally being 9% of salary. Employees are entitled to salary sacrifice additional amounts as superannuation contributions, provided any contributions comply with superannuation guarantee requirements. Brickworks does not have any, or any interest in, defined benefit superannuation funds. All funds administered on behalf of the Company are accumulation funds, and as a result there is no ongoing liability to Brickworks for unfunded superannuation plans. Company performance, shareholder wealth and remuneration This remuneration policy has been tailored to help align Director and executive interests with those of shareholders. The main method of this is through the use of the variable remuneration component and the use of the Brickworks Deferred Employee Share Plan. The Company believes this policy has been effective in increasing shareholder wealth over the long term, and will continue to be effective in creating additional shareholder value. 14 The following table shows a number of relevant measures of Company performance over the past five years. A detailed discussion on the current year results is included in the review of operations and is not duplicated in full here, however an analysis of the figures below demonstrates continued dividend growth, and consistent performance in a difficult cyclical environment. The Board and Senior Management accept that a number of factors have contributed to recent poor share price performance, however the Board is of the opinion that the strategies and efforts adopted by the Group are appropriate to provide long term results to shareholders. Performance based remuneration is tied to performance of the building products and property segments, interest and tax expenses, however the share price is also influenced by factors outside of management’s control. Recent share price pressures have come from a range of sources, including building material stocks facing particularly challenging conditions, investors not giving any weight to the value of the Group’s look-through exposure to the strong resources sector (through SOL and NHC), and broader economic issues such as the potential profit impact of the carbon tax, and uncertainty in global financial markets generally. Whilst the share price does not currently reflect the efforts of the board and management, management have had performance based remuneration cut significantly to appropriate levels given current returns. The changes noted above indicate that the board is prepared to adjust remuneration levels to appropriately match company performance, and the board is satisfied that the previously described remuneration policies will lead to continued improvement to shareholder wealth over the long term. Total revenue (millions) Net profit before significant items after tax (millions) 2008 $553.7 2009 $593.5 2010 $656.5 2011 $635.6 2012 $556.9 $108.2 $113.7 $110.2 $100.8 $78.9 Net profit after tax (millions) $101.5 $305.2 $138.8 $142.6 $43.3 Share price at year end $11.90 $12.85 $11.81 $9.90 $10.08 Dividends – ordinary shares (cents) 39.0 39.0 40.0 40.5 40.5 Details of Key Management Personnel Directors The following persons were directors of Brickworks Ltd during the financial year: Mr R. Millner Mr M. Millner Mr L. Partridge Mr B. Crotty Mr D. Gilham The Hon. R. Webster Executives Non-executive Chairman Non-executive Deputy Chairman Executive director (Managing Director) Non-executive director Non-executive director Non-executive director The following persons had authority and responsibility for planning, directing and controlling the activities of the Group during the financial year: Mr A. Payne Ms M. Kublins Mr D. Fitzharris Mr M. Finney Mr P. Scott Mr D. Millington Chief Financial Officer Executive General Manager – Property & Development Group General Manager Sales – Brickworks Building Products Group General Manager – Austral Bricks East Coast Group General Manager WA – Brickworks Building Products General Manager – Bristile Roofing East Coast On 9 May 2011 Mr Mark Finney was appointed by the company and forms part of the Key Management Personnel disclosures from this date. From the same date, Messrs Caughey and Ellenor are no longer categorised as Key Management Personnel for financial reporting purposes, but remain in their same positions within the group. 15 Remuneration of Individual Key Management Personnel Directors R. Millner M. Millner B. Crotty D. Gilham R. Webster L. Partridge Totals Other Key Management Personnel A. Payne M. Kublins D. Fitzharris M. Finney (3) P. Scott P. Caughey (3) M. Ellenor (3) D. Millington I. Thompson (4) Totals Year 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Year 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 Short term employee benefits Base salary / fees Short term bonus (1) Non- monetary benefits Post employment (Super) Share based payment (Long term incentive) (2) Termination benefits 200,000 195,833 100,000 97,917 100,000 97,917 100,000 97,917 110,000 107,917 1,079,146 1,060,063 1,689,146 1,657,564 - - - - - - - - - - - - - - - - - - - - - - - - 66,777 60,088 66,777 60,088 18,000 17,625 9,000 8,813 9,000 8,813 9,000 8,813 9,900 9,713 15,833 49,998 70,733 103,775 - - - - - - - - - - 217,500 436,693 217,500 436,693 - - - - - - - - - - - - - - Short term employee benefits Base salary / fees Short term bonus (1) Non- monetary benefits Post employment (Super) Share based payment (Long term incentive) (2) Termination benefits 502,403 491,293 364,840 335,563 348,124 349,345 528,504 122,567 351,952 379,806 - - - 142,500 - 75,000 - - - - N/A N/A 25,229 35,168 34,167 32,473 36,700 50,907 21,132 1,466 22,039 31,007 N/A 40,730 44,216 23,758 28,898 23,758 30,860 24,289 8,530 15,833 15,186 N/A 109,050 250,488 67,874 157,635 67,874 98,645 50,000 - 67,874 148,628 N/A 203,422 112,500 24,901 18,062 61,224 N/A 198,045 261,567 254,427 N/A N/A 75,000 - 106,875 N/A 187,989 25,000 2,357,390 - N/A 18,326 16,955 24,480 N/A 16,960 156,222 235,688 N/A 16,686 29,202 22,898 N/A 16,919 157,570 202,255 N/A 56,153 48,187 90,368 N/A 38,033 410,859 901,174 2011 2,522,458 536,875 - - - - - - - - - - N/A - N/A - - - N/A - - - Total 218,000 213,458 109,000 106,730 109,000 106,730 109,000 106,730 119,900 117, 630 1,379,256 1,606,842 2,044,156 2,258,120 Total 677,412 821,165 490,639 697,069 476,456 604,757 623,925 132,563 457,698 574,627 N/A 420,109 N/A 364,210 355,911 499,048 N/A 284,901 3,082,041 4,398,449 Notes (1) The short term bonus amounts disclosed were approved by the Remuneration Committee on 31July 2012, in relation to performance during the 2012 financial year (2011 granted on 29 August 2011). The short term bonus payments were made during the September following approval. (2) (3) (4) Share rights are valued at their grant date and the values are allocated evenly over the period from grant date to vesting date. The amounts disclosed above relate to that portion of the period from grant date to vesting date that fall within the current financial period in accordance with AASB 2. On the same date as the Remuneration Committee approved the short term bonus, they also approved various long term incentive amounts for each of the employees listed above, to be granted as shares in the Deferred Employee Share Plan (as outlined in the section on the share plan above). On 9 May 2011 Mr M. Finney was appointed by the company and forms part of the KMP disclosures from this date. From the same date, Messrs Caughey and Ellenor are no longer categorised as KMP for financial reporting purposes, but remain in their same positions within the group. Mr I. Thompson is no longer categorised as KMP for financial reporting purposes, but remains in the same position within the group. 16 Discussion in relation to specific executives The Company has signed employment contracts with the Managing Director and other senior executives of the Brickworks group. There is no fixed termination date under the contract, however the terms allow for a review every five years, or in certain limited circumstances, such as a material change in the executives position. If the executive resigns from their employment, they are entitled to their salary up to termination date plus any accrued leave provisions. They will also be entitled to a pro-rata portion of the average of the previous 3 years annual bonus. In October 2011 Mr Finney was allocated $250,000 in Brickworks shares under his sign on agreement. These shares are subject to a progressive clawback condition if Mr Finney was to terminate within five years from his commencement date (9 May 2011). If the Company terminates Mr Partridge (Managing Director) other than under immediate termination (as defined in his employment contract), he will receive six months notice (or a payment equivalent to this amount in lieu of notice), plus a termination benefit of twelve months base salary and the average of the previous three years annual bonus. In addition Mr Partridge will receive immediate access to all unvested shares held on his behalf by the Brickworks Deferred Employee Share Plan. If the Company terminates the specified executives other than under immediate termination (as defined in their employment contract), the executive will receive up to six months notice (or a payment equivalent to this amount in lieu of notice), plus a termination benefit of six months base salary and a pro-rata of the average of the previous three years annual bonus. In addition the executive will receive immediate access to all unvested shares held on their behalf by the Brickworks Deferred Employee Share Plan. If the Managing Director or any executive is subject to immediate termination (as defined in their employment contract), Brickworks is not liable for any termination payments to the employee other than any outstanding base pay and accrued leave amounts. All unvested shares held on their behalf by the Brickworks Deferred Employee Share Plan will be forfeited. All senior executives gain strategic business knowledge during the course of their employment. Brickworks will use any means available to it by law to ensure that this information is not used to the detriment of the Company by any staff member on termination. In order to protect the Group’s interests, Brickworks has an enforceable restraint through the executive’s employment contract to prevent executives either going to work for a competitor, or inducing other employees to leave the Company, for a specified period. In consideration of the restraint, executives will receive a monthly payment, equivalent to their existing base salary plus one twelfth of the average of the previous three annual bonuses, for a period of time. For the Managing Director this period is 12 months, and for other executives this period is up to 6 months. The employment contracts referred to above have been prepared and reviewed by an external party. The Managing Director’s salary package has also been reviewed by an external party and is considered to be fair and reasonable. 17 Auditor’s independence declaration The Directors received an independence declaration from the auditor, Ernst & Young. A copy has been included on page 19 of the report. Provision of non-audit services by external auditor During the year the external auditors, Ernst & Young, provided non-audit services to the Group, totalling $17,800. The Directors through the Audit and Risk Committee are of the opinion that the provision of non-audit services has not compromised the independence of the auditors. The non-audit services were all for the provision of accounting advice, which was general in nature, relating to the interpretation and potential application of accounting standards. Brickworks management has been responsible for selecting, applying and calculating all impacts of accounting standards on the Group’s financial statements. The details of total amounts paid to the external auditors are included in note 6 to the financial statements. Proceedings on behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Indemnification of Directors and Officers The Company’s Rules provide for an indemnity of Directors, executive officers and secretaries where liability is incurred in connection with the performance of their duties in those roles other than as a result of their negligence, default, breach of duty or breach of trust in relation to the Company. The Rules further provide for an indemnity in respect of legal costs incurred by those persons in defending proceedings in which judgment is given in their favour, they are acquitted or the Court grants them relief. Since the end of the previous financial year, the Company has paid insurance premiums in respect of Directors’ and officers’ liability. The insured persons under those policies are defined as all Directors (being the Directors named in this Report), executive officers and any employees who may be deemed to be officers for the purposes of the Corporations Act 2001. Rounding of Amounts The Company has applied the relief available to it under ASIC Class Order 98/100 and accordingly, amounts in the financial report and Directors’ report have been rounded off to the nearest $1,000 where allowed under that class order. Made in accordance with a resolution of the Directors at Sydney. Dated 20 September 2012. R.D. MILLNER Director L.R. PARTRIDGE AM Director 18 Ernst & Young Centre 680 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 www.ey.com/au AUDITOR’S INDEPENDENCE DECLARATION To the Directors of Brickworks Limited In relation to our audit of the financial report of Brickworks Limited for the financial year ended 31 July 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 Renay Robinson Partner 20 September 2012 Liability limited by a scheme approved under Professional Standards Legislation 19 BRICKWORKS LIMITED A.B.N. 17 000 028 526 CORPORATE GOVERNANCE STATEMENT The Brickworks Board is committed to developing and maintaining good corporate governance within the Company, and recognise that this is best achieved through its people and their actions. Brickworks’ long term future is best served by ensuring that its employees have the highest levels of honesty and integrity and that these employees are retained and developed through fair remuneration, appropriate long term incentives and equity participation in the Company. It is also critical to the success of the Company that an appropriate culture is nurtured and developed, starting from the Board itself. This Corporate Governance statement has been summarised into sections in line with the 8 essential corporate governance principles as specified in the ASX Corporate Governance Council’s “Corporate Governance Principles and Recommendations (2nd Edition)”, as issued in June 2010. A summary of corporate governance information can be found on the Brickworks website at www.brickworks. com.au. Lay solid foundations for management and oversight The Board is ultimately responsible for all matters relating to the running of the Company, however that role is achieved mainly through governing the Company. It is the role of senior management to manage the Company in accordance with the direction and delegations of the Board, and the responsibility of the Board to oversee the activities of management in carrying out these delegated duties. Brickworks Board has the final responsibility for the successful operations of the Company. In general, it is responsible for, and has the authority to determine, all matters relating to the policies, practices, management and operations of the Company. The Board must also ensure that the Company complies with all of its contractual, statutory and any other legal obligations, including the requirements of any regulatory body. The principal functions and responsibilities of the Board include the following: • • • • • • • • Providing leadership to the Company and its employees; Overseeing the development and implementation of appropriate corporate strategies; Ensuring corporate accountability to shareholders; Overseeing the control and accountability systems within the Company; Ensuring robust and effective risk management, compliance and control systems are in place and operating effectively; Monitoring the performance and conduct of the Company; Monitoring the performance and conduct of senior management, and ensuring adequate succession plans are in place; and Ensuring the Company continually builds an honest and ethical culture. All matters that are not specifically reserved for the board and are necessary for the daily management of the Company are delegated to senior executives and management, through the Managing Director. In monitoring the performance and conduct of senior management, the Remuneration Committee formally reviews the performance of the Managing Director and senior executive staff at least annually. In addition to the formal evaluation procedures, senior executive performance is continually monitored by the Managing Director on behalf of the Board, and the Managing Director’s performance is subject to continuous monitoring by the full Board. During the current year, the performance evaluations referred to above took place in accordance with the process as outlined. Structure the Board to add value It is Board policy that the majority of the Board should be non-executive Directors and the Chairman should be a non-executive Director. At the date of this report, the Board consists of five non-executive Directors listed in the Directors’ Report and the Managing Director, Mr Lindsay Partridge. Specific details concerning each Director are contained in the Directors’ Report. Under the ASX Principles, Messrs Brendan Crotty and Robert Webster are the only Directors considered independent. Mr David Gilham is not independent due to previous senior executive roles with Bristile Ltd, and Messrs Robert Millner and Michael Millner are not independent due to their directorial relationships with Washington H. Soul Pattinson, a major shareholder in Brickworks. Whilst the majority of Directors are not strictly considered ‘independent’ in accordance with the ASX Principles, the Brickworks Board feels that there is an appropriate blend of skills and experience covering all aspects of the Company’s operations, particularly the core businesses of building products manufacturing and property development. The Company considers both quantitative and qualitative elements in determining the materiality of any relationships between individual Directors and the Company. The Company uses the guidance contained in accounting standard AASB1031: Materiality to determine quantitative thresholds, whereby amounts less than 5% are considered immaterial and amounts greater than 10% are considered material, subject to the assessment of qualitative factors. Major qualitative factors include the strategic importance of any relationship and the nature of that relationship. Brickworks does not have a separate nomination committee, however the non-executive members of the Board who are not up for re-election at the next AGM fulfil the role of a nomination committee. These non-executive 20 Directors are responsible for reviewing the composition of the Board to ensure that it comprises Directors with an appropriate mix of experience and expertise. Where a vacancy exists on the Board or where the non-executive Directors consider that the Board would benefit from the appointment of additional Directors with particular expertise or experience, the non-executive Directors, in conjunction with external advisors if appropriate, will select suitable candidates. Any Director appointed by the Board in this manner must be elected by shareholders at the next Annual General Meeting. Non-executive Director performance is reviewed by the Chairman. If the performance of any non-executive Director is considered unsatisfactory, the matter is referred to the remainder of the Board. The efficiency, effectiveness and operations of the Board are continuously subject to informal monitoring by the Chairman and the Board as a whole. Individual Directors of Brickworks are entitled to seek independent professional advice in relation to their role as a Director, at the cost of Brickworks. Directors are required to advise the Chairman or full Board prior to engaging parties to provide this advice. Promote ethical and responsible decision-making Brickworks has an established code of conduct under which all Directors and employees are expected to operate. This code is centred on having the Company and its employees achieving the highest integrity in all its business dealings at all levels of the organisation. The code covers a number of areas, including ethical standards, conflicts of interest, excellence in performance, confidentiality, trading in Company securities, continuous disclosure and equal opportunity, anti-discrimination and harassment. All Directors and employees of Brickworks and its subsidiaries are expected to abide by the code of conduct and the comprehensive policy manual which covers a number of items in more detail. Brickworks is committed to generating an environment whereby its employees are encouraged to advise senior management of breaches to its code of conduct and policy manual. To assist employees in this process, Brickworks has established a confidential whistleblower service utilising external consultants to facilitate the reporting and investigating of breaches to the code of conduct. A summary of the main principles of the Brickworks share trading policy are outlined below: • • • • • • • Brickworks’ Directors and employees are prohibited from trading in shares of Brickworks when in possession of price sensitive information about Brickworks Limited or its business and this information is not available to the public. Directors and employees are also prohibited from encouraging another person (for example, family members or business colleagues) to deal in Brickworks Shares when they have “inside information”. Brickworks has established share trading windows during which employees or Directors of the Company may trade shares in the Company. These windows are each for a period of six (6) weeks duration commencing at: 1. 2. 3. 4. the announcement of the Yearly result to the ASX; the AGM date; the announcement of the half yearly result to the ASX; and the lodgement of a prospectus. Directors and employees are restricted from trading in Brickworks shares during these trading windows if they are in possession of price sensitive information. There is a absolute prohibition on the trading of shares between the end of a financial period and the release of results to the ASX relating to that period. In exceptional circumstances, senior management and Directors may trade outside these windows, providing they obtain written approval from the Managing Director or Chairman respectively prior to trading. Exceptional circumstances can include severe financial hardship and the requirement to comply with a legal or regulatory requirement. This restriction does not apply to a limited number of scenarios, including where there is a no change in the beneficial interest; where the trading is done through a fund or scheme where investment decisions are at the discretion of a third party; participation in an offer made to all or most Brickworks shareholders (such as a rights issue or dividend reinvestment plan); or monthly share purchases made by the Brickworks Employee Share Plans. Brickworks’ Equal Employment Opportunity policy can be summarised in the following extracts from the full policy: “Brickworks is committed to a policy of equal employment opportunity (EEO) which aims to prevent the existence of discriminatory practices or measures which may hinder equitable selection, progress or access to benefits of all employees.” “Specifically, Brickworks aims to... objectively select people on merit, encompassing assessment of individual skills, qualifications, abilities and aptitudes” and to “not discriminate on the basis of characteristics which may include race, age, colour, national origin, sex, marital status, pregnancy, religion, political conviction, physical impairment or sexual preference” Brickworks recognises it has legal and moral obligations not to discriminate on any basis, and is conscious of ensuring that its workforce reflects the diverse nature of the locations it operates in. Over time the company has improved its facilities in a number of its locations to promote opportunities for female operators and employees with physical disabilities. Brickworks is also committed to increasing the number of indigenous employees in the workforce. The company strives to improve shareholder value by ensuring the best candidate for any position is appointed. As part of its ongoing obligations to comply with federal requirements, Brickworks reports annually under the 21 Equal Opportunity for Women in the Workplace Act. The EEO policy does not specifically require the Board to establish measurable objectives toward gender diversity, however the Board considers the following objectives to be appropriate: Board membership: At the point at which a board vacancy arises, the nomination committee will ensure that the male and female candidates with the best skills and experience as required for the vacant position will be assessed for the role. Brickworks is committed to having the best director in the role, having regard to the skills and experience required. Due to the low number and turnover of directors, Brickworks has not set a defined target for female board representation. Executive group: At the point at which a position on the Executive Group becomes available, the best internal candidates (male and female) will be assessed, along with (where applicable) the best male and female external candidates for the role (noting that Brickworks has a policy of promoting from within where possible). Brickworks goal is to have increased female executive representation to 25% by the year 2020. As a means of achieving this objective, all management positions should be advertised internally, with the best male and female candidates being assessed for the role. Whole of organisation: Nearly 50% of Brickworks employees are in shop floor manufacturing roles, where it has traditionally been very difficult to attract and retain female employees. Women currently comprise only 3% of shop floor roles, and Brickworks is committed to increasing the shop floor female presence to 5% of employees by 2015. In less ‘traditional’ male areas such as sales and administration, Brickworks currently has a majority of female employees, with 59% representation in these areas, including a number in roles structured to suit flexible working hours. Overall, women currently comprise 18% of Brickworks total workforce. Brickworks goal is to increase this representation to 25% by the year 2020. Each year the Board will report on these objectives and progress towards them as part of the Corporate Governance statement. Safeguard integrity in financial reporting Brickworks has an established Audit and Risk Committee, which has its own charter outlining the committee’s function, composition, authority, responsibilities and reporting. A summary of the charter is available on the Brickworks website. The composition required under the charter is consistent with the best practice guidelines specified by the ASX. Current members of the Committee are The Hon. Robert Webster (Chairman), Mr Michael Millner, and Mr Brendan Crotty. Details of these Directors’ qualifications and experience are available in the Directors’ Report. The other Board members have a right of attendance, however the Managing Director, along with the Chief Financial Officer, the Company Secretary, and other senior managers may attend by invitation only, to discuss issues on audit and internal control matters. The committee also requests that representatives from the external auditors attend the Committee meetings to report on the results of their work in the period under review. Representatives from both external and internal auditors have direct access to the Committee if required. Audit and Risk Committee attendance details are included in the Directors’ report. The function of the Committee is to assist the Board in fulfilling its statutory and fiduciary responsibilities relating to: • • • • • The external reporting of financial information, including the selection and application of accounting policies; The independence and effectiveness of the external auditors; The effectiveness of internal control processes and management information systems; Compliance with the Corporations Act, ASX Listing Rules and any other statutory requirements applicable to Brickworks Limited; and The application and adequacy of risk management systems within Brickworks Limited. Make timely and balanced disclosure As noted previously, the Company has a written policy dealing with its requirements under the Continuous Disclosure rules contained in ASX listing rule 3.1. Generally, this policy states that all employees have a responsibility to advise senior management of any information about Brickworks or its subsidiaries which could be considered price sensitive for Brickworks shares. Senior management will then consider, in consultation with the Directors, which information will be released to the ASX and what form this release will take. Senior Management are accountable to the Board for compliance with these policies. Respect the rights of shareholders Brickworks is committed to keeping its shareholders and other interested parties informed about the Company’s activities, and to allow shareholders to effectively exercise those rights. This is achieved in a number of ways, including through information releases to the market via the ASX, through the Brickworks website, through shareholder mailings, and at any general meetings of the Company. Shareholders are able to make enquiries of the Company via phone, fax, email or post, details of which can be found on the Brickworks website. Time is specifically allocated at general meetings for questions to be put to the Board of Directors. In addition, the partner or delegate responsible for signing the audit report is expected to be at the annual general meeting of the Company to answer any questions raised in relation to the audit and the auditor’s report. Attendees at that meeting are given an opportunity to ask questions of the auditors. 22 Recognise and manage risk Brickworks is committed to the management of risks throughout our operations to protect our employees, shareholders, the environment, our assets, earnings, markets and reputation. Board responsibility for risk management resides with the Audit and Risk Committee. Brickworks has implemented a risk management framework consistent with each element of the Australian Risk management Standard AS/NZS31000:2009. Key Elements of the comprehensive framework covered material Commercial, Business Process, Financial, Human Resources, Information, Property, Environmental, Health and Safety and Insurable Risks. This risk initiative complements previous actions including the specific risk management policies contained within the Brickworks group policy manual, which are aimed at assisting the Board in the management of risk and legal matters. Certain risk management techniques, including foreign currency and interest rate hedging, may only be undertaken where approved by the full Board of Directors. It is a requirement of the Board that the Managing Director and Chief Financial Officer sign off to the Board, via the Audit and Risk Committee, on the risk management and internal compliance and control systems implemented by the Board, and that these compliance and control systems are operating efficiently and effectively in all material respects. Deployment of the risk management framework further facilitates the sign off process. It is a requirement of the Board that the Managing Director and Chief Financial Officer sign off to the Board, via the Audit and Risk Committee, on the content of the financial statements, and that these statements represent a true and fair view of the Company’s operations and the financial position of the Company. Remunerate fairly and responsibly Brickworks has a Remuneration Committee with a membership of all non-executive Directors. The committee operates under the delegated authority of the Board, and has its own charter, a summary of which is available on the Brickworks website. The main functions of the Remuneration Committee are to assist the Board in fulfilling its responsibilities relating to: • • • Ensuring remuneration policies and practices are consistent with Brickworks’ strategic goals and human resources objectives and which enable Brickworks to attract and retain executives and Directors who will create value for shareholders; Equitably, consistently and responsibly rewarding executives having regard to the performance of Brickworks, the performance of the executive and the general pay environment; and Ensuring executive succession planning is adequate and appropriate. Remuneration Committee attendance details are included in the Directors’ report. This Committee is authorised by the Board to obtain external professional advice, and to secure the attendance of outsiders with relevant experience and expertise if it considers this necessary. The Remuneration Report contains detailed information relating to Director and Senior Executive remuneration, including the policy for determining remuneration, the use of fixed and variable remuneration, and the relationship between executive remuneration and Company performance. 23 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 STATEMENT OF COMPREHENSIVE INCOME AS AT 31 JULY 2012 Revenue Cost of sales Gross profit Other income Distribution expenses Administration expenses Selling expenses Borrowing costs expense Other expenses CONSOLIDATED NOTE 31 JULY 12 $000 31 JULY 11 $000 3 3 4 556,911 635,615 (405,334) (467,338) 151,577 168,277 (60) 3,541 (50,758) (56,058) (20,582) (21,313) (55,526) (59,959) (25,215) (21,155) (59,205) (11,338) Share of net profits of associates and joint ventures accounted for using the equity method 25, 26 86,867 168,517 Profit from ordinary activities before income tax expense 27,098 170,512 Income tax attributable to profit from ordinary activities 5 16,206 (27,961) Profit from ordinary activities after income tax expense 43,304 142,551 Other comprehensive income Foreign currency translation Share of increments / (decrements) in reserves attributable to associates and joint ventures (358) (408) (14,305) (103,100) Income tax on items of other comprehensive income 3,557 31,357 Other comprehensive income for the period, net of tax (11,106) (72,151) Total comprehensive income for the period 32,198 70,400 Net profit attributable to members of the parent entity 43,304 142,551 Total comprehensive income for the period attributable to members of the parent entity Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 8 8 32,198 70,400 29.3 29.3 96.7 96.7 These statements should be read in conjunction with the accompanying notes. 24 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 2012 CURRENT ASSETS Cash assets Receivables Held for trading financial assets Inventories Land held for resale Tax receivable Prepayments Derivative financial instruments TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Inventories Land held for resale Investments accounted for using the equity method Property, plant and equipment Intangible assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing liabilities Derivative financial instruments Provisions Deferred taxes TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits TOTAL EQUITY CONSOLIDATED NOTE 31 JULY 12 $000 31 JULY 11 $000 9 10(a) 11 12(a) 13(a) 19(a) 10(b) 12(b) 13(b) 14 15 16 17 20(a) 18(a) 19(b) 20(b) 21 22 23 14,553 79,354 11 163,141 9,657 1,370 7,442 - 275,528 - 8,301 14,742 50,617 83,639 14 153,575 1,249 3,606 5,864 139 298,703 201 8,372 23,742 1,242,736 450,201 269,486 1,211,298 450,520 285,650 1,985,466 1,979,783 2,260,994 2,278,486 73,024 32,144 105,168 298,574 5,958 22,973 165,713 493,218 598,386 58,863 34,755 93,618 297,929 1,755 25,397 184,041 509,122 602,740 1,662,608 1,675,746 325,802 284,426 1,052,380 325,018 296,396 1,054,332 1,662,608 1,675,746 These statements should be read in conjunction with the accompanying notes. 25 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JULY 2012 l a t o T 0 0 0 $ 0 0 0 $ i d e n a t e R i s g n n r a E s ’ V J & e v r e s e R 0 0 0 $ 0 0 0 $ e v r e s e R s t n e m y a P i s e t a c o s s A d e s a B e r a h S i n g e r o F y c n e r r u C e v r e s e R 0 0 0 $ l a r e n e G e v r e s e R 0 0 0 $ 0 0 0 $ y t i u q E e v r e s e R s t n e m t s u d A j l a t i p a C s t fi o r P e v r e s e R 0 0 0 $ k c o t S 0 0 0 $ y r u s a e r T 0 0 0 $ s e r a h S y r a n d r O i E T O N 4 3 9 , 9 4 6 1 , 1 5 0 0 6 9 , 0 5 5 8 8 2 , 4 2 0 , 1 ) 3 4 6 , 1 ( 5 2 1 , 6 3 ) 1 4 9 , 4 4 ( 2 0 1 , 8 8 ) 1 8 3 , 6 ( 7 4 0 , 9 2 3 0 1 0 2 t s u g u A 1 t a s a y t i u q e l t a o T 9 6 7 , 3 ) 3 5 5 , 4 ( 6 3 1 , 3 - - - ) 3 1 5 , 8 4 ( ) 3 1 5 8 4 ( , 2 5 1 2 5 1 - - - - - 1 5 5 2 4 1 , 1 5 5 , 2 4 1 - ) 1 5 1 2 7 ( , - ) 0 0 1 3 0 1 ( , 0 0 4 0 7 , 1 5 5 2 4 1 , ) 0 0 1 3 0 1 ( , - - - - - - - - - 1 2 4 , 1 - 1 9 - ) 1 9 ( ) 8 8 5 4 4 ( , ) 0 7 2 , 8 4 ( ) 1 9 ( 1 2 4 , 1 1 2 4 , 1 - ) 8 0 4 ( ) 8 0 4 ( - - - - - - - - - - - - - - - - - - - - - - - - - 7 5 3 , 1 3 7 5 3 , 1 3 - - - - - - - - - - - - - - - - - - - 9 6 7 , 3 - - ) 3 5 5 , 4 ( 6 3 1 , 3 - - - - ) 7 1 4 , 1 ( 9 6 7 , 3 7 ) a ( 2 2 ) b ( 2 2 ) b ( 2 2 r a e y e h t r o f e m o c n i i e v s n e h e r p m o c r e h t O r a e y e h t r o f t fi o r p t e N r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l t a o T y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T s r e n w o s a i r a e y e h t g n i r u d d a p r o d e d v o r p s d n e d v D i i i h g u o r h t s e r a h s f o e u s s i / e s a h c r u P o t r e f s n a r t i s e t a c o s s a f o e r a h S s e e y o p m e l o t d e t s e v s e r a h S n a p l e r a h s e e y o p m e l s e r a h s f o e u s s I s t s e r e t n i y t i u q e e d s t i u o i s g n n r a e i d e n a e r t ) o t ( / m o r f r e f s n a r t i s e t a c o s s a f o e r a h S s t n e m y a p d e s a b e r a h S 26 6 4 7 5 7 6 , , 1 2 3 3 4 5 0 , , 1 9 5 3 , 5 8 1 5 4 4 , 2 ) 1 5 0 , 2 ( 5 2 1 , 6 3 ) 4 8 5 , 3 1 ( 2 0 1 , 8 8 ) 8 9 7 , 7 ( 6 1 8 , 2 3 3 1 1 0 2 l y u J 1 3 t a s a y t i u q e l t a o T ) 3 7 3 8 4 ( , ) 3 7 3 , 8 4 ( ) 2 8 8 , 2 ( 6 6 6 3 , 0 2 1 3 , - 3 4 9 - - ) 3 ( - 0 2 1 , 3 ) 6 2 5 3 4 ( , ) 6 5 2 , 5 4 ( - - - 3 - 3 4 0 3 , 3 4 ) 6 0 1 , 1 1 ( 4 0 3 3 4 , - - ) 5 0 3 4 1 ( , 8 9 1 , 2 3 4 0 3 3 4 , ) 5 0 3 4 1 ( , - - - - - - - 3 4 9 3 4 9 - ) 8 5 3 ( ) 8 5 3 ( - - - - - - - - - - - - - - - - 3 3 3 , 4 3 3 3 , 4 - - - - - - - - - - - - - - - - - - - ) 2 8 8 , 2 ( 6 6 6 , 3 - - 4 8 7 - - - - - - - - - 7 ) b ( 2 2 ) b ( 2 2 r a e y e h t r o f e m o c n i i e v s n e h e r p m o c r e h t O r a e y e h t r o f t fi o r p t e N r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l t a o T y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T s r e n w o s a i r a e y e h t g n i r u d d a p r o d e d v o r p s d n e d v D i i i i e d s t u o o t r e f s n a r t i s e t a c o s s a f o e r a h S s t n e m y a p d e s a b e r a h S s t s e r e t n i y t i u q e h g u o r h t s e r a h s f o e s a h c r u P n a p l e r a h s e e y o p m e l s e e y o p m e l o t d e t s e v s e r a h S . s e t o n i g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i d a e r e b l d u o h s s t n e m e t a t s e s e h T 8 0 6 2 6 6 , , 1 0 8 3 , 2 5 0 1 , 7 5 0 , 1 7 1 8 8 3 3 , ) 9 0 4 , 2 ( 5 2 1 , 6 3 ) 1 5 2 , 9 ( 2 0 1 , 8 8 ) 4 1 0 , 7 ( 6 1 8 , 2 3 3 2 1 0 2 l y u J 1 3 t a s a y t i u q e l t a o T BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2012 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from land held for resale Interest received Borrowing costs Dividends and distributions received Income tax paid CONSOLIDATED NOTE 31 JULY 12 $000 31 JULY 11 $000 611,970 (582,581) - 1,083 (20,021) 52,584 1,461 680,020 (647,630) 18,750 1,717 (19,513) 57,113 (1,435) Net cash flows from / (used in) operating activities 24(a) 64,496 89,022 Cash flows from investing activities Purchases of investments Proceeds from the sale or return of investments Payment for business acquisition net of cash acquired Proceeds from sale of property, plant and equipment Purchases of property, plant and equipment 29(b) (78) 3,800 (19,726) 3,920 (28,911) (3,153) 6 (17,110) 4,644 (35,656) Net cash flows from / (used in) investing activities (40,995) (51,269) Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Net proceeds from issue / (repayment) of shares Loan (to) / from other entity Dividends paid Net cash flows from / (used in) financing activities Net increase / (decrease) in cash held Cash at beginning of year Cash at end of year 49,000 (49,000) - 200 (59,765) 70,000 (70,000) (10) (714) (59,765) (59,565) (60,489) (36,064) (22,736) 50,617 14,553 73,353 50,617 9 These statements should be read in conjunction with the accompanying notes. 27 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2012 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Brickworks Limited is a listed public company, incorporated and domiciled in Australia. These accounts were authorised for issue in accordance with a resolution of the directors on 20 September 2012. The financial report includes financial statements for the consolidated entity consisting of Brickworks Limited and its subsidiaries (“the Group”). Basis of preparation and Statement of compliance (a) The financial statement is a general purpose financial statement that has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial statement complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. These financial statements have been prepared under the historical cost convention, except for available-for-sale financial assets, held for trading financial assets, derivatives and investment property, which have been measured at fair value. New accounting standards and interpretations (b) The principal accounting policies adopted in the preparation of the financial statement are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. There were no accounting standards that became effective during the year that impacted on the group’s financial statements. Principles of consolidation (c) The consolidated financial statements are those of the consolidated entity, comprising Brickworks Ltd (the parent entity) and all entities that Brickworks controlled from time to time during the period and at reporting date. Control exists where Brickworks has the capacity to dominate the decision-making in relation to the financial and operating policies of another entity so that the other entity operates with Brickworks to achieve the objectives of Brickworks. There are no dissimilarities in reporting periods or accounting policies between Brickworks or any of its controlled entities. Investments in subsidiaries in the parent entity financial statements are shown at cost. All inter-company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Where controlled entities have entered or left the economic entity during the period, their operating results have been included from the date control was obtained or excluded from the date control ceased. Revenue (d) Sales revenue is recognised when the significant risks and rewards of ownership of the items sold have passed to the buyer, and the revenue is also able to be measured reliably. For revenue from the sale of goods, this occurs upon the delivery of goods to customers. For revenue from the sale of land held for resale, this is recognised at the point at which any contract of sale in relation to industrial land has become unconditional, and at which settlement has occurred for residential land. Revenue from construction contracts is recognised by reference to the stage of completion of a contract or contracts in progress at reporting date or at the time of completion of the contract and billing to the customer. Stage of completion is measured by reference to the number of units installed as a percentage of the number of units for the total contract, which is determined under the contract with the customer. As the number of units is defined in the contract, any level of judgement required is minimal. Interest revenue is recognised on a time proportionate basis that takes into account the effective interest rate applicable to the net carrying amount of the financial asset. Dividend revenue is recognised when the right to receive a dividend has been established. Dividends received from associates and joint venture entities are accounted for in accordance with the equity method of accounting. Rental revenue from investment properties is accounted for on a straight line basis over the lease term. Profits on disposal of investments and property, plant and equipment are recognised at the point where title to the asset has passed. All revenue is stated net of the amount of goods and services tax (GST). Finance costs (e) Borrowing costs incurred for the construction of a qualifying asset are capitalised up to the point that the asset is ready for its intended use. Other finance costs are recognised as an expense over the period to which the expense relates. (f) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability or asset to the extent that it is unpaid or refundable. 28 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (f) Income tax (cont) Deferred tax Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The tax cost base of assets is calculated based on management’s intention for that asset on either use or sale as appropriate. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. In addition, no deferred income tax is recognised for a taxable temporary difference arising from an investment in a subsidiary, associate or joint venture where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. These amounts are reviewed at each balance date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation Brickworks Limited and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the Tax Consolidation regime. Brickworks is the head entity of that group. The tax consolidated group has entered a tax sharing agreement whereby each company in the group contributes to the income tax payable based on the current tax liability or current tax asset of the entity. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. Such amounts are reflected in amounts receivable from or payable to other entities in the group. In addition, the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At balance date, the possibility of default is remote. Tax expense, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax consolidated group are recognised in the separate financial statements of the members of the tax consolidated group. Any current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the parent company (as head entity of the tax consolidated group). Earnings per share (g) Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the period, adjusted for bonus elements in ordinary shares issued during the period. Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Diluted earnings per share is shown as being equal to basic earnings per share if potential ordinary shares are non-dilutive to existing ordinary shares. Cash and cash equivalents (h) Cash and cash equivalents on the balance sheet includes cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. Cash and cash equivalents for the cash flow statement are shown as a net of the cash assets and bank overdraft liability. Cash and cash equivalents are stated at nominal value. Receivables (i) Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. A provision for doubtful debts is established when there is existence of objective evidence that the Group may not be able to collect the debts. Bad debts are written off against the provision for doubtful debts as incurred, when there is objective evidence that the Group will not be able to recover the debt. Objective evidence of an impairment loss can include when a debtor is unable to be physically located, or when a report from a liquidator or administrator of a debtor indicates that recovery of any amounts outstanding is unlikely. Receivables from related parties are recognised and carried at nominal amounts due. Inventories (j) Raw materials are measured at the lower of actual cost and net realisable value. Finished goods are measured at the lower of standard cost and net realisable value. The cost of manufactured products includes direct materials, direct labour and an appropriate portion of variable and fixed overheads. Overheads are applied on the basis of normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Land held for resale (k) Land held for development and resale is recognised when properties have been identified and incorporated into specific developments that have been approved by relevant planning authorities and commenced. These properties are valued at the lower of cost and fair value less costs to sell. Cost includes the cost of acquisition and development. 29 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (l) Property, plant and equipment Land is carried at cost less any impairment losses. Plant and equipment (including buildings) are measured at cost, less depreciation and impairment losses. The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit (CGU) to which the asset belongs. The recoverable amount is the higher of fair value less costs to sell, and the value in use, assessed on the basis of the expected net cash flows that will be received from the assets employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts, using pre-tax discount rates. Subsequent costs are included in the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation The depreciable amount of all fixed assets including building and capitalised lease assets, but excluding freehold land, is depreciated over their useful lives to the economic entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation rates used for each class of depreciable assets are: Class of fixed asset Depreciation rate Buildings 2.5% - 4.0% prime cost Plant and equipment 4.0% - 33.0% prime cost; 7.5% - 22.5% diminishing value The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds on disposal with the carrying amount of the asset at the time of disposal. These gains and losses are included in the income statement. When previously revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. Leases (m) Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses on a straight line basis over the term of the lease. Leases of fixed assets are classified as finance leases where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to entities in the economic entity. Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over their estimated useful lives where it is likely that the economic entity will obtain ownership of the asset, or over the term of the lease. Financial assets (n) Regular way purchases and sales of investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at cost, net of transaction costs. Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss, held-to- maturity investments, available-for-sale financial assets, and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets at fair value through profit and loss (held for trading) The Group has classified certain shares as financial assets at fair value through profit or loss. Financial assets held for trading purposes are classified as current assets and are stated at fair value (subsequent to initial recognition), with any resultant gain or loss recognised in profit or loss. Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. These investments are carried at amortised cost using the effective interest method, with any gains or losses recognised in income when the investments are derecognised or impaired. Available-for-sale financial assets Certain shares held by the Group are classified as being available-for-sale and are stated at fair value (subsequent to initial recognition). Gains and losses arising from changes in fair value are recognised directly in reserves, until the investment is disposed of, at which time the cumulative gain or loss previously recognised in the reserve is included in profit or loss for the period. The fair value of financial instruments traded in active markets is based on quoted market bid prices at the balance sheet date. Where shares are held in listed entities that are not actively traded on the market, quoted marked bid prices are used as the best information on the amount obtainable from an arms length transaction. Loans and Receivables Trade receivables, loans and other receivables are recorded at amortised cost less impairment. 30 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (n) Financial assets (cont) Derecognition Sales of investments are recognised on trade date – the date the Group commits to sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Impairment The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement. Investments in associates (o) Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the parent entity financial statements using the cost method and in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. Under the equity method, the investment in the associate is carried in the consolidated balance sheet at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised. After applying the equity method, the Group determines whether it is necessary to recognise an additional impairment loss with respect to the net investment in the associate. The consolidated income statement reflects the Group’s share of the results of operations of the associate. Where there has been a change recognised directly in the associate’s equity, the Group recognises its share of any changes and discloses this in the consolidated statement of movements in equity. Where reporting dates of associates are not identical to the Group, the financial information used is the last publicly available information, but in any event is no older than 3 months from the Group’s balance date. The associate’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. Investments in joint ventures (p) Investments in joint ventures are accounted for in the parent entity financial statements using the cost method and in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. Under the equity method, the investment is carried in the consolidated balance sheet at cost plus post acquisition changes in the Group’s share of net assets of the joint venture. The consolidated income statement reflects the Group’s share of the results of operations of the joint ventures. Where reporting dates of joint ventures are not identical to the Group, the financial information used is the last publicly available information, but in any event is no older than 3 months from the Group’s balance date. Profits or losses on transactions with the joint venture are eliminated to the extent of the Group’s ownership interest until such time as they are realised by the joint venture on sale. Investment property (q) Investment property, which is property held to earn rentals and/or for capital appreciation, is measured initially at its cost, including transaction costs. Subsequent to initial recognition, investment property is measured at fair value. Gains or losses arising from changes in the fair value of investment property are included in profit or loss in the period in which they arise. (r) Intangibles Goodwill Goodwill is initially recorded at the amount by which the purchase price for a business or for an ownership interest in a controlled entity exceeds the fair value attributed to its net assets (including contingent liabilities) at the date of acquisition. Goodwill on acquisition of associates is included in investments in associates. Any goodwill acquired in a business combination is allocated to each of the cash generating units (CGU’s) expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the CGU to which the goodwill relates. Where this recoverable amount is less than the carrying amount, an impairment loss is recognised. Impairment losses recognised for goodwill are not subsequently reversed. Goodwill is tested for impairment annually and when indicators of impairment exist, and following initial recognition is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Log licences Timber access rights are valued at cost on acquisition. If the timber access right is considered to have an indefinite life, the right is carried at cost less any impairment write down required to ensure it is not carried in excess of recoverable amount. If the right has a definite life, it is amortised on a straight line basis over the expected future life of that right, which varies according to the term of the issue. Brand names Purchased brand names have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight line method to allocate the cost of brand names over their estimated useful lives. 31 Acquisition of assets NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (s) The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Costs directly attributable to business combinations are expensed as non- regular items in the period in which the acquisition is settled. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired. Impairment of assets (t) Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed 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. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Non-financial assets other than goodwill that have had an impairment write-down are reviewed for possible reversal of the impairment at each subsequent reporting date. Payables (u) Trade payables and other accounts payable are recognised when the Group becomes obliged to make future payments resulting from the purchase of goods and services. Deposits received on land sale agreements relate to amounts received as deposits on pending property transactions where the revenue and associated profit has not been brought to account due to uncertainty surrounding the completion of the transaction. Provisions (v) Provisions are recognised when the Group has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. If the effect of the time value of money is material, provisions are discounted using a pre-tax discount rate that reflects the risks specific to the liability. Any increase in the provision due to the passage of time is recognised as a borrowing cost. Employee benefits (w) Provision is made for the Company’s liability for employee benefits arising from services rendered by employees to balance date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. Consideration is made of expected future wage and salary levels, employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash flows. Share-based payments Share-based compensation benefits are provided to employees through the Brickworks Employee Share Plan, details of which can be found in the Remuneration Report in the director’s report. Unvested shares are included in contributed equity as Reserved Shares. The fair value of the shares (market value at purchase date) is recognised as an employee benefits expense with a corresponding increase in equity when the employees become entitled to the shares. Restoration and rehabilitation (x) The landfill opportunities created through the extraction of clay and shale is considered to be a valuable future resource. No provision is made for future rehabilitation costs when the rehabilitation process is expected to be cash flow positive. Where the relevant site is identified as being unable to be used for landfill purposes once the clay and shale reserves are exhausted, a provision is generated. This provision is raised based on the expected net present value of future cash flows associated with the total rehabilitation cost of the site, and charged to expenses on a tonnes extracted basis. Interest bearing liabilities (y) Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. 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. Where the Group expects that it will continue to satisfy the criteria under its banking agreement that ensures the financier is not entitled to call on the outstanding borrowings, and the term is greater than 12 months, the borrowings are classified as non-current. 32 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (z) Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. Financial instruments issued by the Company Transaction costs arising on the issue of financial instruments are recognised directly as a reduction, net of tax, of the proceeds of the financial instruments to which the costs relate. If the financial instrument has an identifiable lifespan, these costs are amortised in the income statement over the period of the instrument. Interest and dividends are classified as expenses or as distributions of profit consistent with the classification of the related debt or equity instruments. Derivatives (aa) Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either fair value hedges or cash flow hedges. The Group documents at the inception of the transaction the relationship between hedging instruments and hedge items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in reserves. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss. When a hedging instrument expires or is terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred to the income statement. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any such instrument are recognised immediately in the income statement. Fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. Derecognition of financial liabilities (ab) A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires, with any resulting gain or loss taken to the income statement. Government grants (ac) Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Grants relating to the purchase of fixed assets are included in non-current liabilities as deferred income and credited to the income statement on a straight-line basis over the expected lives of the related assets. Reserved shares (ad) Own equity instruments which are acquired for later payment as employee share-based payment awards are deducted from equity. These shares are held in trust by the trustee of the Brickworks Deferred Employee Share Plan and vest in accordance with the conditions attached to the granting of the shares, as outlined in the Remuneration Report. The fair value of the shares (market value at purchase date) is recognised as an employee benefits expense with a corresponding increase in equity when the employees become entitled to the shares. No gain or loss is recognised in profit or loss on the purchase, sale or issue of the Group’s own equity instruments. Operating segments (ae) An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Group’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 Managing Director. The Group aggregates two or more operating segments when they have similar economic characteristics, and the segments are similar in each of the following respects: • • • • • Nature of the products; Nature of the production process; Type or class of customer for the products; Methods used to distribute the products; and Nature of the regulatory environment. 33 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (ae) Operating segments (cont.) Management has determined that reportable segments are based around products. A number of identified operating segments have been aggregated to form both the Building Products segment and the Property segment. The accounting policies used by the Group in reporting segments internally are the same as those used by the Group in these consolidated financial statements. Goods and Services Tax (GST) (af) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. Foreign currency transactions and balances (ag) Functional and presentation currency The functional currency of each of the group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency. Transaction and balances Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transaction. The balances of foreign currency monetary items are translated at the period end exchange rate. The balances of non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge. Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the income statement. Group companies The financial results and position of foreign operations whose functional currency is different from the Group’s presentation currency are translated as follows: • • • Assets and liabilities are translated at period end exchange rates prevailing at that reporting date. Income and expenses are translated at average exchange rates for the period. Retained profits are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations are transferred directly to the Group’s foreign currency translation reserve in the balance sheet. These differences are recognised in the income statement in the period in which the operation is disposed. Significant accounting estimates and assumptions (ah) The Group makes estimates and assumptions concerning the future, and the resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. Judgements that are made by management in the application of accounting standards that have significant effects on the financial statements, and estimates with a significant risk of material adjustments in the next year, are disclosed in the relevant notes to the financial statements, where applicable. Accounting standards issued but not yet effective (ai) A number of Australian accounting standards have been issued but have not been adopted for the financial year ended 31 July 2012. The Group has assessed the impact of the following new or amended standards and interpretations which are effective for the group, and are of the opinion that there will not be any changes required to amounts recognised in the financial statements. It is anticipated that there will be some changes to information disclosures required: Amendments to financial statements – 2011-9 (effective application for Brickworks 1 August 2012) AASB 12: Disclosures of Interests in Other Entities (effective application for Brickworks 1 August 2013) AASB 13: Fair Value Measurement (effective application for Brickworks 1 August 2013) AASB 119: Employee Benefits (effective application for Brickworks 1 August 2013) Annual improvements 2009-2011 cycle (IFRS amendment yet to be adopted by AASB) (effective application for Brickworks 1 August 2013) The Group is still assessing the impact of the following new or amended standards: AASB 9: Financial Instruments (effective application for Brickworks 1 August 2015) AASB 10: Consolidated Financial Statements (effective application for Brickworks 1 August 2013) AASB 11: Joint Arrangements (effective application for Brickworks 1 August 2013) 34 NOTE 2: PARENT ENTITY INFORMATION Information relating to Brickworks Ltd Current assets Total assets Current liabilities Total liabilities Issued capital Reserves - capital profits - equity adjustment - general - share based payments Total reserves Retained earnings Total shareholders' equity Net profit after income tax Total comprehensive income 31 JULY 12 $000 31 JULY 11 $000 2,070 26,817 992,978 925,906 2,353 2,523 431,239 431,934 325,802 325,018 84,479 - 11,645 3,388 99,512 136,426 84,479 734 11,645 2,445 99,303 70,059 561,740 494,380 126,540 125,806 34,008 34,435 Information regarding guarantees entered into by the parent entity in relation to the debts of its subsidiaries are contained in note 29(d). There are no contingent liabilities or contractual commitments for the acquisition of property, plant or equipment of the parent entity. NOTE 3: REVENUE Trading revenue Sale of goods Sale of current investments Sale of land held for resale Other operating revenue Interest received - other corporations Dividends received - other corporations Rental revenue Other Total operating revenue Other income Net gain on sale of property, plant and equipment Other items Total other income CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 547,548 - 2,779 606,125 6 21,623 550,327 627,754 1,083 1 1,499 4,001 1,717 1 1,156 4,987 556,911 635,615 (61) 1 (60) 3,528 13 3,541 35 NOTE 4: INCOME AND EXPENSES (a) Specific expense disclosures Depreciation and amortisation - Buildings - Leasehold improvements - Plant and equipment Total depreciation - Intangible assets Total amortisation NOTE CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 3,810 - 20,808 24,618 171 171 3,694 45 22,531 26,270 299 299 Total depreciation and amortisation expense 24,789 26,569 Finance costs paid - Paid to other corporations - Mark to market swap valuation Total finance costs expensed Finance costs capitalised Total finance costs Rental expense on operating leases - Minimum lease payments Unrealised loss / (gain) on carrying value of held for trading financial assets Employee benefit expense Defined contribution superannuation expense Research and development expenditure Bad and doubtful debts - trade debtors Write down of inventories to net realisable value 20,823 4,392 25,215 540 25,755 20,390 765 21,155 - 21,155 18,324 13,382 3 1 100,091 8,079 1,353 554 4,150 100,853 8,497 386 553 1,405 (b) Property related revenues The following items are relevant in explaining the financial performance for the year: Profit from sale of land held for resale 1,269 16,420 Development profits from joint ventures Fair value adjustment on completion of developments Fair value adjustment of properties Property Trust rental profits - 4,414 5,255 9,025 - 715 4,738 7,104 Total profits / (loss) from Property Trusts 26 18,694 12,557 (c) Significant items Significant one-off transactions of associate (1) 756 88,686 Write down of assets to recoverable value - Property, plant & equipment (2) - Building products inventory (3) Costs on closure of manufacturing facilities (2) Costs on start up of manufacturing facilities (3) Impairment of Goodwill (2) Business acquisition costs (2) Other significant items (2)&(3) Significant items before income tax (4,169) (4,192) (6,927) (4,147) (31,627) (1,947) (3,885) (56,138) (14,021) (1,084) (8,651) - - (2,751) (2,511) 59,668 36 NOTE 4: INCOME AND EXPENSES (cont.) Income tax benefit arising from WHSP carrying value (4) (5) Income tax benefit / (expense) on significant items (4) (1) Disclosed in "Share of net profits of associates" line on Income Statement (2) Disclosed in "Other expenses" line on Income Statement (3) Disclosed in "Cost of Sales" line on Income Statement (4) Disclosed in “Tax expense” line on Income Statement (5) Prior year expense of $25.6 million not included in significant items NOTE 5: INCOME TAX (a) Current Tax Deferred Tax Under / (over) provided in prior years (b) Reconciliation of income tax expense to prima facie tax payable Prima facie tax payable on profit / (loss) before income tax at 30% Adjust for tax effect of: rebateable dividends deferred tax items (recognised) / derecognised share of net profits of associates other non-allowable items Overprovision for income tax in prior year Income tax expense / (benefit) attributable to profit / (loss) (c) Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss Current tax - debited / (credited) directly to equity Share of increments / (decrements) in reserves attributable to associates Deferred tax - debited / (credited) directly to equity NOTE 6: AUDITORS’ REMUNERATION Auditor of the parent entity Audit of the financial report Other regulatory audits Other assurance services CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 12,992 7,580 (35,566) - (17,900) 41,768 (276) (15,043) (887) (16,206) 688 27,416 (143) 27,961 8,130 51,154 (12,885) 75 (20,320) 9,681 (887) (16,206) (14,572) (3,192) (6,242) 956 (143) 27,961 - - (5,067) (5,067) (5,067) (30,930) (30,930) (30,930) 444 9 18 471 424 8 19 451 The auditor of the Brickworks Ltd Group is Ernst & Young. Details of non-audit services provided by Ernst & Young are outlined in the Directors’ Report. 37 NOTE 7: DIVIDENDS Final ordinary dividend (prior year) of 27.0 cents per share paid 1/12/11 (2010 - 27.0c paid 01/12/10) Interim ordinary dividend of 13.5 cents per share paid 15/05/12 (2011 - 13.5c paid 17/05/11) Group’s share of dividend received by associated company Proposed final ordinary dividend of 27 cents per share not recognised as a liability at year end (2011 27.0c) CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 39,843 39,843 19,922 (11,392) 48,373 19,922 (11,252) 48,513 39,843 39,843 All dividends paid and proposed have been or will be fully franked at the tax rate of 30% Balance of franking account at year end adjusted for franking credits arising from payment of income tax payable and dividends recognised as receivables Impact on franking account balance of dividends not recognised 151,391 159,909 (17,076) (17,076) There were no dividend reinvestment plans in operation at any time during or since the end of the financial year. NOTE 8: EARNINGS PER SHARE (a) Reconciliation of earnings Net profit attributed to members of the parent entity 43,304 142,551 Earnings used in the calculation of basic EPS Earnings used in the calculation of diluted EPS (b) Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS Weighted average number of ordinary shares outstanding during the year used in calculation of diluted EPS Basic earnings per share Diluted earnings per share NOTE 9: CASH ASSETS Cash on hand Deposits at call 43,304 43,304 142,551 142,551 No. No. 147,567,333 147,482,887 147,567,333 147,482,887 cents cents 29.3 29.3 96.7 96.7 $000 $000 14,003 550 14,553 28,335 22,282 50,617 Deposits at call have carrying amounts that reasonably approximate fair value. Deposits are for periods of up to one month, and earn interest at the respective short term deposit rates. 38 NOTE 10: RECEIVABLES (a) Current Trade receivables Less: provision for doubtful debts Less: advance payments by customers Net trade receivables Add: other debtors CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 78,067 668 77,399 1,794 75,605 3,749 79,354 76,758 890 75,868 2,719 73,149 10,490 83,639 (b) Non-Current Amount receivable from associated companies - 201 (c) Movement in provision for doubtful debts Balance at the beginning of the year Additional provisions recognised Trade debts written off Reversals of provisions not required Balance at the end of the year (d) Receivables past due Receivables past due but not impaired Past due 0 - 30 days Past due 30+ days 890 794 (776) (240) 668 3,267 1,808 5,075 731 842 (394) (289) 890 3,639 1,982 5,621 Trade receivables and other debtors have carrying amounts that reasonably approximate fair value. Average terms are 30 days from statement. Before allowing new customers to trade on credit terms, an analysis of the potential customers credit quality is performed using external credit reporting agencies and internal reporting to determine whether an account will be opened and the amount of the limit to be applied to that account. Various levels of management are required to approve progressively higher credit limits, with individual limits exceeding $1 million reported to the Board. An analysis of trade receivable balances past due is performed constantly throughout the year, and an allowance is made for estimated irrecoverable trade receivables based on historical experience of default, and known information on individual debtors. In many instances security is held over individual debtors in the form of personal guarantees. All receivables not impaired are expected to be collected in full. NOTE 11: HELD FOR TRADING FINANCIAL ASSETS Share trading portfolio at fair value 11 14 The share trading portfolio represents ordinary shares listed on the ASX, and hence have no maturity date. 39 NOTE 12: INVENTORIES (a) Current Raw materials and stores at cost Work in progress at cost Finished goods at cost Finished goods at net realisable value (b) Non-Current Raw materials and stores at cost NOTE 13: LAND HELD FOR RESALE (a) Current (b) Non-Current CONSOLIDATED NOTE 31 JULY 12 $000 31 JULY 11 $000 28,884 12,303 121,431 29,158 8,960 114,595 162,618 152,713 523 862 163,141 153,575 8,301 8,372 9,657 14,742 1,249 23,742 Non-current land held for resale represents portions of properties which have been classified as ready for sale in accordance with the accounting policy note. Exact timing of these sales is unable to be reliably forecast and the sale of these specific blocks is not expected to occur within the following 12 months from balance date. These properties are disclosed in the Property segment of note 27. NOTE 14: INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Investment in associated entities - listed Investment in jointly controlled entities 25 26 1,086,474 156,262 1,059,241 152,057 Market value of listed associates NOTE 15: PROPERTY, PLANT AND EQUIPMENT Land Freehold land at cost Leasehold land at cost Buildings At cost Accum depreciation and impairment writedowns Plant and equipment At cost Accum depreciation and impairment writedowns Add: capital works in progress Total plant and equipment 1,242,736 1,211,298 1,378,436 1,322,194 174,605 235 175,298 235 174,840 175,533 161,169 52,754 158,839 47,880 108,415 110,959 402,300 253,864 148,436 18,510 406,633 261,976 144,657 19,371 166,946 164,028 450,201 450,520 40 NOTE 15: PROPERTY, PLANT AND EQUIPMENT (cont.) (a) Impairment write-downs During the period impairment losses totalling $4.2 million were recognised in relation to various assets. All impairment losses are shown in the ‘Other Expenses’ line on the Statement of Comprehensive Income, and all losses are included in the Building Products segment (refer note 27). Significant impairment losses were recognised on the Cardup, Western Australia, brick making assets, following the mothballing of this production capacity to reflect the altered competitive landscape in the WA brick market. The recoverable value of non-current assets has been assessed after considering the economic benefits to be derived over the remaining useful life, under a value in use assumption. The discount rates used in the estimate of value in use are consistent with those rates used for goodwill impairment testing as disclosed in note 16(b). The carrying value of assets that have been subject to recoverable amount write-downs, by class, are outlined below: Buildings Assets subject to write-downs Assets not subject to write-downs Plant and equipment Assets subject to write-downs Assets not subject to write-downs CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 - 108,415 108,415 - 166,946 - 110,959 110,959 622 163,406 166,946 164,028 The carrying amount of temporarily idle buildings, plant and equipment at 31 July 2012 was Nil (2011 Nil). (b) Reconciliations Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the current and previous financial year are set out below. Consolidated At 1 August 2010 Cost Accumulated depreciation Balance at 1 August 2010 Year ended 31 July 2011 Additions Assets acquired by purchase of subsidiary Disposals Impairment losses Depreciation expense Land $000 Buildings $000 Plant & Equip. $000 Total $000 161,411 - 161,411 9,945 4,750 (573) - - 154,571 (61,163) 466,036 (288,786) 782,018 (349,949) 93,408 177,250 432,069 18,579 2,898 - (187) (3,739) 16,094 7,592 (542) (13,835) (22,531) 44,618 15,240 (1,115) (14,022) (26,270) Balance at 31 July 2011 175,533 110,959 164,028 450,520 Year ended 31 July 2012 Additions Assets acquired by acquisition of business Disposals Impairment losses Depreciation expense 504 - (1,197) - - 3,893 1,504 (2,166) (1,965) (3,810) 24,516 2,034 (620) (2,204) (20,808) 28,913 3,538 (3,983) (4,169) (24,618) Balance at 31 July 2012 174,840 108,415 166,946 450,201 41 NOTE 16: INTANGIBLE ASSETS Goodwill At cost Less: impairment write-downs Timber access rights At cost Less: accumulated amortisation Brand names At cost Less: accumulated amortisation Other intangibles At cost Less: accumulated amortisation CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 284,574 31,627 279,339 - 252,947 279,339 8,541 1,570 6,971 14,300 5,300 9,000 646 78 568 7,141 1,422 5,719 5,300 5,300 - 646 54 592 269,486 285,650 (a) Intangible assets with indefinite useful lives Timber access rights with a carrying value of $6.2 million (2011 $4.8 million) have been assessed as having an indefinite useful life. The main reason for this assessment is that although licences are subject to periodic renewal, the cost of the licence renewal is not significant compared to the future economic benefits obtainable under the licence, there is a history of renewals which are arranged by management as part of the normal operations of the business, there is a realistic expectation that all conditions for renewal will be successfully achieved, and if the licence was not renewed or substantially varied, the issuing authority would be liable to pay compensation to the Company. The remaining timber access rights with an initial cost of $2.3 million are amortised over the life of the supply agreement, which was extended during the period and expires in 2017. The timber access rights have been allocated to the timber products Cash Generating Unit (CGU), which forms part of the building products segment. Brand names with a carrying value of $9.0 million were acquired through a business combination during the year. This name (Daniel Robertson) has been assessed as having an indefinite useful life, as the brand has been part of the brick industry since 1853, and Brickworks intends to continue trading under this brand. The brand names have been allocated to the Vic Bricks CGU, which forms part of the building products segment. Management’s assessment of the appropriateness of the carrying value of indefinite useful life intangibles is based on key assumptions which may vary. In addition to the projected cash flows to be generated by the ongoing use of these licences, these are the discount rate (WACC) and the long term growth rate (LTGR). The rates used in calculating the value in use are consistent with the rates outlined surrounding the impairment of goodwill below (note 16(b)). Given current volatility in financial markets generally, it is difficult to predict how these variables may move. At balance date, it is not expected that a reasonably foreseeable movement in the WACC or LTGR would result in an impairment to these assets. (b) Impairment of Goodwill (i) Allocation of goodwill and intangible assets with indefinite useful lives to cash generating units Goodwill is allocated to the Group’s cash generating units (CGUs) for impairment testing purposes. At 31 July 2012 the following CGU’s have significant allocations of goodwill: Austral Bricks NSW $67.5 million, Austral Bricks WA $47.3 million Austral Bricks Vic $72.4 million, Bristile Roofing East Coast $25.9 million and Austral Masonry $18.7 million. Each of these CGU’s have been valued based on value in use, using the assumptions outlined in point (iii) below. The remainder of goodwill within the business ($21.1 million) and other intangible assets with indefinite useful lives of $15.2 million, is allocated across multiple CGU’s, with no other individual CGU having an allocation that is significant compared to the total value of goodwill carried in the business. The carrying value of goodwill assessed in all these divisions is based on value in use, with the exception of the Austral Bricks Qld and Bristile Roofing West Coast CGU’s which are based on fair value less cost to sell using an observable market price. (ii) Impairment Charges The Group tests goodwill and other intangible assets with indefinite useful lives at least annually for any impairment in accordance with the accounting policy stated in note 1(r). 42 NOTE 16: INTANGIBLE ASSETS (cont.) (b) Impairment of Goodwill (cont) (ii) Impairment Charges (cont) At 31 July 2012, a total of $31.6 million of goodwill impairments were recognised due to the ongoing difficulties faced by the Australian building materials industry generally. Consideration was also given to the particularly poor state of the non-mining sectors of the Qld and WA economies, an additional manufacturer in the WA market, and an inability to immediately recover the full impact of the Carbon Tax through price movements. Impairments were recognised against Austral Bricks WA ($16.9 million), Austral Masonry ($11.2 million), Austral Bricks SA ($1.6 million) and Auswest Timbers ($1.9 million). (iii) Key assumptions The recoverable amount of each CGU is determined on the basis of value-in-use (VIU), unless there is evidence to support a higher fair value less cost to sell. The valuations used to support the carrying amounts of intangible assets (above) and property, plant and equipment (note 15) are based on forward looking key assumptions that are by their nature uncertain. The nature and basis of the key assumptions used to estimate the future cash flows and discount rates, and on which the Company has based its projections when determining the recoverable value of each CGU, are set out below. VIU calculations use pre-tax cash flows projections, inclusive of working capital movements, and are based on financial projections approved by the Board covering a five-year period. Estimates beyond five years are calculated with a growth rate that reflects the long term growth rate for the State (or States) that the CGU predominately operates in. The basis of estimation uses the following key operating assumptions: • Sales volumes are management forecasts, taking into account external forecasts of underlying economic activity for the market sectors and geographies in which each CGU operates. A major driver of sales volumes is housing approvals and commencements. Management has assessed the reported forecast housing approval data from sources such as BIS Shrapnel and the Housing Industry Association (HIA) over the budget period, and adopted a more conservative opinion overall than these independent forecasts. • Costs are calculated taking into account historical gross margins, known cost increases, and estimated inflation rates over the period that are consistent with locations in which the CGU’s operate. • Management expects to obtain sales price growth over the budget period. The increases assumed differ between by CGU and between different states where the CGU operates. Price rises are considered inherently achievable in a rational market where supply of product approximates demand. • Long term growth rates used in the cash flow valuation reflect the average 10 year historical growth rates for the states in which the CGU’s operate (sourced from the Australian Bureau of Statistics). The long term growth rate applied to the significant divisions were Austral Bricks NSW 2.0% (2011: 2.5%), Austral Bricks WA 4.0% (2011: 4.0%), Austral Bricks Vic 3.1% (2011: 3.2%), Bristile Roofing East Coast 3.03% (2011: 3.23%) and Austral Masonry 3.03% (2011: 3.23%). • Management uses an independent external advisor to calculate the appropriate discount rate, based on the weighted average cost of capital (WACC). For 2012, the discount rate was 14.18% (2011: 13.83%) and is applied consistently across all CGU’s. (iv) Sensitivity to changes in assumptions For the CGU’s which have had impairments, any adverse changes in assumptions which are not offset by a positive change in another assumption would lead to a reduced valuation on a value in use basis, and hence a potential impairment. There are no CGU’s which have not had an impairment where a reasonably foreseeable change in assumptions would result in a material impairment to the carrying value of goodwill or other indefinite useful life intangibles. (c) Reconciliations Consolidated Goodwill $000 Timber access rights $000 Brand Names $000 Other Intangibles $000 At 1 August 2010 Cost Accumulated amortisation / impairment Balance at 1 August 2010 Year ended 31 July 2011 Additions Amortisation / impairment charge Balance at 31 July 2011 Year ended 31 July 2012 Additions Asset acquired through purchase of subsidiary Amortisation / impairment charge Balance at 31 July 2012 277,310 - 277,310 2,029 - 279,339 5,235 - (31,627) 252,947 5,300 (5,300) - - - - - 9,000 - 9,000 646 (30) 616 - (24) 592 - - (24) 568 7,141 (1,147) 5,994 - (275) 5,719 - 1,400 (147) 6,972 43 Total $000 290,397 (6,477) 283,920 2,029 (299) 285,650 5,235 10,400 (31,798) 269,487 NOTE 17: PAYABLES Current Trade payables and accruals CONSOLIDATED NOTE 31 JULY 12 $000 31 JULY 11 $000 73,024 58,863 Payables have carrying amounts that reasonably approximate fair value. Average terms on trade payables are 30 days from statement. NOTE 18: INTEREST BEARING LIABILITIES (a) Non-Current Commercial bills Unamortised transaction costs 28 300,000 (1,426) 300,000 (2,071) 298,574 297,929 (b) Commercial bills Commercial bills are drawn under either a 12 month facility expiring in August 2012 or a 4 year facility, expiring in June 2015. More information on the Group’s borrowing facilities can be found in note 28. Interest is payable based on floating rates determined with reference to the BBSY bid rate at each maturity. The fair value of non-current commercial bills is approximately $274.4 million (2011 $270.9 million). A portion of the borrowings are hedged using a fixed interest rate swap contract, details of which can be found in notes 19 and 28. NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS (a) Current asset Interest rate swap contract (b) Non-Current liability Interest rate swap contract 28 28 - 139 5,958 1,755 The interest rate swap is being used to hedge the exposure to changes in the interest rate payable on its commercial bills (refer note 18). NOTE 20: PROVISIONS (a) Current Employee benefits Remediation Infrastructure costs Workers’ compensation Other (b) Non-current Employee benefits Remediation 19,360 2,495 665 4,634 4,990 32,144 13,018 9,955 22,973 19,757 2,890 4,709 4,642 2,757 34,755 13,994 11,403 25,397 44 NOTE 20: PROVISIONS (cont.) (c) Reconciliations Consolidated Year ended 31 July 2012 Balance at the beginning of the year Amounts recognised on acquisition of subsidiary Additional provisions recognised Amounts used Reversals of provisions Balance at the end of the year Current Non-current (d) Descriptions Provision for Remediation Remediation $000 Infrastructure Costs $000 Workers Compensation $000 14,293 - 1,065 (2,315) (593) 12,450 2,495 9,955 12,450 4,709 - - (4,044) - 665 665 - 665 4,642 - 2,437 (2,445) - 4,634 4,634 - 4,634 Other $000 2,757 - 3,675 (1,100) (342) 4,990 4,990 - 4,990 A provision has been recognised for the estimated costs of restoring operational and quarry sites to their original state in accordance with relevant approvals. The settlement of this provision will occur as the operational site nears the end of its useful life, or once the resource allocation within the quarry is exhausted, which varies based on the size of the resource and the usage rate of the extracted material. In some cases this may extend decades into the future. Provision for infrastructure costs A provision has been recognised for Brickworks obligation for the estimated costs of completed infrastructure works in relation to certain properties. The timing of future outflows is expected to occur within the next financial year. Provision for workers compensation The Brickworks group self-insures for workers compensation in certain states. The provision has been based on independent actuarial calculations based on incidents reported before year end. The timing of the future outflows is dependant upon the notification and acceptance of relevant claims, and would be expected to be satisfied over a number of future financial periods. Other provisions Other provisions are made up from a number of sundry items. NOTE 21: NET DEFERRED TAXES Net deferred taxes 165,713 184,041 CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 The balance comprises temporary differences attributable to: Equity accounted associates Property, plant and equipment Timber access rights Provisions Deposits received on land sale agreements Land held for development and resale Other sundry items 175,157 11,783 637 (14,729) (423) 1,774 (8,486) 186,599 10,135 328 (16,126) 86 2,050 969 165,713 184,041 45 NOTE 22: CONTRIBUTED EQUITY Fully paid ordinary shares Reserved shares CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 332,816 (7,014) 332,816 (7,798) 325,802 325,018 (a) Ordinary shares Opening balance Shares issued during the year Costs associated with shares issued 2012 2011 No. of Shares Value $000 No. of Shares 147,567,333 - - 332,816 - - 147,235,904 331,429 - Value $000 329,047 3,779 (10) Balance at end of year 147,567,333 332,816 147,567,333 332,816 Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At shareholder’s meetings each share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. There have been no options issued or on issue at any time during or since the end of the financial year. The parent does not have authorised capital nor par value in respect of its issued shares. (b) Reserved Shares Opening balance add: bonus shares purchased by share plan less: bonus shares vested during period Balance at end of period 644,447 278,083 (306,899) 615,631 (7,798) (2,882) 3,666 (7,014) 496,210 396,509 (248,272) 644,447 (6,381) (4,553) 3,136 (7,798) Reserved shares are those shares held by the employee share plans that have not vested to the participant at balance date. More information on the employee share plans is contained in note 32 of these financial statements. NOTE 23: RESERVES (a) Composition of reserves - capital profits - equity adjustment - general - foreign currency translation - share based payments - associates & JV’s CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 88,102 (9,251) 36,125 (2,409) 3,388 168,471 88,102 (13,584) 36,125 (2,051) 2,445 185,359 284,426 296,396 46 NOTE 23: RESERVES (cont.) (b) Descriptions Capital profits reserve The Capital profits reserve represents amounts allocated from Retained Profits that were profits of a capital nature. Equity adjustments reserve Equity adjustments reserve includes amounts for tax adjustments posted direct to equity. General reserve The General reserve represents amounts reserved for the future general needs of the operations of the entity. Foreign currency translation reserve The Foreign currency translation reserve represents differences on translation of foreign entity financial statements. Share based payments reserve The share based payments reserve represents the value of bonus shares (treasury stock) that have been expensed through profit and loss but are yet to vest to the employee. Associates & JV’s reserve The associates reserve represents Brickworks share of its associate’s & JV’s reserve balances. The Company is unable to control this reserve in any way, and does not have any ability or entitlement to distribute this reserve, unless it is received from its associates or JV’s in the form of dividends. NOTE 24: CASH FLOW INFORMATION (a) Reconciliation of cash flow from operations to net profit after tax CONSOLIDATED NOTE 31 JULY 12 $000 31 JULY 11 $000 Net profit after tax 43,304 142,551 Non-cash flows in net profit Amortisation of intangible assets Amortisation of borrowing costs Depreciation of non-current assets Write down of property, plant & equipment to recoverable value Write down of goodwill to recoverable value (Profits) / losses on disposal of property, plant & equipment (Profits) / losses on sale of investments Non cash profit on sale of land held for resale Share of profits of associates not received as dividends Changes in assets and liabilities net of the effects of acquisitions of businesses (Increase) / decrease in trade and sundry debtors (Increase) / decrease in inventories (Increase) / decrease in land held for resale (Increase) / decrease in prepayments (Increase) / decrease in share trading portfolio (Increase) / decrease in treasury stock Increase / (decrease) in creditors and accruals Increase / (decrease) in taxes payable Increase / (decrease) in other current provisions Increase / (decrease) in other non-current provisions Increase / (decrease) in deferred tax liabilities Net cash flows from / (used in) operating activities 171 680 24,618 4,169 31,627 61 - (2,189) (34,284) 6,955 (3,991) - (1,466) 3 784 16,139 1,932 (4,918) (2,423) (16,676) 64,496 299 1,240 26,270 14,021 - (3,528) 1 - (111,406) 6,160 (12,711) 5,092 (2,896) 1 2,361 (7,270) (188) 2,877 (567) 26,715 89,022 (b) Reconciliation of cash Cash at the end of the financial year as shown in the statement of cash flows is reconciled to items in the statement of financial position as follows: Cash 9 14,553 50,617 47 NOTE 25: ASSOCIATED COMPANIES Information relating to significant associates: Name Washington H Soul Pattinson & Co Ltd Ownership interest 2012 % 2011 % Carrying value 2012 $000 2011 $000 Profit contribution 2011 2012 $000 $000 42.72 42.85 1,086,474 1,059,241 67,375 154,868 Washington H. Soul Pattinson & Co Ltd (WHSP) is involved in coal, pharmaceutical, telecommunications and investment. WHSP’s balance date is 31 July annually. At balance date WHSP owned 44.48% (2011 44.48%) of issued ordinary shares of Brickworks Ltd. WHSP is incorporated in Australia. (a) Summarised share of associates financial information Current assets Non-current assets Current liabilities Non-current liabilities Net assets Outside equity interest Revenue Profit before income tax Income tax expense Outside equity interest Profit after income tax (b) Share of associates’ expenditure commitments Capital commitments Lease commitments CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 840,300 787,238 984,007 772,027 1,627,538 1,756,034 66,966 81,606 128,466 94,637 148,572 223,103 1,478,966 1,532,931 389,215 471,782 1,089,751 1,061,149 390,216 324,969 95,547 (14,579) (19,811) 338,230 (100,071) (83,291) 61,156 154,868 - * - * - 5,681 39,401 45,082 The entity has no legal liability for any expenditure commitments incurred by associates. * Note: Associated company (WHSP) figures for 2012 were not publicly available at the time of preparation of this report. (c) Contingent liabilities of associates Share of contingent liabilities incurred jointly with other investors - * 14,095 The entity has no legal liability for any contingent liabilities incurred by associates. * Note: Associated company (WHSP) figures for 2012 were not publicly available at the time of preparation of this report. 48 NOTE 26: JOINTLY CONTROLLED ENTITIES Information relating to significant jointly controlled entities (JV’s) is set out below: Name Ownership interest 2011 2012 % % Carrying value 2012 $000 2011 $000 Profit contribution 2011 $000 2012 $000 BGAI CDC Trust BGAI Erskine Trust BGAI TTP Trust BGAI Capicure Trust BGAI Heritage Trust BGAI Oakdale Trust BGAI Wacol Trust Other jointly controlled entities Fair value adjustments on completion of developments 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 29,612 52,800 9,578 6,417 15,280 38,695 3,879 1 30,807 50,354 8,394 6,402 17,853 33,728 3,795 724 2,382 7,903 635 767 1,171 1,114 308 798 4,414 3,293 5,101 1,085 710 1,382 - 271 1,092 715 156,262 152,057 19,492 13,649 The principal activity of each of the above JV’s is property management and leasing. They all have balance dates of 30 June, as the other partner in the JV has this balance date. Each of the above entities are incorporated in Australia. The profit contribution includes all fair value adjustments (including impairments) to Investment properties totalling $5.3 million (2011 $4.8 million). Refer note 4(b) for more detail on these profits. (a) Summarised share of JV’s financial information Current assets Non-current assets Current liabilities Non-current liabilities Net assets Revenues Profit before income tax Income tax expense Profit after income tax CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 5,904 343,095 4,907 314,913 348,999 319,820 56,572 154,987 12,470 178,624 211,559 191,094 * 137,440 * 128,726 20,561 21,345 15,078 - 15,078 12,934 - 12,934 * Note: Carrying value of Property Trusts exceeds net assets as the Group makes an adjustment to bring the accounting policies of the Trust in line with those of the Group resulting in a higher net asset position (b) Share of JV’s expenditure commitments Capital commitments Lease commitments 14,815 - 14,815 5,795 - 5,795 The entity has no legal liability for any contingent liabilities incurred by JV’s. (c) Contingent liabilities of JV’s Share of contingent liabilities incurred jointly with other investors - - The entity has no legal liability for any contingent liabilities incurred by JV’s. 49 NOTE 27: SEGMENT INFORMATION Building Products Property Investments Consolidated 31 JULY 12 $000 31 JULY 11 31 JULY 12 31 JULY 11 31 JULY 12 31 JULY 11 31 JULY 12 31 JULY 11 $000 $000 $000 $000 $000 $000 $000 REVENUE Segment revenue from sales to external customers RESULT 547,590 604,915 8,237 28,987 1,084 1,713 556,911 635,615 Segment EBITDA 53,327 68,586 19,009 29,235 67,700 67,895 140,036 165,716 Less depreciation and amortisation Segment EBIT (before significant items) (24,789) (26,569) - - - - (24,789) (26,569) 28,538 42,017 19,009 29,235 67,700 67,895 115,247 139,147 (Less) / add significant items (56,894) (29,018) - - 756 88,686 (56,138) 59,668 Segment result (28,356) 12,999 19,009 29,235 68,456 156,581 59,109 198,815 Unallocated expenses Finance costs Other unallocated expenses Profit before income tax Income tax benefit / (expense) Profit after income tax ASSETS (25,215) (6,796) (21,155) (7,148) 27,098 170,512 16,206 (27,961) 43,304 142,551 Segment assets 991,898 1,016,979 180,661 176,325 1,087,065 1,081,577 2,259,624 2,274,881 Unallocated assets Total assets LIABILITIES 1,370 3,605 2,260,994 2,278,486 Segment liabilities 124,579 110,942 665 5,146 180,868 196,436 306,112 312,524 Unallocated liabilities Borrowings Other Total unallocated liabilities Total liabilities OTHER Aggregate share of the profit of investments accounted for using the equity method Aggregate carrying amount of investments accounted for using the equity method Acquisition of non-current segment assets 298,574 (6,300) 297,929 (7,713) 292,274 290,216 598,386 602,740 798 1,092 18,694 12,557 67,375 154,868 86,867 168,517 - 723 156,261 151,334 1,086,475 1,059,241 1,242,736 1,211,298 - - - - - - - - 37,685 61,888 43,173 35,518 37,685 61,888 Non-cash expenses other than depreciation & amortisation 43,173 35,518 50 NOTE 27: SEGMENT INFORMATION (cont.) The economic entity has the following business segments: Building products division manufactures vitrified clay, concrete and timber products used in the building industry. Major product lines include bricks, blocks, pavers, roof tiles, floor tiles, precast walling and flooring panels and timber products used in the building industry. Property division considers further opportunities to better utilise land owned by the Brickworks Group. Investment division holds investments in the Australian share market, both for dividend income and capital growth, and includes the Group’s investment in Washington H Soul Pattinson and Co. Ltd. The Group has a large number of customers to which it provides products. There are no individual customers that account for more than 10% of external revenues. The Group operates predominantly within Australia, with some product manufactured by the clay products division exported to other countries, particularly New Zealand. Total revenue from sales outside of Australia in the 12 months ended 31 July 2012 was $15.9 million (2011 $13.1 million). The carrying value of non-current assets held outside of Australia at 31 July 2012 was $0.8 million (2011 $0.8 million). NOTE 28: (a) Capital Management FINANCIAL INSTRUMENTS The Brickworks Group manages its capital to ensure that all entities in the Group can continue as going concerns, while striving to maximise returns to shareholders through an appropriate balance of net debt and total equity. The balance of capital can be influenced by the level of dividends paid, the issuance of new shares, returns of capital to shareholders, or adjustments in the level of borrowings through the acquisition or sale of assets. Brickworks capital structure is regularly measured using net debt to capital employed, calculated as net debt divided by (net debt plus total equity). Net debt is calculated as total borrowings (note 18) less cash and cash equivalents (note 9), and total equity of the parent entity includes issued capital (note 22), reserves (note 23) and retained earnings. The Group’s strategy during the year was to maintain the net debt to capital employed (at the consolidated level) below a target limit of 45% which is consistent with prior years. Net debt to capital employed Net debt Total equity Net debt to capital employed CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 285,447 1,662,608 249,383 1,675,746 14.6% 13.0% The group is not subject to any externally imposed capital requirements. (b) Financial Risk Management The Group’s activities expose it to a variety of financial risks, primarily to the risk of changes in interest rates, but also, to a lesser extent, credit risk of third parties with which the group trades and fluctuations in foreign currency exchange rates. The Group’s overall risk management program seeks to minimise any significant potential adverse effects on the financial performance of the Group. Where approved by the Board, certain derivative financial instruments such as interest rate swaps or foreign exchange contracts may be used to hedge certain risk exposures. The Brickworks Group derivative policy prohibits the use of derivative financial instruments for speculative purposes. (c) Terms, conditions and accounting policies Details of the accounting policies adopted in relation to financial instruments are included in the summary of significant accounting policies to the accounts. Information regarding the significant terms and conditions of each significant category of financial instruments are included within the relevant note for that category. 51 NOTE 28: FINANCIAL INSTRUMENTS (cont.) (d) Financial assets and liabilities by category Details of financial assets and liabilities as contained in the annual report are as follows: Financial assets and liabilities by category Financial Assets Cash and cash equivalents Loans and receivables - current Loans and receivables - non-current Total Loans and receivables Derivative financial instruments - current Held for trading assets at fair value through profit and loss Total financial assets Financial Liabilities Other financial liabilities Payables - current Interest bearing liabilities - non-current Derivative financial instruments - non-current Total other financial liabilities Total financial liabilities NOTE CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 9 10(a) 10(b) 19(a) 11 17 18(a) 19(b) 14,553 79,354 - 79,354 - 11 50,617 83,639 201 83,840 139 14 93,918 134,610 73,024 300,000 5,958 378,982 378,982 58,863 300,000 1,755 360,618 360,618 Fair values of financial assets and liabilities are disclosed in the notes to the accounts where those items are listed. (e) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties. The credit risk on liquid funds and derivative financial instruments is considered low because these assets are held with banks with high credit ratings assigned by international credit-rating agencies. The maximum exposure to trade credit risk at balance date to recognised financial assets is the carrying amount net of provision for doubtful debts, as disclosed in the balance sheet and notes to the financial statements. The Brickworks Group debtors are based in the building and construction industry, however the Group minimises its concentration of credit risk by undertaking transactions with a large number of customers. The Group ensures there is not a material credit risk exposure to any single debtor. The Group holds no significant collateral as security, and there are no other significant credit enhancements in respect of these financial assets. The credit quality of financial assets that are neither past due nor impaired is appropriate, and is reviewed regularly to identify any potential deterioration in the credit quality. There are no significant financial assets that would otherwise be past due or impaired whose terms have been renegotiated. (f) Liquidity risk The Brickworks Group manages liquidity risk by maintaining a combination of adequate cash reserves, bank facilities and reserve borrowing facilities, continuously monitored through forecast and actual cash flows, and matching the maturity profiles of financial assets and liabilities. Details of credit facilities available to the Group, and the amounts utilised under those facilities, are as follows: Unused credit facilities Credit facilities Amount utilised Unused credit facility 400,000 300,000 100,000 400,000 300,000 100,000 52 NOTE 28: FINANCIAL INSTRUMENTS (cont.) (f) Liquidity risk (cont.) The Group has a $300.0 million (2011 $300 million) unsecured variable interest rate facility (fully drawn) in place with a syndicate of Australian and overseas banks. The facility is in a single tranche which expires in June 2015. • In addition, the Group has a $100 million 364 day working capital facility with an Australian Bank, which was undrawn at balance date (2011 undrawn). Subsequent to balance date this facility was extended for a further 12 months to August 2013. These facilities are subject to various terms and conditions, including various negative pledges regarding the operations of the Group, and covenants that must be satisfied at specific measurement dates. A critical judgement is that the Group will continue to meet its criteria under these banking covenants to ensure that there is no right for the banking syndicate to require settlement of the facility in the next 12 months. An analysis of the maturity profiles of the Group’s undiscounted financial liabilities, based on contractual maturity and obligated payments, is as follows: Liquidity risk maturity analysis 1 year or less Trade and other payables Total 1 year or less 1 to 5 years Commercial bills Derivatives Total 1 to 5 years (g) Currency risk NOTE 17 19(b) CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 73,024 73,024 352,650 5,958 358,608 58,863 58,863 375,150 1,755 376,905 The Brickworks group does not have any material exposure to unhedged foreign currency receivables. Export sales are all made through Australian agents or direct to overseas customers using Australian Dollars or letters of credit denominated in Australian Dollars. The trading of the Group’s foreign subsidiary, which is in New Zealand dollars (NZD) is not material to the Group as a whole. Accordingly, any reasonably foreseeable fluctuation in the exchange rate of the NZD would not have a material impact on either profit after tax or equity of the Brickworks group. The group has a limited exposure to foreign currency fluctuations due to its importation of goods. The main exposure is to US dollars (USD). It is the policy of the group to enter into forward foreign exchange contracts to cover specific currency payments, as well as covering anticipated purchases for up to 12 months in advance. The overall level of exposure to foreign currency purchases is not material to the group. Accordingly, any reasonably foreseeable fluctuation in the exchange rate of the USD would not have a material impact on either profit after tax or equity of the Brickworks group. (h) Interest rate risk Brickworks’ significant interest rate risk arises from fluctuations in the BBSY bid rate relating to Brickworks long and short term borrowings. Primarily, the exposure to interest rate risk is on the variable interest rate facility referred to in note 28 (f) above. The Brickworks Group manages its exposure to interest rate risk within the Group’s derivative policy. The Group uses interest rate derivatives, where appropriate, to eliminate some of the risk of movements in interest rates on borrowings, and increase certainty around the cost of borrowed funds. The policy has target ranges for fixed interest rate borrowings. At balance date, Brickworks had $175.0 million of bank borrowings unhedged (2011 $50.0 million). The Brickworks group variable interest rate facility currently drawn to $300.0 million (2011 $300.0 million) is a floating rate facility determined with reference to the BBSY bid rate at each bill maturity date. The effective weighted interest rate current on the bills borrowed under this facility at balance date is 6.14% (2011 6.80%). • At 31 July 2012, if interest rates had been +/- 1% per annum throughout the year, with all other variables being held constant, the operating profit after income tax for the year would have been $1.4 million higher or lower respectively (2011 $0.10 million higher / lower). There would not have been any other significant impacts on equity. Interest rate swaps The Brickworks group has entered into interest rate swaps contracts which allow the Group to raise borrowings at floating rates and effectively swap them into a fixed rate (average rate 5.41%, 2011 5.06%). The contracts require settlement of net interest receivable or payable usually around 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying long term debt and are brought to account as an adjustment to borrowing costs. 53 NOTE 28: FINANCIAL INSTRUMENTS (cont.) (h) Interest rate risk (cont.) The notional principal amounts reduce from $125.0 million over the next five years (2011 $250.0 million over five years) as detailed below: Settlement Less than 1 year 1 to 3 years 3 to 5 years Over 5 years Total notional principal at balance date 2012 Avg % - 5.27 5.96 - 2011 Avg % 5.41 6.15 5.96 - 2012 $000 2011 $000 - 125,000 100,000 25,000 50,000 75,000 - - 125,000 250,000 The hedges in place at 31 July 2012 are not hedge accounted, and the fair value movement of the hedges is recognised in the statement of comprehensive income. The financial instruments of the Group that are measured at fair value are grouped into Levels 1 to 3 based in the degree to which the fair value is observable. Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or • liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are • observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that • are not based on observable market data (unobservable inputs). The fair value of these derivatives are calculated using market observable inputs, categorised as “Level 2”. Financial Assets Interest rates on money market instruments (deposits) vary with current short term bank bill rate movements. At balance date, the effective weighted interest rates on these financial assets was 2.95% (2011 5.47%). There are no other financial assets with exposure to interest rate risk. (i) Other price risk The Brickworks group does not have material direct exposure to equity price risk, as the value of the share trading portfolio is insignificant, and hence any fluctuation in equity prices would not be material to either profit after tax or equity of the Brickworks group. Brickworks has significant indirect exposure to equity price risk through its investment in WHSP. Although this investment is accounted for as an equity accounted investment, WHSP has a significant listed investment portfolio which is accounted for at fair value through equity, and contribute to the profit on subsequent disposal. As a result, fluctuations in equity prices would potentially impact on both net profit after tax (where portions of the portfolios are traded) and equity (for balances held at the end of the period) which would result in adjustments to Brickworks net profit after tax and equity. At the time of preparing this report, there was no publicly available information regarding the effects of any reasonably foreseeable fluctuations in equity values on net profit or equity of WHSP at 31 July 2012. NOTE 29: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (a) List of significant controlled entities Details of the significant wholly owned entities within the Brickworks Group of companies are as follows. There are other wholly owned subsidiaries not included in this list as they are individually insignificant to the Group. All wholly owned entities within the Group have been consolidated into these financial statements. Controlled entities incorporated in Australia ABN Group’s Interest A.C.N. 000 012 340 Pty Ltd A.C.N. 074 202 592 Pty Ltd Austral Bricks (NSW) Pty Ltd Austral Bricks (Qld) Pty Ltd Austral Bricks (SA) Pty Ltd Austral Bricks (Tas) Pty Ltd Austral Bricks (Tasmania) Pty Ltd Austral Bricks (Vic) Pty Ltd Austral Bricks (WA) Pty Ltd Austral Bricks Holdings Pty Ltd Austral Facades Pty Ltd Austral Masonry (NSW) Pty Ltd Austral Masonry (Qld) Pty Ltd 38 000 012 340 82 074 202 592 60 125 934 849 62 125 934 858 66 125 934 876 83 125 934 947 14 009 501 053 64 125 934 867 34 079 711 603 55 120 364 365 63 144 804 553 45 141 647 092 30 000 646 695 54 2012 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2011 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 NOTE 29: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (a) List of significant controlled entities (cont.) Controlled entities incorporated in Australia ABN Group’s Interest 53 120 364 356 Austral Masonry (Vic) Pty Ltd 97 141 629 996 Austral Masonry Holdings Pty Ltd 81 125 934 938 Austral Precast (NSW) Pty Ltd 20 145 070 855 Austral Precast (Qld) Pty Ltd 16 145 070 837 Austral Precast (Vic) Pty Ltd 22 145 070 884 Austral Precast (WA) Pty Ltd 88 140 573 646 Austral Precast Holdings Pty Ltd 61 144 804 544 Austral Roof Tiles (WA) Pty Ltd 67 144 804 571 Austral Roof Tiles Pty Ltd 34 087 808 811 Auswest Timbers (ACT) Pty Ltd 53 108 239 925 Auswest Timbers Finance Pty Ltd (in liquidation) 51 120 364 347 Auswest Timbers Holdings Pty Ltd 28 071 093 591 Auswest Timbers Pty Ltd 39 000 165 579 Bowral Brickworks Pty Ltd 63 119 059 513 Brickworks Building Products Pty Ltd 64 076 976 880 Brickworks Building Products (NZ) Pty Ltd 95 120 360 036 Brickworks Head Holding Co Pty Ltd 47 120 364 329 Brickworks Industrial Developments Pty Ltd 12 094 905 996 Brickworks Properties Pty Ltd 28 158 536 353 Brickworks Property Finance Co Pty Ltd 89 120 360 009 Brickworks Sub Holding Co No. 1 Pty Ltd 61 120 364 392 Brickworks Sub Holding Co No. 2 Pty Ltd 59 120 364 383 Brickworks Sub Holding Co No. 3 Pty Ltd 57 120 364 374 Brickworks Sub Holding Co No. 4 Pty Ltd 16 125 922 821 Brickworks Sub Holding Co No. 5 Pty Ltd 18 125 922 830 Brickworks Sub Holding Co No. 6 Pty Ltd 97 125 922 849 Brickworks Sub Holding Co No. 7 Pty Ltd 99 125 922 858 Brickworks Sub Holding Co No. 8 Pty Ltd 40 079 711 630 Bristile Guardians Pty Ltd 32 008 668 540 Bristile Holdings Pty Ltd 19 056 541 096 Bristile Pty Ltd 77 090 775 634 Bristile Roofing (East Coast) Pty Ltd 49 120 364 338 Bristile Roofing Holdings Pty Ltd 63 007 635 529 Christies Sands Pty Ltd 52 000 602 531 Clifton Brick (Queanbeyan) Pty Ltd (in liquidation) 83 004 493 181 Clifton Brick Holdings Pty Ltd 63 004 529 104 Clifton Brick Manufacturers Pty Ltd 53 087 575 611 Daniel Robertson Australia Pty Ltd 66 004 434 342 Davman Builders Pty Ltd 93 000 002 979 Dry Press Publishing Pty Ltd 76 004 372 454 Evans Brothers (Bricks) Pty Ltd (in liquidation) 51 004 096 137 Evans Brothers Pty Ltd (in liquidation) 20 007 622 317 Hallett Brick Pty Ltd 93 007 880 220 Hallett Roofing Services Pty Ltd Horsley Park Holdings Pty Ltd 65 008 392 014 Hutton’s Bricks (Manufacturers) Pty Ltd (in liquidation) 58 009 477 463 31 003 281 123 International Brick & Tile Pty Ltd 40 007 870 779 J. Hallett & Son Pty Ltd 13 008 666 840 Metropolitan Brick Company Pty Ltd 22 004 047 849 N.R.T. Pty Ltd (in liquidation) 34 111 744 640 Newthorpe Pty Ltd (in liquidation) 18 000 041 485 Nubrik (NRT) Pty Ltd (in liquidation) 29 004 767 113 Nubrik Concrete Masonry Pty Ltd 59 004 028 559 Nubrik Pty Ltd 70 008 768 330 Pilsley Investments Pty Ltd 24 009 266 273 Prestige Brick Pty Ltd 68 006 727 920 Prestige Equipment Pty Ltd 61 009 687 709 Ralph Brittain & Company Pty Ltd (in liquidation) 83 007 749 840 Southern Bricks Pty Ltd 65 005 079 167 Team Securities Pty Ltd (in liquidation) 93 091 183 050 Terra Timbers Pty Ltd 52 000 005 550 The Austral Brick Co Pty Ltd 24 000 006 682 The Warren Brick Co Pty Ltd 41 065 439 045 Triffid Investments Pty Ltd (in liquidation) 72 076 286 710 Visigoth Pty Ltd 98 004 209 732 Vitclay Pipes Pty Ltd (in liquidation) 55 2012 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2011 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 NOTE 29: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (b) Business acquisitions On 2 December 2011 the Group acquired the business and assets of Gunns Ltd’s Jarrah saw milling, processing and retail business in Western Australia. The acquisition created a market-leading range of Australia hardwood timber, and provides synergies with the existing Auswest Timber operations in Western Australia. Details of the net assets acquired under this transaction are set out below, with all values determined provisionally at balance date. Cost of acquisition Cash paid Net assets acquired: Inventory Property, plant & equipment Intangibles Employee entitlements assumed Other liabilities Fair value of net assets acquired Direct costs relating to the acquisition $000 6,006 4,100 1,850 1,400 (1,204) (140) 6,006 (994) On 6 March 2012 the Group completed the acquisition of the remaining 50% equity not already held in Daniel Robertson Australia Pty Ltd for $10.1 million. The company had been operating as a joint venture for six years, with Austral manufacturing the product following the closure of the original Daniel Robertson manufacturing plant. The acquisition will enable the bricks businesses on the East Coast of Australia to continue to manufacture this premium iconic brand. Details of the net assets acquired under this transaction are set out below, with all values determined provisionally at balance date. Cost of acquisition Cash paid Cash acquired through purchase Net cash paid for business Net assets acquired: Receivables Property, plant & equipment Prepayments Intangibles Trade creditors and accruals Employee entitlements assumed Income tax provision Deferred tax liability Other liabilities Fair value of net assets acquired Goodwill arising on acquisition Net cash paid for business Direct costs relating to the acquisition Contribution to net profit before tax for the year ended 31 July 2012 Contribution to revenue for the year ended 31 July 2012 $000 10,092 (1,265) 8,827 817 127 40 9,000 (884) (435) (304) (1,220) (1,110) 6,031 2,796 8,827 (393) 1,713 4,241 56 NOTE 29: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (b) Business acquisitions (cont) On 9 March 2012 the Group acquired the business and assets of Boral Masonry’s Cairns, Queensland, operations for $3.2 million. The acquisition provides the Group with additional manufacturing capacity in far North Queensland, and provides significant synergies and savings for the Austral Masonry operations in Queensland. Details of the net assets acquired under this transaction are set out below, with all values determined provisionally at balance date. Cost of acquisition Cash Paid Net assets acquired: Inventory Property, plant & equipment Other assets Employee entitlements assumed Other liabilities Fair value of net assets acquired Goodwill arising on acquisition Net cash paid for business Direct costs relating to the acquisition $000 3,216 877 1,141 119 (54) (751) 1,332 1,884 3,216 (255) On 23 March 2012 the Group acquired the business and assets of CPS’s Queensland precast concrete panel operations for $1.7 million. The acquisition provides the group with additional precast concrete panel manufacturing capacity in South East Queensland, and will provide significant synergies and savings for the Austral Precast operations in Queensland. Details of the net assets acquired under this transaction are set out below, with all values determined provisionally at balance date. Cost of acquisition Cash paid Net assets acquired: Inventory Property, plant & equipment Other current assets Fair value of net assets acquired Goodwill arising on acquisition Net cash paid for business Direct costs relating to the acquisition $000 1,677 528 420 329 1,277 400 1,677 (200) Upon acquisition the acquired businesses were integrated within the existing Brickworks business and systems. As a result, specific financial information relating to the acquired businesses is not available and therefore it is impracticable to disclose the revenue and profit or loss of the acquirees since the acquisition date. It is impracticable to restate the revenue or profit of the combined entity for the period as if the acquisition date for these business combinations effected during the period had been at the beginning of the period, as the legal entities that had been operating those businesses were not acquired, and the financial information of those entities provided to the Group to allow consideration of the purchase of those businesses is subject to signed confidentiality agreements. For the same reason we cannot disclose the carrying amounts of those assets immediately prior to the acquisition. All acquisitions disclosed in the prior period which had been provisionally accounted for at 31 July 2011 were finalised during the current year with no change to the acquisition values. 57 NOTE 29: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (c) Controlled entities disposed of There were no controlled entities within the Group that were disposed of during the period. (d) Closed group A deed of cross-guarantee between Brickworks Ltd and a number of its subsidiaries (the “closed group”) was enacted during the 2010 financial year and relief was obtained from preparing a financial statement for those subsidiaries under an ASIC instrument of relief under subsection 340(i) of the Corporations Act 2001. Under the deed, Brickworks guarantees to support the liabilities and obligations of those subsidiaries. The controlled entities have also given a similar guarantee. For details of those entities covered under the deed, refer to note 29(a). The members of the closed group and the parties to the deed of cross guarantee are identical. The following are the aggregate totals, for each category, relieved under the deed. INCOME STATEMENT Profit before income tax expense Income tax (benefit) / expense Profit after income tax expense RETAINED PROFITS Retained profits at the beginning of the year Profit after income tax expense Dividends paid Share of associate’s transfer to outside equity interests CLOSED GROUP 31 JULY 12 $000 31 JULY 11 $000 9,832 (21,789) 31,621 1,041,229 31,621 (48,373) 3,121 159,423 27,981 131,442 958,148 131,442 (48,513) 152 Retained profits at the end of the year 1,027,598 1,041,229 58 NOTE 29: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (d) Closed group (cont) BALANCE SHEET CURRENT ASSETS Cash assets Receivables Held for trading financial assets Inventories Land held for resale Tax receivable Prepayments Derivative financial instruments TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Other financial assets Inventories Land held for resale Investments accounted for using the equity method Property, plant and equipment Intangibles TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Payables Interest-bearing liabilities Derivative financial instruments Provisions Deferred tax liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits TOTAL EQUITY CLOSED GROUP 31 JULY 12 $000 31 JULY 11 $000 14,552 78,263 11 155,086 9,657 1,971 6,978 0 266,518 158,540 10,000 8,301 14,742 1,086,474 440,770 269,486 50,617 81,114 14 146,479 1,249 3,606 5,524 139 288,742 159,192 10,000 8,372 23,742 1,059,964 438,641 285,650 1,988,313 1,985,561 2,254,831 2,274,303 71,472 31,990 103,462 9,867 298,574 5,958 22,973 171,796 509,168 612,630 56,124 34,589 90,713 - 297,929 1,755 25,397 194,181 519,262 609,975 1,642,201 1,664,328 325,802 288,801 1,027,598 325,018 298,081 1,041,229 1,642,201 1,664,328 59 NOTE 30: CONTINGENT LIABILITIES CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 Contingent liabilities at balance date not provided for in these financial statements: Bank guarantees issued in the ordinary course of business 19,863 19,007 The Directors do not anticipate that any of the bank guarantees issued on behalf of the Group will be called upon. Members of the economic entity are parties to various legal actions against them that are not provided for in the financial statements. These actions are being defended and the directors do not anticipate that any of these actions will result in material adverse consequences for the Company or the Consolidated Entity. NOTE 31: CAPITAL AND LEASING EXPENDITURE COMMITMENTS Capital projects contracted for but not provided for at balance date Payable not later than one year 7,273 45,595 The capital commitments relate to contracts to supply or construct buildings or various items of plant and equipment for use in the building products segment of the business. Operating lease commitments Non-cancellable operating leases contracted for but not capitalised in the financial statements 110,189 54,599 Payable - not later than one year - later than one year but not later than five years - later than five years 20,952 63,526 25,711 110,189 11,640 34,107 8,852 54,599 Operating leases are for the rental of land (used for sales and display centres), manufacturing equipment and motor vehicles. The leases are non-cancellable with rent payable monthly in advance. Leases for properties are on terms of between 3 and 10 years, with renewal options of similar lengths. Some of the operating leases contain contingent rental provisions that state the minimum lease payments shall be increased by the higher of CPI or a given percentage per annum. The highest such percentage increase is 5%. NOTE 32: EMPLOYEE SHARE PLANS (a) Salary sacrifice arrangements Brickworks Ltd has an employee share ownership plan, which allows all employees who have achieved 3 months service with the Group to purchase Brickworks Ltd shares, using their own funds plus a contribution of up to $156 from the Company. All shares acquired under salary sacrifice arrangements are fully paid ordinary shares, purchased on-market under an independent trust deed. At 31 July 2012, the Brickworks Employee Share Plans had 716 members taking part who owned a combined 1,283,527 shares or 0.83% of issued ordinary capital (2011 751 members, 1,305,709 shares, 0.88%). This represented shares purchased under the salary sacrifice arrangements described above, as well as shares held as part of the Brickworks equity based compensation plans shown below. The reduction in employee shareholder numbers reflects an overall reduction in eligible employee numbers during the financial year. (b) Equity-based compensation plans The following table shows the number of fully paid ordinary shares held by the Brickworks Deferred Employee Share Plan that had been granted as remuneration. This table does not include any shares held in the plan that were purchased by the employee under the salary sacrifice arrangements described above. Unvested Granted Sept 07 Granted Sept 08 Granted Sept 09 Granted Sept 10 Granted Sept 11 Total Unvested Vested Total Vested (28,828) (35,734) (49,671) (77,180) (55,410) (246,823) 246,823 Forfeited / Withdrawn (1,869) (3,558) (17,610) (35,192) (11,395) (69,624) (196,900) Closing Balance - 35,871 100,032 232,386 222,620 590,909 550,296 - (266,524) 1,141,205 Opening Balance 30,697 75,163 167,313 344,758 - 617,931 500,373 1,118,304 Granted - - - - 289,425 289,425 - 289,425 60 NOTE 32: EMPLOYEE SHARE PLANS (cont) (b) Equity-based compensation plans (cont) The amount recognised in the Income Statement in relation to equity based compensation arrangements for the year ended 31 July 2012 was $4,608,556 (2011 $4,556,943). The unvested shares vest to employees at 20% per year for each of the following 5 years, provided ongoing employment is maintained. Unvested shares are unavailable for trading by the employee. The fair value of vested shares held by the share plan at 31 July 2012 was $6,158,316 (2011 $5,750,385), based on the closing share price at 31 July 2012 ($10.08 per share) (2011 $9.90 per share). The fair value of shares granted during the period was $2,882,175 (2011 $4,552,722), based on the price paid for these shares when they were acquired on market. All shares granted by the Company provide dividend and voting rights to the employee. More information regarding the Brickworks Employee Share Plans is outlined in the Remuneration Report included in the Director’s Report. NOTE 33: RELATED PARTIES (a) Key management personnel shareholdings Held 31 July 2011 Granted as Remuneration Purchases Shares Disposed of Held 31 July 2012 DIRECTORS Mr R. Millner Mr M. Millner Mr L. Partridge Mr B. Crotty Mr D. Gilham The Hon. R. Webster 5,396,192 5,371,433 227,011 10,209 102,268 15,922 OTHER KEY MANAGEMENT PERSONNEL Mr A. Payne Ms M. Kublins Mr D. Fitzharris Mr P. Scott Mr D. Millington Mr M. Finney 167,838 42,053 75,709 59,211 23,039 - - - 24,906 - - - 12,453 6,891 6,891 6,891 5,168 24,181 - - - - - - - - - - - - - - - - - - - (4,355) - - (7,444) - 5,396,192 5,371,433 251,917 10,209 102,268 15,922 180,291 44,589 82,600 66,102 20,763 24,181 Shareholdings shown above reflect all direct, indirect and beneficial holdings by key management personnel. All share transactions by key management personnel were on normal terms and conditions on the Australian Stock Exchange. There were no other transactions with key management personnel during the period. Short term employee benefits Post-employment benefits Other long-term employee benefits Termination benefits Share based payment benefits CONSOLIDATED 31 JULY 12 $000 31 JULY 11 $000 4,270 228 - - 628 5,126 5,012 306 - - 1,338 6,656 (c) Other related party transactions During the year material transactions took place with the following related parties: Various intercompany loans are in existence between the Parent entity and some of its wholly owned subsidiaries. The loans are unsecured, interest free and have no fixed terms for repayment. The loans are a net asset to the Parent entity of $667.8 million. Property transactions with various trusts (Iisted in note 26) which are jointly owned by the Brickworks Group and Goodman Australia Industrial Fund, an unlisted property trust. The sale of land held for resale by the Brickworks Group to these trusts resulted in revenue of $2.4 million and profit of $0.9 million. All transactions with the property trusts are at arm’s length values. Directors and their director-related entities are able, with all staff members, to purchase goods produced by the Brickworks group on terms and conditions no more favourable than those available to other customers. NOTE 34: EVENTS OCCURING AFTER BALANCE DATE There have been no events subsequent to balance date that could materially affect the financial position and performance of Brickworks Ltd or any of its controlled entities. 61 In the opinion of the Directors: DIRECTOR’S DECLARATION 1. the complete set of the financial statements and notes of the consolidated entity, as set out on pages 26 to 61, and the additional disclosures included in the Remuneration Report section of the Directors’ Report designated as audited, are in accordance with the Corporations Act 2001: (a) comply with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) give a true and fair view of the financial position as at 31 July 2012 and of the performance for the year ended on that date of the consolidated entity; 2. 3. the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board; there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; and 4. as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 29(a) will be able to meet any obligations or liabilities to which they are or may become subject to, by virtue of the Deed of Cross Guarantee. This declaration is made after receiving the declaration required to be made to the Directors in accordance with s295A of the Corporations Act 2001 for the financial year ended 31 July 2012. This declaration is made in accordance with a resolution of the Board of Directors. Dated 20 September 2012 R.D. MILLNER Director L.R. PARTRIDGE AM Director 62 Ernst & Young Centre 680 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 www.ey.com/au INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BRICKWORKS LIMITED Report on the financial report We have audited the accompanying financial report of Brickworks Limited, which comprises the consolidated statement of financial position as at 31 July 2012, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows 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 referred to in the directors’ report. Liability limited by a scheme approved under Professional Standards Legislation 63 Opinion In our opinion: a. the financial report of Brickworks Limited is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the consolidated entity’s financial position as at 31 July 2012 and of its performance for the year ended on that date; and 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 the directors’ report for the year ended 31 July 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 Brickworks Limited for the year ended 31 July 2012, complies with section 300A of the Corporations Act 2001. Ernst & Young Renay Robinson Partner Sydney 20 September 2012 64 STATEMENT OF SHAREHOLDERS ORDINARY SHARES AT 31 AUGUST 2012 Number of holders Voting entitlement is one vote per fully paid ordinary share % of total holdings by or on behalf of twenty largest shareholders Distribution of shareholdings: 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,000 - 100,000 100,001 and over Holdings of less than marketable parcel of 50 shares The names of the substantial shareholders as disclosed in substantial shareholder notices received by the Company: 7,696 81.27% 3,260 3,510 459 423 44 7,696 715 Shareholder Washington H Soul Pattinson & Co. Ltd Perpetual Ltd and subsidiaries IOOF Holdings Ltd Permanent Trustee Company Ltd 20 LARGEST SHAREHOLDERS AS DISCLOSED ON THE SHARE REGISTER AS AT 31 AUGUST 2012 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Washington H Soul Pattinson & Company Limited RBC Investor Services Australia Nominees Pty Limited National Nominees Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited J S Millner Holdings Pty Limited RBC Investor Services Australia Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Mr K S Baker RBC Dexia Investor Services Australia Nominees Pty Limited Australian Foundation Investment Company Limited Citicorp Nominees Pty Limited Mr R D Millner & Mr M J Millner J P Morgan Nominees Australia Limited CPU Share Plans Pty Ltd T G Millner Holdings Pty Limited Argo Investments Limited 20. Warbont Nominees Pty Ltd Number of shares 70,896,583 17,710,519 8,744,153 7,111,550 % 44.48 8.23 4.97 3.46 2.58 2.19 2.15 1.84 1.70 1.48 1.27 1.18 1.00 0.95 0.92 0.90 0.80 0.41 0.39 0.35 Number of Shares 65,645,140 12,144,323 7,339,208 5,102,052 3,811,377 3,224,567 3,172,695 2,717,137 2,509,779 2,189,122 1,873,698 1,747,647 1,477,970 1,407,213 1,361,292 1,332,167 1,180,503 608,509 574,960 509,339 119,928,698 81.27 65 NOTES 66 NOTES 67 NOTES 68 TABLE OF IMPORTANT DATES 2012 annual result released Record date for final ordinary dividend Annual General Meeting Payment date for final ordinary dividend 2013 half-year end 2013 half-year result announced Record date for interim ordinary dividend Payment date for interim ordinary dividend 2013 financial year end 2013 annual result released 20 September 2012 8 November 2012 27 November 2012 29 November 2012 31 January 2013 21 March 2013 16 April 2013 7 May 2013 31 July 2013 19 September 2013 The above dates are indicative only and are subject to change 

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