Boart Longyear Group
Annual Report 2009

Plain-text annual report

Boart Longyear® AnnuAl RepoRt 2009 Executive Leadership Team 20 Financial Statements 2 4 6 8 Financial Report Directors’ Report Independent Auditor’s Report 18 Directors’ Declaration 21 Supplementary Information 23 Corporate information 50 52 Contents Chairman's letter Chief Executive Officer's report Results summary Business review Board of Directors Financial Calendar 2009 Full Year Financial results Annual General Meeting Financial Half Year End Interim results Financial Year End Annual General Meeting The Annual General Meeting of Boart Longyear will be held at Museum of Sydney – AGL Theatre Corner Bridge and Phillip Streets Sydney, NSW 2000, Australia Commencing at 10.00am on 11 May 2010 Telephone +61 2 9251 5988 Boart Longyear Limited ACN. 123 052 728 53 131 IBC 19 February 2010 11 May 2010 30 June 2010 August 2010 31 December 2010 Forward-Looking Statements Statements in this report that are not historical are forward-looking statements. These statements are based on management’s current belief and their expectations. The forward- looking statements in this report are subject to uncertainty and changes in circumstances and involve risks and uncertainties that may affect our operations, markets, products, services, prices and other factors as discussed in our filings with the Australian Securities Exchange. Significant risks and uncertainties may relate to, but are not limited to, financial, economic, competitive, environmental, political, legal, regulatory and technological factors. In addition, completion of transactions of the type described in this report are subject to a number of uncertainties and to negotiation and execution of definitive agreements among the parties and closing will be subject to approvals and other customary conditions. Accordingly, there can be no assurance that the transactions will be completed or that our expectations will be realised. We assume no obligations to provide revision to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. Corporate information Headquarters Principal Administrative Office 10808 South Riverfront Parkway #600 South Jordan, Utah 84095 Tel: +1 801 972 6430 Fax: +1 801 977 3374 Registered Office 919-929 Marion Road Mitchell Park, South Australia 5043 Tel: +61 8 8375 8375 Fax: +61 8 8377 0539 Auditors Deloitte Touche Tohmatsu Company Secretaries Fabrizio Rasetti Paul Blewett Shareholder Enquiries Boart Longyear Investor Relations 10808 South Riverfront Parkway South Jordan, Utah 84095 Australia: +61 8 8375 8300 Others: +1 801 952 8513 email: ir@boartlongyear.com Listing Boart Longyear is listed on the Australian Securities Exchange under the symbol “BLY” Share Registry Link Market Services Limited Level 12680 George Street Sydney NSW 2000 Tel: +61 2 8280 7111 Annual Meeting The third Annual General Meeting of Shareholders of Boart Longyear Limited will be held at the Museum of Sydney, located at the corner of Bridge and Phillip Streets, Sydney NSW 2000 on Tuesday, 11 May 2010, commencing at 10:00 a.m. (Sydney time). Website www.boartlongyear.com www.precinct.com.au Boart Longyear® is the leading provider of mineral exploration drilling services and drilling products for the global mining industry. We are the only integrated drilling services and products provider, combining engineering excellence, global manufacturing facilities and the most experienced drilling services group in the business. Our customers rely on our unique ability to develop, field test, and deliver any combination of drilling consumables, capital equipment, and expertise direct to any corner of the world. We have provided this service for over 120 years. Chairman’s letter 2 I am pleased to present our 2009 Annual Report. The past year was the most challenging operating environment our Company has experienced for many years. The global financial crisis in late 2008 led to tight credit market conditions that endured for most of 2009. This, in turn, reduced demand worldwide across many industries, including the mining industry that we serve. The Company’s management reacted swiftly to the changed circumstances by reducing manufacturing capacity and headcount, lowering overhead and operating costs, and cutting back capital expenditure. As a result, the Company maintained positive cash generation throughout the year and ample interest cover. Chair man Boart Longyear Annual Report 2009 3 In May, we announced our intention to renegotiate our banking arrangements prior to year‑end 2009. After an exhaustive review of all available options, the Board decided in August to undertake a comprehensive recapitalisation of the Company. A placement to institutional investors, coupled with a one‑for‑one rights issue and a share purchase plan for retail shareholders, raised a total (before expenses) of US$698 million. This was accomplished through the issue of over three billion new shares at the price of AU$0.27 cents per share, a discount of 18 percent on the theoretical ex‑rights price for the 30 days prior to the recapitalisation program announcement. All elements of the recapitalisation were oversubscribed, and we thank our shareholders for their support for this program. The net proceeds raised were used to repay, in full, the Company’s US$585 million term debt facility due to mature in April 2010. A portion of the Company’s bank revolver facility was also paid down. Accordingly, following the recapitalisation program, the Company ended 2009 with a strong balance sheet, including net debt of US$48 million and undrawn facilities totalling US$133 million. The Company made a statutory loss in 2009 of US$15 million after tax (US$157 million profit in 2008). Adjusting to remove restructuring charges, the net loss on the disposal of businesses, debt restructuring charges and related tax charges, our underlying profit after tax was US$7 million. Both revenue and EBITDA were substantially down on the prior record year. In 2009 our EBITDA was US$111 million (US$356 million in 2008) on revenues of US$978 million (US$1.8 billion in 2008). Adjusting to remove restructuring charges of US$12 million and a US$4 million loss on the disposal of businesses, our underlying EBITDA was US$128 million. Despite significantly lower revenues and EBITDA, the Company generated adjusted net operating cash during the year of US$129 million through tight management of working capital and reduced capital expenditure (US$37 million, down from US$146 million in 2008). In light of our trading results, the Board has decided to pay no final dividend for 2009. The Board expects to resume dividend payments as business conditions improve. Chair man Although the priority in 2009 was operational cost efficiency and cash conservation, I am pleased to report that the Company maintained its strong commitment to safety and to new product development during the year. Improvements were made in our already industry‑leading safety performance, and our Lost Time Incident Rate declined by over 40 percent during the year. During 2009 we launched over 10 new products and our ongoing R&D program remains on track to launch over a dozen new products in 2010. These products will provide increased safety, productivity and reliability to our customers and will continue to strengthen our brand and market position in the years ahead. Looking forward, we are confident that our markets are improving in 2010. Moreover, we are well‑placed to capture our full share of increased demand, for both drilling services and products. Our focus will remain on meeting our customers’ needs with quality products and services and a steadfast commitment to safe operations. I take this opportunity to thank our customers and suppliers for their support during 2009. I would also like to thank my fellow Board members for their exceptional contribution during 2009. The Board met on seven occasions and also participated in 35 special meetings. All directors contributed with dedication and commitment. I would also like to thank our Chief Executive Officer, Craig Kipp, and his executive team for their leadership and dedication during a difficult year. On behalf of the Board, I thank all of our 6,500 employees around the world for their efforts and achievements. Graham Bradley AM Chairman Chief Executive Officer’s report 4 2009 was a tough year for global business. Boart Longyear was not immune from these conditions. In last year’s letter to shareholders, I stated: “We will come out of this current global downturn stronger, leaner and more focused.” I am happy to report that we have done just that. Boart Longyear now enters 2010 in a good position: stronger, smarter, more disciplined and optimistic. C E Over a three‑month period starting in late 2008, we experienced close to a 50 percent decline in revenue. This coincided with the looming April 2010 maturity of most of our debt and the virtual closure of the global financial markets. For us, this resulted in a balance sheet that needed to be improved and an urgent need for cost restructuring. Our leaders stayed focused and got to work. We moved quickly, taking out 34 percent of SG&A and reducing head count by 40 percent, while our operating teams continued to deliver on global customer commitments and also improved our safety performance. In mid‑year both existing and new shareholders supported our necessary equity raising, allowing us to retire US$585 million of debt. As we put 2009 in the corporate history books, there are a couple of key lessons worth reflecting upon that will serve Boart Longyear in the future. The first is the “speed premium”. The world will continue to get smaller, more connected, and yet more “local”. We were able to react quickly and stay in front of the cost curve during this financial crisis because our global leaders in over 40 countries remained connected to their regional customers and also the global market. We will continue to invest in a new ERP platform so our teams will be supported with up‑to‑date, real time market information, allowing our global teams to have the ability to take decisive action on the spot. Boart Longyear Annual Report 2009 5 Second, despite severe cost constraints and rapid global restructuring efforts, we continued a very robust R&D program, resulting in an exciting pipeline of new products and drilling technology for 2010. Our planned new product launches and drilling technology are the best they have ever been! Fulfilling Boart Longyear’s potential remains an exciting challenge. Our focus remains on driving exploration technology, building relationships with key mining and drilling customers, and leveraging our unique products and services mix. However, feedback from our customers has also reminded us that we must build a “consistent Boart Longyear”. As I travel the mining world, I often hear, “I wish I could deal with the same Boart Longyear, everywhere”. This means that our teams must provide the same training, processes, equipment and delivery in every region, mine site and operating environment. This is our mission, but it is a tough challenge as we operate over 1,100 drill rigs in 40 countries and sell products in over 100 countries. I believe we have a global leadership team that is up to the challenge, and we are upgrading our management information systems to work around the globe, 24 hours a day, in real time. Closing where I started, we used 2009 to create a stronger balance sheet and leaner cost structure, and strengthen the focus on our customers. We will continue to monitor the fundamentals of our business on a regular basis. We are already well into executing the demanding 2010 plans for each region and business. As this market turns around, Boart Longyear’s goal is to remain positioned as the strongest and most agile player in the market. Finally, I would like to thank our Board, executive team, and regional teams for their drive and positive energy. Our leaders worked long hours, at reduced pay, to make swift and difficult decisions in a very uncertain market. The results have allowed us to enter 2010 stronger and smarter. I am looking forward to an exciting year. Our entire leadership team could not be more energised. Craig Kipp Chief Executive Officer The second lesson is the “variable cost premium”. The mining industry is a cyclical industry. However, Boart Longyear proved again that, when our revenues decline, our variable cost structure allows management to lower costs quickly when faced with lower revenues. In 2009, despite revenues that declined close to 50 percent, we generated US$129 million of adjusted cash from operations and US$128 million of adjusted EBITDA. Fortunately, during the last five years, Boart Longyear was preparing for tough times. We closed or divested over 15 factories, consolidated regional operations, streamlined our product offerings and sold many non‑core businesses. Ultimately, this provided the difference in 2009. These actions allowed us to stay focused on our core expertise of exploration drilling and drilling products. Challenges also provide opportunities. There are two key 2009 accomplishments of which I am most proud. First, our safety performance continued to improve. Our safety metrics showed a 43 percent improvement in Lost Time Incident Rate and a 17 percent improvement in Total Case Incident Rate. More importantly, many positive “safety culture” comments from our customers verified these results. Safety continues to be a hallmark of the Boart Longyear brand and a cornerstone of our corporate culture. O Results summary 6 2009 COnsOlidatEd OvErviEw US$M Revenue Gross Margin Gross Margin % EBITDA EBITDA Margin % Adjusted EBITDA 1 Adjusted EBITDA Margin % NPAT Adjusted NPAT 2 Adjusted NPAT Margin % Cash from Operations Adjusted Cash from Operations 3 Adjusted Cash from Operations % 2008 1,839 578 31% 356 19% 367 20% 157 163 9% 144 149 8% Revenue (US$M) Down 47% Adjusted EBITDA1 (US$M) Down 65% 2008 2009 978 1,839 2008 2009 128 2009 Change 978 234 24% 111 11% 128 13% (15) 7 1% 117 129 13% –47% –60% –69% –110% –19% 367 Adjusted Cash Flow from Operations3 (US$M) Down 13% Net Debt (US$M) Down 94% 2008 2009 149 129 2008 (Due April 2010) 585 179 764 2009 (Due April 2012) 48 Discretionary Cash Trends (US$M) Capex Acquisitions – net Dividends 2007 0 2008 2009 0 0 57 37 124 120 119 146 1 Adjusted EBITDA: Adjusted to remove restructuring charges and the (gain)/loss on the disposal of businesses. Restructuring charges in 2008 and 2009 were $20.3 million and $12.6 million, respectively. Losses/(gains) on business disposals in 2008 and 2009 were ($9.1 million) and $4.2 million respectively. 2 Adjusted NPAT: Adjusted to remove restructuring charges, the (gain)/loss on the disposal of businesses, debt restructuring charges and related tax charges. Restructuring charges net of tax in 2008 and 2009 were $13.8 million and $8.3 million respectively. Losses/(gains) on business disposals in 2008 and 2009 were ($7.8 million) and $3.0 million respectively. Debt restructuring charges related to the write‑down of swaps was $11.0 million. 3 Adusted cash from operations: Adjusted to remove cash flows related to restructuring charges, the (gain)/loss on the disposal of businesses and related tax charges. Restructuring cash flows net of tax in 2008 and 2009 were $4.7 million and $10.5 million respectively. Cash flows net of tax related to business disposals in 2008 and 2009 were $1.0 million and $1.3 million respectively. rEsults summary Boart Longyear Annual Report 2009 7 GlObal drillinG sErviCEs US$M Revenue EBITDA EBITDA margin % GlObal prOduCts US$M Revenue EBITDA EBITDA margin % 2008 1,241 295 24% 2008 598 129 22% 2009 737 142 19% 2009 241 26 11% Change –41% –52% Change –60% –80% tOtal COmpany rEvEnuE Total Company 2009 Revenue Products and Services Over 30% of revenue was derived from production mining and non-mining end markets Percussive Products Percussive Drilling Underground Drilling Non‑mining Drilling Surface Core Drilling Rotary Drilling Other Products Other 8% 4% 8% 13% 29% 20% 17% 1% rEsults summary Business review 8 a b l D r illing ProDucts g l o drillinG COnsumablEs drillinG Capital EquipmEnt drillinG sErviCEs global Drillin g s E r V i c E s FOCusEd On + safety + experience + reliability + innovation = productivity Our innOvatiOn CyClE a b l D r illing ProDucts g l o global Drillin g s E r V i c E s Boart Longyear Annual Report 2009 9 The innovation cycle begins with our Global Products team working in close collaboration with our Global Drilling Services division. In turn, we incorporate our experience in the field into our innovation cycle. This results in sharing field data, challenges, safety requirements and best practices, ultimately driving innovation that increases productivity in the field. This integrated business model gives Boart Longyear the advantage of bringing new technology to the market with speed. Our innOvatiOn CyClE 10 Quick Descent® Head Assembly. Improves productivity by reducing drag and allowing fluid to pass easily through the core barrel – increasing drop speed. Provides a more reliable latch indication system, allowing the drillers to know when a positive latch has occurred. ● ● ◆ ▲ ● ▼ ■ Business review Boart Longyear is a trusted partner and global leader in providing world-class drilling services and products to our customers. We do something no one else can do. Our unique ability to manufacture and deliver any combination of consumables, capital equipment and expertise direct to our customers in any corner of the world puts us in a class of our own. Our global engineering groups are combined into “Centres of Expertise”, offering round-the-clock sharing of data, best practices and ideas. This 24-hour stream of information significantly shortens our product development cycle, leading to new product introductions. Sonic Rig. Sonic drilling provides a continuous, relatively undisturbed core sample and accuracy through any type of formation. Sonic drilling reduces waste by up to 80 percent, drills two to three times faster than conventional overburden drilling methods and allows more flexibility within a single bore hole. GlObal innOvatiOn Stage Bit®. Increasing productivity with the largest crown height in the industry partnered up with a patented window design that allows superior flushing capability for higher penetration rates and longer life. 11 DeltaBase 95 Drill Rig. A high powered, light weight anchor rig designed for double-head drilling systems, rotary/ rotary or rotary/percussive drilling systems built on a compact footprint. Mobile Drill Rig. A heavy duty rig that is easily maintained with a self-diagnosing CAN-bus (controller area network) system and designed for quick set up and easy movement hole to hole. This rig was designed with safety in mind. Centres of Expertise ◆ Coring Consumables ● Coring/RC Rig ▲ Percussive ▼ Sonic/Delta Base ■ Diamond Products SC11 Drill Rig. A modular rig designed to be easily broken down into flyable sections for heliportable work in remote locations. The compact footprint makes adapting a shack easy. ▼ ▼ ◆ ▲ ● ● SC9 Drill Rig. A new approach to surface exploration drills. Features a completely hands-free rod management system and CAN-bus (controller area network) technology for self-monitoring and efficient rig operation. VWall® Rods. An innovative coring rod with internally upset wall feature that lightens the overall weight by up to 30 percent, increasing worksite safety and rig depth capacity while increasing drilling productivity through decreased core retrieval time. GLOBAL INNOVATION Business review With over 120 years of drilling experience, our Drilling Services business is experienced in, and equipped for, all types of drilling, including surface coring, underground, multi‑purpose, reverse circulation, conventional air/mud rotary, flooded reverse, directional, sonic, and percussive production. Always leading the way, our teams are constantly developing tomorrow’s solutions and applying emerging technologies to the services we provide our customers. Our competitive strengths include: – Global reach and longstanding relationships with a global customer base – Developing equipment and consumables to enhance drilling productivity – Full suite of drilling services technologies – Industry‑leading safety and training programs Safety We operate with a “safety first” approach to drilling. The Company’s drillers are known for taking on the largest, most technical and difficult drilling projects and completing them safely and with accurate results. Experience With the broadest array of specialised services in the drilling industry, we can accommodate specific needs for any application on a worldwide basis. With seasoned crews and first‑hand experience in virtually every major global market, we understand no site is the same and have the ability to quickly mobilise equipment and crews to nearly any location around the world. Reliability Our global network of service and repair facilities provides the infrastructure and experienced personnel to customise each rig for a given job for optimal performance. Customers trust that Boart Longyear’s trained employees and our modernised fleet of drill rigs will protect the safety of all employees every day, everywhere, on every job. Mining and Minerals We are the leading drilling services provider for the exploration, development and production of copper, gold, iron ore, nickel and other metals and minerals. The rock core chips and samples we extract provide mining companies with critical information over the life of a mining project, rom exploration through closure of the mine. 12 Environment and Infrastructure We have the largest sonic rig fleet in the world. This technology is better than any other at providing our customers the best subsurface sample, while minimising waste. In addition to sonic, our diversified fleet of auger, probe and rotary rigs further enables us to serve a wide variety of markets (i.e., environmental, construction and water) and drill in diversified locations such as factories, dams and city work. By positioning our fleet this way we can serve a large customer base that ranges from private businesses to government agencies. Innovation Boart Longyear designs and manufactures much of the equipment that our drilling teams use, bringing our job sites world‑class products designed with the experience gained year after year by our teams in the field. We are dedicated to understanding and exceeding our customers’ production, cost, safety and environmental goals. Our drilling services solutions are based upon proven and time‑tested processes that have been perfected in the widest variety of drilling applications around the globe. Our customers know we deliver performance they can count on. drillinG sErviCEs Boart Longyear Annual Report 2009 13 Our Drilling Services division operates in more than 40 countries across North America, South America, Asia and the Pacific Rim, Europe and Africa. We have an international network of more than 50 zone locations that maintain and mobilise equipment close to key geographic markets. drillinG sErviCEs Business review 14 drillinG prOduCts The Boart Longyear Products division maintains an extensive patent portfolio and leverages its technology to clearly distinguish itself as the innovative products leader in the drilling industry. Products offered include drilling equipment, drill rods, diamond bits, wireline core extraction systems, reverse circulation pipe and accessories, overburden tooling, rock drills, rock drilling rods, and bits. Boart Longyear Annual Report 2009 15 Top. Robotic arm used in production of percussive rods Above. Salt Lake City diamond bit plant Environmental and Infrastructure Drilling Our products are put to work around the globe and provide solutions to the most demanding geo‑technical and geo‑ construction drilling challenges. Whether locating a safe source of potable water in a rural village or stabilising the ground underneath a transportation system in a major metropolis, our customers rely on Boart Longyear products every day. Our precision engineered drill rig line and tooling offering provide our customers with reliable solutions for any situation. Production and Development Mining We design, manufacture and supply pneumatic and hydraulic rock drills and rock drilling tools using the most technically advanced materials and systems in the industry. From hand‑ held pneumatic rock drills to percussive bits, shanks and rods, we offer drilling equipment and drilling consumable products to perform on any job. The Global Products division designs, manufactures and sells drilling equipment such as drills and support systems, as well as drilling consumables including bits, rods and all requisite tooling. These products are used in industries such as mineral exploration, mining, energy, environmental sampling and remediation, as well as infrastructure reinforcement and development. In conjunction with these products, Boart Longyear offers its customers professional aftermarket service and support, including drill equipment commissioning, training, maintenance programs, spare parts and emergency parts kits. Mineral and Energy Exploration Drilling Our coring exploration products are well known and trusted among exploration drilling contractors. Since revolutionising the industry more than 50 years ago with the genuine Q® coring system, we have continued to develop innovative drilling consumables such as our Stage® diamond drill bits, high productivity Q® wireline system, RQ® threaded drill rods, upset V‑Wall® drill rods and the LF® platform of modular drill rigs. Each Boart Longyear product brought to market is designed with the operator in mind and focuses on delivering safe and repeatable productivity in every drilling condition. Business review Our drillers in the field are a world‑class team with a wealth of operating knowledge. Ready to match the logistics and conditions of each job, we bring best‑ in‑industry technology and expertise to get the job done right. While ever in search of better solutions and greater productivity, we know that people come first. Internally as well as externally, safety and integrity are part of our business culture. Safety First Boart Longyear has demonstrated commitment to the safety of our employees and customers and to protecting the environment, as shown by our proudly earned safety and environmental certifications of ISO and OHSAS. Safety is an integral part of the Boart Longyear corporate culture. In 2009, we kicked off our “Drilling to Zero” program. Our goal is zero workplace injuries, zero new cases of occupational illnesses, and zero environmental incidents. Ethics and Good Citizenship We take pride in upholding the highest standards of behaviour. We operate ethically and contribute to the communities in which we operate so our employees and shareholders can be proud of their association with the Company. 16 1,430 3.26 0.34 Exceptional Results We are focused on delivering exceptional results to our customers and shareholders every day. For Boart Longyear, this necessitates more than consistently delivering on our promises. We strive to achieve results through exceptional execution, an unwavering commitment to our customers and the dedication to finding new and innovative ways to beat the competition. Dedication to Our Clients’ Success We are dedicated to providing the products, services and support our clients need to succeed. This is a passion we manifest through our focus on the customer, building strong client relationships and our non‑negotiable approach to quality. Mutual Trust and Respect People are our most important asset. We know that the best ideas develop as a result of collaborative efforts between individuals with diverse backgrounds, opinions and perspectives. We value the diversity that is Boart Longyear and demonstrate mutual trust and respect for one another. Lost Days Count 2007 2008 520 2009 377 Total Case Incident Rate1 2007 2008 2009 2.15 1.78 Lost Time Incident Rate1 2007 2008 2009 0.14 0.08 S A F E T Y E X O T Y E N C E L L E N C E R U O J R U O A L IN CIDENTS N E Z E R O T N U J I RIE S . ZERO ILLNESSES . ZER O E N V I R O N M Our COrE valuEs 1 Incident rates are calculated using the U.S. Occupational Safety and Health Administration formula – 200,000 man hours. Boart Longyear Annual Report 2009 17 People are the very foundation of our success. With over 120 years of experience behind us, our employees have joined a team with a proven past and an exciting future. We believe we have more than just great employees, we have the know-how, vision and commitment to design and implement the best and most innovative solutions in the industry. Board of Directors 18 Craig Kipp Mr. Kipp was appointed a director of the Company on 28 June 2008. He was appointed the Company’s Chief Executive Officer on 1 January 2009, prior to which time he was President and Chief Operating Officer. Mr. Kipp joined the Company in 2005 after 22 years with General Electric, where he was employed in various capacities, including as President and Chief Operating Officer of the Global Nuclear Fuel division and General Manager of operations in Hungary and China. Mr. Kipp received his BS and MS in Mechanical Engineering from the University of North Dakota and an MBA from the University of Chicago. Graham Bradley AM Mr. Bradley was appointed a director of the Company on 21 February 2007 and is currently Chairman of the Company. He is also Chairman of Stockland Corporation Limited (appointed February 2004) and Po Valley Energy Limited (appointed September 2004) and a director of Singapore Telecommunications Limited (appointed March 2004). He is also chairman of the unlisted local subsidiaries of HSBC plc and Anglo American plc. He was elected president of the Business Council of Australia in October of 2009. In addition, Mr. Bradley is a director of a number of non‑profit philanthropic organisations. From 1995 to 2003, Mr. Bradley was the Chief Executive Officer of the listed investment management group Perpetual Limited. He also spent four years as the Chief Executive Officer of the law firm Blake Dawson. Previously, he spent 12 years at McKinsey & Company, an international firm of management consultants. Mr. Bradley resigned as Chairman of Proteome Systems Limited on 29 November 2007 and Film Finance Corporation Australia Limited on 30 June 2008. Mr. Bradley received a BA and LLB (Hons 1) from Sydney University and an LLM from Harvard Law School. He is a member of the Remuneration & Nomination Committee. Bruce Brook Mr. Brook was appointed a director of the Company on 21 February 2007. He is currently a director and Chairman of the Audit Committee of Lihir Gold Limited (appointed December 2005), director of Snowy Hydro Limited (appointed May 2006) and Chairman of Energy Developments Limited (appointed April 2009). As of 1 March 2010, he was appointed a director of the Export Finance and Insurance Corporation. He is a member of the Financial Reporting Council, a member of the Finance Committee of the University of Melbourne and a member of the Audit Committee of the Salvation Army (Southern Territory). Mr. Brook was the Chief Financial Officer of WMC Resources Limited from 2002 to 2005 and has approximately 30 years’ experience in various roles, including Deputy Chief Financial Officer of ANZ Banking Group Limited, Group Chief Accountant of Pacific Dunlop Limited, General Manager, Group Accounting at CRA Limited and General Manager, Accounting and Services at Pasminco Limited. Mr. Brook resigned as a director and the Chairman of the Board of Directors of Energy Developments Limited on 17 February 2010 (appointed a director in April 2009 and Chairman in September 2009) and as a director of Consolidated Minerals Limited on 20 February 2008 (appointed December 2005). Mr. Brook gained his B.Comm and B.Accounting at the University of Witwatersrand and is a fellow of the Institute of Chartered Accountants in Australia. He is Chairman of the Audit, Compliance & Risk Committee and a member of the Environment Health & Safety Committee. Boart Longyear Annual Report 2009 19 David Grzelak Mr. Grzelak was appointed a director of the Company on 13 November 2008. He is currently Chairman and Chief Executive Officer of Komatsu America Corp. and has held a variety of senior executive positions with Komatsu since joining the company in 1991. Prior to joining Komatsu, he worked in General Electric’s Transportation Systems business for approximately 20 years. Mr. Grzelak has served as a director of the Alamo Group Inc. (listed on the New York Stock Exchange) and member of its Audit, Compensation & Nomination committees since 2006. Mr. Grzelak earned his BS in industrial engineering from Penn State University and an MBA from Gannon University. He is a member of the Audit, Compliance & Risk Committee and the Environment, Health & Safety Committee. David Mclemore Mr. McLemore was appointed a director of the Company on 21 February 2007. He has 35 years of industrial and broad operational experience. He has held a number of positions with various Advent International portfolio companies for more than ten years and was involved with Advent International’s acquisition of the Boart Longyear Group from Anglo American plc in 2005. Mr. McLemore served at various times as Chairman, Deputy Chairman and Vice Chairman of the Boart Longyear Group from 2005 until 2007. Mr. McLemore also served as a General Manager of a General Electric’s Power Systems division from 1985 to 1997. Mr. McLemore received his BS from Oklahoma State University. He is Chairman of the Environmental Health & Safety Committee and was appointed it’s Chairman effective 15 November 2008. He is also Chairman of the Remuneration & Nomination Committee and was appointed it's Chairman effective 22 March 2010. Peter St George Mr. St George was appointed a director of the Company on 21 February 2007. He also has been a director of First Quantum Minerals Limited (listed on the Toronto Stock Exchange) since October 2003. Mr. St George was a director of Spark Infrastructure Group, Powercor Australia Limited, Citipower Pty Limited and CHEDHA Holdings Pty Limited from December 2005 until 31 December 2008. He also served as a director and Chairman of Walter Turnbull, an Australian accounting and financial services firm, from August 2002 until 31 October 2008 and was a director of SFE Corporation Limited from 2000 until its merger with ASX Limited in July 2006. Mr. St George served as Chief Executive/ Co‑Chief Executive of Salomon Smith Barney Australia/NatWest Markets Australia from 1995 to 2001. In addition, he has more than 20 years’ experience in senior corporate advisory roles within NatWest Markets and Hill Samuel & Co in London. Mr. St George qualified as a Chartered Accountant in South Africa and received an MBA from the University of Cape Town. He is a member of the Remuneration & Nomination Committee and the Audit, Compliance & Risk Committee. Executive Leadership Team 20 Craig Kipp See Page 18. Brad Baker Mr. Baker was appointed as Senior Vice President, Human Resources in 2008. Prior to joining Boart Longyear he worked for Milacron Inc. for 17 years in a variety of operational, divisional and global human resources roles including Vice President of Human Resources. Mr. Baker received his BA in Business from Bowling Green State University and his MBA from Xavier University. Michael Birch Mr. Birch was appointed as Vice President of Global Drilling Services effective January 2010, after leading the Global Products division since May 2006. Prior to joining Boart Longyear, he worked for Black & Decker Corporation for 15 years across various business units in both North America and Europe. Past roles include Vice President and General Manager for Baldwin Hardware and Director of Marketing and Product Development for the DeWalt Industrial Power Tools, both divisions of Black & Decker Corporation. Mr. Birch received his B.A. in Business Management from Brigham Young University. Ira Kane Mr. Kane joined Boart Longyear in 2006 through the acquisition of the Prosonic Corporation, the nation’s largest provider of sonic drilling services, where he served as its President and COO. Prior to this, he served for nine years as President & COO of MPW Industrial Services Co. He also held the position of Executive Vice‑President of OHM corporation and was a practicing attorney in Columbus, Ohio. Mr. Kane received his BA from Hofstra University and his JD from Cleveland‑ State University. Joe Moody Mr. Moody was appointed as Vice President of Global IT in April 2009 alongside his role of Vice President, Global Engineering he has held since 2007. Prior to that, he held the role of Group Vice President and Chief Technical Officer for Teleflex, Inc. Past roles include serving in several managerial positions with Motorola, Inc. and General Motors. Mr. Moody received his BS in Electrical Engineering from GMI Engineering & Management Institute (now Kettering University), and an MBA from the University of Michigan. Joe Ragan Mr. Ragan was appointed Chief Financial Officer in 2008. Prior to joining Boart Longyear, he held the position of Chief Financial Officer for GTSI Corp., a leading technology solutions provider for the public sector listed on NASDAQ. He also held the position of Chief Financial Officer of U.S. Operations for Winstar Communications Inc., an international telecommunications company. Mr. Ragan received his BS in Accounting from The University of the State of New York his MS in Accounting from George Mason University and his CPA in the Commonwealth of Virginia. Fabrizio Rasetti Mr. Rasetti was appointed Senior Vice President, General Counsel and Secretary in 2006. Prior to joining Boart Longyear, he was a Segment General Counsel and Segment Vice‑President for Business Development for NYSE‑listed SPX Corporation and served in various other management roles during his nine‑years there. Prior to SPX Corporation, he worked in the private law firms of Howrey & Simon and Towey & Associates in Washington, DC. Mr. Rasetti received his BS in Foreign Service and JD from Georgetown University. Boart Longyear Annual Report 2009 Financial report Contents Directors’ Report Auditor’s Independence Declaration Independent Auditor’s Report Directors’ Declaration Consolidated Statement of Comprehensive Income (Loss) Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 21 23 49 50 52 53 54 55 56 58 This page has been left blank intentionally. 22 23 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED DIRECTORS’ REPORT The directors present their report together with the financial report of Boart Longyear Limited (“Boart Longyear” or the "Company") and its controlled entities (collectively the “Group” or the “Consolidated Entity”) for the financial year ended 31 December 2009 (“financial year”) and the Independent Auditor’s Report thereon. Financial results and information contained herein are presented in United States (“US”) dollars unless otherwise noted. DIRECTORS The directors of the Company in office during the financial year and as of the date of this report are set out below. � Graham Bradley � Bruce Brook � David Grzelak � Craig Kipp � David McLemore � Peter St George DIRECTORS’ MEETINGS Appointed 21 February 2007 Appointed 21 February 2007 Appointed 13 November 2008 Appointed 28 June 2008 Appointed 21 February 2007 Appointed 21 February 2007 The following table sets out for each director the number of directors’ meetings (including meetings of committees of directors) held and the number of meetings attended by each director during the financial year while he was a director or committee member. The table does not reflect the directors’ attendance at committee meetings in an “ex-officio” capacity. Directors Remuneration & Audit, Compliance Environment, Graham Bradley Bruce Brook Craig Kipp David McLemore Peter St. George David Grzelak Board of Directors Nominations Committee Held 7 Attended 7 Held 6 Attended 6 & Risk Committee Health & Held Attended Held Attended Safety Committee 7 7 7 7 7 7 7 7 7 7 6 6 6 6 7 7 7 7 7 7 4 4 4 4 4 4 In addition to the seven regular meetings of the Board, 35 special meetings were held during the course of the year. COMPANY SECRETARIES Fabrizio Rasetti was appointed Company Secretary on 26 February 2007. A summary of his work experience and qualifications is found on page 20. Paul Blewett was appointed Company Secretary on 21 October 2008. Prior to joining Boart Longyear he was General Counsel and Company Secretary for Hills Industries Limited (ASX:HIL). Prior to Hills Industries, he held a number of positions with other Australian Securities Exchange listed companies, following private legal practice for 8 years with Lynch Meyer, Adelaide, South Australia. Mr. Blewett received his LLB from the University of Adelaide in 1983. _______________________________________________________________________________________ 23 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED 24 PRINCIPAL ACTIVITIES The Company is a leading integrated provider of drilling services, capital equipment and consumable products for customers in the mining and minerals exploration, environmental and infrastructure, and energy industries. The Group conducts these activities through two operating divisions, known as the Global Drilling Services and Global Products divisions. The Global Drilling Services division operates in over 40 countries. It provides services to a diverse customer base and offers a broad range of drilling technologies, including, but not limited to, diamond core, underground, reverse circulation, rotary and sonic drilling. The Global Products division manufactures and sells capital equipment and consumables primarily to customers in the drilling services and mining industries globally. These products include rigs and products such as bits, rods and in-hole tools for exploration drilling, rock drilling and environmental, infrastructure and construction applications. The division also distributes a wide variety of products and supplies through its network of retail drill stores in the United States. Financial performance Financial performance across all business lines and geographic regions has been negatively affected by the global credit crisis and economic downturn. Results for the twelve months ended 31 December 2009 reflect a decrease in revenue and profits as a result of these and other causes. Total revenue for the twelve months ended 31 December 2009 was $978 million, a decrease of approximately 47% compared to $1,839 million for the prior year. Of the $860 million decrease in revenue during 2009, $503 million was attributable to a decrease in revenues in the Global Drilling Services division and $357 million was due to the Global Products division. Revenues were lower in each of the five geographic regions. In 2009, the Global Drilling Services division generated revenue of $737 million, down approximately 41% from the prior year. In particular, drill rig utilisation decreased and pricing was lower, but lower revenues were partially offset by lower operating costs and improved efficiency. In 2009, the Global Products division generated revenue of $241 million, down 60% from the prior year. The decrease was driven by lower sales volume caused by adverse market conditions that reduced the number of mineral drilling projects. Management aggressively cut costs to offset the steep decline in revenue. The Group continued the initiative begun late in 2008 to reduce operating costs through a series of restructuring activities. During the financial year, the Group incurred costs of $8 million for employee separation costs, as well as costs of $5 million related to occupancy reductions and other initiatives. 2009 general and administrative expenses of $117 million were down 35% from the prior year. Selling and marketing expenses of $71 million were down 40% from the prior year. Net profit (loss) after tax for the twelve months ended 31 December 2009 was a loss of ($15) million compared to a profit of $157 million in the prior twelve months ended 31 December 2008. The 2009 losses include restructuring expenses of $13 million and $17 million in one-time expenses (primarily non-cash) related to the capital raising program undertaken during the financial year. Tax benefit for the twelve months ended 31 December 2009 was $8 million compared to an expense of $75 million for the prior twelve months ended 31 December 2008. The 34.2% tax benefit compares favorably to the 32.2% tax expense reported in 2008, and takes into account the tax weighting of the corporate structure. Earnings (loss) per share in 2009 was (0.6) cents per share on a basic and diluted basis, compared to earnings per share on a basic and diluted basis of 10.4 cents for the prior year. DIVIDENDS No dividends have been paid or declared during the financial year. _______________________________________________________________________________________ 24 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED 25 SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS Capital Raising and Debt Repayment During the financial year, the Group executed a capital raising program that raised approximately $698 million. Proceeds from the capital raising were used to repay and retire the Group’s $585 million Term Loan A debt facility, to repay approximately $62 million of amounts previously drawn on its existing revolver facility, and to pay approximately $50 million of costs directly related to the capital raising. The Group recorded a pre-tax, one-time (primarily non-cash) charge of $17 million related to the capital raising, largely related to certain floating-to-fixed interest rate obligations. Divestiture of Operations During the financial year, the Group completed the sale of its Sub Saharan African manufacturing operations in Roodepoort, South Africa. The sale also included the buyer’s exclusive right to manufacture and sell certain of the Group’s percussive rock drills and hard rock tools in Sub Saharan Africa. The Group recognised a loss on the disposal of approximately $4 million. Other than the Company’s capital raising, debt retirement and divestiture listed above, in the opinion of the directors, there were no other significant changes in the state of affairs of the Group during the financial year. Enterprise Resource Planning System Implementation The Company has initiated a project to implement a new Enterprise Resource Planning (“ERP”) system. The ERP system will be an integral element of the Company’s management, reporting and control systems. The Company will transition to the new ERP system in a series of conversions scheduled to occur in 2010 and 2011. EVENTS SUBSEQUENT TO REPORTING DATE In the opinion of the directors, there has not arisen in the interval between the end of the financial year and the date of the report any matter or circumstance that has significantly affected, or may significantly affect, the Group’s operations, results or state of affairs in future financial years. FUTURE DEVELOPMENTS The Group intends to continue its principal activities related to providing drilling services and selling drilling capital equipment and consumable products while focusing on operating improvements, product development, cost management, cash generation and debt reduction. The Group may also elect to expand its product or service offerings through organic growth initiatives or strategic acquisitions. Further information about likely developments in the operations of the Group in future years, expected results of those operations, and strategies of the Group and its prospects for future financial years has been omitted from this report because disclosure of the information is likely to result in unreasonable prejudice to the Group. CORPORATE GOVERNANCE STATEMENT The Board believes that high standards of corporate governance are an essential prerequisite for creating sustainable value for shareholders. This statement summarises the main corporate governance policies and practices in place within the Group. Unless otherwise noted, the Company has followed the best practice recommendations set out in the ASX Corporate Governance Council’s Principles and Recommendations (the “ASX Guidelines”). The Company’s most significant governance policies, including Board and committee charters, may be found on the Company’s website at www.boartlongyear.com. _______________________________________________________________________________________ 25 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED 26 Role of the Board The Board charter sets out the powers and responsibilities of the Board. These include: providing strategic direction for, and approving, the Company’s business plans and objectives; � � monitoring the operational and financial position and performance of the Company; � establishing a sound risk management framework for the Company and ensuring that management takes reasonable steps to implement appropriate controls and otherwise mitigate risks; requiring that robust financial and other reporting mechanisms are put in place to provide adequate, accurate and timely information to the Board and shareholders regarding all material developments; appointing and evaluating the performance of the Chief Executive Officer, approving other key executive appointments and planning for executive succession; reviewing and approving remuneration for senior executives; approving the Company’s annual operating budget and business plans and monitoring the management of the Company’s capital, including any material capital expenditures, acquisitions or divestitures; � � � � � monitoring procedures to ensure compliance with legal and regulatory requirements and accounting standards; and determining the level of authority delegated to the Chief Executive Officer and Company management. � The Board has delegated to the Chief Executive Officer and to the Company’s Executive Management Committee (“EXCO”) responsibility for managing the business of the Company in compliance with Board policies, legal requirements and the fundamental standards of ethics and integrity reflected in the Group’s Code of Business Conduct. The Board policies and charters set clear thresholds for management authority and ensure accountability to, and oversight by, the Board or its committees for the approval of specific matters, including remuneration of senior executives, changes to the Company’s share capitalisation, declaration of dividends, the Company’s annual operating budget, material acquisitions and divestitures and changes to corporate strategy. Delegations are regularly reviewed by the Board and may be changed by the Board at any time. Composition of the Board At the date of this report, the Company has one executive director and five non-executive directors. Boart Longyear recognises that the ability of its Board to fulfill its role properly requires that the directors collectively have an appropriate range of skills, experience and expertise, including experience in accounting and financial reporting, operational expertise and experience in the markets the Group serves, and that a majority of the directors are independent. In assessing the independence of non-executive directors, the Board has considered the criteria detailed in the Board charter, including, whether a director: � � � � � � is a substantial shareholder of the Company, or otherwise is associated directly or indirectly with a substantial shareholder; has been employed in an executive capacity by the Company or Group within the last three years and did not become a director within three years of being so employed; has been a principal of a material professional advisor or a material consultant to the Company or Group within the last three years; is a partner in, or material shareholder or officer of, a material supplier or customer of the Company or Group; has a material contractual relationship with the Company or Group other than as a director; and has received more than A$100,000 from the Company or Group during the past year other than as compensation for the director fulfilling his duties as a director. The charter also defines materiality as being an amount in excess of 5% of Boart Longyear’s or the advisor’s, supplier’s or customer’s revenues or expenses, as the case may be. The Board meets the requirements of the charter and the recommendations of the ASX Guidelines as a majority of the Board is comprised of non-executive directors and all non-executive directors, including the Chairman, meet the independence criteria listed above. _______________________________________________________________________________________ 26 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED 27 Board Processes The Board meets at least six times a year and convenes additional meetings as required. The agenda for Board meetings is prepared by the Chief Executive Officer and other senior management in conjunction with the Chairman and, along with supporting papers, is distributed to directors prior to each meeting. Certain senior executives participate in Board and committee meetings, thus providing the directors with access to key operating, financial and compliance personnel on a regular basis. In addition, the directors have access to other Company employees in Board and committee meetings, during visits to operations and in other settings. Board Committees The Board has three permanent committees to assist it in discharging its responsibilities. These are the: � Audit, Compliance & Risk Committee; � Remuneration & Nominations Committee; and � Environment, Health & Safety Committee. These committees have written charters that are reviewed annually. All non-executive directors may attend any committee meeting. The Chairman of each committee reports on committee proceedings at the next Board meeting and minutes of committee meetings are circulated to directors in the Board papers. Audit, Compliance & Risk Committee The Audit, Compliance & Risk Committee assists the Board to fulfill its governance and disclosure responsibilities in relation to the quality and integrity of the Company’s financial reports, internal controls, risk management framework and external audits. The committee also monitors compliance with laws and regulations. The committee makes recommendations to the Board regarding the appointment, performance and independence of the external auditor and must approve all non-audit services performed by the external auditor. The committee is comprised of three non-executive directors, all of whom are independent directors and at least one of whom has relevant accounting qualifications or experience. The members of the committee during and since the financial year are: � Bruce Brook – Chairman � Peter St George � David Grzelak Remuneration & Nominations Committee The Remuneration & Nominations Committee supports the Board by overseeing matters related to executive and director remuneration and the composition and performance of the Board. The committee’s responsibilities include: � � � � developing and reviewing remuneration plans, including annual bonus plans and long term incentive plans, including equity-based incentive plans; developing performance objectives for the Chief Executive Officer and his direct reports and reviewing performance against those objectives; overseeing policies for recruitment, retention and succession planning for directors and key executive positions; and reviewing the composition of the Board and monitoring the performance of the Board and the directors. The committee consists of the following three non-executive directors: � Peter St George – Chairman � Graham Bradley � David McLemore _______________________________________________________________________________________ 27 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED 28 Environment, Health & Safety Committee Boart Longyear places a high priority on safety, management of operational risks and compliance with environmental laws and regulations. The Environment, Health & Safety Committee assists the Board in the effective discharge of its responsibilities in relation to these matters and has authority to investigate any matter within the scope of the committee’s charter. Among its responsibilities, the committee: � � � ensures that the Company has effective systems and processes for monitoring and mitigating operational risks; reviews and assesses the Company’s policies and practices to ensure compliance with environmental and operational regulatory requirements, including through internal and external audits; and reviews the results of investigations of any major health, safety or environmental incidents occurring in the Company’s operations. The committee consists of the following three non-executive directors: � David McLemore – Chairman � Bruce Brook � David Grzelak Board and Director Performance The Board has a formal annual assessment process that includes performance assessments of the Board committees and individual directors. As part of the assessment process, each director completes a questionnaire on the operation of the Board and its committees and the performance and contributions of the directors. The results of the questionnaires are compiled by the Chairman and discussed with each director individually. The Chairman also holds a further discussion about the Board’s effectiveness with the Board as a whole. The Board effectiveness evaluation took place this year between June and December 2009. New directors undergo an induction process to inform them of the nature of the Company’s business, strategies, risks and issues, and expectations about director performance, including awareness of continuous disclosure principles. The terms of a non-executive director’s appointment are set out in a letter to the director from the Company. The letter details the director’s obligations, including to: � � � � � � � act in the best interests of the Company at all times; submit to re-election from time-to-time as required by the Company’s constitution; notify the Chairman of any change in circumstances that might prevent the director from being regarded as independent; comply with the Company’s constitution, governance policies and all applicable legal requirements, including the Company’s Securities Trading Policy; devote sufficient time to prepare for and attend Board meetings and otherwise to discharge the director’s duties; keep confidential, and not use for the benefit of any person or party other than the Company, any confidential information of the Company or Group; and disclose any directorships, business interests or circumstances that might represent conflicts of interests or reasonably be perceived to interfere with the exercise of the director’s independent judgment, or have an adverse impact on the Company’s reputation or public profile. The appointment letter also confers certain benefits and rights upon the director, including indemnities and insurance coverage for liabilities arising out of the discharge of the director’s duties and unfettered access to papers, information and employees of the Company. In addition, directors may, with the approval of the Chairman, consult with professional advisors. Executive Performance The Company employs a structured performance evaluation process to ensure that senior executives are motivated to deliver shareholder value and are accountable to the Board at all times. The process commences early each financial year when the Board establishes and approves corporate performance objectives as well as individual performance objectives for the most senior managers of the Company. As detailed more fully in the Remuneration Report, performance against those objectives determines the potential incentive the executive may receive under the Company’s annual bonus plan. The Chief Executive Officer’s annual incentive is based 100% on the achievement of the annual corporate performance objectives approved by the Board. Other senior managers of the Company have individual _______________________________________________________________________________________ 28 29 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED performance objectives that account for 50% of the total annual bonus for which they are eligible and the annual corporate performance objectives account for the balance. The Company’s executive performance assessment process for 2009 and goal-setting process for 2009 commenced in January 2009 and was completed in March 2009. Risk Management The Board recognises that risk management and internal controls are fundamental to good corporate governance, and the Board and senior management accept their responsibility to identify and manage risk on an ongoing basis. The Company’s risk management framework consists of a number of controls, including: � � � � documented systems, procedures, authorities and delegations for the orderly management of the Company; policies and ethical standards, and ensuring that employees understand such obligations; risk-based internal audits to test the Company’s controls and assist management with the enforcement of Company policies; and certifications from management and process owners throughout the Company regarding the design and operation of risk management systems, internal controls and compliance. The Board is assisted and advised in its oversight of the Company’s risk management system by two of its committees: the Environment, Health & Safety Committee with respect to operational risks generally and the Audit, Compliance & Risk Committee with respect to financial, compliance and other risks. Those committees review the annual audit plan of the Company’s internal audit function and Environment, Health & Safety group, and, along with senior management, consider the findings of those audits. The Audit, Compliance & Risk Committee also monitors compliance programs managed by the Company’s legal function and reviews the significant findings of any compliance reviews or investigations. The Company also has implemented a formal risk management system based on a written risk management policy and the findings of Company audits and investigations. The system is managed by the corporate Director of Risk Management, who, among other tasks, directs regular regional and corporate risk identification and mitigation reviews and assists in tracking corrective actions. Integrity of Financial Reporting In accordance with the ASX Guidelines, the Chief Executive Officer and Chief Financial Officer have certified the following (among other detailed certifications) to the Board in writing: 1) in their opinion, after having made appropriate enquiries, with regard to the integrity of the financial statements of the Company for the year ended 31 December 2009: (i) (ii) the financial statements of the Company and Consolidated Entity for the financial year comply with Accounting Standards and have been properly maintained in accordance with section 286 of the Corporations Act 2001; the financial reports of the Company and Consolidated Entity, and notes thereto, present a true and fair view, in all material respects, of the financial position and performance of the Company and of the Consolidated Entity in accordance with section 297 of the Corporations Act 2001; and (iii) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2) to the best of their knowledge and belief after having made appropriate enquiries, with regard to risk management and internal control systems of the Company for the year ended 31 December 2009: (i) (ii) the statements made in (1) above regarding the integrity of the financial statements are founded on a sound system of risk management and internal compliance which, in all material respects, implements the policies adopted by the Board of Directors; the risk management and internal compliance system, to the extent it relates to financial reporting, is operating effectively in all material respects based on the risk management model adopted by the Company; and (iii) nothing has come to management’s attention since 31 December 2009 that would indicate any material change to the statements made in 2(i) and 2(ii) above. _______________________________________________________________________________________ 29 30 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED These statements are supported by certifications made to the Chief Executive Officer and Chief Financial Officer by the financial managers of each of the Company’s divisions and regions and by other managers globally. They provide a reasonable but not absolute level of assurance and do not imply a guarantee against adverse events or more volatile outcomes arising in the future. A number of internal control deficiencies relating to financial reporting have been identified during the financial year, and in such cases, where deemed appropriate, additional tests of procedures or tests of resulting account balances included in the financial statements have confirmed that there has been no material impact on the financial reports. Management also has reported to the Board as to the effectiveness of the Company’s management of material business risks. Code of Business Conduct and Ethical Standards Boart Longyear’s directors, management and employees are required to act with integrity at all times and maintain high ethical standards. The Company has adopted a Code of Business Conduct that covers a broad range of matters, including: � � � � � � � � conflicts of interest and the preservation and proper use of Company assets; protection of confidential and commercially sensitive information; employment legislation; competition law and fair dealing; environmental, health and safety considerations; improper payments, bribery and money laundering, including transactions with government officials; financial reporting and record-keeping; and each employee’s affirmative duty to report violations of policy or law. The Code of Business Conduct is available on the Company’s website at www.boartlongyear.com. The Company supplements the Code of Business Conduct with additional policies that provide more detailed guidance on substantive legal requirements and other principles and requires employees to successfully complete assigned compliance training courses on an ongoing basis. Environmental Performance Boart Longyear is committed to achieving a high standard of environmental performance. The Company’s operations are subject to various environmental laws and regulations in the many jurisdictions in which it operates, including regulations under both Commonwealth and state legislation in Australia. The Board, with the assistance of the Environment, Health & Safety Committee, monitors environmental performance against relevant legislation and Company objectives and monitors remedial action when required. The directors are not aware of any business unit operating in breach of environmental regulations during the financial year and to the date of this report under any applicable law of the Commonwealth or of a State or Territory. Continuous Disclosure The Board aims to ensure that all of its shareholders and the market in general are kept fully and promptly informed of all major developments and changes that are likely to materially affect its operations, financial results and business prospects. The Company’s External Communications Policy specifies how the Company will meet its continuous disclosure obligations under ASX Listing Rule 3.1 and sets out procedures for Company employees to report potentially price-sensitive information to management and the Board. The Company produces financial statements for its shareholders and other interested parties twice per year. Shareholders have the right to attend the Annual General Meeting in May and are provided with an explanatory memorandum on the resolutions proposed through the Notice of Meeting. The Company also has an investor relations function to manage and assure prompt and relevant communications with shareholders and the market generally, and the Company posts material information for its shareholders, such as ASX announcements and financial results, on its website at www.boartlongyear.com. Donations Boart Longyear contributes to the communities in which it works with donations, sponsorship and practical support. The Company does not make political donations. _______________________________________________________________________________________ 30 31 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED DIRECTORS’ SHAREHOLDINGS The following table sets out each director’s relevant interest in shares, debentures, and rights or options over shares or debentures of the Company or a related body corporate as at the date of this report. Directors Graham Bradley Bruce Brook David Grzelak David McLemore Peter St. George Craig Kipp Fully paid ordinary shares 4,552,146 Restricted shares, 1 rights and options 491,891 998,272 10,000 1,158,609 1,001,515 5,214,626 45,945 - - 72,972 5,694,710 2 Total 5,044,037 1,044,217 10,000 1,158,609 1,074,487 10,909,336 (1) The non-executive directors’ restricted shares as listed in the table above, although fully paid ordinary shares, are subject to a vesting condition of three years’ service by the directors. Certain of the 5,694,710 restricted shares and options listed for Mr. Kipp are performance share rights granted under the Long-Term Incentive Plan and thus are subject to a performance condition as well as a service condition (2) Mr. Kipp was awarded 900,000 share options on 18 June 2009 by the Board, subject to shareholder approval. Should shareholder approval not be received, the Company is legally committed to provide other compensation of equal value to Mr. Kipp. GRANTS OF SHARES, RIGHTS OVER SHARES AND OPTIONS GRANTED TO DIRECTORS AND EXECUTIVES The shares or rights over shares of the Company that have been granted to directors or executives of the Group are included in the Remuneration Report. Options over unissued shares of the Company have been granted to the Chief Executive Officer, Mr. Kipp, and certain other executives, as detailed in the Remuneration Report. No shares or interests have been issued during or since the end of the financial year as a result of exercise of an option. DIRECTORS' AND OFFICERS’ INTERESTS IN CONTRACTS Except as noted herein, no contracts involving directors' or officers’ interests existed during, or were entered into since the end of the financial year other than the transactions detailed in Note 34 to the financial statements. PROCEEDINGS ON BEHALF OF 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 financial year. _______________________________________________________________________________________ 31 32 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED REMUNERATION REPORT The information provided in this Remuneration Report is that required under Section 300A of the Corporations Act. This Report sets out the remuneration arrangements for the Key Management Personnel (KMP), who are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, including any director (whether executive or otherwise). The KMP include the top five highest-paid executives. The remuneration policy and programs detailed in this report also apply to senior Company management not included as KMP. The following individuals have been included as KMP during the financial year: � Graham Bradley - Chairman, Non-executive director � Bruce Brook - Non-executive director � David McLemore - Non-executive director � Peter St George - Non-executive director � Craig Kipp - Chief Executive Officer and Executive director � � Brad Baker - Senior Vice President, Human Resources � � Scott Alexander - Vice President of Global Drilling Services (employment ended 31 December 2009) � Michael Birch - Vice President of Global Products Fabrizio Rasetti - Senior Vice President, General Counsel and Company Secretary Joseph Ragan III - Chief Financial Officer Remuneration Policies and Practices The Board has ultimate responsibility for remuneration issues, including policies and procedures to ensure that the Company remunerates fairly and responsibly. The Remuneration & Nominations Committee (“Remuneration Committee”) has been established to assist the Board with remuneration issues and is responsible for ensuring that the Company compensates appropriately and consistently with market practices. It also seeks to ensure that the Company’s remuneration programs and policies will attract and retain high-calibre directors, executives and employees and will motivate them to maximise the Company’s long-term business, create value for shareholders and support the Company’s goals and values. The role and responsibilities of the Remuneration Committee are set out in its charter. The Chief Executive Officer, the Senior Vice President for Human Resources and other members of senior management attend meetings of the committee, as appropriate, to provide information necessary for the committee to discharge its duties. In addition, the committee also has access to external consultants as it sees fit to provide advice, market data and other information required. Overall, the structure, quantum and mix of components of the Company’s remuneration program, detailed below, are designed to meet the specific needs of the business and be consistent with good market practice. The Company and Remuneration Committee will regularly review all elements of its remuneration framework to ensure that they remain appropriate to the business strategy and are competitive and consistent with contemporary market practice. Non-Executive Director Remuneration Non-executive directors are remunerated by a fixed base fee with additional amounts paid for serving on Board committees. Non-executive director fees are determined within an aggregate directors’ fee pool limit that periodically will be approved by shareholders in general meeting. The current approved limit is A$2.0 million. Fees are set to reflect the responsibility and time commitments required of non-executive directors and are reviewed annually to ensure that they remain fair and consistent with market practice. _______________________________________________________________________________________ 32 33 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED The base fee for non-executive directors during the financial year was US$100,000 per annum, while the Chairman received a base fee of US$300,000 per annum. Non-executive directors (other than the Chairman) receives an additional 10% of the base fee for each Board committee on which they sit or 20% of the base fee for each committee they chair. Compulsory superannuation payments for Australian-resident non-executive directors are included in the base fee and additional committee fees. In 2009, given the financial difficulties the Company faced as a result of the economic downturn, the directors elected to reduce their compensation by 10% from 1 March 2009 through 31 December 2009. Effective 1 January 2010, the directors’ fees were restored to the pre-reduced amounts indicated above. During the financial year, $746,912 of the pool was utilised for non-executive director fees, being approximately 48% of the fee pool limit. Non-executive directors also are reimbursed for all reasonable out-of-pocket expenses incurred in carrying out their duties, including travel costs and office and secretarial support. They do not receive any retirement benefits other than statutory superannuation contributions or any performance-related remuneration, such as management short-term and long-term incentive awards. Non-Executive Director Share Acquisition Plan In February 2008, the Committee recommended, and the Board approved, the establishment of a Non-Executive Director Share Acquisition Plan (NEDSAP) as foreshadowed in the Company’s prospectus. The NEDSAP is a fee sacrifice plan in which only non-executive directors may participate. Participation in the NEDSAP is voluntary, and non-executive directors may elect to sacrifice up to 100% of pre-tax fees to acquire ordinary shares at the prevailing market price. Shares acquired under the NEDSAP will be subject to a holding lock for up to ten years. The holding lock may be removed in certain circumstances, including a cessation of directorship. There have been no shares purchased under this plan during the financial year ended 31 December 2009. During the year ended 31 December 2008 there were 200,985 shares purchased under this plan. Executive Remuneration There are several components of remuneration provided to reward executives, presenting a balance of fixed and at-risk pay, as well as short and longer term rewards. Consistent with market practice, the proportion of remuneration attributable to each component depends on the executive’s seniority. These components are as follows: Fixed Remuneration Base Salary At-risk Remuneration Short-Term Incentive - Corporate Bonus Plan (“CBP”); and Long-Term Incentive Plan (“LTIP”) - share rights, cash rights and share options The Company’s executive remuneration has been structured to ensure that it: � � � � is reasonable; provides a competitive compensation program to retain, attract and reward key employees; achieves clear alignment between total remuneration and delivered business and personal performance over the short and long terms; and is an appropriately balanced mix of fixed and at-risk compensation. The Company places great importance on the need to retain key employees, thereby avoiding disruption to operations. Accordingly, the use of both time-based and performance-based rewards is designed to ensure the Company’s leadership is retained and delivers sustainable, long-term shareholder returns. The directors believe that the at-risk components of the remuneration framework will effectively align senior management’s interests with those of shareholders. _______________________________________________________________________________________ 33 34 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED The Directors believe that the achievement of certain performance objectives by executives of the Company links the remuneration policy to the Company achieving its targeted performance objectives. The Company has only been a public company since 11 April 2007 and therefore does not have a five-year history to present. An analysis of the past three years’ remuneration and performance achievement has demonstrated the correlation between the short-term incentives (CBP) and the Company’s achievement of its targeted performance objectives. For the 2009 plan year, the executive KMP will receive between 85% and 100% of their target bonus amount. For the 2008 plan year, the executive KMP received between 79% and 90% of their target bonus amount. Mr. Ragan received 100% for the 2008 year due to a one- time commitment made in his employment agreement. In both years, management remuneration under the CBP directly tracked to corporate financial targets established for those years, which represented between 50% of the bonus payable to senior executives and 100% of the bonus payable to the Chief Executive Officer. The table below shows summary information about the Company’s earnings and movements in shareholder wealth for the last three years to 31 December 2009: 2009 US$'000 2008 US$'000 2007 US$'000 Revenue Net profit (loss) after tax Share price at start of period Share price at end of year Basic and diluted earnings (loss) per share Dividends per share 978,177 (14,883) A$0.20 A$0.35 (0.6) cents None 1,838,538 156,724 A$2.35 A$0.20 10.4 cents 3.8 cents 1,575,737 81,115 A$1.87 A$2.35 5.4 cents None The relative proportions in 2009 of the elements of executive compensation that are fixed and incentive based are: Executive Management Craig Kipp Short-term 1 37% Long-term 2 11% Short-term 3 43% Long-term 4 9% incentive based 52% Fixed Incentive Total Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker 48% 49% 67% 48% 49% 10% 16% 4% 16% 16% 35% 23% 29% 25% 24% 7% 12% 0% 11% 11% 42% 35% 29% 36% 35% (1) Short-term fixed compensation includes salary and other benefits such as automotive allowances. One-time items such as sign-on bonuses and special cash awards are excluded from the calculations. Mr. Alexander’s termination benefits were a one-time item and are therefore excluded from the table. (2) Long-term fixed compensation includes post-employment benefits and the 50% of the LTIP compensation that vests only based on service. For Mr. Kipp, the 2,500,000 share options granted to him in conjunction with his acceptance of the chief executive officer position were one-time grants and are therefore excluded from long-term compensation. (3) Short-term incentive compensation includes the annual bonuses under the Corporate Bonus Plan. (4) Long-term incentive compensation includes the 50% of the LTIP awards that vest based on both performance and service conditions. _______________________________________________________________________________________ 34 35 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED Fixed Remuneration The fixed component of executive compensation consists primarily of base salary. The executive KPMs also receive other benefits, such as a vehicle allowance. In addition, the Company contributes to retirement programs, such as Australia’s Superannuation Guarantee system and the United States’ 401(k) plans. The level of fixed compensation paid to employees is based on market standards and also takes into account a variety of factors, including an individual’s experience, the unique skills required to perform their role and their particular contribution to the Company. In 2009, given the financial difficulties the Company faced as a result of the global economic downturn, the Group’s executives, including the KMPs, elected to voluntarily reduce their base salaries by 10% from 1 March 2009 through 31 December 2009. The CEO elected to reduce his base salary by 15% from 1 January 2009 through 31 December 2009. Effective 1 January 2010 all executives’ base salaries were restored to their pre-reduced amounts. At-risk Remuneration At-risk remuneration includes both short-term and long-term incentives. Short-term Incentives The Company has established its Corporate Bonus Plan (“CBP”) to provide incentives for certain of its employees to achieve specific annual objectives that are determined by the Board on an annual basis. The CBP aims to: � � � focus employees on achieving key financial, safety and operational targets; align individual efforts with annual operating performance objectives; and reward superior individual and Company performance. The CBP rewards senior executives and other participants for their achievement during a financial year of specific key performance indicators for the Company as well as for the achievement of performance goals specific to the business unit or function for which they are responsible. The incentive earned under the CBP, if any, will vary depending on relative performance against a variety of targets, as detailed more fully below. Except in certain circumstances, all participants in the CBP must remain employed with the Company on the date incentives are paid to receive any award. The potential incentives available under the CBP range between 10% and 100% of an employee’s base salary depending on the employee’s role. Of that potential incentive, 50% is linked to the Company’s financial performance, and 50% is linked to operational or functional objectives relevant to the employee’s business unit or function, such as meeting sales targets, staying within expense budget or meeting other individual commitments. Additionally, certain conditions may reduce, but not increase, incentives under the CBP, including failure by a participant’s business unit to achieve target safety metrics (which can reduce the overall incentive payable under the CBP by up to 10%) and a participant’s failure to adhere to corporate leadership values, such as legal compliance (which can reduce the incentive payable under the CBP by up to 100%). The Remuneration and Nominations Committee approves the Company’s annual financial targets for the CBP. Targets are set at both “threshold” and “stretch” levels. The committee also reviews non-financial targets for the CEO and his direct reports. The committee’s philosophy in setting financial targets is to establish “threshold” targets that represent the desired minimum outcome for each goal and “stretch” targets that are realistically achievable with excellent execution of the Company’s annual plan. At the end of the financial year, the committee assesses the level of achievement against financial and non-financial targets. The final determination of performance measures is determined after reviewing the Company’s audited financial results. The financial performance indicators adopted by the Board in 2009 as the most appropriate measures in the financial year for determining the incentives payable under the CBP were earnings before interest, taxes and depreciation and amortisation (EBITDA), sales, general and administrative expenses (SG&A) and cash generation. These performance metrics and targets were selected in order to focus executives on strict and aggressive management of expenses and cash generation which is critical during a severe economic and market segment downturn. Faced with rapidly declining revenues brought on by the market decline, it was determined that establishing the EBITDA and SG&A metrics as a percentage of sales was the most appropriate measure. In addition, it was critical that the Group generate cash in order to finance the ongoing needs of the business during the decline. Therefore, the cash target was set as an absolute dollar measure. For 2009, all stretch financial targets were exceeded. Achievement of individual operating or functional objectives were evaluated and determined on an individual functional, divisional or regional basis. _______________________________________________________________________________________ 35 36 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED Long-term Incentives The Company has established a Long-term Incentive Plan (“LTIP”) to assist in retaining key executives, encouraging superior performance on a sustained basis, and providing such executives with an opportunity to share in the growth and value of the Company. The incentive provided under the LTIP in 2009 was an annual grant of rights (“Rights”) that vest based on the satisfaction of performance-based and/or time-based conditions. Rights can be granted in the form of shares (“Share Rights”), cash (“Cash Rights”) or a combination thereof. Share Rights convert to ordinary, fully paid shares on a one-for-one basis. The executives eligible to participate in the LTIP are senior divisional, regional and corporate executives. The target value of annual LTIP grants varies depending on the participant’s position. The target amounts are based on market averages for comparable roles at similarly-sized companies. The Company made grants to approximately 110 participants in 2009. Under the terms of the LTIP in 2009, participants received a specified number of Share Rights and/or Cash Rights that will, when vested, result in the participant receiving ordinary shares in the Company and/or cash at no cost to the participant. The Company may acquire shares underlying the share grants, and the price paid by the Company will be the prevailing market price of the shares at the time of acquisition. The acquired shares will be held in trust, and the participant will receive dividends paid on those shares from the time of acquisition until vesting. Shares acquired in respect of grants which do not vest will be held by the trustee and will be available for issue in respect of future grants for the Australian trust. Under the US trust, shares held in respect of grants which do not vest, or are forfeited, must be sold within 60 days of forfeiture. In 2009, the Board of Directors amended the LTIP to allow for the grant of Cash Rights. The primary reason for introducing this feature was to allow LTIP grants to continue to provide market competitive incentives despite the Company’s depressed share price. Otherwise, LTIP grants would have involved excessively large grants of Share Rights to provide appropriately valued long-term incentive awards. Also in 2009, the Board revised the terms of the 2008 Performance Share Rights to permit, at the discretion of the Board, a fourth “retesting” year in measuring cumulative EPS performance achievement. The revision applies to the 2008 Performance Share Rights and will only be exercised if the Company has not achieved its cumulative EPS performance threshold for the 2008 awards after the initial three year measurement period. The tranches of Rights granted under the LTIP and the vesting conditions attaching to each are as follows: Tranche Performance Share Rights or Performance Cash Rights Percentage of Grant 50% for CEO and executives who report directly to the CEO Retention Share Rights or Retention Cash Rights 50% for CEO and executives who report directly to the CEO Vesting Condition Partial Vesting Achievement of the cumulative earnings per share (“EPS”) targets set by the Board at a level the Board considers demanding. The targets include a “threshold” EPS target and a “stretch” EPS target for each financial year during the three-year performance period. Vesting will be determined by the Company’s performance against cumulative EPS targets for the performance period. plus Continuation of employment during the performance period and until the third anniversary of the grant date. Continuous employment from the grant date and until the third anniversary of the grant date. Yes. Vesting occurs on a pro-rata basis if the cumulative three-year minimum EPS threshold is surpassed. At the minimum cumulative EPS threshold, 50% of Performance Share and/or Performance Cash Rights will vest. Full vesting occurs only if the Company’s cumulative EPS meets or exceeds the cumulative “stretch” EPS target for the performance period. No, except in certain special circumstances such as death, redundancy, retirement, change of control or other circumstances considered by the Board in its absolute discretion to be extraordinary. In such circumstances, the Board will determine whether all or some portion of the outstanding rights will vest. _______________________________________________________________________________________ 36 37 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED The following table shows the threshold and target performance requirements as well as the actual performance achieved for the EPS performance metric associated with the LTIP performance share rights. 2008 2009 Threshold EPS Performance 3.68 cents 0.00 cents Target EPS Performance 4.27 cents 0.68 cents Actual EPS 1 Performance 3.60 cents 0.003 cents (1) Earnings adjusted to exclude impact of restructuring, recapitalisation and related charges, as well as gains/losses related to the sale of businesses. The above targets and thresholds have been realigned from those originally set to reflect the new number of outstanding shares in issue. Stock Options In 2009, the Board approved the Boart Longyear Limited 2009 Option Plan (“2009 Plan”) to bolster executive retention. The 2009 Plan authorised the grant of no more than 5,000,000 options as was intended as a one-time benefit. Under the 2009 Plan, the company awarded non-qualified share options to the CEO and granted non-qualified share options to senior executives, including the KMPs. The options were granted on 18 June 2009 at an original exercise price of A$0.30 per option. The exercise price was set at a premium of 22.5% to the prevailing market price for the Company’s shares on the date of the grant. The options will vest in full and become exercisable on 18 June 2012 if the executive remains continuously employed with the Company until that date. Unexercised options will expire on 18 June 2014 and no longer be exercisable. Details of individual option awards under the 2009 Plan can be found on page 44. Subsequent to the original grant date and in accordance with the ASX listing rules, the Company’s Board of Directors modified the share option exercise price to reflect the dilution impact resulting from the Company’s 2009 capital raising program and the related issuance of additional shares subsequent to the original grant date. Refer to page 45. Employee and Director Trading in Company Securities The Company has adopted a Securities Trading Policy for its directors and employees. The policy prohibits trading in the Company’s stock at any time if a person is in possession of material, non-public information. In addition, it prohibits short- term trading and dealing in derivative securities and establishes “black-out” periods from 1 July and 1 January of each year until such time as the Company’s half-year and full-year results are made public. The policy prohibits any director or employee from entering into transactions that limit the economic risk of participating in unvested entitlements under the Company’s equity-based remuneration schemes and it also requires directors to immediately disclose any Company shares purchased on margin if a director were likely to sell Company shares in response to the financier’s demand for repayment. Further, when trades are allowed under the policy, non-executive directors and the Chief Executive Officer may only trade in the Company’s shares with the consent of the Chairman, and executive officers and other designated employees must obtain the consent of the Company’s General Counsel prior to any trade. The Chairman must obtain the consent of the Chairman of the Audit, Risk & Compliance Committee to trade in the Company’s shares. _______________________________________________________________________________________ 37 I I D E T M L R A E Y G N O L T R A O B t r o p e R l a i c n a n F i l a u n n A 9 0 0 2 R E B M E C E D 1 3 y r a m m u S n o i t a r e n u m e R l a t o T d e s a b $ % - e r a h S s n o i t p O s t h g R & i $ - i m r e T n o i t a n - g n o L m r e t - g n o L m r e t - g n o L m r e t s e r a h S s t i f e n e b 4 e c n a m r o f r e p 4 n o i t n e t e r s t i f e n e b r e h t O $ $ $ $ $ $ r e p u S - a u n n a 3 n o i t $ 2 , 1 r e h t O $ l a u n n A s u n o B $ y r a l a S s e e F & $ n o i t a s n e p m o c d e s a b - h s a c - n o N 8 n o i t a s n e p m o c d e s a b - e r a h S n o i t a s n e p m o c d e s a b - h s a C r e h t O s t i f e n e b t n e m y o p m e - t s o P l s t i f e n e B m r e T t r o h S 9 0 0 2 9 5 2 , 8 2 5 2 7 4 , 3 4 1 0 0 0 , 0 1 1 7 6 1 , 9 1 1 3 4 2 , 7 5 1 1 4 1 , 8 5 0 , 1 % 4 . 7 4 % 3 . 6 1 % 0 . 0 % 0 . 0 % 6 . 3 2 - 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- - - 4 3 7 , 1 1 4 6 2 , 4 3 - 6 5 7 , 0 1 3 0 3 , 1 6 8 3 4 , 6 3 1 7 , 5 - 0 0 9 , 6 0 0 9 , 6 0 0 9 , 6 0 0 9 , 6 0 0 9 , 6 5 7 2 , 4 5 1 5 1 5 1 - - 4 6 2 , 4 3 8 6 0 , 2 2 8 6 0 , 2 2 7 1 5 , 0 8 0 8 5 , 4 1 0 8 5 , 4 1 1 5 4 , 5 5 5 6 4 , 7 6 1 9 , 7 1 1 5 4 , 5 8 - - - - - - - - - - - - - - - - ) 0 0 6 , 2 1 ( ) 4 7 4 , 3 ( 2 7 2 , 3 4 ) 5 7 7 , 9 5 1 ( - - - 4 1 4 5 1 2 7 , 3 0 6 5 2 7 , 3 9 6 4 0 5 , 2 4 5 3 2 1 , 9 5 6 1 5 1 , - - 8 4 1 4 7 , 1 0 0 5 4 1 , 1 1 1 1 8 7 8 0 0 3 , 0 8 3 0 3 1 , 6 4 8 6 3 1 , 0 8 3 0 3 1 , 0 7 2 4 1 , 5 1 5 9 1 1 , 9 6 2 2 3 8 , 6 3 1 8 1 9 , 0 9 7 5 7 7 , 7 7 0 3 0 1 , 7 7 9 6 9 2 , 0 7 4 1 5 3 , 9 2 4 3 2 2 , 5 2 0 8 4 1 , 5 2 0 4 2 3 , 0 5 2 6 6 1 , 0 0 0 , 5 4 0 0 0 , 5 4 0 0 0 , 3 5 1 0 0 0 , 3 5 1 5 7 7 , 2 4 5 7 7 , 2 4 6 2 9 , 0 5 9 2 2 , 2 1 1 6 9 0 , 0 2 3 0 6 3 , 4 5 3 ) 7 7 5 , 2 3 1 ( ) 7 7 5 , 2 3 1 ( , 0 0 8 6 9 7 1 , , 9 7 1 7 0 3 3 , , 0 0 8 6 9 7 1 , , 8 4 4 9 3 1 4 , * s r o t c e r i D e v i t u c e x E - n o N l y e d a r B m a h a r G k o o r B e c u r B e r o m e L c M d v a D i e g r o e G . t S t r e e P 3 1 1 1 l k a e z r G d v a D i l y e d n a H f f o e G l a t o T * * t n e m e g a n a M e v i t u c e x E 6 r e n n u r B l u a P 7 I I I n a g a R h p e s o J r e d n a x e A l t t o c S i p p K g a r C i 8 l n a o D e c n a r r e T 9 n o s n h o J k c i r t a P i t t e s a R o z i r b a F i 0 1 r e k a B d a r B L A T O T l a t o T h c r i B l e a h c M i . d e t i m L i r a e y g n o L t r a o B y b l d e y o p m E * . f o e r e h t e t a i l i f f a s e t a t S d e t i n U d e t s i l n u r e h t o n a r o , n o i t a r o p r o c s e t a t S d e t i n U d e r e t s g e r - e r a w a e D d e t s l i i l n u n a , ) ” I H L “ ( . c n I i , s g n d o H l r a e y g n o L y b d e y o p m E * * l 40 0 4 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ D E T I M I L R A E Y G N O L T R A O B t r o p e R l a i c n a n i F l a u n n A 9 0 0 2 R E B M E C E D 1 3 g n i s o l c s i d m o r f t c a r t n o c e c n a r u s n i s t i y b d e t n e v e r p s i y n a p m o C e h T . e c n a r u s n i y t i l i b a i l ’ s r e c i f f o d n a ’ s r o t c e r i d r e d n u s e i t u d r i e h t f o e c n a m r o f r e p e h t n i d e r r u c n i s e i t i l i b a i l t s n i a g a d e r u s n i e r e w P M K e h T . 8 0 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o f 7 7 5 3 8 . 0 $ S U = 1 $ A f o e t a r e g n a h c x e e g a r e v a n a n o d e s a B l a i t n e t o p a o t d e t a l e r y n a p m o C e h t o t d e d i v o r p s e c i v r e s g n i t l u s n o c r o f 4 6 2 , 4 3 $ S U d i a p s a w e g r o e G t S r e t e P . n o i t a s n e p m o c h s a c m r e t - t r o h s r e h t o d n a s e s u n o b n o - n g i s , s e c n a w o l l a e v i t o m o t u a s e d u l c n I . e g a r e v o c h c u s r o f d i a p s m u i m e r p . n o i t i s i u q c a e h t r o f e s n e p x e e h t s i e l b a t s i h t n i t n u o m a e h T . 7 0 0 2 l i r p A n i g n i t s i l s ’ y n a p m o C e h t o t p u d a e l e h t g n i r u d d n a o t r o i r p d e m r o f r e p k r o w f o t c e p s e r n i s r o t c e r i d e v i t u c e x e - n o n e h t o t d e d r a w a e r e w s e r a h S e h T . s r a e y n e t o t p u f o k c o l g n i d l o h a e v a h d n a s r a e y e e r h t f o n o i t i d n o c e c i v r e s a e v a h s e r a h s e s e h t , s u t c e p s o r p s ’ y n a p m o C e h t n i d e s o l c s i d s A . n o i t i d n o c e c i v r e s e h t r e v o d e s i n g o c e r s i t a h t r a e y . r a e y t n e r r u c e h t g n i r u d d e u s s i s e r a h s w e n o n e r e w e r e h T . n o i t a n g i s e r s i h n o p u d e t s e v y l l u f e m a c e b s e r a h s e h t d n a d e v i a w s a w s e r a h s s ’ y e l d n a H . r M n o n o i t i d n o c e c i v r e s . s e t a t S d e t i n U e h t n i y t i t n e g n i y o l p m e e h t y b e d a m s n o i t u b i r t n o c n a l p ) k ( 1 0 4 r o s r o t c e r i d n a i l a r t s u A r o f s t n e m y a p n o i t a u n n a r e p u s s e d u l c n I . 8 0 0 2 r e b m e c e D . 8 0 0 2 r e b m e t p e S 1 3 9 2 n o n o e v i t c e f f e s a w t n e m e r i t e r s ’ r e n n u r B d e c n e m m o c t n e m y o l p m e s ’ n a g a R . 8 0 0 2 r e b o t c O 1 3 n o d e d n e t n e m y o l p m e s ’ n a l o D . 8 0 0 2 e n u J 6 n o d e d n e t n e m y o l p m e s ’ n o s n h o J . 8 0 0 2 e n u J 2 n o d e c n e m m o c t n e m y o l p m e s ’ r e k a B . 8 0 0 2 r e b m e v o N 5 1 d e n g i s e r y e l d n a H . r M . r M . r M . r M . r M . r M . r M . r M . r M . 7 0 0 2 . 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 0 1 . 1 1 . 2 1 . 3 1 . 4 1 . 5 1 n i d e u r c c a s u n o b e h t r e d n u / r e v o d i a p s u n o b l a u t c a e h t m o r f e s a e r c e d r o e s a e r c n i e h t s t n e s e r p e r n m u l o c s i h t n i d e d u l c n i t n u o m a e h T . s u n o b t e g r a t f o % 5 8 t a d e u r c c a e r e w 7 0 0 2 r o f s t n u o m a s u n o B . 0 0 0 , 5 4 $ f o s u n o b n o - n g i s a d e v i e c e r n a l o D . r M d n a 0 0 0 , 5 7 $ f o s e s u n o b n o - n g i s d e v i e c e r r e k a B . r M d n a n a g a R . t n e m e e r g a t n e m y o l p m e s i h r e p 8 0 0 2 r o f s u n o b t e g r a t d e i f i c e p s a d e v i e c e r n a g a R . 8 0 0 2 r e b m e v o N 3 1 n o d e t n i o p p a s a w k a l e z r G _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 1 4 I I D E T M L R A E Y G N O L T R A O B t r o p e R l a i c n a n F i l a u n n A 9 0 0 2 R E B M E C E D 1 3 i l g n s o c s d m o r f i t c a r t n o c e c n a r u s n i s t i y b d e t n e v e r p s i y n a p m o C e h T . e c n a r u s n i y t i l i b a i l ’ s r e c i f f o d n a ’ s r o t c e r i d r e d n u s e i t u d r i e h t f o e c n a m r o f r e p e h t n i d e r r u c n i s e i t i l i b a i l i t s n a g a d e r u s n i e r e w P M K e h T . 8 0 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o f 7 7 5 3 8 . 0 $ S U = 1 $ A f o e t a r e g n a h c x e e g a r e v a n a n o d e s a B . e g a r e v o c h c u s r o f i d a p i s m u m e r p l a i t n e t o p a o t d e t a e r l y n a p m o C e h t o t d e d v o r p s e c v r e s i i g n i t l u s n o c r o f 4 6 2 , 4 3 $ S U d a p i s a w e g r o e G t S r e t e P . n o i t a s n e p m o c h s a c m r e t - t r o h s r e h t o d n a s e s u n o b n o - n g s i , s e c n a w o l l a e v i t t o m o u a s e d u c n I l e h t r o f e s n e p x e e h t s i l e b a t i s h t n i t n u o m a e h T . 7 0 0 2 l i r p A n i g n i t s i l ’ s y n a p m o C e h t o t p u d a e l e h t g n i r u d d n a o t r o i r p d e m r o f r e p k r o w f o t c e p s e r n i s r o t c e r i d e v i t u c e x e - n o n e h t o t d e d r a w a e r e w s e r a h S e h T . s r a e y n e t o t p u f o k c o l i g n d o h l a e v a h d n a s r a e y e e r h t f o n o i t i d n o c i e c v r e s a e v a h s e r a h s e s e h t , s u t c e p s o r p ’ s y n a p m o C e h t n i d e s o c s d i l s A . n o i t i d n o c i e c v r e s e h t r e v o d e s n g o c e r i s i t a h t r a e y n i d e u r c c a s u n o b e h t r e d n u / r e v o d a p i s u n o b l a u t c a e h t m o r f e s a e r c e d r o e s a e r c n i e h t s t n e s e r p e r n m u o c l i s h t n i d e d u c n l i t n u o m a e h T . s u n o b t e g r a t f o % 5 8 t a d e u r c c a e r e w 7 0 0 2 r o f s t n u o m a s u n o B . 7 0 0 2 . 8 0 0 2 r e b m e c e D 1 3 n o e v i t c e f f e s a w t n e m e r i t e r s ’ r e n n u r B . 8 0 0 2 r e b m e t p e S 9 2 n o d e c n e m m o c t n e m y o p m e l ’ s n a g a R . 8 0 0 2 e n u J 2 n o d e c n e m m o c t n e m y o p m e l s ’ r e k a B . 8 0 0 2 e n u J 6 n o d e d n e t n e m y o p m e l ’ s n o s n h o J . 8 0 0 2 r e b m e v o N 5 1 d e n g s e r i l y e d n a H . 8 0 0 2 r e b o t c O 1 3 n o d e d n e t n e m y o p m e l ’ s n a o D l . r M . r M . r M . r M . r M . r M . r a e y t n e r r u c e h t g n i r u d d e u s s i s e r a h s w e n o n e r e w e r e h T . n o i t a n g s e r i i s h n o p u d e t s e v y l l u f e m a c e b s e r a h s e h t d n a i d e v a w s a w s e r a h s ’ l s y e d n a H . r M n o n o i t i d n o c i e c v r e s . s e t a t S d e t i n U e h t n i y t i t n e i g n y o p m e l e h t y b e d a m s n o i t u b i r t n o c n a p l ) k ( 1 0 4 r o s r o t c e r i d n a i l a r t s u A r o f s t n e m y a p n o i t a u n n a r e p u s s e d u c n I l . n o i i t i s u q c a . 0 0 0 , 5 4 $ f o i s u n o b n o - n g s a d e v e c e r n a o D l i . r M d n a 0 0 0 , 5 7 $ f o s e s u n o b n o - n g s d e v e c e r i i r e k a B . r M d n a n a g a R . t n e m e e r g a t n e m y o p m e l i s h r e p 8 0 0 2 r o f s u n o b t e g r a t d e i f i c e p s a d e v e c e r n a g a R i . 8 0 0 2 r e b m e v o N 3 1 n o d e t n o p p a i s a w k a e z r G l . r M . r M . r M . 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 0 1 . 1 1 . 2 1 . 3 1 . 4 1 . 5 1 41 1 4 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 42 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED Analysis of Annual Bonuses Included in Remuneration Included as 2009 Remuneration % Vested in % Forfeited in Target STI % for US$ Year Year Financial Year Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker 1,000,000 280,000 146,250 126,512 200,000 142,500 100.0 100.0 90.0 85.0 100.0 100.0 - - 10.0 15.0 - - 100.0 70.0 50.0 50.0 50.0 50.0 The Board elected to award to a limited number of employees, including Mr. Ragan and Mr. Rasetti, a one-time cash award in 2009 in recognition of their extraordinary efforts in executing the Company’s 2009 capital raising program. These employees were deemed to be instrumental in the successful capital raising efforts. Details of these awards are included in the 2009 Remuneration Summary on page 38. Included as 2008 Remuneration % Vested in % Forfeited in Target STI % for US$ Year Year Financial Year Paul Brunner Craig Kipp Joseph Ragan III 1 Scott Alexander Michael Birch Terrance Dolan Patrick Johnson Fabrizio Rasetti Brad Baker 1 725,603 504,693 72,154 123,542 151,659 - - 145,001 74,148 79.0 79.0 100.0 83.2 86.3 - - 89.5 83.2 21.0 21.0 - 16.8 13.7 100.0 100.0 10.5 16.8 100 75/85 70 50 50 50 50 50 50 (1) The accrued bonuses for Messrs. Ragan and Baker have been calculated on a pro-rata basis since these executives were not employed by the Company for the full calendar year. _______________________________________________________________________________________ 42 43 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED Rights, Options and Shares Granted as Compensation to Key Management Personnel Share Rights and Shares Details of the rights under the LTIP and restricted shares that were granted as compensation to the KMP during the reporting period, and details of those that were exercised, vested, or lapsed during the financial year, are as follows: Held at the Vested and Held at the Exercisable beginning of Granted as Vested Forfeited end of the as at Name Graham Bradley Bruce Brook David Grzelak David McLemore Peter St George Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker the Financial Year No. Remun- eration No. 1 491,891 45,945 - - 72,972 494,710 300,000 178,500 85,000 200,000 150,000 - - - - - 1,800,000 750,000 550,000 550,000 550,000 550,000 during the during the Financial 31 December year No. year No. Year No. 491,891 45,945 - - 72,972 2,294,710 1,050,000 728,500 - - - - - - - - (635,000) - - - 750,000 700,000 - - - - - - - - - - - 2009 No. - - - - - - - - - - - (1) The fair value of the rights at the grant date is the closing price on the 25 March 2009 date of grant (US$0.07), the rights vest over a three-year period from the grant date, with 50% subject to certain performance conditions. The rights under the LTIP and the restricted shares were provided at no cost to the recipient. Cash Rights Details of the cash rights that were granted to the KMP during the reporting period, and details of those that were exercised, vested or forfeited during the financial year, are as follows: Held at the beginning of Granted as Vested Forfeited the Financial Remun- during the during the Year US$ eration US$ 1 year US$ year US$ Held at the end of the Financial Year US$ Vested and Exercisable as at 31 December 2009 US$ - - - - - - 550,000 275,000 225,000 225,000 225,000 225,000 - - - - - - - - - (225,000) - - 550,000 275,000 225,000 - 225,000 225,000 - - - - - - Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker (1) The cash rights vest over a three-year period from the grant date, with 50% subject to certain performance conditions. _______________________________________________________________________________________ 43 44 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED Options Details of the options that were granted as compensation to the KMP during the reporting period, and details of those that were exercised, vested, or lapsed during the financial year, are as follows: Held at the Vested and Held at the Exercisable beginning of Granted as Vested Forfeited end of the as at Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker the Financial Year No. 2,500,000 - - - - - Remun- eration No. 900,000 375,000 275,000 275,000 275,000 275,000 during the during the Financial 31 December year No. year No. 2009 No. Year No. 3,400,000 375,000 275,000 - - - - - - - - - (275,000) - - - 275,000 275,000 - - - - - - On 18 June 2009, the Board awarded Mr. Kipp 900,000 options under the 2009 Plan subject to shareholder approval. In addition to the options granted to Mr. Kipp, on 18 June 2009, the Board granted a total 1,475,000 stock options to other KMPs. All options granted on 18 June 2009 will vest in full and become exercisable on 18 June 2012 if the executive remains continuously employed with the Company until that date. At the date of grant, the options had an exercise price of A$0.30 per option and a fair market value of US$0.143 per option. On 15 December 2009, in accordance with the ASX listing rules, the Board adjusted the exercise price from A$0.30 per option to A$0.245 per option to reflect the impact of the Company’s 2009 capital raising program and the related issuance of additional shares subsequent thereunder. In regards to the 900,000 stock options awarded to Mr. Kipp on 18 June 2009, should shareholder approval not be received, the Company is legally committed to provide other compensation of equal value to Mr. Kipp. Except as described above, no options or other rights over shares in the Company have been granted to KMP during or since the end of the financial year. During the reporting period, no shares were issued on the exercise of options or rights previously granted as compensation. Analysis of Movements in Rights, Options and Shares The movement during the reporting period, by value of the relevant rights, options and shares in the Company held by KMP is detailed below: Value granted in year Value forfeited in year Entitlement to Entitlement to share rights cash rights US$ US$ Share options US$ Entitlement to Entitlement to share rights cash rights US$ US$ Share options US$ 132,911 55,380 40,612 40,612 40,612 40,612 550,000 275,000 225,000 225,000 225,000 225,000 128,675 53,615 39,317 39,317 39,317 39,317 - - - - - - - - - 227,335 225,000 39,317 - - - - - - Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker _______________________________________________________________________________________ 44 45 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED The value (based upon historic valuations) of outstanding rights, options and shares in the company held by KMP as at 31 December 2009 is detailed below: Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker Share rights Cash rights value US$ value US$ Options value US$ Total rights and option value US$ 1,008,548 175,380 356,557 - 424,147 306,112 550,000 275,000 225,000 - 225,000 225,000 2,990,983 53,615 39,317 - 39,317 39,317 4,549,531 503,994 620,874 - 688,464 570,429 The following table shows the share-based payment arrangements in which KMP’s participate that were in existence at 31 December 2009: Series (1) Issued 12 April 2007 (2) Issued 17 September 2007 (3) Issued 11 April 2008 (4) Issued 28 April 2008 * (5) Issued 28 April 2008 * (6) Issued 26 June 2008 (7) Issued 23 July 2008 (8) Issued 23 October 2008 (9) Issued 25 March 2009 (10) Issued 18 June 2009 * (11) Issued 18 June 2009 * Grant Date 12-Apr-07 17-Sep-07 11-Apr-08 28-Apr-08 28-Apr-08 26-Jun-08 23-Jul-08 23-Oct-08 25-Mar-09 18-Jun-09 18-Jun-09 Vesting Date 12-Apr-10 1-Jul-10 11-Apr-11 1-Jan-13 1-Jan-14 11-Apr-11 23-Jul-11 23-Oct-11 25-Mar-12 18-Jun-12 18-Jun-12 Fair Value at Expiry Date Grant Date N/A 1-Jul-10 11-Apr-11 31-Dec-15 31-Dec-15 11-Apr-11 23-Jul-11 23-Oct-11 25-Mar-12 18-Jun-14 18-Jun-14 1.53 1.81 1.77 0.69 1.45 2.10 2.05 0.40 0.07 0.14 0.14 * Subsequent to the original grant date, the Company’s Board of Directors modified the share options exercise price to reflect the dilution impact resulting from the Company’s 2009 capital raising program and the related issuance of additional shares subsequent to the original grant date as follows: Original Exercise Price A$1.95 A$0.21 A$0.30 A$0.30 Modified Exercise Price A$1.895 A$0.155 A$0.245 A$0.245 Series 4 Series 5 Series 10 Series 11 _______________________________________________________________________________________ 45 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED Service Agreements and Summary of Key Contract Terms Summary of specific terms of the contracts between the Company and Key Management Personnel are set out below. 46 Name and position held at the end of Financial Year Craig Kipp Chief Executive Officer President Scott Alexander 1 Vice President, Global Drilling Services Notice Notice Termination payments Duration of Period by Period by (where these are in addition to contract None Specified Company None Specified Executive 180 Days statutory entitlements) • For termination with cause, statutory entitlements only • For termination without cause • 12 months' salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months or until 31 December 2010, whichever is later • Up to $100,000 relocation expense reimbursement • Tax gross-up payment should any termination or other contractual payment be deemed subject to an excise tax under the US tax code None Specified None Specified 90 days • For termination with cause, statutory entitlements only • For termination without cause • 12 months' salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months Brad Baker None Specified None Specified 90 days • For termination with cause, statutory Senior Vice President, Human Resources Michael Birch 1 Vice President, Global Products entitlements only • For termination without cause • 12 months' salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months None Specified None Specified 90 days • For termination with cause, statutory entitlements only • For termination without cause • 12 months' salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months (1) Effective 31 December 2009, Mr. Alexander resigned his position as Vice President, Global Drilling Services. Effective 1 January 2010, Michael Birch assumed the role of Vice President, Global Drilling Services. _______________________________________________________________________________________ 46 47 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED Name and position held at the end of Financial Year Fabrizio Rasetti Senior Vice President, General Counsel and Secretary Joseph Ragan, III Chief Financial Officer Notice Notice Termination payments Duration of Period by Period by (where these are in addition to contract None Specified Company None Specified Executive 90 days statutory entitlements) • For termination with cause, statutory entitlements only • For termination without cause • 12 months' salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months None Specified None Specified 90 days • For termination with cause, statutory entitlements only • For termination without cause • 12 months' salary • Pro-rata bonus to termination date • Waiver of medical insurance premiums for 12 months NON-AUDIT SERVICES Details of amounts paid or payable for non-audit services provided during the year by the auditor are outlined in Note 35 to the financial statements. The directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services, as disclosed in Note 35 to the financial statements, do not compromise the external auditor’s independence, based on advice received from the Audit, Compliance & Risk Committee, for the following reasons: � � all non-audit services have been reviewed and approved by the Audit, Compliance & Risk Committee to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision- making capacity for the company, acting as an advocate for the company or jointly sharing economic risks and rewards. INDEMNIFICATION OF DIRECTORS AND OFFICERS AND AUDITORS The directors and officers of the Company are indemnified by the Company to the maximum extent permitted by law against liabilities incurred in their respective capacities as directors or officers. In addition, during the financial year the Company paid premiums in respect of contracts insuring directors and officers of the Company and any related body corporate against liabilities incurred by them to the extent permitted by the Corporations Act 2001. The insurance contracts prohibit disclosure of the nature of the liability and the amount of the premium. The Company has not paid any premiums in respect of any contract insuring Deloitte Touche Tohmatsu, against a liability incurred in the role as an auditor of the Company. _______________________________________________________________________________________ 47 48 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration is included on page 49 of the annual financial report. ROUNDING OF AMOUNTS Boart Longyear Limited is a company of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the directors’ report and financial report. Amounts in the directors’ report and the financial report are presented in US dollars and have been rounded off to the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated. Signed in accordance with a resolution of the directors. On behalf of the Directors Graham Bradley Chairman Sydney, 19 February 2010 Craig Kipp Chief Executive Officer Sydney, 19 February 2010 _______________________________________________________________________________________ 48 49 Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au The Directors Boart Longyear Limited 919-929 Marion Road Mitchell Park SA 5043 Australia 19 February 2010 Dear Directors Boart Longyear Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Boart Longyear Limited. As lead audit partner for the audit of the financial statements of Boart Longyear Limited for the financial year ended 31 December 2009, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU A V Griffiths Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. _______________________________________________________________________________________ 49 50 Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Independent Auditor’s Report to the members of Boart Longyear Limited Report on the Financial Report We have audited the accompanying financial report of Boart Longyear Limited, which comprises the statement of financial position as at 31 December 2009, and the statement of comprehensive income (loss), the statement of cash flows and the statement of changes in equity for the year ended on that date, 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 as set out on pages 52 to 130. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 3, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, 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. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance 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 judgement, 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 control 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 control. 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. Liability limited by a scheme approved under Professional Standards Legislation. _______________________________________________________________________________________ 50 51 Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s Opinion In our opinion: (a) the financial report of Boart Longyear Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 31 December 2009 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 3. Report on Remuneration Report We have audited the Remuneration Report included on pages 32 to 47 of the directors’ report for the year ended 31 December 2009. 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. Auditor’s Opinion In our opinion the Remuneration Report of Boart Longyear Limited for the year ended 31 December 2009, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU A V Griffiths Partner Chartered Accountants Sydney, 19 February 2010 _______________________________________________________________________________________ 51 52 Annual Financial Report 31 DECEMBER 2009 BOART LONGYEAR LIMITED DIRECTORS’ DECLARATION The directors declare that: (a) in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable; (b) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and (c) the directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of the directors made pursuant to section 295(5) of the Corporations Act 2001. Graham Bradley Chairman Sydney, 19 February 2010 Craig Kipp Chief Executive Officer Sydney, 19 February 2010 _______________________________________________________________________________________ 52 Consolidated Statement of Comprehensive Income (Loss) For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 53 Consolidated Parent Note 2009 US$'000 5 5 7 9 5 6 8 978,177 (744,670) 233,507 - 4,365 (117,260) (70,549) (12,643) (14,890) 22,530 1,616 (46,752) (22,606) 7,723 2008 US$'000 1,838,538 (1,260,620) 577,918 - 18,427 (181,695) (118,295) (20,328) (6,697) 269,330 1,637 (39,688) 231,279 (74,555) 2009 US$'000 2008 US$'000 - - - - - (2,560) - - (109) (2,669) 12,545 - 9,876 (3,023) - - - 55,110 - (1,753) - - (2,118) 51,239 603 - 51,842 (1,751) (14,883) 156,724 6,853 50,091 Revenue Cost of goods sold Gross margin Other revenue Other income General and administrative expenses Selling and marketing expenses Restructuring expenses and related impairments Other expenses Operating profit (loss) Interest income Finance costs Profit (loss) before taxation Income tax (expense) benefit Profit (loss) for the year attributable to equity holders of the parent Earnings (loss) per share: Basic and diluted earnings (loss) per share 25 (0.6) cents 10.4 cents Other comprehensive income (loss) Profit (loss) for the year attributable to equity holders of the parent Losses on cash flow hedges recorded in equity Transfer to profit or loss on cash flow hedges Interest rate swap expense - ineffective hedge Exchange differences on translation of foreign operations Actuarial losses related to defined benefit plans Income tax on income and expense recognised directly through equity Other comprehensive income (loss) for the year (net of tax) Total comprehensive income (loss) for the year attributed to equity holders of the parent Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 (14,883) 156,724 6,853 50,091 (2,007) 12,976 15,242 26,211 121,179 (3,113) (9,805) 134,472 (20,359) 6,147 - (14,212) (133,764) (31,680) 12,162 (167,494) - - - - - - - - - - - - - - - - 119,589 (10,770) 6,853 50,091 _______________________________________________________________________________________ See accompanying notes to the financial statements. See accompanying notes to the financial statements. 53 Consolidated Statement of Financial Position As at 31 December 2009 BOART LONGYEAR LIMITED 54 Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Current tax receivable Prepaid expenses Total current assets Non-current assets Property, plant and equipment Goodwill Other intangible assets Deferred tax assets Other financial assets Other assets Defined benefit plan asset Total non-current assets Total assets Current liabilities Trade and other payables Provisions Other financial liabilities Current tax payable Loans and borrowings Total current liabilities Non-current liabilities Trade and other payables Loans and borrowings Other financial liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Other equity Retained earnings (accumulated losses) Total equity Note 31a 10 11 12 8 13 14 15 8 12 19 16 18 12 8 17 16 17 12 8 18 20 21 22 23 Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 87,557 198,598 144,990 1,818 21,215 28,045 482,223 380,515 276,956 84,287 122,100 - 1,799 17,958 50,603 234,578 177,296 306 10,161 26,166 499,110 403,693 234,571 73,456 68,537 - 1,609 13,031 883,615 1,365,838 794,897 1,294,007 170,118 13,973 11,835 41,221 3,133 240,280 - 132,486 4,822 5,323 44,890 187,521 427,801 938,037 1,136,347 23,038 (137,182) (84,166) 938,037 195,597 23,109 - 32,378 1,148 252,232 1,293 813,770 27,197 2,130 45,037 889,427 1,141,659 152,348 478,036 (118,319) (141,539) (65,830) 152,348 148 650,702 - - 11,018 - 661,868 - - - 17,661 2,226,378 - - 2,244,039 2,905,907 108 28,323 - - 6,583 - 35,014 - - - 11,614 2,186,106 - - 2,197,720 2,232,734 1,041 1,511 - - - - - - - - 1,041 1,511 - - - - 690 690 1,731 2,904,176 - - - - - - 1,511 2,231,223 2,890,807 2,228,139 6,024 - 7,345 2,592 - 492 2,904,176 2,231,223 _______________________________________________________________________________________ See accompanying notes to the financial statements. See accompanying notes to the financial statements. 54 55 Consolidated Statement of Changes in Equity For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED Consolidated Foreign Currency Equity Settled Total Attributible Issued Capital US$'000 Translation Compensation Hedging Reserve US$'000 Reserve US$'000 Reserve US$'000 Other Equity US$'000 Accumulated to Owners of Losses US$'000 the Parent US$'000 Balance at 1 January 2008 Profit for the period Other comprehensive income for the period Payment of dividends Purchase of shares for LTIP Share-based compensation expense 479,673 30,215 368 (8,050) (141,539) (141,028) - - - (1,637) - - (133,764) - - - - - - - 2,224 - (9,312) - - - - - - - - 156,724 (24,418) (57,108) - - 219,639 156,724 (167,494) (57,108) (1,637) 2,224 Balance at 31 December 2008 478,036 (103,549) 2,592 (17,362) (141,539) (65,830) 152,348 Balance at 1 January 2009 Loss for the period Other comprehensive income for the period Issued under Capital Raising Program Purchase of shares for LTIP Share-based compensation expense Capitalised transaction costs - GST refund * 478,036 (103,549) 2,592 (17,362) (141,539) - - 662,297 (3,986) - - - 121,179 - - - - - - - - 3,432 - - 16,746 - - - - - - - - - 4,357 (65,830) (14,883) (3,453) - - - - 152,348 (14,883) 134,472 662,297 (3,986) 3,432 4,357 Balance at 31 December 2009 1,136,347 17,630 6,024 (616) (137,182) (84,166) 938,037 * During the period, a GST refund was received relating to the IPO transaction costs that were capitalised in 2007. PARENT Issued Capital US$'000 Equity Settled Compensation Reserve US$'000 Retained Earnings US$'000 Total Attributible to Owners of the Parent US$'000 Balance at 1 January 2008 2,229,776 Profit for the period Payment of dividends Purchase of shares for LTIP Share-based compensation expense - - (1,637) - Balance at 31 December 2008 2,228,139 Balance at 1 January 2009 Profit for the period Issued under Capital Raising Program Purchase of shares for LTIP GST refund on capitalized IPO costs Share-based compensation expense 2,228,139 - 662,297 (3,986) 4,357 - Balance at 31 December 2009 2,890,807 368 - - - 2,224 2,592 2,592 - - 3,432 6,024 7,509 50,091 (57,108) - - 2,237,653 50,091 (57,108) (1,637) 2,224 492 2,231,223 492 6,853 - - 2,231,223 6,853 662,297 (3,986) 4,357 3,432 7,345 2,904,176 _______________________________________________________________________________________ See accompanying notes to the financial statements. See accompanying notes to the financial statements. 55 Consolidated Statement of Cash Flows For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 56 Consolidated Parent Note 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 Cash flows from operating activities Profit (loss) for the year Adjustments provided by operating activities: Income tax expense (benefit) recognised in profit Finance costs recognised in profit Depreciation and amortisation Investment revenue recognised in profit Loss on sale or disposal of non-current assets (Gain) loss on disposal of businesses Impairment of current and non-current assets Foreign exchange gain (loss) Share-based compensation Long term compensation - cash rights Non-operating expenses Changes in net assets and liabilities, net of effects from acquisition and disposal of businesses: (Increase) decrease in assets: Trade and other receivables Inventories Other assets Increase (decrease) in liabilities: Trade and other payables Provisions Cash generated from operations Interest paid Interest received Income taxes paid Net cash flows from operating activities 6 7 5 7 7 21 5 (14,883) 156,724 (7,723) 46,752 88,507 (1,616) 49 4,130 1,318 (1,712) 3,432 690 - 58,163 56,114 608 (35,882) (16,233) 181,714 (28,396) 1,616 (37,781) 117,153 74,555 39,688 86,347 (1,637) 1,018 (9,131) 6,577 6,462 2,224 - (536) (16,213) (48,559) (2,222) (29,505) 5,058 270,850 (38,023) 1,637 (91,593) 142,871 6,853 3,023 - - (12,545) - - - - 311 - - (621,304) - 6,396 (3,492) - (620,758) - 12,545 - (608,213) 50,091 1,751 - - (603) - - - - - - - 28,516 - 4,385 (16,051) - 68,089 - 603 - 68,692 _______________________________________________________________________________________ See accompanying notes to the financial statements. See accompanying notes to the financial statements. 56 Consolidated Statement of Cash Flows (continued) For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 57 Consolidated Parent Note 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 Cash flows from investing activities Purchase of property, plant and equipment Purchase of rods and casings Proceeds from sale of property, plant and equipment Development costs paid Software costs paid Payments for acquisitions of businesses Proceeds on disposal of subsidiary, net of cash disposed Payments for investments Net cash flows used in investing activities Cash flows from financing activities Proceeds from issuance of shares Payments for share issuance costs Payments for share buy-back for LTIP Payments for debt issuance costs Proceeds from borrowings Repayment of borrowings Dividends paid 31b 31c 24 GST refund on capitalized IPO costs Net cash flows (used in) from financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalents at the end of the year 31a (30,850) (5,979) 6,350 (5,064) (10,294) (403) 5,126 - (41,114) 697,702 (49,549) (3,986) (503) 29,229 (710,861) - 4,357 (33,611) 42,428 50,603 (5,474) 87,557 (137,668) (8,242) 3,484 (5,081) (15,890) (138,426) 19,624 - (282,199) - - (1,637) (523) 287,079 (133,128) (57,108) - 94,683 (44,645) 87,548 7,700 50,603 - - - - - - - (40,271) (40,271) 697,702 (49,549) (3,986) - - - - 4,357 648,524 40 108 - 148 - - - - - - - (10,926) (10,926) - - (1,637) - - - (57,108) - (58,745) (979) 1,087 - 108 _______________________________________________________________________________________ See accompanying notes to the financial statements. See accompanying notes to the financial statements. 57 58 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 1. GENERAL INFORMATION Boart Longyear Limited (the “Parent” or the “Company”) is a public company listed on the Australian Securities Exchange Limited (“ASX”) and is incorporated in Australia. Boart Longyear Limited and subsidiaries (collectively referred to as the “Boart Longyear Group” or the “Group”) operate in five geographic regions, which are defined as North America, Latin America, Europe, Asia Pacific, and Africa. Boart Longyear Limited’s registered office and its principal place of business are as follows: Registered office 919-929 Marion Road Mitchell Park South Australia 5043 Australia Tel: +61 (8) 8375 8375 Principal place of business Riverpark Corporate Center #14 Suite 600 10808 South River Front Parkway South Jordan , Utah 84095 United States of America Tel: +1 (801) 972 6430 2. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for the current annual reporting period. Details of the impact of these new accounting standards are set out in the individual accounting policy notes set out below. These Standards and Interpretations include: Presentation of Financial Statements AASB 101 ‘Presentation of Financial Statements (revised September 2007)’, AASB 2007-8 ‘Amendments to Australian Accounting Standards arising from AASB 101’. The adoption of these standards requires the disclosure of “total comprehensive income”, changes the titles on some of the financial statements, requires a statement of financial position at the beginning of the earliest comparative period when comparatives are “restated” or retrospective adjustments are made, and requires disclosure of income tax relating to each component of other comprehensive income. Other than changing the presentation of certain disclosures, the adoption of this standard did not have a significant impact on the Group’s financial results or statement of financial position. Borrowing Costs AASB 123 ‘Borrowing Costs’ (revised), AASB 2007-6 ‘Amendments to Australian Accounting Standards arising from AASB 123’ makes a number of amendments to other accounting standards as a result of the revised AASB 123 and must be adopted at the same time. This revised version requires an entity to capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. The adoption of this standard did not have a significant impact on the Group’s financial results or statement of financial position. Share-based Payments AASB 2008-1 ‘Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations’ amends AASB 2 ‘Share-based Payment’ to introduce equivalent amendments made to IFRS 2 ‘Share-based Payment’ to: � � � � clarify that vesting conditions are those conditions that determine whether the entity receives the services that result in the counterparty’s entitlement restrict the definition of vesting conditions to include only service conditions and performance conditions amend the definition of performance conditions to require the completion of a service period in addition to specified performance targets specify that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The adoption of this standard did not have a significant impact on the Group’s financial results or statement of financial position. Business Combinations AASB 3 ‘Business Combinations (2008)’, AASB 127 ‘Consolidated and Separate Financial Statements’ and AASB 2008-3 ‘Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127’ alter the manner in which business combinations and changes in ownership interests in subsidiaries are accounted for. There are also consequential amendments to other standards affected through AASB 2008-2, most notably AASB 128 ‘Investments in Associates’ and AASB 131 ‘Interests in Joint Ventures’. The adoption of this standard did not have a significant impact on the Group’s financial results or statement of financial position. _______________________________________________________________________________________ 58 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 2. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) 59 Financial Instruments Disclosure AASB 2009-2 ‘Amendments to Australian Accounting Standards – Improving Disclosures about Financial Instruments’ amends AASB 7 ‘Financial Instruments: Disclosures’ to require enhanced disclosures about fair value measurements and liquidity risk. Among other things the amendments: � � � � clarify that the existing AASB 7 fair value disclosures must be made separately for each class of financial instrument add disclosure of any change in the method of determining fair value and the reasons for the change establish a three-level hierarchy for making fair value measurements used in the disclosures clarify that the current maturity analysis for non-derivative financial instruments should include issued financial guarantee contracts and disclosure of a maturity analysis for derivative financial liabilities. Comparative information is not required to be provided in the first year the amendments are applied. The adoption of this standard did not have a significant impact on the Group’s financial results or statement of financial position. Standards and Interpretations issued not yet effective The accounting standards and AASB Interpretations that will be applicable to the Group in future reporting periods are detailed below. Apart from these standards and interpretations, management has considered other accounting standards that will be applicable in future periods, however they have been considered insignificant to the Group. Amendments to Australian Accounting Standards AASB 2009-4 ‘Amendments to Australian Accounting Standards arising from the Annual Improvement Process’ is effective for annual reporting periods beginning on or after 1 July 2009. The standard introduces amendments into Accounting Standards that are equivalent to those made by the IASB under its program of annual improvements to its standards. A number of the amendments are technical changes to other pronouncements as the result of AASB 3 ‘Business Combinations’ (2008), to align the scope of the pronouncements or to implement other consequential amendments. Management has not yet assessed the impact of adopting this standard. Further Amendments to Australian Accounting Standards AASB 2009-5 ‘Further Amendments to Australian Accounting Standards arising from the Annual Improvements Process’ is effective for annual reporting periods beginning on or after 1 January 2010. The standard introduces amendments into Accounting Standards that are equivalent to those made by the IASB under its program of annual improvements to its standards. A number of the amendments are largely technical, clarifying particular items, or eliminating unintended consequences. Other changes are more substantial, such as the current/non- current classification of convertible instruments, the classification of expenditures on unrecognised assets in the statement of cash flows and the classification of leases of land and buildings. Management has not yet assessed the impact of adopting this standard. Group cash-settled share-based payments AASB 2009-8 ‘Amendments to Australian Accounting Standards – Group Cash-Settled Share-based Payment Transactions’ amends AASB2 ‘Share-based Payment’ to clarify the accounting for group cash-settled share- based payment transactions. An entity receiving goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash. Management has not yet assessed the impact of adopting this standard. Related party disclosures AASB 2009-12 ‘Amendments to Australian Accounting Standards – Related Party Disclosures” amends the requirements of the previous version of AASB 124 ‘ Related Party Disclosures’ to clarify the definition of a related party and includes an explicit requirement to disclose commitment involving related parties. Management has not yet assessed the impact of adoption of this standard. _______________________________________________________________________________________ 59 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 2. ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS (CONTINUED) 60 Classification of Rights Issues AASB 2009-10 ‘Amendments to Australian Accounting Standards – Classification of Rights Issues’ is effective for annual reporting periods beginning on or after 1 February 2010. The standard amends AASB 132 ‘Financial Instruments: Presentation’ to require a financial instrument that gives the holder the right to acquire a fixed number of the entity's own equity instruments for a fixed amount of any currency to be classified as an equity instrument if, and only if, the entity offers the financial instrument pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. Prior to this amendment, rights issues (rights, options, or warrants) denominated in a currency other than the functional currency of the issuer were accounted for as derivative instruments. Management has not yet assessed the impact of adoption of this standard. Financial instruments AASB 2009-11 ‘Amendments to Australian Accounting Standards arising from AASB 9 ‘Financial Instruments’ introduces new requirement s for classifying and measuring financial assets, as follows: � Debt instruments meeting both a 'business model' test and a 'cash flow characteristics' test are measured at amortised cost (the use of fair value is optional in some limited circumstances) Investments in equity instruments can be designated as 'fair value through other comprehensive income' with only dividends being recognised in profit or loss � � All other instruments (including all derivatives) are measured at fair value with changes recognised in � the profit or loss The concept of 'embedded derivatives' does not apply to financial assets within the scope of the Standard and the entire instrument must be classified and measured in accordance with the above guidelines. Management has not yet assessed the impact of adoption of this standard. Prepayments of a Minimum Funding Requirement AASB 2009-14 ‘Amendments to Australian Interpretation – Prepayments of a Minimum Funding Requirement’ is effective for annual reporting periods beginning on or after 1 January 2001. The standard makes limited- application amendments to Interpretation 14 ‘AASB 119 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. The amendments apply when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements, permitting the benefit of such an early payment to be recognised as an asset. Management has not yet assessed the impact of adoption of this standard. 3. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance This financial report is a general purpose financial report which has been prepared in accordance with the requirements of applicable Accounting Standards including Australian Interpretations and the Corporations Act 2001. The financial report includes the separate financial statements of the Parent and the consolidated financial statements of the Group. Accounting Standards include Australian equivalents to International Financial Reporting Standards (“A-IFRS”). Compliance with A-IFRS ensures that the financial statements and notes of the Parent and the Group comply with IFRS. The financial report is presented in United States dollars which is Boart Longyear Limited’s functional and presentation currency. The financial statements were authorised for issue by the directors on 19 February 2010. _______________________________________________________________________________________ 60 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 61 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Basis of preparation The financial report has been prepared on a historical cost basis, except for the revaluation of certain financial instruments that are stated at fair value. Cost is based on fair values of the consideration given in exchange for assets. In applying A-IFRS, management is required to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgments made by management in the application of A-IFRS that have significant effects on the financial statements and estimates with a significant risk of material adjustments in the next year are disclosed, where applicable, in the relevant notes to the financial statements. Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported. These accounting policies have been consistently applied by each entity in the Group. The consolidated financial statements are prepared by combining the financial statements of all of the entities that comprise the consolidated entity, Boart Longyear Limited and subsidiaries as defined in AASB 127 ‘Consolidated and Separate Financial Statements’. Consistent accounting policies are applied by each entity and in the preparation and presentation of the consolidated financial statements. Subsidiaries are all entities for which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the Group until such time as the Group ceases to control such entity. Where necessary, adjustments are made to the financial statements of subsidiaries to make their accounting policies consistent with the Group accounting policies. In preparing the consolidated financial statements, all inter-company balances and transactions, and unrealised income and expenses arising from inter-company transactions, are eliminated. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. The accounting policies and methods of computation are the same as those in the prior annual financial report. Comparative figures have been adjusted to conform to the changes in presentation in the current reporting period, where necessary. The significant accounting policies set out below have been applied in the preparation and presentation of the financial report for the year ended 31 December 2009 and the comparative information. (a) Presentation currency Results of the major operating businesses are recorded in their functional currencies, which are generally their local currency. The Group’s US dollar denominated revenue represents the most predominant currency. Accordingly, under A-IFRS, management believes that US dollar reporting represents the best indicator of the results of the Group and therefore the consolidated financial information is presented in US dollars. (b) Cash and cash equivalents Cash and cash equivalents comprise cash on hand and deposits repayable on demand with a financial institution. Cash balances and overdrafts in the balance sheet are stated at gross amounts within current assets and current liabilities, unless there is a legal right of offset at the bank. The cash and cash equivalents balance primarily consists of demand deposits, money market funds and bank term deposits with original maturity at time of purchase of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. _______________________________________________________________________________________ 61 62 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) Trade and other receivables Trade receivables are recorded at amortised cost. The Group reviews collectability of trade receivables on an ongoing basis and makes judgments as to its ability to collect outstanding receivables and provides an allowance for credit losses when there is objective evidence that the Group will not be able to collect the debt. The amount of the loss is recognised in the income statement within operating expenses. When a trade receivable is determined to be uncollectible, it is written off against the allowance account for doubtful debts. Subsequent recoveries of amounts previously written off are recorded in other income in the income statement. (d) Inventories Products Inventories are measured at the lower of cost or net realisable value. The cost of inventories is based on a standard cost method, which approximates actual cost on a first-in first-out basis, and includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads (including depreciation) based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Drilling Services The Group maintains an inventory of core drilling rods and casings and certain consumables for use in the rendering of services. Such inventories are measured at the lower of cost or net realisable value. Core drilling rods and casings are initially recognised at cost and are expensed as utilised. A regular and ongoing review is undertaken to establish whether any items are obsolete or damaged, and if so their carrying amount is written down to its net realisable value. Allowances are recorded for inventory considered to be excess or obsolete. (e) Property, plant and equipment Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, including the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the present value at acquisition of the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate assets. Subsequent costs are recognised in the carrying amount of an item of property, plant and equipment, as appropriate, only when it is probable that the future economic benefits embodied within the item will flow to the consolidated entity and the cost of the item can be measured reliably. All other costs, including repairs and maintenance, are recognised in the income statement as an expense as incurred. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term or their useful lives. Land and properties in the course of construction are not depreciated. The following useful lives are used in the calculation of depreciation: Buildings Plant and machinery Drilling rigs Other drilling equipment Office equipment Computer equipment: Hardware Software 20-40 years 5-10 years 5-12 years 1-5 years 5-10 years 3-5 years 1-7 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. _______________________________________________________________________________________ 62 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 63 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Goodwill and other intangible assets Goodwill Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Trademarks and trade names Trademarks and trade names recognised by the Group that are considered to have indefinite useful lives are not amortised. Each period, the useful life of each of these assets is reviewed to determine whether events and circumstances continue to support an indefinite useful life assessment for the asset. Trademarks and trade names that are considered to have a finite useful life are carried at cost less accumulated amortisation and accumulated impairment losses and have an average useful life of 3 years. Such assets are tested for impairment at least annually or more frequently if events or circumstances indicate that the asset might be impaired. Contractual customer relationships Contractual customer relationships acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair values can be measured reliably. Contractual customer relationships have a finite useful life and are carried at cost less accumulated amortisation and accumulated impairment losses. Contractual customer relationships are amortised over 10 – 15 year periods on a straight line basis. The estimated useful life and amortisation method is reviewed at the end of each annual reporting period, with any changes being recognised as a change in accounting estimate. Patents Patents are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is charged on a straight line basis over their estimated useful lives of 10 - 20 years. The estimated useful life and amortisation method is reviewed at the end of each annual reporting period, with any changes being recognised as a change in accounting estimate. Research and development costs Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in profit or loss when incurred. _______________________________________________________________________________________ 63 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 64 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Goodwill and other intangible assets (continued) Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. Other development expenditure is recognised in profit or loss when incurred. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised in profit or loss on a straight line basis over the estimated useful lives, which on average is 15 years. Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss when incurred. (g) Assets classified as held for sale Non-current assets (and disposal groups) classified as held for sale and liabilities directly associated are measured at the lower of carrying amount or fair value less costs to sell. The Group classifies non-current assets and disposal groups as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for such a sale and the sale is highly probable. The sale of the asset (or disposal group) must be expected to be completed within one year from the date of classification, except in the circumstances where sale is delayed by events or circumstances outside the Group’s control but it remains committed to a sale. The Group discloses the results of these disposal groups as discontinued operations on the face of the income statement only if they meet the following requirements: � � � represent a separate major line of business or geographical area of operations; are part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or are a subsidiary acquired exclusively with a view to resale. (h) Leased assets Leases are classified as finance leases when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. All other leases are classified as operating leases. Assets held under finance leases are initially recognised at their fair value or, if lower, at amounts equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Finance lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Refer to Note 3(o). Contingent rentals are recognised as expenses in the periods in which they are incurred. Finance leased assets are amortised on a straight-line basis over the shorter of the lease term or the estimated useful life of the asset. Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. _______________________________________________________________________________________ 64 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 65 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Leased assets (continued) Lease incentives In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on a straight-line basis over the term of the lease, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (i) Current and deferred taxation Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity or where it arises as part of a business combination, in which case it is recognised in goodwill. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, in respect of all temporary differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. Temporary differences are differences between the Group’s taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the financial statements. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. Tax consolidation The Group includes tax consolidated groups for the entities incorporated in Australia and the United States. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of each tax-consolidated group are recognised in the separate financial statements of the members of that tax-consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity. Tax values arising from the unused tax losses and relevant tax credits of each members of the tax- consolidated group are recognised by the head entity in that tax-consolidated group. Entities within the various tax-consolidated groups will enter into tax funding arrangements and tax- sharing agreements with the head entities. Under the terms of the tax funding arrangements, the relevant head entity and each of the entities in that tax-consolidated group will agree to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. _______________________________________________________________________________________ 65 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 66 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Derivative financial instruments The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk, including foreign exchange forward contracts and interest rate swaps. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event, the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedges), or hedges of highly probable forecast transactions or hedges of foreign currency risk of firm commitments (cash flow hedges). The fair value of hedging derivatives is classified as a non-current asset or a non-current liability if the remaining maturity of the hedge relationship is more than 12 months and as a current asset or a current liability if the remaining maturity of the hedge relationship is less than 12 months. Derivatives not designated into an effective hedge relationship are classified as a current asset or a current liability regardless of their remaining maturities. Hedge accounting The Group designates certain hedging instruments, which include derivatives, embedded derivatives and non-derivatives in respect of foreign currency risk, as either fair value hedges or cash flow hedges. Hedges of foreign exchange risk on firm commitments are accounted for as cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk. Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to profit or loss from that date. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss as part of other expenses or other income, or interest expense if appropriate. Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. _______________________________________________________________________________________ 66 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 67 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash flow hedge (continued) Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. (k) Impairment Non-financial assets The Group’s non-financial assets, other than inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, a recoverable amount is estimated at each reporting date. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit or group of units on a pro rata basis. The recoverable amount of an asset or cash-generating unit is the greater of its value in use or its fair value, less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a post-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Financial assets A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss is not recognised directly for trade receivables because the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are recorded in other income in the income statement. Changes in the carrying amount of the allowance account are recognised in profit or loss. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in profit or loss. _______________________________________________________________________________________ 67 68 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Trade and other payables Trade payables and other payables are carried at amortised cost. They represent unsecured liabilities for goods and services provided to the Group prior to the end of the financial period that are unpaid and arise when the Group becomes obligated to make future payments. (m) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Warranties The Group maintains warranty reserves for products manufactured by its various companies. A provision is recognised when the following conditions are met: 1) the Company has an obligation as a result of an implied or contractual warranty; 2) it is probable that an outflow of resources will be required to settle the warranty claim; and 3) the amount of the claim can be reliably estimated. Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the Group starts to implement the restructuring plan or announces the main features of the restructuring plan to those affected by the plan in a sufficiently specific manner to raise a valid expectation of those affected that the restructuring will be carried out. The Group’s restructuring accruals include only the direct expenditures arising from the restructuring, which are those that are both necessarily incurred by the restructuring and not associated with the ongoing activities. Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. (n) Employee benefits Liabilities for employee benefits for wages, salaries, annual leave, long service leave, and sick leave represent present obligations resulting from employees’ services provided to the reporting date and are calculated at discounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers compensation insurance and payroll tax, when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. Non-accumulating non-monetary benefits, such as medical care, housing, cars and free or subsidised goods and services, are expensed based on the net marginal cost to the Group as the benefits are taken by the employees. A provision is recognised for the amount expected to be paid under short-term cash bonus or profit- sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. _______________________________________________________________________________________ 68 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 69 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) Employee benefits (continued) Defined contribution pension plans and post-retirement benefits A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The amount recognised as an expense in the income statement in respect of pension costs and other post-retirement benefits is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet. Defined benefit pension plans The Group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any fund assets is deducted. The discount rate is the yield at the balance sheet date on high quality corporate bonds that have maturity dates approximating to the terms of the Group’s defined benefit obligations. Where there is no deep market in such bonds, the market yields at the reporting date on government bonds are used. The calculation is performed by a qualified actuary using the projected unit credit method. Actuarial gains and losses arising from experience adjustments and related changes in actuarial assumptions are charged or credited to retained earnings. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised as an expense in the profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in profit or loss. Where the calculation results in a benefit to the Group, the recognised asset is limited to the net total of any unrecognised past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan. Past service cost is the increase in the present value of the defined benefit obligation for employee services in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other long-term employee benefits. Past service costs may either be positive (increase the benefit obligation where benefits are introduced or improved) or negative (decrease the benefit obligation where existing benefits are reduced). Share-based payment transactions Equity-settled share-based payments with employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a Black-Scholes-Merton model, which requires the input of highly subjective assumptions. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Equity-settled share-based payment transactions with other parties are measured at the fair value of the goods and services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each reporting date. When determining expense related to long-term incentive plans, the Company considers the probability of shares vesting due to achievement of performance metrics established by the Board of Directors related to long-term incentives that include a performance vesting condition. The Company also estimates the portion of share and cash rights that will ultimately be forfeited. A forfeiture rate over the vesting period has been estimated, based upon extrapolation of historic forfeiture rates. _______________________________________________________________________________________ 69 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 70 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) Employee benefits (continued) Earn-out and bonus agreements In certain circumstances, previous owners of acquired businesses may become employees of the Group. A business combination agreement may include earn-out or bonus clauses which provide for an adjustment to the cost of the combination contingent upon future events. If contingent consideration is, in substance, compensation for services or profit sharing (e.g., clauses requiring that the individual remain employed by the Group), those payments are recognised as an expense over the period of services provided. (o) Loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. Debt issuance costs are amortised using the effective interest rate method over the life of the borrowing. For refinancing or restructuring of liabilities which are not considered a substantial modification, all costs incurred related to the refinancing or restructuring are amortised to profit and loss over the remaining period of the borrowings. For refinancing or restructuring of liabilities which are considered a substantial modification, a gain (loss) is recognised and the initial issue costs are written off, while any issuance costs related to the refinancing are recorded against the liabilities. 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. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. (p) Financial instruments Debt and equity instruments Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Financial guarantee contract liabilities Financial guarantee contract liabilities are measured initially at their fair values and subsequently at the higher of the amount recognised as a provision and the amount initially recognised less cumulative amortisation in accordance with the revenue recognition policies described in Note 3(r). Financial assets Investments are recognised and derecognised on trade date where the 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 fair value, net of transaction costs except for those financial assets classified as fair value through profit or loss which are initially measured at fair value. Subsequent to initial recognition, investments in subsidiaries are measured at cost in the Group financial statements. Subsequent to initial recognition, investments in associates are accounted for under the equity method in the consolidated financial statements and the cost method in the Group financial statements. _______________________________________________________________________________________ 70 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 71 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (p) Financial instruments (continued) Loans and receivables Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Non-current loans and receivables are measured at amortised cost using the effective interest rate method less impairment. Interest is recognised by applying the effective interest rate. Current trade receivables are recorded at the invoiced amount and do not bear interest. Financial liabilities Financial liabilities are classified as either financial liabilities at fair value through profit or loss or other financial liabilities. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability. Fair value is determined in the manner described in Note 12. Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs, and subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts the estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. (q) Transaction costs on the issue of equity instruments Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. (r) Revenue recognition Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts, volume rebates and sales taxes. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods. Transfers of risks and rewards vary depending on the individual terms of the contract of sale and with local statute, but are generally when title and insurance risk has passed to the customer and the goods have been delivered to a contractually agreed location. Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion of the contract is determined as follows: � � revenue from drilling services contracts is recognised on the basis of actual meters drilled for each contract; and revenue from time and material contracts is recognised at the contractual rates as labour hours are delivered and direct expenses are incurred. Investment income is accrued over time, by reference to the principal outstanding and at the effective applicable interest rate. _______________________________________________________________________________________ 71 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 72 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (s) Foreign currency transactions The financial statements of the Group and its international subsidiaries have been translated into US dollars using the exchange rate at each balance sheet date for assets and liabilities of foreign operations and at an average exchange rate for revenues and expenses throughout the period. The effects of exchange rate fluctuations on the translation of assets and liabilities are recorded as movements in the foreign currency translation reserve (“FCTR”). The Group’s presentation currency is the US dollar. The Group determines the functional currency of its subsidiaries based on the currency used in their primary economic environment, and, as such, foreign currency translation adjustments are recorded in the FCTR for those subsidiaries with a functional currency different from the US dollar. Transaction gains and losses, and unrealised translation gains and losses on short-term inter-company and operating receivables and payables denominated in a currency other than the functional currency, are included in other income in the consolidated income statement. (t) Contingencies The recognition of accruals for legal disputes is subject to a significant degree of estimation. Accruals are made for loss contingencies when it is deemed probable that an adverse outcome will occur and the amount of the loss can be reasonably estimated. Accruals are recognised when (a) the Group has a present legal or constructive obligation as a result of past events, (b) it is more likely than not that an outflow of resources will be required to settle the obligation, and (c) the amount of that outflow has been reliably estimated. (u) Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments (see below). All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are recognised in the profit or loss as incurred. Changes in the fair value of contingent consideration classified as equity are not recognised. Where a business combination is achieved in stages, the Group’s previously held interests in the acquired entity are remeasured to fair value at the acquisition date (i.e. the date the Group attains control) and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss, where such treatment would be appropriate if that interest were disposed of. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under AASB 3(2008) are recognised at their fair value at the acquisition date, except that: � � � deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with AASB 112 Income Taxes and AASB 119 Employee Benefits respectively; liabilities or equity instruments related to the replacement by the Group of an acquiree’s share- based payment awards are measured in accordance with AASB 2 Share-based Payment; and assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 Non- current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard. _______________________________________________________________________________________ 72 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 73 3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (u) Business combinations (continued) If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see below), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date, and is subject to a maximum of one year. (v) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: � where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or for receivables and payables which are recognised inclusive of GST. � The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. _______________________________________________________________________________________ 73 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 74 4. SEGMENT REPORTING The Group has adopted AASB 8 ‘Operating Segments’ and AASB 2007-3 ‘Amendments to Australian Accounting Standards arising from AASB 8’ with effect from 1 January 2009. AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. In contrast, the predecessor Standard (AASB 114 ‘Segment Reporting’) required an entity to identify two sets of segments (business and geographical), using a risk and rewards approach, with the entity’s ‘system of internal reporting to key management personnel’ serving only as the starting point for the identification of such segments. The adoption of AASB 8, has not changed the identification of the Group’s reportable segments. Segment information reported externally continues to be analysed on the basis of the Group’s two general operating activities – Global Drilling Services and Global Products – which provides services and products to mining companies, energy companies (coal, oil, gas and geothermal), water utilities, environmental and geotechnical engineering firms, government agencies and other mining services companies. This information is reported to the Group’s Chief Executive Officer for the purposes of resource allocation and assessment of performance. Information regarding these segments is presented below. The accounting policies of the reportable segments are the same as the Group’s accounting policies. The following is an analysis of the Group’s revenue and results by reportable operating segment for the periods under review: Segment revenues and results Segment revenue Segment profit 31 Dec 2009 31 Dec 2008 31 Dec 2009 31 Dec 2008 US$'000 US$'000 US$'000 US$'000 737,180 240,997 978,177 1,240,559 597,979 1,838,538 Global Drilling Services Global Products Unallocated * Finance costs Interest income Profit (loss) before taxation 72,383 16,232 88,615 (66,085) (46,752) 1,616 (22,606) 230,614 115,284 345,898 (76,568) (39,688) 1,637 231,279 * Unallocated costs include corporate general and administrative costs as well as other expense items such as restructuring costs and foreign exchange gains or losses. _______________________________________________________________________________________ 74 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 75 4. SEGMENT REPORTING (CONTINUED) Segment assets Global Drilling Services Global Products Total of all segments Unallocated * Total Segment assets 31 Dec 2009 31 Dec 2008 US$'000 US$'000 781,115 225,947 1,007,062 358,776 1,365,838 751,497 290,895 1,042,392 251,615 1,294,007 * Unallocated assets are those assets that are not specifically associated with either of the segments and include: cash, deferred tax assets, post-employment assets, and other general corporate assets. For the purposes of monitoring segment performance and allocating resources between segments, the chief operating decision marker monitors the segment assets as disclosed above. Other segment information Depreciation and amoritzation of segment assets Additions to non-current assets* 31 Dec 2009 31 Dec 2008 31 Dec 2009 31 Dec 2008 US$'000 US$'000 US$'000 US$'000 69,450 10,204 79,654 8,853 88,507 68,562 12,999 81,561 4,786 86,347 38,145 10,031 48,176 7,922 56,098 255,245 24,043 279,288 24,620 303,908 Global Drilling Services Global Products Total of all segments Unallocated ** Total * Non-current assets excluding deferred tax assets, post-employment assets and other financial assets. ** Unallocated additions to non-current assets relates to the acquisition of general corporate assets which includes intangible software. The Group has no single external customer that provided more than 10% of the Group’s revenues. Geographic Information The Group’s two business segments operate in five principal geographic areas – Africa, Europe, North America, Latin America, and Asia Pacific. The Group’s revenue from external customers and information about its segment assets by geographical locations is detailed below: North America Asia Pacific Latin America Africa Europe Total Revenue from external customers Non-current assets* 31 Dec 2009 31 Dec 2008 31 Dec 2009 31 Dec 2008 US$'000 US$'000 US$'000 US$'000 463,085 275,856 112,080 82,156 45,000 978,177 790,581 507,739 230,498 203,171 106,549 1,838,538 311,259 307,577 74,028 39,677 11,016 743,557 332,786 275,094 69,857 23,089 12,503 713,329 * Non-current assets excluding deferred tax assets, post-employment assets and other financial assets. _______________________________________________________________________________________ 75 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 76 5. REVENUE An analysis of the Group’s revenue for the year is as follows: Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 Revenue from the rendering of services Revenue from the sale of goods 737,180 240,997 978,177 1,240,559 597,979 1,838,538 Interest income: Bank deposits Other loans and receivables Other Dividends from subsidiaries 6. FINANCE COSTS 1,314 113 189 1,616 - 1,470 75 92 1,637 - 979,793 1,840,175 - - - 2 12,543 - 12,545 - 12,545 - - - 574 29 - 603 55,110 55,713 Interest on loans and bank overdrafts Interest rate swap expense Amortisation of debt issuance costs Interest on obligations under finance leases Finance costs due to debt repayment Interest rate swap expense - ineffective hedge Bank refinancing fee Write-off of debt issuance costs Loss arising on derivatives in a designated fair value hedge accounting relationship Gain arising on adjustment to hedged item in a designated fair value hedge accounting relationship Total finance costs Consolidated 2009 US$'000 2008 US$'000 11,752 15,556 2,352 430 30,090 15,242 1,050 370 16,662 694 (694) - 46,752 31,210 6,147 1,651 680 39,688 - - - - 14,760 (14,760) - 39,688 _______________________________________________________________________________________ 76 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 77 7. PROFIT FOR THE YEAR (a) Gains and losses Profit for the year has been arrived at after crediting (charging) the following gains and (losses): Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 Loss on disposal of property, plant and equipment (49) (1,018) Gain (loss) on disposal of businesses (4,130) 9,131 - - - - Net foreign exchange gains (losses) (2,512) 7,054 (109) (1,786) Change in fair value of financial assets carried at fair value through profit or loss Other income 1,389 2,976 - 2,242 - - - - (b) Income and expenses relating to financial instruments Profit for the year includes the following income and expenses arising from movements in the carrying amounts of financial instruments (other than derivative instruments in an effective hedge relationship). Loans and receivables: Interest income Impairment of loans and receivables Financial liabilities at amortised cost Interest expense Interest rate swap expense Amortisation expense Finance costs due to debt repayment Exchange loss Interest on obligations under finance leases Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 1,427 91 1,518 (11,752) (15,556) (2,352) (16,662) (74) (430) (46,826) 1,545 (5,428) (3,883) (31,210) (6,147) (1,651) - (219) (680) (39,907) 12,545 - 12,545 - - - - - - 603 - 603 - - - - - - _______________________________________________________________________________________ 77 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 78 7. PROFIT FOR THE YEAR (CONTINUED) (c) Employee benefit expenses: Post employment benefits: Defined contribution plans Defined benefit plans Long-term incentive plans: Equity-settled share-based payments Cash rights compensation Termination benefits (non-restructuring) Termination benefits (restructuring) Other employee benefits 1 Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 (12,025) (632) (13,229) 758 (47) - (61) - (3,432) (690) (416) (8,234) (52,666) (78,095) (2,224) - (845) (9,312) (108,234) (133,086) (311) (334) - - - - - - - - (358) (395) (1) Other employee benefits include such items as medical benefits, worker’s compensation, other fringe benefits, state taxes, etc. (d) Other: Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 Depreciation of non-current assets Amortisation of non-current assets Operating lease rental expense Impairment of inventory Recovery of inventory previously imparied Impairment of property, plant and equipment (restructuring) (79,865) (8,642) (34,440) (563) 1,706 (80,307) (6,040) (27,619) (7,220) - (1,318) (1,398) - - - - - - - - - - _______________________________________________________________________________________ 78 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 79 8. INCOME TAXES Income tax expense (benefit) is as follows: Income tax expense (benefit): Current tax expense (benefit) Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax expense (benefit) Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 35,264 105,655 (3,369) (2,633) 1,762 (44,749) (7,723) (218) (30,882) 74,555 - 6,392 3,023 - 4,384 1,751 (a) The prima facie income tax expense (benefit) on pre-tax accounting profit reconciles to the income tax expense (benefit) in the financial statements as follows: Profit (loss) before taxation (22,606) 231,279 9,876 51,842 Income tax (benefit) expense calculated at Australian rate of 30% Impact of higher rate tax countries Impact of lower rate tax countries Net nondeductible/nonassessable items Unrecognised tax losses Income subject to double taxation in the U.S. Unutilised foreign tax credits Recognition of deferred tax assets arising in prior years Deduction of foreign taxes Dividends exempt from tax Other (Over) under provision (6,782) (7,796) (1,487) (6,560) 1,148 2,607 4,978 (638) (1,304) - 6,349 (9,485) 1,762 (7,723) 69,384 6,183 (2,552) (2,756) 73 7,693 8,337 (2,506) (4,963) - (4,120) 74,773 (218) 74,555 2,963 15,553 - - 60 - - - - - - - 3,023 - 3,023 - - - - - 2,322 - - (16,533) 409 1,751 - 1,751 _______________________________________________________________________________________ 79 80 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 8. INCOME TAXES (CONTINUED) (b) Income tax recognised directly in equity during the period The following current and deferred amounts were charged (credited) directly to equity during the period: Deferred tax: Actuarial movements on defined benefit plans Share issue costs Cash flow hedges (c) Current tax assets and liabilities Current tax assets: Income tax receivable attributable to: Parent Other entities in the tax consolidated group Other entities Current tax liabilities: Income tax payable attributable to: Parent Other entities in the tax consolidated group Other entities (d) Deferred tax balances Deferred tax comprises: Temporary differences Tax losses Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 (340) 12,437 (9,465) 2,632 19,060 (8,042) 10,197 21,215 - - 41,221 41,221 72,147 44,630 116,777 7,262 - 4,900 12,162 17,878 (11,295) 3,578 10,161 - - 32,378 32,378 66,407 - 66,407 - 12,437 - 12,437 19,060 (8,042) - 11,018 - - - - - - - - 17,878 (11,295) - 6,583 - - - - 17,661 - 17,661 11,614 - 11,614 _______________________________________________________________________________________ 80 81 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 8. INCOME TAXES (CONTINUED) Opening Credited to FX Acquired/ balance income Differences disposed Adj. to PY acquisitions Credited to equity Closing balance Consolidated 2009 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Deferred tax assets (liabilities) Property, plant and equipment Provisions Doubtful debts Intangibles Acquisitions and restructuring costs Share-issue expenses Accrued liabilities Pension Debt and interest Hedge loss Unearned revenues Inventory Investments in subsidiaries Foreign tax credit carryforward Unrealised foreign exchange Other Unused tax losses and credits: Tax losses Presented in the balance sheet as follows: Deferred tax liability Deferred tax asset (21,165) 5,891 577 (7,429) 8,092 11,737 9,716 6,839 2,764 9,834 - 7,415 (597) 6,723 20,960 5,050 66,407 - 66,407 7,067 (1,794) 9 (1,303) (1,250) (6,496) (991) (1,878) 5,870 5,954 23,488 (1,202) - - (24,479) (2,876) 119 44,630 44,749 31 452 44 (570) 621 - 745 525 182 - - 569 - - - 390 2,989 - 2,989 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 12,437 - (340) - (9,465) - - - - - - 2,632 - 2,632 (14,067) 4,549 630 (9,302) 7,463 17,678 9,470 5,146 8,816 6,323 23,488 6,782 (597) 6,723 (3,519) 2,564 72,147 44,630 116,777 (5,323) 122,100 116,777 2009 Deferred tax assets (liabilities) Share issue costs Accrued Liabilities Presented in the balance sheet as follows: Deferred tax liability Deferred tax asset Opening Charged to Balance US$'000 income US$'000 11,614 - 11,614 (6,496) 106 (6,390) Parent Other US$'000 Charged to Equity US$'000 Closing Balance US$'000 - - - 12,437 12,437 17,555 106 17,661 - 17,661 17,661 _______________________________________________________________________________________ 81 82 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 8. INCOME TAXES (CONTINUED) Opening Credited to FX Acquired/ balance income Differences disposed Adj. to PY acquisitions Credited to equity Closing balance Consolidated 2008 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Deferred tax assets (liabilities) Property, plant and equipment Provisions Doubtful debts Intangibles Acquisitions and restructuring costs Share-issue expenses Accrued liabilities Pension Debt and interest Hedge loss Unearned revenues Inventory Investments in subsidiaries Foreign tax credit carryforward Unrealised foreign exchange Other Unused tax losses and credits: Tax losses Presented in the balance sheet as follows: Deferred tax liability Deferred tax asset (23,753) 4,138 125 (7,822) 11,080 16,122 9,231 923 4,688 4,935 (1,169) 2,976 (597) - - (705) 20,170 3,902 24,072 2,752 1,381 441 3,765 (3,983) (4,385) (344) (1,429) (2,345) - 1,274 4,172 54 6,723 20,960 6,099 35,135 (4,253) 30,882 (242) 372 11 (703) 995 - 829 83 421 - (105) 267 (54) - - (61) 1,813 351 2,164 78 - - - - - (2,052) (617) - - - - - - - - - - - (281) (2,255) - - - - - - - - - - - - - - - - - - - 7,262 - 4,899 - - - - - - (21,165) 5,891 577 (7,429) 8,092 11,737 9,716 6,839 2,764 9,834 - 7,415 (597) 6,723 20,960 5,052 66,407 (617) 12,161 - - - - (2,255) (617) 12,161 66,407 (2,130) 68,537 66,407 2008 Deferred tax assets (liabilities) Opening Charged to Balance US$'000 income US$'000 Parent Other US$'000 Credited to Equity US$'000 Closing Balance US$'000 Share issue costs 15,999 (4,385) - - 11,614 Presented in the balance sheet as follows: Deferred tax liability Deferred tax asset - 11,614 11,614 _______________________________________________________________________________________ 82 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 83 8. INCOME TAXES (CONTINUED) Unrecognised deferred tax assets Tax losses - revenue Unused tax credits Consolidated 2009 US$'000 2008 US$'000 2,789 48,951 51,740 2,197 52,696 54,893 The Parent and its wholly-owned Australian resident entities became part of the same tax-consolidated group with effect from 12 April 2007 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Boart Longyear Limited. Companies within the US group also form a tax-consolidated group within the United States. Certain companies within the Dutch group have also formed a tax-consolidated group within the Netherlands. Entities within the tax-consolidated groups have entered into tax-funding arrangements with the head entities. Under the terms of the tax-funding arrangements, the tax-consolidated groups and each of the entities within those tax-consolidated groups agree to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. Such amounts are reflected in amounts receivable or payable to other entities in the tax-consolidated groups. 9. GROUP RESTRUCTURING The Company initiated a restructuring and cost reduction plan beginning in November of 2008. Activities related to the restructuring and cost reduction plan continued during 2009. The restructuring and cost reduction plan activities include: � � � � � � � reduction of drilling services and manufacturing operating and administrative staff levels; reduction of sales, general and administrative staff levels; consolidation of drilling services, manufacturing and administrative facilities; relocation of certain manufacturing activities to lower cost facilities; outsourcing certain operational and administrative activities; discontinuing certain businesses and product lines; and the sale of non-core businesses (see Note 30). The Group incurred costs related to executing the restructuring and cost reduction plan, including costs associated with employee separations, leased facilities, and impairments of inventory and capital equipment related to discontinued businesses and product lines. Expenses related to executing the restructuring and cost reduction plan were as follows: Employee separation costs Occupancy Impairment of property, plant and equipment Impairment of inventory Recovery of inventory previously impaired Other Consolidated 2009 US$'000 2008 US$'000 8,234 3,436 1,318 563 (1,706) 798 12,643 9,312 2,002 1,398 7,220 - 396 20,328 _______________________________________________________________________________________ 83 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 84 9. GROUP RESTRUCTURING (CONTINUED) Restructuring expenses relate to the following expense categories: Cost of goods sold General and administrative expenses Selling and marketing expenses 10. TRADE AND OTHER RECEIVABLES Consolidated 2009 US$'000 2008 US$'000 3,541 5,162 3,940 12,643 12,345 3,971 4,012 20,328 Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 Trade receivables Allowance for doubtful accounts Goods and services tax receivable Other receivables Intercompany receivable 177,442 (5,940) 14,901 12,195 - 198,598 217,239 (8,100) 13,965 11,474 - 234,578 - - 1,707 - 648,995 650,702 - - - 106 28,217 28,323 The aging of trade receivables is detailed below: Current Past due 0 - 30 days Past due 31 - 60 days Past due 61-90 days Past due 90 days Consolidated 2009 US$'000 2008 US$'000 128,700 32,235 6,771 3,086 6,650 166,870 28,055 9,204 6,542 6,568 177,442 217,239 _______________________________________________________________________________________ 84 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 10. TRADE AND OTHER RECEIVABLES (CONTINUED) The movement in the allowance for doubtful accounts in respect of trade receivables is detailed below: 85 Opening Balance Additional provisions Amounts used Amounts reversed Foreign currency exchange differences Closing balance Consolidated 2009 US$'000 2008 US$'000 8,100 4,989 (2,664) (5,080) 595 5,940 3,425 6,453 (125) (1,025) (628) 8,100 The average credit period on sales of goods is 60 days (2008: 65 days). No interest is presently charged on trade receivables. The Group’s policy requires customers to pay the Group in accordance with agreed payment terms. The Group’s settlement terms are generally 30 to 60 days from date of invoice. All credit and recovery risk associated with trade receivables has been provided for in the balance sheet. Trade receivables have been aged according to their original due date in the above aging analysis. The Group holds security for a number of trade receivables in the form of letters of credit, deposits, and advanced payments. The Group has used the following basis to assess the allowance loss for trade receivables and as a result is unable to specifically allocate the allowance to the aging categories shown above: � � � the general economic conditions in specific geographical regions; an individual account by account specific risk assessment based on past credit history; and any prior knowledge of debtor insolvency or other credit risk. 11. INVENTORIES Raw materials Work in progress Finished products Consolidated 2009 US$'000 2008 US$'000 16,327 5,194 123,469 144,990 32,724 5,788 138,784 177,296 _______________________________________________________________________________________ 85 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 86 12. FINANCIAL INSTRUMENTS Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balances. The capital structure of the Group consists of debt, which includes the borrowings disclosed in Note 17, cash and cash equivalents and equity attributable to equity holders of the Parent, comprising issued capital, reserves, other equity and retained earnings (accumulated losses) as disclosed in Notes 20, 21, 22 and 23 respectively. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 3 to the financial statements. Categories of financial instruments Financial Assets Current Loans and Receivables: Cash and cash equivalents Trade and other receivables Other financial assets Non-current Investments carried at cost: Investments in subsidiaries Financial Liabilities Current Amortised cost: Trade and other payables Restructuring Provisions Loans and borrowings Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 87,557 198,598 1,818 287,973 50,603 234,578 306 285,487 148 650,702 - 650,850 108 28,323 - 28,431 - - 2,226,378 2,186,106 Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 170,118 195,597 2,256 3,133 8,730 1,148 175,507 205,475 1,041 - 1,041 1,511 - 1,511 Other financial liabilities - Derivative instruments 11,835 - Non-current Amortised cost: Trade and other payables Loans and borrowings - 132,486 132,486 1,293 813,770 815,063 Other financial liabilities - Derivative instruments 4,822 27,197 - - - - - - - - - - At the reporting date there are no significant concentrations of credit risk. The carrying amount reflected above represents the Group’s and the Parent’s maximum exposure to credit risk for such loans and receivables. _______________________________________________________________________________________ 86 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 87 12. FINANCIAL INSTRUMENTS (CONTINUED) Financial risk management objectives The Group’s corporate treasury function provides services to the business, coordinates access to domestic and international financial markets, and monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Group seeks to minimise the effects of these risks, where deemed appropriate, by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provide written principles on foreign exchange risk and interest rate risk. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. Market risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates (Note 3(j)). The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including: � � foreign exchange forward contracts to hedge the exchange rate risk arising from transactions not recorded in an entity’s functional currency; interest rate swaps to mitigate the risk of rising interest rates. Foreign currency risk management The Group subsidiaries undertake certain transactions denominated in currencies other than their functional currency, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The carrying amount of the Group’s foreign currency denominated monetary assets and monetary liabilities, including intercompany balances, at the reporting date is as follows: Australian Dollar Canadian Dollar Euro US Dollar Assets Liabilities 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 429,090 79,700 35,944 346,502 308,821 24,062 40,948 201,245 77,391 42,631 118,378 368,349 56,458 37,211 113,280 158,592 _______________________________________________________________________________________ 87 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 88 12. FINANCIAL INSTRUMENTS (CONTINUED) Foreign currency sensitivity The Group is mainly exposed to Australian Dollars (AUD), Canadian Dollars (CAD), the Euro (EUR) and United States Dollar (USD). The Group is also exposed to translation differences as the Group’s presentation currency is different to the functional currencies of various operating entities. However this represents a translation risk rather than a financial risk and consequently is not included in the following sensitivity analysis. The following tables detail the Group’s sensitivity to a 10% change in each of the Group’s subsidiaries functional currency against the relevant foreign currencies. The percentages disclosed below are the sensitivity rates used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a given percentage change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the Group where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number indicates an increase in net profit and net assets where the subsidiaries functional currency strengthens against the respective currency. For a weakening of the subsidiaries functional currency against the respective currency there would be an equal and opposite impact on the profit and net assets. AUD Impact Consolidated CAD Impact Consolidated 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 Net profit Net assets Change in currency 1 (24) (31,973) 10% (428) (22,498) 10% EUR Impact Consolidated 980 191 10% 6,165 (3,370) 10% USD Impact Consolidated Net profit Net assets Change in currency 1 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 97 7,494 10% (982) 7,506 10% 15,737 1,986 10% (5,550) 1,231 10% (1) This has been based on the historical changes in the Group’s subsidiaries functional currencies against the related foreign currencies in the financial year ended 31 December 2009 and 31 December 2008. The Parent has no significant exposure to foreign currencies at the reporting date. The Group’s sensitivity to certain foreign currency denominated loans has decreased during the current period mainly due to the retirement of these instruments and due to current hedging activity. In management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year end exposure does not necessarily reflect the exposure during the course of the year. _______________________________________________________________________________________ 88 89 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 12. FINANCIAL INSTRUMENTS (CONTINUED) Forward foreign exchange contracts There were no open forward foreign currency contracts as of 31 December 2009. At 31 December 2008 the Group had the following open forward foreign currency contract: Outstanding contracts Consolidated Sell - CAD Less than 3 months Average exchange rate Foreign currency Contract value Fair value 2008 rate 2008 FC'000 2008 US$'000 2008 US$'000 1.2216 30,540 25,000 - During the years ended 31 December 2009, and 2008, the Group entered into contracts to hedge the foreign currency exposure it has on United States dollar denominated loans in Canada. The Group periodically enters into forward foreign exchange contracts (for terms not exceeding 9 months) to hedge the exchange rate risk arising from these anticipated future transactions, which are designated as fair value hedges. Interest rate risk management The Parent and the Group are exposed to interest rate risk as entities within the Group borrow funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts. Hedging activities are evaluated regularly to align with interest rate views and defined risk appetite. The Parent’s and the Group’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note. Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rates. At the reporting date, if interest rates had been 100 basis points higher or lower and all other variables were held constant, the Group’s: � � profit before tax would increase/decrease by $2,774,000 (2008: decrease/increase by $3,295,000). $1,157,000 of the increase/decrease is attributable to the Group’s exposure to interest rates on its variable rate borrowings. An offsetting $3,931,000 is attributable to the fair value change in the ineffective portion of the Group’s interest rate swap contract. other equity reserves would increase/decrease by $247,000 (2008: increase/decrease by $7,196,000) mainly as a result of the Group’s exposure to interest rates on its interest rate swap contracts that are in a cash flow hedge relationship. Interest rate swap contracts Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the LIBOR curve at reporting date and the credit risk inherent in the contract, and are disclosed below. The average interest rate is based on the outstanding balances at the start of the financial year. _______________________________________________________________________________________ 89 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 90 12. FINANCIAL INSTRUMENTS (CONTINUED) Interest rate swap contracts (continued) The following tables detail the notional principal amounts and the remaining terms of interest rate swap contracts outstanding as at reporting date. Outstanding floating for fixed contracts Consolidated 1 to 2 years 2 to 5 years Average contracted fixed interest rate 2009 % 2008 % 5.1825% - 3.1890% 5.1825% Notional principal amount Fair value 2009 2008 2009 2008 US$'000 US$'000 US$'000 US$'000 275,000 - 275,000 100,000 325,000 425,000 (16,657) - (16,657) (1,497) (25,700) (27,197) The interest rate swaps settle on a quarterly basis. The floating rate on the interest rate swaps is 90-day USD LIBOR. The Group settles the difference between the fixed and floating interest rate on a net basis. The effective portion of the interest rate swap contracts that exchange floating rate interest amounts for fixed rate interest amounts are designated as cash flow hedges in order to reduce the Group’s cash flow exposure resulting from variable rates on borrowings. The interest rate swaps and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in profit or loss over the period of the loan. Credit risk management 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 and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. Trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. Except as detailed in the following table, the carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained. Financial assets and other credit exposures Consolidated Maximum credit risk 2009 2008 US$'000 US$'000 Performance guarantees provided including letter of credits 28,557 40,619 Liquidity risk management Ultimate responsibility for liquidity risk management rests with the Treasurer and board of directors, who have built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. _______________________________________________________________________________________ 90 91 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 12. FINANCIAL INSTRUMENTS (CONTINUED) Liquidity risk management (continued) The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Included in Note 17 is a listing of additional undrawn facilities that the Group has at its disposal to further reduce liquidity risk. Liquidity and interest risk tables The following tables detail the Parent’s and the Group’s remaining contractual maturity for its non-derivative financial liabilities. The tables have been presented based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group may be required to pay. The table includes both interest and principal cash flows. The adjustment column represents the possible future cash flows attributable to the instrument included in the maturity analysis which are not included in the carrying amount of the balance sheet. Consolidated 2009 Non-interest bearing payables Restructuring provision Weighted average effective interest rate % - - Finance lease liability 8.4% Variable interest rate instruments 1.3% Fixed interest rate Less than 3 months 1 to 3 to Adjust- 1 month months 1 year 1 - 5 years 5+ years ment Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 109,326 60,792 376 548 - 1,692 2,464 - - 570 293 1,317 134,240 188 274 146 instruments 3.1% 1,000 - - - 110,934 62,009 5,473 134,810 2008 Non-interest bearing payables Restructuring provision Finance lease liability 8.1% Variable interest rate - - 136,463 728 32 59,134 1,455 65 - 6,547 2,433 1,293 - 3,285 instruments 3.9% 2,657 5,313 23,909 832,621 Fixed interest rate instruments 12.0% 1,173 - - - 141,053 65,967 32,889 837,199 - - - - - - - - - - - - - - (381) 170,118 2,256 3,475 (3,996) 132,000 - 1,000 (4,377) 308,849 - - (1,032) 196,890 8,730 4,783 (52,500) 812,000 - 1,173 (53,532) 1,023,576 _______________________________________________________________________________________ 91 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 92 12. FINANCIAL INSTRUMENTS (CONTINUED) Liquidity and interest risk tables (continued) Parent Weighted average effective interest rate % Less than 3 months 1 to 3 to Adjust- 1 month months 1 year 1 - 5 years 5+ years ment Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 - - 844 844 1,054 1,054 197 197 457 457 - - - - - - - - - - - - - - - - 1,041 1,041 1,511 1,511 2009 Non-interest bearing payables 2008 Non-interest bearing payables The following table details the Parent’s and the Group’s expected maturity for its non-derivative financial assets. The tables below have been presented based on the undiscounted contractual maturities of the financial assets. Consolidated 2009 Non-interest bearing receivables Cash 2008 Non-interest bearing receivables Cash Less than 3 months 1 to 3 to Adjust- 1 month months 1 year 1 - 5 years 5+ years ment Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 86,348 87,557 86,348 25,902 - - 173,905 86,348 25,902 108,267 50,603 158,870 126,311 - 126,311 - - - - - - - - - - - - - - - - - - - - - 198,598 87,557 286,155 234,578 50,603 285,181 _______________________________________________________________________________________ 92 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 93 12. FINANCIAL INSTRUMENTS (CONTINUED) Liquidity and interest risk tables (continued) Parent 2009 Non-interest bearing receivables Cash 2008 Non-interest bearing receivables Cash Less than 3 months 1 to 3 to Adjust- 1 month months 1 year 1 - 5 years 5+ years ment Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 325,351 325,351 148 - 325,499 325,351 13,072 108 13,180 15,251 - 15,251 - - - - - - - - - - - - - - - - - - - - - - - - 650,702 148 650,850 28,323 108 28,431 The liquidity and interest risk tables have been prepared based on the Group’s intent to collect the assets or settle the liabilities in accordance with their contractual terms. If the group were to collect or settle the balances early, the liquidity disclosure would be different than what is reported. The following table details the Group’s liquidity analysis for its derivative financial instruments. The table has been drawn up based on the undiscounted net cash inflows (outflows) on the derivative instrument that settle on a net basis and the undiscounted net inflows (outflows) on those derivatives. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves existing at the reporting date. Consolidated 2009 Interest rate swaps 2008 Interest rate swaps Less than 3 months 1 to 3 to Adjust- 1 month months 1 year 1 - 5 years 5+ years ment Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 - - (3,418) (8,417) (4,822) (3,416) (10,366) (13,476) - - - (16,657) 61 (27,197) The Parent had no derivative financial instruments for the reporting periods disclosed. _______________________________________________________________________________________ 93 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 94 12. FINANCIAL INSTRUMENTS (CONTINUED) Fair value of financial instruments The fair values of financial assets and financial liabilities are determined as follows: � � � the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices the fair value of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions the fair value of derivative instruments are calculated using quoted prices. Where such prices are not available, use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. The directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair values. Fair value measurements recognised in the statement of financial position The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on 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). 2009 Financial assets at FVTPL Held for trading Financial liabilities at FVTPL Derivative instruments 2008 Financial liabilities at FVTPL Derivative instruments Level 1 US$'000 Level 2 US$'000 Level 3 US$'000 Total US$'000 1,494 - - - 16,657 27,197 - - - 1,494 16,657 27,197 _______________________________________________________________________________________ 94 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 95 13. PROPERTY, PLANT AND EQUIPMENT Balance at 1 January 2008 Additions Acquisitions through business combinations Adjustments to business combinations accounted for on a provisional basis in 2007 Disposal of assets Currency movements Balance at 1 January 2009 Additions Adjustments to business combinations accounted for on a provisional basis in 2008 Disposal of assets Transfer from intangible assets Currency movements Balance at 31 December 2009 Accumulated depreciation and impairment: Balance at 1 January 2008 Depreciation for the year Impairment of non-current assets Disposal of assets Currency movements Balance at 1 January 2009 Depreciation for the year Impairment of non-current assets Disposal of assets Currency movements Balance at 31 December 2009 Net book value at 31 December 2008 Net book value at 31 December 2009 Land and Buildings US$'000 Consolidated Plant and Equipment US$'000 Total US$'000 44,829 4,011 4,329 - (539) (5,538) 47,092 12 - (9,363) - 3,431 41,172 (4,121) (3,223) - 157 2,631 (4,556) (1,622) - 1,377 (1,803) (6,604) 42,536 34,568 452,950 134,026 33,270 2,540 (20,221) (100,407) 502,158 34,243 (6,554) (19,093) 655 80,709 592,118 (135,298) (77,084) (1,398) 14,156 58,623 (141,001) (78,243) (1,318) 15,226 (40,835) (246,171) 361,157 345,947 497,779 138,037 37,599 2,540 (20,760) (105,945) 549,250 34,255 (6,554) (28,456) 655 84,140 633,290 (139,419) (80,307) (1,398) 14,313 61,254 (145,557) (79,865) (1,318) 16,603 (42,638) (252,775) 403,693 380,515 Tangible property, plant and equipment includes machinery equipment, office equipment, furniture and fixtures, and vehicles, which are substantially freehold. The net book value of property, plant and equipment at 31 December 2009 and 2008 includes an amount of $3,424,000 and $3,430,000 respectively, related to assets held under finance leases. During 2009, the Group sold its Sub Saharan manufacturing operations. This sale included net book value of property, plant and equipment of $5,487,000. During 2008, the Group sold the mining capital equipment and diamond wire businesses in South Africa and the residential water business in the United States of America. These sales included net book value of property, plant and equipment of $425,000, $257,000 and $1,768,000, respectively. _______________________________________________________________________________________ 95 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 96 14. GOODWILL Gross carrying amount: Balance at 1 January 2008 Additions through business combinations Adjustments to business combinations accounted for on a provisional basis in 2007 Currency movements Balance at 31 December 2008 Balance at 1 January 2009 Adjustments to business combinations accounted for on a provisional basis in 2008 Currency movements Balance at 31 December 2009 Consolidated Goodwill US$'000 206,186 65,577 2,775 (39,967) 234,571 234,571 7,947 34,438 276,956 Allocation of goodwill to cash-generating units Goodwill has been allocated for impairment testing purposes to individual cash generating units. The carrying amount of goodwill by geographic segment allocated to cash-generating units that are significant individually or in aggregate is as follows: Asia Pacific Latin America North America Consolidated 2009 US$'000 2008 US$'000 136,943 33,884 106,129 276,956 105,661 33,108 95,802 234,571 _______________________________________________________________________________________ 96 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 97 14. GOODWILL (CONTINUED) The carrying amount of goodwill is tested for impairment annually at 31 October and whenever there is an indicator that the asset may be impaired. Due to the current economic environment and the impact on trading performance, the Group believes that there is an indication of impairment and therefore tested for impairment at 30 June 2009 as well as at 31 October 2009. If an asset is impaired, it is written down to its recoverable amount. In its impairment assessment, the Group assumes the recoverable amount based on a value in use calculation using cash flow projections based on the Group’s three year strategic plan and financial forecasts over a 9-year period, which approximates the length of a typical business cycle based on historical industry experience, with a terminal value. Key assumptions used for impairment testing include: � � a global discount rate of 11.5% adjusted on a case by case basis for regional variations in the required equity rate of return based on independent data (the adjusted rates ranged from 9.2% to 25.3%) expected future profits and future annual growth rates consistent with internal forecasts and expected performance of the specific business line being tested for impairment over the cycle. The growth rates do not exceed forecasts for the long term industry averages. Sensitivity analyses were performed to determine whether the carrying value is supported by different assumptions. The key variables of the sensitivity analysis included: � � � applicable discount rates; terminal growth rates; and inflation assumptions. Based on the impairment testing performed, the recoverable amount from each cash generating unit exceeded the goodwill carrying amount. Consequently, no impairments were recorded in 2009. _______________________________________________________________________________________ 97 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 98 15. OTHER INTANGIBLE ASSETS Consolidated Customer Develop- ment Trademarks Patents relationships Software assets Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 1,988 1,270 - - 1,090 - - - - 3,258 - 1,090 24,544 33,376 1,763 - (7,710) 51,973 - - - 15,890 - 15,890 5,474 - - 5,081 (846) 9,709 33,096 34,646 1,763 20,971 (8,556) 81,920 3,258 1,090 51,973 15,890 9,709 81,920 - 505 - - - 3,763 - 607 - - - 1,697 (41) (123) - (297) (160) - (164) (457) (164) (423) - (587) (457) (190) - (647) (990) - - - 6,745 57,728 (2,693) (4,058) 1,145 (5,606) (5,606) (5,398) (1,559) (12,563) - 7,065 - - - 22,955 - (1,340) - (1,340) (1,340) (2,187) - (3,527) - 5,719 (363) (655) 2,459 16,869 (990) 13,896 (363) (655) 9,204 103,012 (587) (359) 49 (897) (3,618) (6,040) 1,194 (8,464) (897) (444) (60) (1,401) (8,464) (8,642) (1,619) (18,725) Gross carrying amount: Balance at 1 January 2008 Additions through business combinations Adjustments to business combinations accounted for on a provisional basis in 2007 Additions Currency movements Balance at 31 December 2008 Balance at 1 January 2009 Adjustments to business combinations accounted for on a provisional basis in 2008 Additions Disposals Transfer to PP&E Currency movements Balance at 31 December 2009 Accumulated amortisation: Balance at 1 January 2008 Amortisation for the period Currency movements Balance at 31 December 2008 Balance at 1 January 2009 Amortisation for the period Currency movements Balance at 31 December 2009 Net book value at 31 December 2008 Net book value at 31 December 2009 3,094 3,176 633 1,050 46,367 45,165 14,550 19,428 8,812 15,468 73,456 84,287 _______________________________________________________________________________________ 98 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 99 16. TRADE AND OTHER PAYABLES Current Trade payables Accrued payroll and benefits Goods and services tax payable Professional fees Other sundry payables and accruals Non-current Trade and other payables Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 86,391 40,226 19,530 3,992 19,979 105,671 34,833 24,795 4,127 26,171 170,118 195,597 - - 1,293 1,293 - - - 766 275 1,041 - - - - - 618 893 1,511 - - The average credit period on purchases of certain goods is 37 days (2008: 43 days). No interest is charged on the trade payables for this period. Thereafter, various percentages of interest may be charged on the outstanding balance based on the terms of the specific contracts. The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe. _______________________________________________________________________________________ 99 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 100 17. BORROWINGS Unsecured - at amortised cost Current Term bank loans Debt issuance costs Non-current Term bank loans Revolver bank loans Debt issuance costs Secured - at amortised cost Current - finance lease liabilities Non-current - finance lease liabilities Disclosed in the financial statements as: Current borrowings Non-current borrowings A summary of the maturity of the Group's borrowings is as follows: Less than 1 year Between 1 and 2 years Between 2 and 3 years Between 3 and 4 years More than 4 years Term Bank Loans Consolidated 2009 US$'000 2008 US$'000 1,000 (381) 65,000 67,000 (475) 2,514 961 135,619 3,133 132,486 135,619 3,133 458 132,028 - - 135,619 1,173 (2,166) 650,000 162,000 (873) 2,141 2,643 814,918 1,148 813,770 814,918 1,148 585,241 1,737 226,341 451 814,918 During the year ended 31 December 2009, the Group repaid $585,000,000 of its bank term loans. The loans had an original, scheduled maturity date of 10 April 2010. The bank term loans were repaid with proceeds from the 2009 capital raising program (see Note 20). At 31 December 2009, outstanding bank term loans primarily consist of a variable rate loan with a scheduled maturity date of 13 April 2012. The interest rates on the loans are based on a base rate plus applicable margin. The base rate is generally based upon USD LIBOR rates, while the margin is determined based upon leverage according to a pricing grid. At 31 December 2009, the rates were based upon USD LIBOR + 1.05%, which totaled 1.36%. At 31 December 2008, the rates ranged from USD LIBOR + 0.65% to USD LIBOR + 0.75%, which amounted to rates ranging from 2.05% to 2.15%. The Group hedges its exposure to floating rates under the loans via interest rate swaps, exchanging variable rate interest payments for fixed rate interest payments. The interest swap contracts were largely entered into in 2006 and reflect notional amounts and maturities assuming (a) a portion of the variable interest loans would be hedged and (b) that bank term loans would be repaid largely according to original, scheduled maturity dates. As of 31 December 2009, the notional amount of interest rate swap contracts was $275,000,000, which exceeded outstanding bank term loans. As of 31 December 2009, interest rate swap contracts with notional value up to $16,250,000 are deemed effective and are accounted for as cash flow hedges, while $258,750,000 of the interest rate swap contract are deemed ineffective as cash flow hedges upon repayment of the $585,000,000 bank term loan in late 2009. As of 31 December 2008, the entire $425,000,000 of outstanding interest rate swap contracts were deemed to be effective cash flow hedges and were accounted for accordingly. As of 31 December 2009, the $275,000,000 of interest rate swap contracts outstanding swapped variable rates (as noted above) to fixed at a base rate 5.18%. As of 31 December 2008, $425,000,000 notional amount of floating rate interest rates were swapped to fixed at a base rate ranging from 3.16% to 5.18%. _______________________________________________________________________________________ 100 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 101 17. BORROWINGS (CONTINUED) Revolver Bank Loans Bank facilities include a revolver of $200,000,000. As of 31 December 2009, $67,000,000 is drawn with interest rates of 1.30%. As of 31 December 2008, $162,000,000 was drawn with interest rates ranging from 1.15% to 2.59%. Outstanding letters of credit of $11,405,000 and $11,550,000 as of 31 December 2009 and 2008, respectively, reduce the amount available to draw under the revolver. Loan Covenants - Term and Revolver Bank Loans The Group’s borrowings contain covenants and restrictions requiring the Group to meet certain financial ratios and reporting requirements, as well as minimum levels of subsidiaries that are guarantors of the borrowings. These covenants include maintaining a Debt to EBITDA ratio of not more than 3.75:1 and an EBITDA to Interest ratio of not less than 3.0:1. The agreement also requires that borrowers and guarantors represent at least 75% of the EBITDA and total tangible assets of the Group (see Note 27 for a listing of subsidiary guarantors). Testing of covenant compliance takes place twice-yearly for the trailing 12 month periods to 30 June and 31 December. Noncompliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the associated debt becoming immediately due and payable. The Group is in compliance with the debt covenants as of 31 December 2009 and 2008. Finance Leases The finance lease liabilities were assumed largely as part of acquiring certain businesses prior to 2008. The leases are secured by the assets leased. The borrowings have interest rates ranging from 6.77% to 13.08%, with repayment periods not exceeding 3 years. _______________________________________________________________________________________ 101 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 102 18. PROVISIONS Current Employee benefits Restructuring and termination costs (i) Warranty (ii) Non-current Employee benefits Pension and post-retirement benefits (Note 19) Consolidated 2009 US$'000 2008 US$'000 11,103 2,256 614 13,973 1,942 42,948 44,890 58,863 9,013 8,730 5,366 23,109 1,909 43,128 45,037 68,146 The changes in the provisions for the year ended 31 December 2009 are as follows: Balance at 1 January 2009 Additional provisions recognised Reductions arising from payments/other sacrifices of future economic benefits Reductions resulting from remeasurement or settlement without cost Foreign exchange Balance at 31 December 2009 Consolidated Restructuring and termination costs (i) US$'000 Warranty (ii) US$'000 8,730 11,267 (15,796) (2,548) 603 2,256 5,366 2,609 (5,880) (1,710) 229 614 (i) (ii) The provision for restructuring and termination costs represents the present value of management’s best estimate of the costs directly and necessarily caused by the restructuring that are not associated with the ongoing activities of the entity, including termination benefits and onerous leases. The provision for warranty claims represents the present value of management’s best estimate of the future outflow of economic benefits that will be required under the Group’s warranty program. The Parent has a provision for $690,000 at 31 December 2009 for cash rights compensation. _______________________________________________________________________________________ 102 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 103 19. PENSION AND POSTRETIREMENT BENEFITS The Parent has no employees and therefore does not support any pension or postretirement plans. Accordingly, the disclosures detailed below relate to the Group. Pension and Postretirement Medical Commitments The Group operates defined contribution and defined benefit pension plans for the majority of its employees. It also operates postretirement medical arrangements in Southern Africa and North America. The policy for accounting for pensions and postretirement benefits is included in Note 3(n). The assets of the defined contribution plans are held separately in independently administered funds. The charge in respect of these plans is calculated on the basis of contributions payable by the Group during the fiscal year. The majority of the defined benefit pension plans are funded in accordance with minimum funding requirements by local regulators. The assets of these plans are held separately from those of the Group, in independently administered funds, in accordance with statutory requirements or local practice throughout the world. The postretirement medical arrangements provide health benefits to retired employees and certain dependants. Eligibility for coverage is dependent upon certain criteria. The majority of these plans are unfunded and have been provided for by the Group. Defined Contribution Plans Pension costs represent actual contributions paid or payable by the Group to the various plans. At 31 December 2009, and 2008, there were no significant outstanding/prepaid contributions. Group contributions to these plans were $12,025,000 and $13,229,000 for the years ended 31 December 2009, and 2008, respectively. The Group’s operations in the Netherlands participate in an industry-wide pension scheme for the mechanical and electrical engineering industries, known as the PME Fund. Although it is a defined benefit pension plan, the participating employers have no obligation other than to pay set contributions based on benefits accrued by the employees every period. The employers are not obligated to make additional payments to fund deficits, nor have they any right to repayments in the event of surpluses. The Group treats the PME scheme as a defined contribution plan. Defined Benefit Pension Plans Full actuarial valuations of the defined benefit pension plans were performed as of various dates and updated to 31 December 2009 by qualified independent actuaries. The estimated market value of the assets of the funded pension plans was $178,854,000 and $150,626,000 at 31 December 2009, and 2008, respectively. The market value of assets was used to determine the funding level of the plans. The market value of the assets of the funded plans was sufficient to cover 93% and 88% in 2009 and 2008, respectively, of the benefits that had accrued to participants after allowing for expected increases in future earnings and pensions. Entities within the Group are paying contributions as required in accordance with local actuarial advice. As the majority of the defined benefit pension plans are closed to new participants, it is expected that under the projected unit credit method, service cost will increase as the participants age. Group contributions to these plans were $5,310,000 for both the years ended 31 December 2009 and 2008. Contributions in 2010 are expected to be $7,058,000. During the year ended 31 December 2009 the pension plan in the United States of America was frozen with respect to all beneficiaries. This resulted in a curtailment and resulted in a gain of $2,510,000, which was recognised in profit and loss in 2009. _______________________________________________________________________________________ 103 104 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 19. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) The principal assumptions used to determine the actuarial present value of benefit obligations and pension costs are detailed below (shown in weighted averages): Discount rates Expected average rate of increase Southern 2009 The Africa 9.5% Americas 5.9% Europe 5.5% Southern Africa 7.5% 2008 The Americas 6.5% Europe 6.3% in salaries 6.8% 4.0% 4.0% 5.0% 4.3% 3.5% Expected average rate of increase of pensions in payment 5.8% - 1.5% 4.0% - 1.5% Expected average long term rate of return on plan assets Expected average increase 7.5% 7.4% 6.4% 6.8% 8.0% 6.4% in healthcare costs (initial) 7.8% 7.5% Expected average increase in healthcare costs (ultimate) 7.8% 5.0% - - 6.0% 8.0% 6.0% 5.0% - - Amounts recognised in profit or loss in respect of these defined benefit plans are as follows: 2009 Post- 2008 Post- Pension retirement Pension retirement Plan medical Plan Total plan Medical Plan Total US$'000 2,126 11,145 122 (11,396) (2,510) US$'000 509 636 - - - US$'000 2,635 11,781 122 US$'000 3,070 13,315 4,069 US$'000 453 735 US$'000 3,523 14,050 (4,126) (57) (11,396) (17,555) - (17,555) (2,510) 142 (861) (719) (513) 1,145 632 3,041 (3,799) (758) Current service cost Interest cost on plan liabilities Past service cost Expected return on plan assets Effects of settlement and curtailment gains Total charge (credit) to profit and loss account For the financial years ended 31 December 2009 and 2008 a loss (gain) of $412,000 and $(564,000), respectively, has been included in cost of goods sold and the remainder in general and administrative or sales and marketing expenses. _______________________________________________________________________________________ 104 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 105 19. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) The following amounts have been recognised in the statement of comprehensive income. 2009 Post- 2008 Post- Pension retirement Pension retirement Plan Medical Plan Total Plan Medical Plan Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Actuarial losses during the year, net of taxes (2,786) (667) (3,453) (22,779) (1,639) (24,418) In 2001, legislation in South Africa was passed which restricts pension surpluses where they are not expected to give rise to future contribution reductions or refunds because of local restrictions over their use. During 2007, the South African Regulators approved the subsidiary's proposal in respect of the apportionment of the surplus from the plans. The majority of the members elected to transfer to the Alexander Forbes Retirement Fund effective 28 February 2008, leaving only one member in the fund. The liability with respect to the transfer was settled on 19 December 2008. The net asset recorded has certain restrictions on how the surplus can be used. The amount included in the balance sheet arising from the Group’s obligations in respect of defined benefit plans is as follows: 2009 Post- 2008 Post- Pension retirement Pension retirement Plan Medical Plan Total Plan Medical Plan Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 188,455 (178,854) 9,601 - - - 188,455 165,891 (178,854) (150,626) 9,601 15,265 - - - 165,891 (150,626) 15,265 4,901 14,502 10,488 10,488 15,389 24,990 5,421 20,686 9,411 9,411 14,832 30,097 Present value of funded defined benefit obligations Fair value of plan assets Present value of unfunded defined benefit obligations Deficit Net liability arising from defined benefit obligations 14,502 10,488 24,990 20,686 9,411 30,097 _______________________________________________________________________________________ 105 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 106 19. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) Movements in the present value of the defined benefit obligations were as follows: 2009 Post- 2008 Post- Pension retirement Pension retirement Plan Medical Plan Total Plan Medical Plan Total US$'000 171,312 US$'000 9,411 US$'000 180,723 US$'000 246,668 US$'000 11,481 US$'000 258,149 2,126 11,145 2 15,857 122 (2,510) (1,185) 12,167 (15,681) - 509 636 299 601 - - (266) 103 (863) 58 2,635 11,781 301 3,070 13,315 65 16,458 (20,689) 122 (2,510) (1,451) 12,270 (16,544) 58 4,069 194 (18,766) (26,761) (29,853) - 453 735 290 2,655 (4,126) - (861) (585) (631) - 3,523 14,050 355 (18,034) (57) 194 (19,627) (27,346) (30,484) - Opening defined benefit obligation Current service cost Interest cost Contributions from plan participants Actuarial losses (gains) Past service cost Losses (gains) on curtailments Liabilities extinguished on settlements Exchange differences on foreign plans Benefits paid Federal subsidy on benefits paid Closing defined benefit obligation 193,355 10,488 203,843 171,312 9,411 180,723 Changes in the fair value of plan assets were as follows: 2009 Post- 2008 Post- Pension retirement Pension retirement Plan Medical Plan Total Plan Medical Plan Total US$'000 150,626 US$'000 - US$'000 150,626 US$'000 257,362 US$'000 - US$'000 257,362 11,396 13,345 (1,185) 15,041 5,310 2 (15,681) 178,854 - - (266) - 830 299 11,396 13,345 (1,451) 15,041 6,140 301 17,555 (49,714) (18,717) (31,382) 5,310 65 - - - - 341 290 17,555 (49,714) (18,717) (31,382) 5,651 355 (863) (16,544) (29,853) (631) (30,484) - 178,854 150,626 - 150,626 Opening fair value plan of assets Expected return on plan assets Actuarial gains (losses) Assets distributed on settlements Exchange differences on foreign plans Contributions from the employer Contributions from plan participants Benefits paid Closing fair value of plan assets _______________________________________________________________________________________ 106 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 19. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) The analysis of the plan assets and the expected rate of return at the balance sheet date are as follows: 107 2009 Southern Africa The Americas Europe Rate of Return Fair Value Rate of Return Fair Value Rate of Return Fair Value Total Fair Value % US$'000 % US$'000 % US$'000 US$'000 - 9.5% - 7.5% - 7.5% - 9,876 - 10,700 - 20,576 9.3% 4.6% - 3.7% 3.7% 7.4% 57,752 53,039 - 4,714 2,357 117,862 7.8% 3.8% 6.3% 2.0% - 6.4% 24,654 12,933 2,425 404 - 40,416 82,406 75,849 2,425 15,818 2,357 178,854 2008 Southern Africa The Americas Europe Rate of Return Fair Value Rate of Return Fair Value Rate of Return Fair Value Total Fair Value % US$'000 % US$'000 % US$'000 US$'000 10.5% 7.5% - 5.5% - 6.8% 6,968 6,757 - 7,391 - 21,116 10.0% 5.0% - 4.0% 4.0% 7.9% 41,682 43,576 - 6,631 2,842 94,731 8.0% 4.0% 6.5% - - 6.8% 19,476 12,520 2,783 - - 34,779 68,126 62,853 2,783 14,022 2,842 150,626 At 31 December 2009 Equity Bonds Property Cash Other Total market value At 31 December 2008 Equity Bonds Property Cash Other Total market value The pension and post-retirement (surplus) deficit by geographic region are as follows: Consolidated 31 December 2009 31 December 2008 Southern The Southern The Africa Americas Europe Total Africa Americas Europe Total Postretirement medical plan deficit Pension plan - 10,488 - 10,488 218 9,193 - 9,411 (surplus) deficit Total (surplus) deficit (17,958) (17,958) 14,275 24,763 18,185 18,185 14,502 24,990 (13,249) (13,031) 18,435 27,628 15,500 15,500 20,686 30,097 On 8 December 2003, the Medicare Prescription Drug Improvement and Modernisation Act of 2003 was signed into law in the U.S. The Act introduced a prescription drug benefit beginning 2006 under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Based on an actuarial analysis of the levels of benefits provided under the Group’s Postretirement Welfare Plan, the plan’s actuary has concluded that beneficiaries receive drug coverage at least actuarially equivalent to Medicare Part D. The federal subsidy was reflected in costs, reducing the accumulated postretirement benefit obligation by approximately $905,000 and $468,000 at 31 December 2009 and 2008, respectively. The expense was reduced by approximately $29,000 and $87,000 at 31 December 2009 and 2008, respectively. _______________________________________________________________________________________ 107 108 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 19. PENSION AND POST-RETIREMENT BENEFITS (CONTINUED) 2009 Post- retirement Medical Plan US$'000 - Pension Plan US$'000 178,854 Total US$'000 178,854 Pension Plan US$'000 150,626 2008 Post- retirement Medical Plan US$'000 - Total US$'000 150,626 (193,355) (14,502) (10,488) (10,488) (203,843) (24,990) (171,312) (20,686) (9,411) (9,411) (180,723) (30,097) (570) (166) (736) (635) 63 (572) 13,345 - 13,345 (49,714) - (49,714) Fair value of plan assets Present value of defined benefit obligation Deficit Experience adjustments on plan liabilities Experience adjustments on plan assets Assumed healthcare cost trend rates have a significant effect on the amounts recognised in profit or loss. A one percentage point change in assumed healthcare cost trend rates would have the following effects: One percentage point increase Effect on the aggregate of the service cost and interest cost Effect on accumulated post-employment benefit obligation One percentage point decrease Effect on the aggregate of the service cost and interest cost Effect on accumulated post-employment benefit obligation 2009 2008 US$'000 US$'000 168 1,362 126 1,256 (142) (1,160) (107) (1,067) _______________________________________________________________________________________ 108 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 109 20. ISSUED CAPITAL Share Capital Ordinary shares, fully paid Movements in ordinary shares Balance at beginning of year Issued under capital raising program Share issuance costs GST receivable on share issuance costs Deferred tax on share issuance costs Purchase of shares for LTIP Balance at end of the year Share Capital Ordinary shares, fully paid Movements in ordinary shares Balance at beginning of year Issued under capital raising program Share issuance costs GST receivable on share issuance costs Deferred tax on share issuance costs GST refund on capitalized IPO costs Purchase of shares for LTIP Consolidated 2009 US$'000 2008 US$'000 1,136,347 478,036 478,036 697,702 (49,549) 1,707 12,437 (3,986) 479,673 - - - - (1,637) 1,136,347 478,036 Parent 2009 Number of shares (000's) 2008 US$'000 2008 Number of shares (000's) 2009 US$'000 2,890,807 4,585,942 2,228,139 1,497,624 2,228,139 697,702 (49,549) 1,707 12,437 4,357 (3,986) 1,497,624 3,108,730 - - - 2,229,776 1,502,846 - - - - - - - - (20,412) (1,637) (5,222) Balance at end of the year 2,890,807 4,585,942 2,228,139 1,497,624 During the financial year, the Group executed a capital raising program which raised $697,702,000. Proceeds from the capital raising were used to repay $585,000,000 of the Group’s Term Loan A facility, to repay approximately $62,000,000 of amounts previously drawn on its existing revolver facility, and to pay $49,549,000 of costs directly related to the capital raising. _______________________________________________________________________________________ 109 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 21. RESERVES 22. OTHER EQUITY 110 Foreign currency translation Equity-settled employee benefits Unrealised losses related to hedging instruments Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 17,630 6,024 (616) 23,038 (103,549) 2,592 (17,362) (118,319) - 6,024 - 6,024 - 2,592 - 2,592 During the years ended 31 December 2009 and 2008 the changes in each of the respective reserve accounts were as follows: Foreign currency translation Balance at beginning of year Exchange differences arising on translation of foreign operations Balance at end of the year Consolidated 2009 US$'000 2008 US$'000 (103,549) 30,215 121,179 17,630 (133,764) (103,549) Exchange differences relating to the translation from the functional currencies of the Group’s foreign controlled entities into United States dollars are brought to account by entries made directly to the foreign currency translation reserve. Equity-settled employee benefits Balance at beginning of year Share-based compensation expense Balance at end of the year Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 2,592 3,432 6,024 368 2,224 2,592 2,592 3,432 6,024 368 2,224 2,592 The equity-settled employee benefits reserve arises on the grant of restricted shares, LTIP rights and share options. Amounts are transferred out of the reserve and into issued capital when the share is issued. Unrealised losses related to hedging instruments Balance at beginning of year Unrealised loss on cash flow hedges Transfer to profit or loss on cash flow hedges Interest rate swap expense - ineffective hedge Related income tax Balance at end of the year Consolidated 2009 US$'000 2008 US$'000 (17,362) (2,007) 12,976 15,242 (9,465) (616) (8,050) (20,359) 6,147 - 4,900 (17,362) The hedging reserve represents hedging gains and losses recognised on the effective portion of cash flow hedges. The cumulative deferred gain or loss on the hedge is recognised in profit or loss when the hedged transaction impacts the profit or loss, or is included as a basis adjustment to the non-financial hedged item, consistent with the applicable accounting policy. During the financial year, the Group executed a capital raising program which raised approximately $697,702,000. Proceeds from the capital raising were used to repay loans that were being hedged thus making a portion of the hedge ineffective. As a result, the mark to market balance of $15,242,000 associated with the ineffective portion of the hedge was transferred to profit or loss. During the years ended 31 December 2009 and 2008, the changes in other equity consisted of: Balance at beginning of year Balance at end of the year Capitalised transaction costs - GST refund related to 2007 IPO 23. RETAINED EARNINGS (ACCUMULATED LOSSES) During the years ended 31 December 2009 and 2008, the changes in accumulated losses consisted of: Consolidated 2009 US$'000 2008 US$'000 (141,539) 4,357 (137,182) (141,539) - (141,539) Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 (65,830) (141,028) 492 7,509 (14,883) - (3,453) (84,166) 156,724 (57,108) (24,418) (65,830) 6,853 - - 7,345 50,091 (57,108) - 492 Balance at beginning of year Profit (loss) for the period attributable to equity holders of the parent Dividends paid Actuarial losses on defined benefit plans (net of tax) Balance at end of the year 24. DIVIDENDS Fully paid ordinary shares Final dividend 35% franked Interim dividend 35% franked There were no dividends declared or paid for the year ended 31 December 2009. Dividends declared and paid during the year ended 31 December 2008 are as follows: 2008 US Cents per share Total US$'000 1.5 2.3 3.8 22,543 34,565 57,108 2009 US$'000 2008 US$'000 Below is the combined amount of franking credits available for the next year: Adjusted combined franking balance 7,995 12,471 _______________________________________________________________________________________ 110 _______________________________________________________________________________________ 111 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 111 22. OTHER EQUITY During the years ended 31 December 2009 and 2008, the changes in other equity consisted of: Balance at beginning of year Capitalised transaction costs - GST refund related to 2007 IPO Balance at end of the year 23. RETAINED EARNINGS (ACCUMULATED LOSSES) Consolidated 2009 US$'000 2008 US$'000 (141,539) 4,357 (137,182) (141,539) - (141,539) During the years ended 31 December 2009 and 2008, the changes in accumulated losses consisted of: Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 (65,830) (141,028) 492 7,509 (14,883) - (3,453) (84,166) 156,724 (57,108) (24,418) (65,830) 6,853 - - 7,345 50,091 (57,108) - 492 Balance at beginning of year Profit (loss) for the period attributable to equity holders of the parent Dividends paid Actuarial losses on defined benefit plans (net of tax) Balance at end of the year 24. DIVIDENDS There were no dividends declared or paid for the year ended 31 December 2009. Dividends declared and paid during the year ended 31 December 2008 are as follows: Fully paid ordinary shares Final dividend 35% franked Interim dividend 35% franked 2008 US Cents per share Total US$'000 1.5 2.3 3.8 22,543 34,565 57,108 Below is the combined amount of franking credits available for the next year: 2009 US$'000 2008 US$'000 Adjusted combined franking balance 7,995 12,471 _______________________________________________________________________________________ 111 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 112 25. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share Diluted earnings (loss) per share Basic earnings (loss) per share The earnings (loss) and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Consolidated 2009 Cents 2008 Cents per share per share (0.6) (0.6) 10.4 10.4 2009 US$'000 2008 US$'000 Earnings (loss) used in the calculation of basic EPS (14,883) 156,724 Weighted average number of ordinary shares for the purposes of basic earnings per share 2,436,800 1,502,011 2009 '000 2008 '000 Diluted earnings per share The earnings (loss) used in the calculation of diluted earnings per share is as follows: 2009 US$'000 2008 US$'000 Earnings used in the calculation of diluted EPS (14,883) 156,724 Weighted average number of ordinary shares used in the calculation of basic EPS Shares deemed to be issued for no consideration in respect of: Non-executive director restricted shares LTIP share rights Weighted average number of ordinary shares used in the calculation of diluted EPS 2009 '000 2008 '000 2,436,800 1,502,011 - 7,257 335 635 2,444,057 1,502,981 Instruments which have not been included in the calculation of diluted earnings per share because they are not dilutive include non-executive restricted shares, LTIP share rights and share options. _______________________________________________________________________________________ 112 113 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 26. COMMITMENTS FOR EXPENDITURE Commitments The Group has a number of continuing operational and financial commitments in the normal course of business. 2009 US$'000 2008 US$'000 Capital Commitments Purchase commitments for capital expenditures 3,930 732 Operating leases Non-cancellable future operating lease commitments as at 31 December 2009 and 2008, consist of the following: Consolidated 31 December 2009 31 December 2008 Land and Buildings US$'000 Plant and Equipment US$'000 Land and Buildings US$'000 Plant and Equipment US$'000 8,876 19,922 9,462 38,260 20,402 43,618 2,655 66,675 7,774 16,610 8,367 32,751 16,060 39,123 4,476 59,659 Payments due within: One year Two to five years After five years Description of operating leases The Group has operating leases for land, buildings, plant and equipment with the following lease terms: � � � 1 – 30 years for land and buildings with an average lease term of 7 years 1 – 5 years for machinery and equipment with an average lease term of 3 years 1 – 7 years for all other property with an average lease term of 3 years The Group’s property operating leases generally contain escalation clauses, which are fixed increases generally between 3% and 9%, or increase subject to a national index. The Group does not have any significant purchase options. Contingent rental payments exist for certain pieces of equipment and are not significant compared with total rental payments. These are based on excess wear and tear and excess use. The Group has no significant operating leases that are considered onerous other than the $1,933,000 included in the restructuring expenses provision. _______________________________________________________________________________________ 113 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 114 27. CONTINGENT LIABILITIES Indemnifications Anglo American plc has agreed to indemnify the Group for 50% of any losses in excess of $250,000 suffered due to unknown environmental matters (up to a maximum of $15,000,000) arising from Group properties formerly owned by Anglo American plc and which are identified within five years of the purchase date on 29 July 2005. Letters of credit Standby letters of credit primarily issued in support of commitments or other obligations as of 31 December 2009 are as follows. � One of the Group’s subsidiaries in Holland has a letter of credit in the amount of $2,500,000 for � � � performance bonds which expires July 2010. Three of the Group’s subsidiaries in the U.S. have letters of credit in the amounts of $405,000, $500,000 and $2,400,000 for various leases which expire January 2010 and February 2010. Two of the Group’s subsidiaries in Argentina have letters of credit in the amounts of $2,200,000 and $1,400,000 to support loans, which expire February 2010. The Group’s subsidiary in Zambia has a letter of credit in the amount of $2,000,000 to support products inventory which expires December 2010. A summary of the maturity of issued letters of credit is as follows: Less than one year Consolidated 2009 US$'000 2008 US$'000 11,405 11,550 _______________________________________________________________________________________ 114 115 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 27. CONTINGENT LIABILITIES (CONTINUED) Guarantees The subsidiaries of the Group provide guarantees within the normal course of business which includes payment guarantees to cover import duties, taxes, performance and completion of contracts. In addition, the Group and certain subsidiaries are guarantors on the Group’s loans and borrowings. A summary of the Group’s subsidiaries which are guarantors of the Group’s long-term debt is as follows: Country Canada United States Entity Longyear Canada ULC Boart Longyear Alberta Limited Boart Longyear Canada Longyear Holdings, Inc. Longyear TM, Inc. Boart Longyear Company Boart Longyear Consolidated Holdings Inc Boart Longyear International Holdings Inc Longyear Global Holdings, Inc. Resources Services Holdco, Inc. Boart Longyear Global Holdco, Inc. Prosonic Corporation Boart Longyear Nevada Australia Boart Longyear Limited Boart Longyear Management Pty Limited Boart Longyear Investments Pty Limited Votraint No. 1609 Pty Limited North West Drilling Pty Limited Drillcorp Pty Limited Grimwood Davies Pty Limited Boart Longyear Australia Pty Limited Boart Longyear Australia Holdings Pty Limited A.C.N. 066 301 531 Pty Limited Aqua Drilling & Grouting Pty Ltd. New Zealand Boart Longyear (NZ) Limited Europe Coopertief Longyear Holdings Longyear Calulo Holdings BV Boart Longyear International BV Boart Longyear BV South Africa Longyear South Africa (Pty) Limited Chile Boart Longyear S.A. Connors SA Legal Contingencies The Group is subject to certain routine legal proceedings that arise in the normal course of its business. The Group believes that the ultimate amount of liability, if any, for any pending claims of any type (either alone or combined), including the legal proceedings described above, will not materially affect the Group’s operations, liquidity, or financial position taken as a whole. However, the ultimate outcome of any litigation is uncertain, and unfavorable outcomes could have a material adverse impact. _______________________________________________________________________________________ 115 116 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 27. CONTINGENT LIABILITIES (CONTINUED) Other Contingencies Other contingent liabilities as at 31 December 2009 and 2008 consist of the following: Contingent Liabilities Guarantees or counter-guarantees issued to outside parties 17,152 29,069 Consolidated 2009 US$'000 2008 US$'000 _______________________________________________________________________________________ 116 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 117 28. COMPANY SUBSIDIARIES The principal subsidiaries’ ownership percentage consist of the following: Subsidiaries A.C.N. 066 301 531 Pty Ltd Aqua Drilling & Grouting Pty Ltd. BLI Zambia Ltd. BLY Ghana Limited BLY Mali S.A. BLY Mexico Servicios S.A. de C.V. Boart Longyear (Cambodia) Ltd. Boart Longyear (D.R.C.) SPRL Boart Longyear (Germany) GmbH Boart Longyear (Holdings) Ltd. Boart Longyear (Hong Kong) Limited Boart Longyear (Investments) Ltd. Boart Longyear (NZ) Limited Boart Longyear (Pty) Ltd Boart Longyear (Vic) No. 1 Pty Ltd (Australia) Boart Longyear (Vic) No. 2 Pty Ltd (Australia) Boart Longyear Alberta Limited Boart Longyear Argentina S.A. (i) Boart Longyear Australia Holdings Pty Limited Boart Longyear Australia Pty Ltd Boart Longyear Bermuda Limited Boart Longyear Burkina Faso Sarl Boart Longyear BV Boart Longyear Canada Boart Longyear Company Boart Longyear Consolidated Holdings, Inc. Boart Longyear Drilling Products Co.(Wuxi) Ltd. Boart Longyear Drilling Services KZ LLP Boart Longyear EMEA Cooperatief U.A. Boart Longyear Global Holdco, Inc Boart Longyear GmbH & Co Kg Boart Longyear Holdings (Thailand) Co., Ltd. Boart Longyear India Private Ltd Boart Longyear International BV Boart Longyear International Holdings, Inc. Boart Longyear Investments Pty Ltd Boart Longyear Limitada Boart Longyear Limited Boart Longyear Limited Boart Longyear Limited Boart Longyear LLC Boart Longyear Ltd Boart Longyear Management Pty Ltd Country of Incorporation Australia Australia Zambia Ghana Mali Mexico Business Tools and Equipment Drilling Services Drilling Services Drilling Services Drilling Services Drilling Services Cambodia Drilling Services Dem. Rep. of Con Drilling Products & Services Germany Tools and Equipment United Kingdom Holding Company Hong Kong Drilling Services United Kingdom Dormant New Zealand Drilling Services Botswana Drilling Products Australia Australia Canada Argentina Australia Australia Bermuda Holding Company Holding Company Holding Company Drilling Services Holding Company Drilling Services Holding Company Burkina Faso Drilling Services Netherlands Drilling Products Canada Drilling Products & Services USA USA China Tools, Equipment and Drilling Holding Company Drilling Products and Services Kazakhstan Drilling Services Netherlands Holding Company USA Germany Thailand India Holding Company Drilling Products and Services Drilling Services Tools and Equipment Netherlands Holding Company USA Australia Brazil Ireland Laos Thailand Holding Company Holding Company Drilling Products Drilling Products Drilling Services Drilling Services Russia Federation Drilling Services Ghana Australia Dormant Holding Company 31 Dec 31 Dec 2009 2008 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - 100 100 100 100 100 100 100 100 100 100 100 - - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 _______________________________________________________________________________________ 117 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 118 28. COMPANY SUBSIDIARIES (CONTINUED) Subsidiaries Boart Longyear Netherlands BV Boart Longyear Nevada Boart Longyear Poland Spolka Z.o.o. Boart Longyear Products KZ LLP Boart Longyear RUS Boart Longyear S.A. Boart Longyear S.a.r.l. Boart Longyear SAC Country of Incorporation Norway USA Poland Business Holding Company Drilling Services Drilling Products and Services Kazakhstan Drillings Products Russia Federation Drilling Services Chile France Peru Tools, Equipment and Drilling Svs Holding Company Drilling Products and Services Boart Longyear Vermogensverwaltung GmbH Germany Dormant Boart Longyear Zambia Ltd. Britton Hermanos Perforaciones de Mexico, S.A. C.V. Connors SA Zambia Mexico Chile Drilling Services Drilling Services Drilling Services Cooperatief Longyear Holdings UA Netherlands Holding Company Drillcorp Pty Ltd Geoserv Pesquisas Geologicas S.A. Grimwood Davies Pty Ltd Inavel S.A. J&T Servicios, S.C. Longyear Calulo Holdings BV Longyear Canada, ULC Longyear Global Holdings, Inc. Longyear Holdings New Zealand, Ltd. Longyear Holdings, Inc. Longyear South Africa (Pty) Ltd Longyear TM, Inc. North West Drilling Pty Limited P.T. Boart Longyear Patagonia Drill Inversiones Mineras S.A. Patagonia Drill Mining Services S.A. Portezuelo S.A. Australia Brazil Australia Uruguay Mexico Drilling Services Drilling Services Drilling Services Drilling Services Drilling Services Netherlands Drilling Services Canada USA Tools and Equipment Services Holding Company New Zealand Holding Company USA Holding Company South Africa Drilling Products and Services USA Australia Indonesia Chile Argentina Paraguay Holding Company Drilling Services Drilling Services Drilling Services Drilling Services Drilling Services Professional Sonic Drillers (Pty) Ltd T/A Prosonic Africa (ii) South Africa Drilling Services Prosonic Corporation Prosonic Deutschland GmbH Prosonic International, Inc. Rentas de Exploracion I Limitada Rentas de Exploracion II Limitada Rentas de Exploracion III Limitada Resources Services Holdco, Inc Votraint No. 1609 Pty Ltd Votraint Switzerland SARL USA Drilling Services Germany Drilling Services USA Chile Chile Chile USA Drilling Services Holding Company Holding Company Holding Company Holding Company Australia Drilling Services Switzerland Holding Company (i) This entity changed its name from Connors Argentina SA (ii) As at 31 December 2009 this entity is in the process of being liquidated. 31 Dec 31 Dec 2009 2008 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - _______________________________________________________________________________________ 118 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 119 29. ACQUISITION OF OPERATIONS There were no entities acquired by the Group during the year ended 31 December 2009. During 2009, goodwill related to 2008 acquisitions was increased by $7,947,000. The goodwill adjustment related to the Eklund Drilling Company, Inc. (Eklund) and Westrod Engeneering acquisitions, which were accounted for provisionally at 31 December 2008. The 2009 adjustments to goodwill reflect primarily fair value adjustments of $7,544,000 related to Eklund property plant and equipment and intangible assets. In addition, cash of $403,000 was paid in 2009 for a purchase price adjustment and stamp tax payment for Westrod Engeneering. During the financial year ended 31 December 2008 the Group acquired the following entities: On 25 February 2008, the Group acquired 100% of the issued share capital of Britton Brothers Diamond Drilling (Britton Brothers). Britton Brothers is a provider of uranium and minerals exploration drilling services located in Canada and Mexico. Accounting for this acquisition was determined provisionally at 31 December 2008 as market valuations and other calculations had not been finalised. The goodwill arising on the acquisition of Britton Brothers is attributable to the position it occupies as a leading exploratory driller in Canada and Mexico, which provides the Group the opportunity to expand both its mineral and energy footprints in Canada and Mexico and neighbouring countries through leveraging Boart Longyear’s global infrastructure and resources. On 5 May 2008, the Group acquired 100% of the issued share capital of Aqua Drilling & Grouting Pty Limited (“Aqua”). Aqua is a Melbourne-based drilling services company specialising in environmental drilling, geotechnical drilling, water drilling and related services. Accounting for this acquisition was determined provisionally at 31 December 2008 as market valuations and other calculations had not been finalised. The goodwill arising on the acquisition of Aqua is attributable to its position as one of the leading environmental and infrastructure drilling companies in Eastern Australia and its experienced management and operational teams. On 1 July 2008, the Group acquired the business of Westrod Engineering. Westrod Engineering is a Western Australia-based manufacturer of reverse circulation (“RC”) consumables including rods, subs and swivels for minerals drilling. Accounting for this acquisition was determined provisionally at 31 December 2008 as market valuations and other calculations had not been finalised. The goodwill arising on the acquisition of Westrod Engineering is attributable to the ability to expand into the RC drilling market. The introduction of the RC product range into the Group will be an excellent complement to our growing RC drilling services business. Combined with recent RC-related acquisitions such as KWL and Grimwood Davies, this acquisition expands our RC offering by making Boart Longyear the only company that manufactures and distributes RC products and also does RC contract drilling, all on a global scale. On 16 September 2008, the Group acquired certain assets of Eklund Drilling Company, Inc. (Eklund). Eklund is located in the United States with headquarters in Elko, Nevada. Eklund specialises in reverse circulation drilling. Accounting for this acquisition was determined provisionally at 31 December 2008 as market valuations and other calculations had not been finalised. The goodwill arising on the acquisition of Eklund is attributable to its position in global reverse circulation drilling which provides the Group the opportunity to expand its reach into a key reverse circulation market and the opportunity to expand its global footprint. Patagonia Drilling, which was purchased on 31 December 2007, was accounted for provisionally at 31 December 2007 and was finalised during the financial year ended 31 December 2008. This resulted in adjustments to the initial book values that decreased the net assets purchased by $7,290,000 million, primarily as the result of the recognition of provisions for taxes payable, other contingencies and debt balances. In addition, this was offset by fair value adjustments amounting to $3,332,000 which had not been determined at 31 December 2007. All of these acquisitions were accounted for as purchase transactions and the consolidated profit and loss amounts includes the operations of the acquisitions from the date of acquisition through 31 December 2008. The net profit contributed by these acquisitions in the period between the dates of acquisition and the reporting date were approximately $5,325,000. Had the acquisitions been completed on 1 January 2008, total consolidated revenue for the period would have been $1,892,250,000 and consolidated profit for the period would have been $168,180,000. _______________________________________________________________________________________ 119 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 29. ACQUISITION OF OPERATIONS (CONTINUED) The net assets acquired during 2008 for all other business combinations, and the goodwill arising, are as follows: 120 Net assets acquired Cash and cash equivalents Trade and other receivables Inventories Prepaid expenses Intangible assets Property, plant and equipment Trade and other payables Deferred tax liabilities Goodwill arising on the acquisition Total consideration Net cash outflow arising on acquisition: Total Consideration Cash and cash equivalents acquired Acquiree's carrying amount before business combination US$'000 Fair value adjustments US$'000 Fair value US$'000 2,811 9,748 974 333 - 18,057 (6,855) 34 25,102 - - - - 33,656 12,988 - (2,052) 44,592 2,811 9,748 974 333 33,656 31,045 (6,855) (2,018) 69,694 73,524 143,218 (143,218) 2,811 (140,407) _______________________________________________________________________________________ 120 121 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 30. DISPOSAL OF OPERATIONS On 30 June 2009, the Group announced the sale of its Sub Saharan manufacturing operations and the exclusive right to sell certain of the Group’s percussive rock drills and hard rock tools in Sub Saharan Africa for $7,803,000. The disposal is consistent with the Group’s on-going strategy to divest select non-core assets. The assets that were sold were not considered a core business and earned lower returns than the core business lines. The net assets disposed of are as follows: Book value of net assets sold Assets Liabilities Foreign currency translation reserve Net assets disposed Working capital adjustment Disposal costs Loss on disposal Total proceeds Cash paid - closing costs and working capital adjustment Net cash inflow from disposal of subsidiaries US$'000 7,017 (444) 2,683 9,256 1,388 1,069 (3,910) 7,803 (2,457) 5,346 During the year ended 31 December 2009 the Group also paid $220,000 related to the settlement of the disposal of its diamond wire business in South Africa, which was sold on 2 September 2008. MCE South Africa On 17 March 2008, the Group announced the sale of its mining capital equipment (“MCE”) business in South Africa for total proceeds of $16,972,000. The disposal is consistent with the Group’s long-term policy to focus its activities on higher return, core business opportunities. The MCE South Africa business was not considered a core business and earned lower returns than the core business lines. The MCE South Africa net assets disposed of are as follows: Book value of net assets sold Assets Liabilities Net assets disposed Disposal costs Gain on disposal Total proceeds Cash paid - closing costs Net cash inflow from disposal of subsidiaries Diamond Wire US$'000 13,060 (6,094) 6,966 597 9,409 16,972 (597) 16,375 On 2 September 2008, the Group sold its diamond wire business in South Africa for total proceeds of $2,536,000. The disposal is consistent with the Group’s long-term policy to focus its activities on higher return, core business opportunities. The diamond wire business was not considered a core business and earned lower returns than the core business lines. Residential Water On 31 December 2008, the Group sold its residential water business in the United States of America for total proceeds of $831,000. The disposal is consistent with the Group’s long-term policy to focus its activities on higher return, core business opportunities. The residential water business was not considered a core business and earned lower returns than the core business lines. _______________________________________________________________________________________ 121 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 122 31. NOTES TO THE CASH FLOW STATEMENT (a) Reconciliation of cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents 87,557 50,603 148 108 Consolidated Parent 2009 US$'000 2008 US$'000 2009 US$'000 2008 US$'000 (b) Businesses acquired During the financial year ended 31 December 2009 there were no acquisitions. The Group paid additional cash of $403,000 for the Eklund and Westrod acquisitions. During the financial year ended 31 December 2008, the Group acquired four businesses. The net cash outflow for acquisitions was $140,004,000. Refer to Note 29 for further details. In addition, there was a working capital adjustment that resulted in a refund of $1,578,000 related to a 2007 acquisition. (c) Businesses disposed During the financial year ended 31 December 2009 the Group disposed of its Sub Saharan manufacturing operation. During the financial year ended 31 December 2008, the Group disposed of its MCE South Africa, Diamond Wire, and Residential Water businesses. Details of the disposal are as follows: Book value of net assets sold Trade and other receivables Inventories Property, plant and equipment Intangible assets Prepaids and other assets Trade and other payables Foreign currency translation reserve Net assets disposed Working capital adjustment Disposal costs Gain (loss) on disposal Total proceeds Cash paid - closing costs and working capital adjustment Net cash inflow on disposal Consolidated 2009 US$'000 2008 US$'000 - 539 5,487 363 628 (444) 2,683 9,256 1,388 1,069 (3,910) 7,803 (2,457) 5,346 5,803 8,276 2,450 - 306 (6,342) - 10,493 - 715 9,131 20,339 (715) 19,624 During the year ended 31 December 2009 the Group also paid $220,000 related to the settlement of the disposal of its diamond wire business in South Africa, which was sold on 2 September 2008. _______________________________________________________________________________________ 122 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 123 32. SHARE-BASED PAYMENTS The Company has established a Long-term Incentive Plan (“LTIP”) to assist in retaining key employees and encouraging a superior performance on a sustained basis. The incentive provided under the LTIP includes an annual grant of rights that will vest based on the satisfaction of either time-base conditions or both performance- based and time-based conditions. Vested rights will convert to ordinary fully paid shares on a one-for-one basis. Under the terms of the LTIP, the performance share rights vest upon the achievement of the cumulative EPS targets set by the Board. The Board will set a minimum and maximum EPS target for each financial year during the three-year vesting period. Vesting will be determined by the Company’s actual performance against cumulative EPS targets for the relevant three-year period. Partial vesting occurs on a pro-rata basis if the cumulative three-year minimum EPS target is surpassed. Full vesting occurs only if the Company’s actual EPS performance meets or exceeds the maximum cumulative EPS target for the three-year period. Participants must also remain employed with the Company during the EPS period. The retention share rights vest upon continuous employment with the Company from the grant date until the third anniversary of the grant date. The Company may acquire shares underlying the grants which will be held in trust. The participant will receive dividends paid on those shares from the time of acquisition until vesting. During the years ended 31 December 2009 and 2008, there were several grants of share rights made under the Long-Term Incentive Plan (“LTIP”). The total share-based expense associated with share rights for the years ended 31 December 2009 and 2008 was $2,460,000 and $1,555,000, respectively. The Company grants share options to certain senior management in order to attract, retain and properly incentivise those individuals. During 2009, the Company granted 3,450,000 share options to employees. During 2008, the Company’s prior CEO announced his retirement and his successor was granted 2,500,000 share options as part of his employment agreement. The share-based expense associated with share options for the years ended 31 December 2009 and 2008 was $661,000 and $354,000, respectively. In addition, prior to the IPO, there were 643,240 restricted shares granted to Board members in consideration of services performed. The share-based expense recorded relating to the restricted shares during the years ended 31 December 2009 and 2008 was $311,000 and $334,000, respectively. The following table shows the share-based payment arrangements that were in existence at 31 December 2009: Series Number Grant Date (1) Issued 12 April 2007 (2) Issued 1 September 2007 (3) Issued 11 April 2008 (4) Issued 28 April 2008 (5) Issued 28 April 2008 (6) Issued 26 June 2008 (7) Issued 23 July 2008 (8) Issued 23 October 2008 (9) Issued 14 January 2009 (10) Issued 25 March 2009 (11) Issued 18 June 2009 (12) Issued 18 June 2009 * 610,808 432,000 3,112,801 1,000,000 1,500,000 411,901 124,000 487,500 32,500 13,625,000 2,275,000 12-Apr-07 17-Sep-07 11-Apr-08 28-Apr-08 28-Apr-08 26-Jun-08 23-Jul-08 23-Oct-08 14-Jan-09 25-Mar-09 18-Jun-09 900,000 18-Jun-09 Vesting Date 12-Apr-10 1-Jul-10 11-Apr-11 1-Jan-13 1-Jan-14 11-Apr-11 23-Jul-11 23-Oct-11 14-Jan-12 25-Mar-12 18-Jun-12 18-Jun-12 Fair Value at Grant Date US$ 1.53 1.81 1.77 0.69 1.45 2.10 2.05 0.40 0.18 0.07 0.14 0.14 * Mr. Kipp was awarded 900,000 options on 18 June 2009 by the Board, subject to shareholder approval. Should shareholder approval not be received, the Company is legally committed to provide other compensation of equal value to Mr. Kipp. _______________________________________________________________________________________ 123 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 32. SHARE-BASED PAYMENTS (CONTINUED) The fair value of the rights was determined using the Black-Scholes option pricing model using the following inputs: 124 Grant date share price US$ Expected volatility Life of rights Dividend Risk-free yield interest rate Series 1 Series 2 Series 3 Series 4 Series 5 * * Series 6 Series 7 Series 8 Series 9 Series 10 * Series 11 * Series 12 1.53 1.81 1.77 1.63 1.63 2.10 2.05 0.40 0.18 0.07 0.19 0.19 35.95% 35.95% 49.62% 49.86% 49.86% 50.34% 50.62% 56.68% 73.10% 86.74% 97.29% 97.29% 36 months 33.5 months 36 months 56 months 68 months 34 months 36 months 36 months 36 months 36 months 60 months 60 months 0.00% 0.00% 0.00% 0.86% 0.86% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 6.42% 6.16% 5.43% 5.58% 5.58% 5.67% 5.81% 6.11% 4.84% 5.55% 5.59% 5.59% * Subsequent to the original grant date, the Company’s Board of Directors modified the share option exercise price to reflect the dilution impact resulting from the Company’s 2009 capital raising program and the related issuance of additional shares subsequent to the original grant date, as follows: Original exercise price A$1.95 A$0.21 A$0.30 A$0.30 Modified exercise price A$1.895 A$0.155 A$0.245 A$0.245 Series 4 Series 5 Series 11 Series 12 The following reconciles the outstanding restricted shares, LTIP rights and share options at the beginning and end of the financial year: Consolidated 2009 2008 Number of restricted shares, rights and options '000 Weighted average exercise price US$ Number of restricted shares, rights and options '000 Weighted average exercise price US$ Balance at beginning of financial year Granted during the financial year Forfeited during the financial year Exercised during the financial year Balance at end of the financial year Exercisable at end of the financial year 8,294 18,177 (1,959) - 24,512 - 0.25 0.05 (0.03) - 0.11 - 1,249 7,436 (359) (32) 8,294 - 0.00 0.28 0.00 0.00 0.25 - _______________________________________________________________________________________ 124 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 125 33. KEY MANAGEMENT PERSONNEL COMPENSATION Details of key management personnel The directors and other members of key management personnel of the Group during the year were: � Graham Bradley - Chairman, non-executive director � Bruce Brook - Non-executive director � David McLemore - Non-executive director � Peter St George - Non-executive director � David Grzelak - Non-executive director � Craig Kipp - Chief Executive Officer and Executive Director � � Brad Baker - Senior Vice President, Human Resources � � Scott Alexander - Vice President of Global Drilling Services (employment ended 31 December 2009) � Michael Birch - Vice President of Global Products Fabrizio Rasetti - Senior Vice President, General Counsel and Company Secretary Joseph Ragan III - Chief Financial Officer The aggregate compensation made to key management personnel of the Parent and Group is set out below. Consolidated Parent 2009 US$ 2008 US$ 2009 US$ 2008 US$ Short-term employee benefits 5,752,835 6,158,031 Post-employment benefits Other long-term benefits Termination benefits Share-based payment 128,681 360,545 324,487 1,549,832 8,116,380 155,004 153,000 45,000 1,148,217 7,659,252 700,115 46,797 - - 866,533 61,303 - - 311,229 1,058,141 334,479 1,262,315 34. RELATED PARTY TRANSACTIONS (a) Transactions with key management personnel (i) Key management personnel compensation Details of key management personnel compensation are disclosed in Note 33 to the financial statements. (ii) Other transactions with key management personnel of the Group. Details of other transactions with key management personnel are disclosed in Note 32 of the financial statements. (iii) Key management personnel equity holdings _______________________________________________________________________________________ 125 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 126 34. RELATED PARTY TRANSACTIONS (CONTINUED) Details of key management personnel equity holdings are disclosed below. 2009 Graham Bradley Bruce Brook David McLemore Peter St. George David Grzelak Scott Alexander Michael Birch Craig Kipp Fabrizio Rasetti 2008 Graham Bradley Bruce Brook Geoff Handley David McLemore Peter St. George David Grzelak Paul Brunner Scott Alexander Michael Birch Patrick Johnson Craig Kipp Fabrizio Rasetti Balance 1 January No. Net change during year No. Balance Balance 31 December No. held nominally No. 2,610,255 504,053 1,158,609 519,188 10,000 588,918 664,596 5,214,626 1,066,121 2,433,782 540,164 - 555,299 - - - - - 5,044,037 1,044,217 1,158,609 1,074,487 10,000 588,918 664,596 5,214,626 1,066,121 - - - - - - - - - Balance 1 January No. Net change during year No. Balance Balance 31 December No. held nominally No. 2,383,782 154,053 86,486 808,609 289,188 - 226,473 350,000 24,512 350,000 230,000 10,000 2,610,255 504,053 110,998 1,158,609 519,188 10,000 16,869,839 3,175,161 20,045,000 588,918 664,596 1,430,973 10,214,626 984,121 - - (1,430,973) (5,000,000) 82,000 588,918 664,596 - 5,214,626 1,066,121 - - - - - - - - - - - - _______________________________________________________________________________________ 126 127 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 34. RELATED PARTY TRANSACTIONS (CONTINUED) Rights, Options and Shares Granted as Compensation to Key Management Personnel Share Rights and Shares Details of the rights under the LTIP and restricted shares that were granted as compensation to the KMP during the reporting period, and details of those that were exercised, vested, or lapsed during the financial year are as follows: Held at the Vested and Held at the Exercisable beginning of Granted as Vested Forfeited end of the as at Name Graham Bradley Bruce Brook David Grzelak David McLemore Peter St George Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker the Financial Year No. Remun- eration No. 1 491,891 45,945 - - 72,972 494,710 300,000 178,500 85,000 200,000 150,000 - - - - - 1,800,000 750,000 550,000 550,000 550,000 550,000 during the during the Financial 31 December year No. year No. Year No. 491,891 45,945 - - 72,972 2,294,710 1,050,000 728,500 - - - - - - - - (635,000) - - - 750,000 700,000 - - - - - - - - - - - 2009 No. - - - - - - - - - - - (1) The fair value of rights at the grant date is the closing price on the 25 March 2009 date of grant (US$0.07), the rights vest over a three-year period from the grant date, with 50% subject to certain performance conditions. _______________________________________________________________________________________ 127 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 128 34. RELATED PARTY TRANSACTIONS (CONTINUED) Cash Rights Details of the cash rights that were granted to the KMP during the reporting period, and details of those that were exercised, vested or forfeited during the financial year are as follows: Held at the beginning of Granted as Vested Forfeited the Financial Remun- during the during the Year US$ eration US$ 1 year US$ year US$ Held at the end of the Financial Year US$ Vested and Exercisable as at 31 December 2009 US$ - - - - - - 550,000 275,000 225,000 225,000 225,000 225,000 - - - - - - - - - (225,000) - - 550,000 275,000 225,000 - 225,000 225,000 - - - - - - Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker (1) The cash rights vest over a three-year period from the grant date, with 50% subject to certain performance conditions. The rights under the LTIP and the restricted shares were provided at no cost to the recipient. Options Held at the Vested and Held at the Exercisable beginning of Granted as Vested Forfeited end of the as at the Financial Year No. 2,500,000 - - - - - Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker Remun- eration No. 900,000 375,000 275,000 275,000 275,000 275,000 during the during the Financial 31 December year No. year No. - - - - - - - - - (275,000) - - Year No. 3,400,000 375,000 275,000 - 275,000 275,000 2009 No. - - - - - - During the year ended 31 December 2009, the Board awarded to Mr. Kipp 900,000 stock options, subject to shareholder approval. In addition to those options granted to Mr. Kipp, the Board granted a total of 1,475,000 stock options to other KMP. All the stock options granted in 2009 will vest in full and become exercisable on 18 June 2012 if the executive remains continuously employed with the Company until that date. At the date of grant, the options had an original exercise price of A$0.30 per option and a fair market value of US$0.143 per option. On 15 December 2009, in accordance with the ASX listing rules, the Board adjusted the exercise price from A$0.30 per option to A$0.245 per option to reflect the dilution impact resulting from the Company’s 2009 capital raising program and the related issuance of additional shares subsequent to the original grant date. In regards to the 900,000 stock options awarded to Mr. Kipp on 18 June 2009, should shareholder approval not be received, the Company is legally committed to provide other compensation of equal value to Mr. Kipp. During the year ended 31 December 2008, the previous CEO announced his retirement and Mr. Kipp signed an employment agreement which allowed for the issuance of two tranches of share options. The first tranche of 1,000,000 options vests on 1 January 2013 and had an original exercise price of A$1.95 per option and a fair value on the grant date of US$0.69 per option. The second tranche of 1,500,000 options vests on 1 January 2014 and had an original exercise price of A$0.21 and a fair value on the grant date of US$1.45 per option. _______________________________________________________________________________________ 128 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 129 34. RELATED PARTY TRANSACTIONS (CONTINUED) On 15 December 2009, in accordance with the ASX listing rules, the Board adjusted the exercise price for the first tranche from A$1.95 per option to A$1.85 per option, and for the second tranche from A$0.21 per option to A$0.155 per option. The changes in exercise price were made to reflect the dilution impact resulting from the Company’s 2009 capital raising program and the related issuance of additional shares subsequent to the original grant date. Vesting for both tranches of options is conditioned on Mr. Kipp’s employment with the Company on the relevant vesting date, although vesting may accelerate upon certain events such as a change in control. Both tranches of options expire on 31 December 2015. Except as described above, no options or other rights over shares in the Company have been granted to KMP during or since the end of the financial year. During the reporting period, no shares were issued on the exercise of options or rights previously granted as compensation. Analysis of Movements in Rights, Options and Shares The movement during the reporting period, by value of the relevant rights, options and shares in the Company held by KMP is detailed below: Value granted in year Value forfeited in year Entitlement to Entitlement to share rights cash rights Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker US$ 132,911 55,380 40,612 40,612 40,612 40,612 US$ 550,000 275,000 225,000 225,000 225,000 225,000 Share options US$ Entitlement to Entitlement to share rights cash rights US$ US$ Share options US$ 128,675 53,615 39,317 39,317 39,317 39,317 - - - - - - - - - 227,335 225,000 39,317 - - - - - - The value (based upon historic valuations) of outstanding rights, options and shares in the Company held by KMP as at 31 December 2009 is detailed below: Name Craig Kipp Joseph Ragan III Fabrizio Rasetti Scott Alexander Michael Birch Brad Baker Share rights value as of period end US$ Cash rights value as of period end US$ Options value as of period end US$ Total rights and option value as of period end US$ 1,008,548 175,380 356,557 - 424,147 306,112 550,000 275,000 225,000 - 225,000 225,000 2,990,983 53,615 39,317 - 39,317 39,317 4,549,531 503,994 620,874 - 688,464 570,429 _______________________________________________________________________________________ 129 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 130 34. RELATED PARTY TRANSACTIONS (CONTINUED) (b) Transactions with related parties Transactions with other related parties consist of the following: Consolidated 2009 US$ 2008 US$ Consulting fees paid to a director - 34,264 The Company’s Chairman, Mr. Bradley, is also the chairman of the unlisted local, Australian subsidiary of HSBC plc, a lender to the Group under its term and revolver bank loans (see Note 17). Terms under the bank loans are at arms length. 35. REMUNERATION OF AUDITORS Audit or review of the financial report Auditor of the parent entity Related practice of the parent entity auditor Non-audit services Tax services Review of tax returns Capital raising Due diligence and other non-audit services Consolidated Parent 2009 US$ 2008 US$ 2009 US$ 2008 US$ 1,139,000 1,254,000 2,393,000 1,459,000 2,199,000 3,658,000 826,000 415,000 420,000 13,000 746,000 590,000 - 10,000 20,000 - 20,000 - 80,000 420,000 - 20,000 - 20,000 - 130,000 - - 1,674,000 1,346,000 500,000 130,000 The auditor of Boart Longyear Limited is Deloitte Touche Tohmatsu. 36. SUBSEQUENT EVENTS The directors have not become aware of any matter or circumstance that has arisen since 31 December 2009 that has affected or may affect the operations of the consolidated entity, the results of those operations, or the state of the consolidated entity in subsequent years. _______________________________________________________________________________________ 130 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 131 SUPPLEMENTARY INFORMATION Additional stock exchange information as at 12 March 2010. Number of holders of equity securities (a) Ordinary share capital 4,611,574,674 fully paid ordinary shares are held by 30,240 individual shareholders. All issued ordinary shares carry one vote per share, however partly paid shares do not carry the rights to dividends. (b) Share rights and share options 18,099,802 share rights are held in trust for 128 individual shareholders. 4,775,000 share options are held by 10 individual option holders. Distribution of holders of equity securities 1-1000 1,001-5000 5,001-10,000 10,001-100,000 100,001 and over Fully paid ordinary shares Share rights Share options 1,504 5,672 4,279 15,966 2,819 30,240 - 6 8 87 27 128 - - - - 10 10 _______________________________________________________________________________________ 131 Notes to the Consolidated Financial Statements For the financial year ended 31 December 2009 BOART LONGYEAR LIMITED 132 SUPPLEMENTARY INFORMATION (CONTINUED) Substantial shareholders Ordinary shareholders HSBC Custody Nominees (Australia) Limited National Nominees Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited-GSCO ECA ANZ Nominees Limited Amp Life Limited Cogent Nominees Pty Limited Citicorp Nominees Pty Limited Australian Reward Investment Alliance Cogent Nominees Pty Limited - SMP Accounts Queensland Investment Corporation HSBC Custody Nominees (Australia) Limited - A/C 2 USB Nominees Pty Limited UBS Wealth Management Australia Nominees Pty Ltd RBC Dexia Investor Services Australia Nominees Pty Limited Bond Street Custodians Limited Citicorp Nominees Pty Limited Grandor Pty Limited Band and Company Fully paid ordinary shares Percent of Issued Capital Number 871,126,150 524,870,049 519,598,245 333,148,677 169,486,026 132,640,637 58,462,760 48,785,476 48,751,861 41,016,020 40,997,750 34,204,875 34,004,437 27,607,901 23,561,100 22,045,000 21,463,033 20,000,000 20,000,000 16,972,566 Percent 18.9% 11.4% 11.3% 7.2% 3.7% 2.9% 1.3% 1.1% 1.1% 0.9% 0.9% 0.7% 0.7% 0.6% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 3,008,742,563 65.3% _______________________________________________________________________________________ 132 Executive Leadership Team 20 Financial Statements 2 4 6 8 Financial Report Directors’ Report Independent Auditor’s Report 18 Directors’ Declaration 21 Supplementary Information 23 Corporate information 50 52 Contents Chairman's letter Chief Executive Officer's report Results summary Business review Board of Directors Financial Calendar 2009 Full Year Financial results Annual General Meeting Financial Half Year End Interim results Financial Year End Annual General Meeting The Annual General Meeting of Boart Longyear will be held at Museum of Sydney – AGL Theatre Corner Bridge and Phillip Streets Sydney, NSW 2000, Australia Commencing at 10.00am on 11 May 2010 Telephone +61 2 9251 5988 Boart Longyear Limited ACN. 123 052 728 53 131 IBC 19 February 2010 11 May 2010 30 June 2010 August 2010 31 December 2010 Forward-Looking Statements Statements in this report that are not historical are forward-looking statements. These statements are based on management’s current belief and their expectations. The forward- looking statements in this report are subject to uncertainty and changes in circumstances and involve risks and uncertainties that may affect our operations, markets, products, services, prices and other factors as discussed in our filings with the Australian Securities Exchange. Significant risks and uncertainties may relate to, but are not limited to, financial, economic, competitive, environmental, political, legal, regulatory and technological factors. In addition, completion of transactions of the type described in this report are subject to a number of uncertainties and to negotiation and execution of definitive agreements among the parties and closing will be subject to approvals and other customary conditions. Accordingly, there can be no assurance that the transactions will be completed or that our expectations will be realised. We assume no obligations to provide revision to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws. Corporate information Headquarters Principal Administrative Office 10808 South Riverfront Parkway #600 South Jordan, Utah 84095 Tel: +1 801 972 6430 Fax: +1 801 977 3374 Registered Office 919-929 Marion Road Mitchell Park, South Australia 5043 Tel: +61 8 8375 8375 Fax: +61 8 8377 0539 Auditors Deloitte Touche Tohmatsu Company Secretaries Fabrizio Rasetti Paul Blewett Shareholder Enquiries Boart Longyear Investor Relations 10808 South Riverfront Parkway South Jordan, Utah 84095 Australia: +61 8 8375 8300 Others: +1 801 952 8513 email: ir@boartlongyear.com Listing Boart Longyear is listed on the Australian Securities Exchange under the symbol “BLY” Share Registry Link Market Services Limited Level 12680 George Street Sydney NSW 2000 Tel: +61 2 8280 7111 Annual Meeting The third Annual General Meeting of Shareholders of Boart Longyear Limited will be held at the Museum of Sydney, located at the corner of Bridge and Phillip Streets, Sydney NSW 2000 on Tuesday, 11 May 2010, commencing at 10:00 a.m. (Sydney time). Website www.boartlongyear.com www.precinct.com.au 

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