Cardno Limited
Annual Report 2010

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Financial Report 2 0 1 0 Table of Contents Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Directors’ Report ............................................................................................................................................... 3 Corporate Governance Statement .................................................................................................................. 21 Consolidated Statement of Financial Performance ........................................................................................ 26 Consolidated Statement of Comprehensive Income ...................................................................................... 27 Consolidated Statement of Financial Position ................................................................................................ 28 Consolidated Statement of Changes in Equity ............................................................................................... 29 Consolidated Statement of Cash Flows ......................................................................................................... 30 Notes to the Consolidated Financial Statements ........................................................................................... 31 Directors’ Declaration ..................................................................................................................................... 75 Independent Auditor’s Report ......................................................................................................................... 76 Additional Shareholder Information ................................................................................................................ 78 Corporate Directory ........................................................................................................................................ 80 Page 2 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 The Directors present their report together with the consolidated financial statements of Cardno Limited (“the Company”) being the Company and the entities it controlled at the end of, or during, the year ended 30 June 2010. 1. Directors The Directors of the Company in office during or since the year ended 30 June 2010 are set out below: John Massey (Chairman - Non-executive) Graham Tamblyn (Deputy Chairman - Executive) Andrew Buckley (Managing Director - Executive) Anthony Barnes (Non-executive) (appointed 31 July 2008) Peter Cosgrove (Non-executive) Jeffrey Forbes (Executive and Company Secretary) Trevor Johnson (Executive) Ian Johnston (Non-executive) Details of the qualifications, experience and responsibilities of the Directors are on pages 4 to 6. 2. Company Secretary Jeffrey Forbes BCom, MAICD, MAusIMM was appointed to the position of Company Secretary on 10 July 2006. Mr Forbes had been a Company Secretary of another unrelated listed company for 6 years prior to joining Cardno. Michael Pearson LLB, BA, ACIS was appointed to the position of Joint Company Secretary on 24 September 2009. Page 3 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Director Experience Special Responsibilities John C Massey BCom, CPA, FAICD(Life), FAIM Non-executive Chairman Age 64 Graham G Tamblyn DipCE, MIEAust, CPEng, RPEQ, FAICD Deputy Chairman Executive Director Age 60 John Massey has been Chairman of Cardno Limited since July 2004 and a Non-Executive Director since March 2004. He has extensive and broadly-based strategic experience, development skills developed as a Chairman, Director and Chief Executive spanning many different industries. commercial leadership and is also Chairman of As well as being Chairman of the Company, the Board’s John Remuneration Nominations Committees. and John is also Chairman of Sunstate Cement Limited and a Director of Macmahon Holdings Limited and the Stockyard / Kerwee Beef Group. He has been actively involved in corporate governance and director issues and was made a Life Fellow of the Australian Institute of Company Directors in recognition of his eminence in the field of directorship and for distinguished service, and is a member of the Board of Governors of the Committee for the Economic Development of Australia. John’s previous Board appointments include being Chairman of Symbiosis Group and Ventracor and Director of SEQ Water, Dairy Australia, Brisbane Airport Corporation and KR Castlemaine Foods. Graham commenced work with the engineering consultancy Cardno & Davies in 1973. He is an experienced civil engineer in the urban development field with involvement in such notable projects as the Kawana Waters master planned community, Noosa Waters, Twin Waters, and Pelican Waters. Graham’s commitment to the urban development and engineering industry is evidenced by his considerable involvement in industry associations such as the Urban Development Institute of Australia of which he was Sunshine Coast Branch President for 6 years up to 2002. Graham’s career has included periods as Managing Director and Chairman of Cardno Holdings Pty Ltd. Apart from ongoing technical project work Graham plays a role in assisting with the implementation of the Cardno Group’s growth strategy of merger and acquisition. Page 4 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Director Experience Andrew D Buckley BE(Hons), FIEAust, FAICD, CPEng, RPEQ Managing Director Age 53 Anthony H (Tony) Barnes BCom Non-executive Director Age 60 Peter J Cosgrove AC, MC ndc (Ind), jssc, psc (US), Dip Mil Stud, FAICD Non-executive Director Age 63 Andrew was appointed Managing Director of the Cardno Group in 1997. He has thirty years’ experience in executive management, project management, design and implementation of engineering and development assistance projects. Andrew has worked in the management, design and construction of mining, engineering and infrastructure projects in Australia, Africa, USA and Asia. For the last 15 years he has worked in executive management roles in the engineering, construction and development assistance sectors with a special focus on growth. Under Andrew’s leadership the Cardno Group has grown from an annual turnover of approximately $14 million in FY1997 to $477 million in FY2010 and from less than 200 people to over 3,700. Andrew was a Non-executive Director of CBD Professional Services Pty Ltd, which is associated with Carter Newell Lawyers until December 2009. Tony Barnes has been a non-executive Director of Cardno since 31 July 2008. He was formerly the Chief Financial Officer of Zinifex Limited, an international mining, exploration and development company. Mr Barnes also held the position of Chief Executive Officer of Zinifex Limited during a management change. Mr Barnes played a key role in the successful IPO of Zinifex Limited in May 2004 and its subsequent restructure culminating in the merger with Oxiana Limited in July 2008 to form Oz Minerals Limited. He has extensive financial experience following a career which included more than 32 years with BHP, both within Australia and Internationally. Tony is also a Director of the Victorian Rugby Union. Retired General Peter Cosgrove joined Cardno as a Non Executive Director on 26 March 2007, bringing with him a wealth of experience and credentials. Peter is a Director of Qantas Airways Limited and Qantas Superannuation Limited, and a Fellow of the Australian Institute of Company Directors. Peter was a director of Australian Rugby Union Limited until April 2010. He also holds a number of prestigious memberships and board appointments. Peter was Chief of the Australian Defence Force from July 2002 until July 2005. In 1999 he was appointed as Commander of the International Forces in East Timor and helped the country transition to independence. Peter was awarded the Military Cross in Vietnam and he was appointed as a Companion of the Military Division of the Order of Australia, Companion of the New Zealand Order of Merit (CNZM) and Commander of the United States Legion of Merit. In 2001 Peter was the Australian of the Year. Page 5 of 80 Special Responsibilities Andrew is a member of the Nominations Committee Tony is Chairman of the Board’s Audit, Risk & Compliance Committee, the Standing Due Diligence Committee and a member of the Remuneration Committee. Peter is a member of the Nominations Committee Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Director Experience Jeffrey I Forbes BCom, MAICD, MAusIMM Chief Financial Officer, Company Secretary, Executive Director Age 57 Trevor C Johnson BE, MEngSc, PhD, FIEAust, CPEng, RPEQ, MAICD Executive Director Age 53 Ian J Johnston DipCM, GradDip App Fin & Inv, ASIA, ACIS, FAICD Non-executive Director Age 61 Jeff joined Cardno in July 2006 as Chief Financial Officer, Company Secretary and Executive Director, Finance. Jeff has more than 32 years experience as a finance manager, primarily in the resources sector prior to joining Cardno. Jeff has significant experience in the financing and development of resource projects in both Australia and in the Asia Pacific region. He has held senior positions domestically and internationally. Prior to joining Cardno he was an Executive Director, Chief Financial Officer and Company Secretary of Highlands Pacific Limited. Jeff has significant experience in capital raisings and during his career Jeff has worked for a number of major companies including Rio Tinto, BHP and CSR. Trevor has 30 years experience as a civil engineer, with special expertise in the fields of hydraulics, water quality and environmental analysis. He continues to act as Project Director for many of Cardno’s major urban development projects, and regularly appears as an expert witness on engineering matters. In his executive role as Director Corporate, he is also responsible for a number of acquisition, co-ordination and communication activities within the Group. Trevor has been an employee of Cardno for over 25 years, and has been a Director of Cardno Holdings Pty Ltd and subsequently Cardno Limited since 1996. Ian Johnston became a Non Executive Director of Cardno Limited in November 2004 bringing with him extensive experience in treasury, corporate banking and equity capital markets. Following a career of nearly 25 years in the banking industry, Ian joined RBS Morgans in 1988 as Head of Corporate Finance and is now Chairman Corporate Finance and a member of its advisory board. He is also a Director of RBSM Foundation Limited and Data#3 Limited. He is also a member of the National Trust of Queensland Brisbane City Hall Conservation Appeal Committee and Rowland advisory board. Ian’s previous Board appointments include Symbiosis Group Limited and The Rock Building Society Limited. Page 6 of 80 Special Responsibilities Jeff is a member of the Standing Due Diligence Committee. Trevor is Chairman of the Standing Due Diligence Committee and is a member of the Board’s Audit, Risk & Compliance Committee. Ian is a member of the Board's Audit, Risk & Compliance Committee, the Remuneration Committee, the Nominations Committee and the Standing Due Diligence Committee. Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 3. Principal Activities The principal activity of the consolidated entity during the financial year was operating as a provider of professional services in physical and social infrastructure. There were no changes to the principal activities of the Cardno Group during the financial year under review. 4. Review of Results and Operations Cardno achieved a record net profit after tax of $37.60 million for the year ended 30 June 2010, a 10.1% increase over the 2009 financial year. Basic earnings per share increased to 43.86 cents. Cardno had strong operating cash flow of $46.75 million in 2010, an increase of 21% over 2009, and had cash of $56.28 million at 30 June 2010. The Company’s balance sheet remains strong with low net debt. In August 2010, the company completed a successful Rights issue raising $49 million. The Board has declared a fully franked final dividend of 15 cents per share to be paid on 15 October 2010 to all shareholders registered on 17 September 2010. With the interim dividend of 14 cents per share in March 2010, this will result in a full year dividend of 29 cents, which is also a record for Cardno. Revenue was $477.24 million, which was slightly down from 2009, with most of this reduction resulting from the strengthening Australian dollar in 2010. Cardno delivered another record profit for its shareholders during a period of significant adverse economic conditions. This is the sixth consecutive year of record profit and earnings per share growth since listing in 2004 with total shareholder return in this period of over 400%. Cardno has performed strongly through the global financial crisis. The company’s strategy of diversifying its operations through acquisitions and growth across multiple geographic regions and disciplines has proven successful. The company now employs over 3,700 staff worldwide, operating out of 150 offices. During the financial year Cardno made four acquisitions. The 615-person Cardno ENTRIX and the 155 person Cardno ERI have increased Cardno’s exposure to the highly strategic and growing environmental consulting market, as well as the oil and gas sector in the US and internationally. In Australia, Cardno acquired two specialist businesses: Cardno ITC a 100-person Australia wide electrical, mechanical and specialist engineering group providing services to the building sector; and Cardno AUS a utility detection and mapping services business based in Victoria. The Board noted that the Company’s second half performance was stronger than the first half as expected, reflecting the impact of improving market conditions and the benefit of acquisitions undertaken in recent months. Cardno’s markets continue to improve. Cardno has traditionally achieved organic growth of 7% to 9% before the global financial crisis. With the strong performance of recent major acquisitions and a return to organic growth, the company is well positioned for 2011. Page 7 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 5. Dividends Dividends paid or declared by the Company to members since the end of the previous financial year were: Type Declared and paid during the year - Final 2009 ordinary - Interim 2010 ordinary Declared after end of year - Final 2010 ordinary Dealt with in the financial report as: - Dividends paid or provided - Noted as a subsequent event (Note 29) Cents per share Total amount $’000 Franked/ unfranked Date of payment 14.0 14.0 15.0 11,801 12,154 Franked Franked 13 October 2009 26 March 2010 15,840 Franked 15 October 2010 23,955 15,840 39,795 All dividends paid or declared by the Company since the end of the previous financial year were fully franked at 30%. 6. Events Subsequent to the Reporting Date On 11 August Cardno completed a $49m capital raising via a 1:6 fully underwritten renounceable rights issue. The number of ordinary shares issued under the rights issue was 15,089,139. The capital raised will be used to reduce debt used for the June 2010 acquisition of ENTRIX and ERI and for working capital. On 16 August 2010, the Directors of Cardno Limited declared a final dividend of 15.0 cents per share for the 2010 financial year. The fully franked dividend will be paid on 15 October 2010 to shareholders registered on 17 September 2010 and will total $15,839,940. The dividend has not been provided for in the 30 June 2010 financial statements. 7. Likely Developments The consolidated entity will continue to manage its global business in physical and social infrastructure and pursue its policy of growing the Company both organically and by acquisition during the next financial year. 8. Significant Changes in the State of Affairs Other than detailed elsewhere, there have been no significant changes in the state of affairs since 30 June 2009. 9. Indemnification and Insurance of Officers The Company has agreements with each of the Directors and Officers of the Company in office at the date of this report indemnifying them against liabilities to any person other than the Company or a related body corporate that may arise from their acting as Directors or Officers of the Company. The indemnity continues to have effect when the Directors and Officers cease to hold office, other than where such liabilities arise out of conduct involving a wilful breach of duty by the Officers, the improper use by the Directors or Officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the Directors’ and Officers’ liability, as such disclosures are prohibited under the terms of the contract. Page 8 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 10. Directors’ Meetings Attendance at Board meetings and Board Committee meetings for the year ended 30 June 2010 is set out below: No. of Meetings Held A H Barnes A D Buckley P J Cosgrove J I Forbes T C Johnson I J Johnston J C Massey G G Tamblyn (cid:138) not a member of this committee Board of Directors A 13 13 13 13 13 13 13 12 B 13 13 13 13 13 13 13 13 Audit, Risk & Compliance Committee B A 4 (cid:138) (cid:138) (cid:138) 4 4 1 (cid:138) 4 (cid:138) (cid:138) (cid:138) 4 4 1 (cid:138) Remuneration Committee Nominations Committee A 4 (cid:138) (cid:138) (cid:138) (cid:138) 4 4 (cid:138) B 4 (cid:138) (cid:138) (cid:138) (cid:138) 4 4 (cid:138) A (cid:138) 2 2 (cid:138) (cid:138) 2 2 (cid:138) B (cid:138) 2 2 (cid:138) (cid:138) 2 2 (cid:138) A = number of meetings attended. B = number of meetings held during the time the Director held office during the year or was a committee member. The Standing Due Diligence Committee was not required to meet during the year. The Board established a specific Due Diligence Committee in relation to the ENTRIX and ERI acquisitions and associated equity raising. 11. REMUNERATION REPORT - AUDITED Principles of Compensation Compensation levels for Directors and secretaries of the Company and relevant key management personnel of the consolidated entity are competitively set to attract and retain suitable qualified staff, reward the achievement of strategic objectives and achieve the broader outcome of creating value for shareholders. The remuneration structure takes into account: (cid:131) (cid:131) (cid:131) (cid:131) the capability and experience of the Directors and Senior Executives; the Directors’ and Senior Executives’ ability to control the performance of areas of the Company’s business; the Company’s performance; and the amount of incentives within each Director’s and Senior Executive’s remuneration. Total shareholder return is an essential element of the Company’s strategy, and the remuneration framework serves this aim by seeking to attract and retain high calibre executives. Since Cardno Limited was established in March 2004 the Company has exceeded the growth and profit targets set by the Board and this successful performance has been reflected in the remuneration of Executives. The Executive Director and Senior Executive Remuneration Policy is set out below: Cardno Limited seeks to set fair and market competitive remuneration for its Executive Directors and Senior Executives to ensure high performance and long-term commitment while taking into consideration the best interest of shareholders. Executive Directors and Senior Executives remuneration consists of fixed salary, potential Performance Equity Plan participation, discretionary cash bonuses and other benefits including superannuation and salary sacrificing. In determining the salary of Executive Directors and Senior Executives, an assessment of performance is completed and a review of the market is conducted. The Company takes into account the responsibilities of the individual’s position, the level of skill and experience as well as the Company’s business. If the employment of an Executive Director or Senior Executive is terminated, the Executive Director or Senior Executive may be entitled to receive from the employer pay in lieu of notice and compensation for employee entitlements such as annual leave and long service leave up to the termination date and by reference to the Executive’s remuneration. Page 9 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Remuneration Committee The Remuneration Committee reviews and makes recommendations to the Board on remuneration issues and policies applicable to all staff for the consolidated entity. It is also responsible for reviewing share option schemes, incentive performance packages, superannuation entitlements, retirement and termination entitlements and fringe benefits policies. The members of the Remuneration Committee during the year were John Massey (Chairman), Ian Johnston and Tony Barnes, all independent Non-Executive Directors. The Remuneration Committee is required to meet at least twice a year. The Remuneration Committee met four times during the year. Compensation levels are reviewed annually by the Remuneration Committee through a process that considers individual, segment and overall performance of the consolidated entity. In addition, external consultants provide analysis and advice to ensure the Directors’ and Senior Executive’s compensations are competitive in the market place where required. Fixed Compensation Fixed compensation consists of base compensation (which is calculated on a total cost basis) and includes any FBT charges related to employee benefits (including motor vehicles), as well as employer contributions to superannuation funds. Fixed compensation is generally reviewed on an annual basis. Performance-linked Compensation Performance-linked compensation includes both short-term and long-term incentives and is designed to reward key management personnel for meeting or exceeding their financial, divisional and personal objectives. In 2009 the Cardno Board had an independent review undertaken of the long term incentive plan for Senior Executives. Changes recommended by the consultants were approved by shareholders at the 2009 AGM and have been adopted. The short-term incentive is an ‘at risk’ bonus provided in the form of cash. The long-term incentive consists of the issue of Performance Options or Rights which are subject to certain vesting conditions related to the Company’s Earnings Per Share Growth and, in the case of Rights, also Total Shareholder Return over 3 years. The Executive Directors did not participate in the 2008 PEP and so the Company implemented an alternative cash based transitional long-term incentive plan linked to the performance of the Company over 3 years commencing in the 2009 financial year. Short-Term Incentive Bonus Each year the Remuneration Committee reviews the key performance indicators (KPIs) for the key management personnel. The KPIs generally include measures relating to the consolidated entity, the relevant segment, the individual and include financial, people, customers, strategy and risk measures. The principal financial performance objectives are compared to budgeted amounts. The non-financial objectives vary with position and responsibility. At the end of the financial year the Remuneration Committee assesses the actual performance of the consolidated entity, the relevant segment and individual against the KPI’s set at the beginning of the financial year. The Remuneration Committee approves the discretionary bonus to be paid to individuals on the delegated authority of the board. The method of assessment was chosen as it provides the committee with an objective assessment of the individual performance. Half of the bonus is paid in the year the bonus is granted while the balance is paid 12 months later, subject to continuing employment. Page 10 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Long-Term Incentive Bonus Employee Share Acquisition Plans (“ESAP”) Shares are issued under the ESAP, in accordance with thresholds approved by shareholders at the 2009 AGM. It provides employees with the opportunity to acquire shares in the Company for no consideration as a bonus component of their remuneration. Employees with 12 months service or greater who have worked an average of 100 hours or more per month are entitled to $1,000 of shares each year and employees with 6 to 12 months service are entitled to $500 of shares each year. Employees who work part time, who have greater than 12 months service and who have worked more than 600 hours per year are also entitled to $500 of shares each year. Shares issued under ESAP rank equally with other fully paid ordinary shares from the date of issue. Shares are issued in the name of the participating employee and are subject to a restriction period. The shares are restricted under the plan until the earlier of three years from the date of acquisition or the date they cease to be an employee. Once the restriction period is lifted the shares can be traded as fully paid ordinary shares. The ESAP has no conditions that could result in the recipient forfeiting ownership of shares. The number of shares still under a restriction period at 30 June 2010 are detailed in the table below: Grant Date Issue Price 29 January 2008 23 February 2009 9 March 2010 $6.19 $3.18 $4.07 Restricted at 30 June 2010 121,739 352,779 401,373 Shares issued during the reporting period are valued at the average market price over the 5 trading days prior to the date of the issue to employees, which approximates the fair value. Performance Equity Plan (PEP) The PEP is designed to reward strong performance by individuals within the Cardno Group of companies. Options and Rights are issued under the PEP, in accordance with thresholds approved at the 2009 AGM, which provides certain employees, as determined by the Managing Director and Remuneration Committee, with the opportunity to acquire shares in the Company, or rights to acquire shares in the Company. The plan rules contain a restriction on removing the “at risk” aspect of the instruments granted to executives. Plan participants may not enter into any transaction designed to remove the “at risk” aspect of an instrument before it vests. (cid:131) Options The plan operates by granting an option to key staff to purchase a prescribed number of shares at a pre-determined time in the future. During the 2010 financial year, options with a grant date fair value of $1,728,573 were issued with a vesting period of three years from the grant date. Each option is convertible to one ordinary share. The exercise price of the options, determined in accordance with the rules of the plan, is based on the weighted average price of the Company’s shares traded during the five days preceding the date of offering the option. All options expire on the earlier of their expiry date or termination of the employee’s employment. The options may be exercised at any time during a 12 month period ending thirty-six months after the date the options are issued. There are no voting or dividend rights attached to the options. Voting rights and dividends will be attached to the unissued ordinary shares when the options have been exercised. No options were exercised during the 2009/10 financial year. Options with a grant date fair value of $310,405 lapsed during the year as a result of vesting conditions not being satisfied. Page 11 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Grant Date Vesting Date Expiry Date 25 October 2007 25 October 2007 5 December 2007 5 December 2007 5 December 2008 2 December 2009 19 October 2009 19 October 2010 29 November 2009 29 November 2010 29 November 2011 2 December 2012 25 October 2009 25 October 2010 5 December 2009 5 December 2010 5 December 2011 2 December 2013 Exercise Price $ Fair Value at Grant Date $ Number of Options at Beginning of Year 7.57 0.68 230,000 7.57 0.92 330,000 7.71 0.70 1,272,500 7.71 0.95 1,719,000 3.35 0.41 2,421,000 Options Granted Options Lapsed Options Vested Not Exercised Number of Options as at 30 June 2010 - - - - - - - 230,000 - - 330,000 103,000 1,169,500 - 180,500 163,000 - - - 1,538,500 2,258,000 2,244,900 4.43 0.77 - 2,244,900 - Weighted average exercise price Weighted average remaining contract life Total expense recognised $454,311 (2009: $552,687) 5.93 4.43 6.12 7.69 5.00 670 days The options outstanding at 30 June 2010 have not vested, are not exercisable at 30 June 2010 and have an exercise price in the range of $3.35 to $7.71. The options issued prior to FY2010 are subject to a performance hurdle and will not vest unless there has been at least a 5% improvement per year (compounded) in the earnings per share of the Company over the vesting periods. The options issued during FY2010 are subject to a performance hurdle and to vest the Company must achieve earnings per share (EPS) growth in accordance with the following scale: EPS Growth Over 3 Years <12.5% (<4% pa) 12.5% (4% pa) >12.5% (4% pa) & <26% (8% pa) 26% (8% pa) >26% (8% pa) & <40% (12% pa) ≥40% (12% pa) % of Performance Options in Tranche to Vest 0% 30% Pro rata 70% Pro rata 100% The fair values of options granted during the year has been calculated using the Black-Scholes model, taking into account price volatility, risk free interest rates and the dividend yield. (cid:131) Rights At the 2009 AGM the Board proposed, upon recommendations by an independent consultant to the Remuneration Committee, the introduction of performance rights alongside changes to the vesting criteria and hurdles. The plan operates by granting a right to acquire an ordinary share at nil consideration at a predetermined time in the future. During the 2010 financial year 359,000 rights with a grant date fair value of $1,098,625 were issued with a vesting period of three years from the grant date. Each right is convertible to one ordinary share. All rights expire on the earlier of their expiry date or termination of the employee’s employment. The rights may be exercised at any time during a one-year period ending thirty-six months after the date the rights are issued if performance hurdles have been met. There are no voting or dividend rights attached to the rights. Voting rights and dividends will be attached to the ordinary shares issued when the rights have been exercised. Page 12 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Grant Date Exercise Date Expiry Date Performance Hurdle Fair Value at Grant Date $ Number of Rights at Beginning of Year Rights Granted Rights Lapsed Rights Vested Not Exercised Number of Rights as at 30 June 2010 22 October 2009 22 October 2012 22 October 2013 2 December 2009 2 December 2012 2 December 2013 Total expense recognised $95,899 (2009: NIL) EPS Growth TSR EPS Growth TSR 3.96 3.19 3.20 2.30 - - - - 67,500 67,500 112,000 112,000 - - - - - - - - 67,500 67,500 112,000 112,000 The rights outstanding at 30 June 2010 have not vested, are not exercisable at 30 June 2010 and have no exercise price. The rights are subject to performance hurdles of total shareholder return (Tranche 1: 50%) and EPS growth (Tranche 2: 50%) in accordance with the following scale: TSR of Cardno Relative to TSRs of Companies in Comparator Group Over 3 Years <50th percentile 50th percentile >50th & <75th percentiles 75th percentile and above % of Rights to Vest (Tranche 1 50%) 0% 50% Pro rata 100% EPS Growth Over 3 Years % of Rights to Vest (Tranche 2 50%) <12.5% (<4% pa) 12.5% (4% pa) >12.5% (4% pa) & <26% (8% pa) 26% (8% pa) >26% (8% pa) & <40% (12% pa) ≥40% (12% pa) 0% 30% Pro rata 70% Pro rata 100% The fair values of rights granted during the year with a total shareholder return performance hurdle, have been calculated using a Monte-Carlo simulation valuation model taking into account price volatility, risk free interest rates and comparator company shareholder return performance. A Black-Scholes model has been used to value the rights with an EPS performance hurdle taking into account price volatility, risk free interest rates and the dividend yield. Executive Director 2009 Transition Long Term Incentive Plan (TLTI) The Executive Directors did not participate in the 2008 PEP. In 2009 the Board determined to introduce an alternative cash based transitional long term incentive plan while the Company developed a new long term incentive plan for Executive Directors and senior management. The new long term incentive plan was developed in FY2010. The Group’s performance will be measured over a period of three years commencing with FY2009. Performance will be measured by reference to two measures each weighted at 50%. The first measure will be total shareholder return (TSR) compared to the TSR of the smallest 100 companies in the S&P/ASX300 excluding companies in the resources and financial sectors and the second measure will be absolute growth in earnings per share (EPS). The Board has discretion to adjust earnings so that they accurately reflect ongoing Company performance. Each measure will have an equal weighting and is pro-rated between a base threshold and stretch targets. Performance will be measured at the end of FY2011. In the event of a takeover or change-in-control, the stretch TLTI award opportunities will become immediately payable to participants. A takeover or change in control is deemed to have occurred when more than 30% of ordinary issued shares are acquired by, or their voting is controlled by, a person or group of related persons. Page 13 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 The award opportunities for the participants will be a percentage of the Executive Director’s base package as at 1 July 2008 and be paid in cash: Performance Level Managing Director Other Executive Directors Below threshold Threshold Between threshold & target Target Between target & stretch Stretch & above 0% 25% Pro rata 50% Pro rata 100% 0% 12.5% Pro rata 25% Pro rata 50% The respective measures for TSR and EPS are: Performance Level Threshold Target Stretch Employment Agreements Relative TSR 50th Percentile 62.5th Percentile 75th Percentile EPS Growth 3% per annum compound 5% per annum compound 15% per annum compound Employment Agreements have been entered into with Executive Directors and Senior Executives. The agreements contain remuneration, performance and confidentiality obligations on the part of both the employer and the employee. The Executives covenant that during the term of employment and for at least six months after termination they will not solicit any existing client or employee of the Company. Non-executive Directors The Non-executive Directors of Cardno Limited are entitled to a fee that is determined by the Board on commencement of the role and reviewed on an annual basis thereafter. The fee includes compulsory superannuation contributions. Non-executive Directors do not participate in equity plans of the Company and do not receive retirement benefits. Page 14 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Director, Executive Officer and Key Management Remuneration Details of the nature and amount of each major element of remuneration of each Director of the Company and each of the five named Company executives and relevant Group executives who receive the highest remuneration are: Short Term Salary and Fees $ STI Cash Bonus $ Non- Monetary Benefits $ Total $ Post Employment Long Term Super- annuation Benefits $ Other Long Term Benefits* $ 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 147,321 87,000 33,000 - 73,394 73,394 73,394 73,394 594,121 524,633 288,564 228,083 298,925 297,425 250,568 240,688 - - - - - - - - 540,000* 225,000* 96,000* 60,000* 30,000 57,500 10,000 27,737 - - - - - - - - - - - - 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - - 147,321 87,000 33,000 - 73,394 73,394 73,394 73,394 1,138,121 753,633 388,564 292,083 332,925 358,925 264,568 272,425 - - 22,679 83,000 47,000 73,623 6,606 6,606 6,606 6,606 52,121 101,234 52,436 112,917 50,000 50,105 46,557 55,987 - - - - - - - - 114,916* 114,916* 28,750* 28,750* 29,310* 29,310* 25,056* 25,056* - - - - Director Non-Executive John Massey Anthony Barnes Peter Cosgrove Ian Johnston Executive Andrew Buckley Jeffrey Forbes Trevor Johnson Graham Tamblyn Former James Verco Total Compensation – 2010 1,759,287 676,000 16,000 2,451,287 284,005 198,032* Total Compensation – 2009 1,524,617 370,237 16,000 1,910,854 490,078 198,032* Termination Benefits $ Share Based Payments Shares Options & Rights* Total $ Proportion of Remuneration Performance Related Value of Options & Rights as a Proportion of Remuneration - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 170,000 170,000 80,000 73,623 80,000 80,000 80,000 80,000 166,779** 23,575** 80,149** 11,254** 60,732** 8,363** 43,851** 4,267** 1,471,937 993,358 549,899 445,004 472,967 446,703 380,032 357,735 - 5,015** - 5,015 - - 351,511** 3,284,835 52,474** 2,651,438 - - - - - - - - 55.8% 36.6% 37.3% 22.5% 25.4% 21.3% 20.8% 16.0% - - 33.3% 23.4% - - - - - - - - 11.3% 2.4% 14.6% 2.5% 12.8% 1.9% 11.5% 1.2% - - 5.0% 2.0% * Includes STI and TLTI cash bonuses which have been accrued but not paid based on estimates of achievement of performance targets. ** The amount included in remuneration is the grant date fair value which has been recognised in accordance with accounting standards over the expected vesting period and includes amounts relating to revised estimates for the number of equity instruments likely to vest not recognised in prior periods. Page 15 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Director, Executive Officer and Key Management Remuneration continued Executives Executives Roger Collins- Woolcock Paul Gardiner Michael Renshaw Kylie Sprott (appointed 12/10/09) Former Steven Coote (ceased employment 25/09/10) Charles Tapp (ceased employment 15/04/10) Short-Term Post Employment Long Term Salary $ STI Cash Bonus $ Non- Monetary Benefits $ Total $ Super- annuation Benefits $ Other Long Term Benefits $ Termination Benefits $ Share Based Payments Shares Options & Rights* Total $ Proportion of Remuneration Performance Related Value of Options & Rights as a Proportion of Remuneration 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 317,752 314,107 335,428 339,577 381,476** 444,904** 156,410 - 101,018 335,779 273,301 324,807 40,000 60,000 40,000 80,000 43,798 45,000 - - - 80,000 27,000 45,000 4,000 4,000 4,000 4,000 - 3,600 - - - 4,000 - - 361,752 378,107 379,428 423,577 425,274 493,504 156,410 - 101,018 419,779 300,301 369,807 30,848 30,889 32,755 28,592 - - 13,780 - 7,058 32,470 36,097 28,795 - - - - - - - - - - - - - - - - - - - - - - - - 131,022 - 1,000 1,000 1,000 1,000 1,000 1,000 - - - 1,000 1,000 1,000 63,153* 6,671* 77,987* 8,937* 63,153* 6,671* 2,501* - 456,753 416,667 491,170 462,106 489,427 501,175 172,691 - - 8,937* 108,076 462,186 43,198* 5,406* 511,618 405,008 131,022 - 4,000 5,000 249,992* 2,229,735 36,622* 2,247,142 22.6% 16.0% 24.0% 19.2% 21.9% 10.3% 1.4% - - 19.2% 13.7% 12.7% 18.0% 15.4% 13.8% 1.6% 15.9% 1.9% 12.9% 1.3% 1.4% - - 1.9% 8.4% 1.6% 11.2% 1.6% Total compensation – 2010 Total compensation – 2009 1,565,385 1,759,174 150,798 310,000 8,000 1,724,183 15,600 2,084,774 120,538 120,746 * The amount included in remuneration is the grant date fair value which has been amortised on a straight line basis over the expected vesting period. ** Salary includes expatriate benefits and is payable in USD. Additional Information – Cash Bonuses Name Andrew Buckley Jeffrey Forbes Trevor Johnson Graham Tamblyn Roger Collins-Woolcock Paul Gardiner Michael Renshaw Kylie Sprott Charles Tapp STI TLTI Vested% Forfeited % Vested % Forfeited % 72% 80% Note 1 Note 1 Note 1 Note 1 Note 1 Note 1 Note 1 28% 20% Note 1 Note 1 Note 1 Note 1 Note 1 Note 1 Note 1 0% 0% 0% 0% N/A N/A N/A N/A N/A 0% 0% 0% 0% N/A N/A N/A N/A N/A Note 1: No STI incentive maximum or minimum amount is contracted between Cardno and the individuals noted in the table. Page 16 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Consequences of Performance on Shareholder Wealth In considering the Group’s performance and benefits for shareholder wealth, the Remuneration Committee has regard to the following indices in respect of the current financial year and the previous four financial years. Net Profit After Tax (‘000’s) Dividends Paid or Provided (000’s) Change in Share Price – year on year Basic Earnings Per Share Growth Return on Capital Employed 2010 2009 2008 2007 2006 $37,597 $23,955 $0.53 0.1% 17.3% $34,154 $21,434 -$1.06 4.3% 19.0% $27,452 $16,349 -$2.69 12.6% 25.8% $18,468 $9,903 $2.83 18.9% 35.5% $12,663 $6,859 $1.55 62.6% 62.7% Over the past four years, the Group’s profit after income tax has grown at an average rate per annum of 42% and revenue from $101 million (2005) to $477 million (2010). During the same period average key management personnel total compensation has grown by approximately 16% per annum. Performance Options & Rights Options and Rights granted to Executive Directors and Officers of the Company Details of vesting profiles of options and rights granted as remuneration to the Executive Directors and key management personnel and to the most highly remunerated Offices of the Group and still outstanding at 30 June 2010, including Rights granted during the financial year are as follows: Key Management Personnel Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Graham Tamblyn Executives Roger Collins-Woolcock Paul Gardiner Michael Renshaw Kylie Sprott Charles Tapp Outstanding Grant Date Vesting Date % Vested in Year % Forfeited in Year Options Rights - 150,000 - 70,000 - 50,000 - 40,000 - 60,000 45,000 - 70,000 55,000 - 60,000 45,000 - 50,000 35,000 60,000 - 30,000 - 25,000 - 20,000 - 30,000 - - 30,000 - - 30,000 - - 8,000 - 22-Oct-09 25-Oct-07 22-Oct-09 25-Oct-07 22-Oct-09 25-Oct-07 22-Oct-09 25-Oct-07 2-Dec-09 5-Dec-08 5-Dec-07 2-Dec-09 5-Dec-08 5-Dec-07 2-Dec-09 5-Dec-08 5-Dec-07 2-Dec-09 5-Dec-08 5-Dec-07 22-Oct-12 19-Oct-10 22-Oct-12 19-Oct-10 22-Oct-12 19-Oct-10 22-Oct-12 19-Oct-10 2-Dec-12 29-Nov-11 29-Nov-10 2-Dec-12 29-Nov-11 29-Nov-10 2-Dec-12 29-Nov-11 29-Nov-10 2-Dec-12 29-Nov-11 29-Nov-10 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% No options were issued to Executive Directors and key management personnel during the financial year. Non-Executive Directors do not participate in any of the Company’s incentive plans. No options and rights granted during the financial year have vested. No options or rights have been granted since the end of the financial year and up to the date of this report. No options or rights were exercised during the financial year. Details of the performance criteria are included on page 13. Page 17 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 The movement during the reporting period, by value, of options and rights over ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Key Management Personnel Granted in year $ Exercised in year $ Lapsed in year $ Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Graham Tamblyn Executives Roger Collins-Woolcock Paul Gardiner Michael Renshaw Kylie Sprott 214,500 107,250 89,375 71,500 82,500 82,500 82,500 22,000 - - - - - - - - - - - - - - - - 12. Directors’ and Executives’ Interests As at the date of this report, the interests of the Directors in the shares of Cardno Limited were: A H Barnes A D Buckley P J Cosgrove J I Forbes T C Johnson I J Johnston J C Massey G G Tamblyn Cardno Limited Ordinary Shares Shares held in Escrow Options over Ordinary Shares Performance Rights 4,044 2,450,261 - 24,856 2,050,001 241,955 58,334 1,248,211 - - - - - - - - - 150,000 - 70,000 50,000 - - 40,000 - 60,000 - 30,000 25,000 - - 20,000 The movement during the reporting period in the number of ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Held at 1 July 2009 Purchases Received as Compensation Sales Held at 30 June 2010 Non–Executive Directors John Massey Anthony Barnes Peter Cosgrove Ian Johnston Executive Directors Graham Tamblyn Andrew Buckley Jeffrey Forbes Trevor Johnson Executives Roger Collins-Woolcock Paul Gardiner Michael Renshaw Kylie Sprott 44,382 3,348 - 207,390 1,426,330 2,359,037 19,947 1,967,399 653,652 800,141 153,213 - 5,618 118 - - 521 - 1,358 - - - 10,359 3,580 - - - - - - - - 245 245 245 - - - - - 210,000 - - - - - - - 50,000 3,466 - 207,390 1,216,851 2,359,037 21,305 1,967,399 653,897 800,386 163,817 3,580 13. Unissued shares under options and rights At the date of this report unissued ordinary shares of the Company under option are: Exercise Date Expiry date Exercise price Number of options 19 October 2010 29 November 2010 29 November 2011 2 December 2012 25 October 2010 5 December 2010 5 December 2011 2 December 2013 $7.57 $7.71 $3.35 $4.43 330,000 1,538,500 2,258,000 2,244,900 Page 18 of 80 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2010 At the date of this report unissued ordinary shares of the Company in relation to performance rights are: Exercise Date Expiry date Exercise price Number of rights 22 October 2012 2 December 2012 22 October 2013 2 December 2013 Nil Nil 135,000 224,000 These options and rights do not entitle the holder to participate in any share issue of the Company. 14. Non-Audit Services During the year KPMG, the Company’s auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditors and in accordance with written advice provided by resolution of the Audit, Risk & Compliance Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and does not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: (cid:131) (cid:131) all non-audit services are subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit, Risk & Compliance Committee to ensure they do not impact the integrity and objectivity of the auditor; and that non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, in that they do not involve 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 risks and rewards. Details of the amounts paid to the auditor of the Company, KPMG, and its related practices for audit and non-audit services provided during the year are set out in note 31. 15. Lead Auditor’s Independence Declaration Under Section 307C of the Corporations Act 2001 The lead auditor’s independence declaration is set out on page 20 and forms part of the Directors’ report for the year ended 30 June 2010. 16. Rounding of Amounts The Company is 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 statements. Amounts in the Directors’ report and financial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Signed in accordance with a resolution of Directors. On behalf of the Directors JOHN C MASSEY Chairman Brisbane 16 August 2010 Page 19 of 80 Corporate Governance Statement The Board of Directors of Cardno Limited is ultimately responsible for all corporate governance matters of the consolidated entity and is accountable to the shareholders for the overall business performance of the company. Details of the corporate governance policies of the company can be found in the Investor Centre of the company’s website, www.cardno.com.au. Cardno Limited is committed to implementing and maintaining sound corporate governance practices and has considered the ASX Corporate Governance Principles and Recommendations (Second Edition) in the development of its corporate governance. The Board has assessed the company’s current practice against these Principles and Recommendations and notes that the company’s practices are consistent except where stated below. Principle 1: Lay solid foundation for management and oversight The role of the Board and delegation to Senior Executives has been formalised. The most significant responsibilities of the Board are: (cid:131) (cid:131) providing strategic guidance to the company including contributing to the development of and approving the corporate strategy; reviewing and approving business plans, the annual budget and financial plans including available resources and major capital expenditure initiatives; (cid:131) reviewing the operational and financial performance of the company’s activities; (cid:131) reporting to shareholders and the market; (cid:131) ensuring compliance with prudential regulations and standards; (cid:131) ensuring adequate risk management processes are in place; (cid:131) reviewing internal controls and internal and external audit reports; (cid:131) monitoring and influencing the culture and reputation of the company; (cid:131) monitoring board composition, director selection and board process and performance; (cid:131) (cid:131) (cid:131) approving key executive appointments and ensuring executive succession planning; reviewing the performance and remuneration of the Managing Director and Senior Executives; ensuring that the Board as a whole has an appropriate understanding of each substantial segment of the business; and authorising and monitoring major investment and strategic commitments. (cid:131) The Board has delegated to Senior Executives responsibility for the implementation of the company’s strategic direction, business plans and day-to-day management of the company’s operations. The performance of Senior Executives is evaluated by the Board through formal performance reviews undertaken on an annual basis. The individual performance of each Senior Executive is reviewed against goals set in the previous year and new objectives are established for the following financial year. The performance reviews were completed during the year in accordance with the process agreed by the Board. The Board endorses a culture of continuous improvement and will therefore continue to refine and develop its role and the delegation of responsibilities to management as the company develops. The Board’s responsibilities and functions are also contained in the company’s Corporate Governance Policy which can be accessed in the Investor Centre on the company’s website. Principle 2: Structure the Board to add value To add value, the Board has been formed so that it has effective composition, size and commitment to adequately discharge its responsibilities and duties. Collectively the Directors have a broad range of experience, expertise, skills, qualifications and contacts relevant to the business. Details of the skills and experience of each Director are contained in the Directors’ Report and on the company’s website. The Board currently comprises four Non-executive Directors including the Chairman, and four Executive Directors. The Board has adopted the following criteria to determine the independence of a Director as someone who must be a Non-executive Director and: (cid:131) is not a substantial shareholder of the company or an officer of, or otherwise associated directly with, a substantial shareholder of the company; (cid:131) within the last three years has not been employed in an executive capacity by the company or another group member, or been a director after ceasing to hold any such employment; (cid:131) within the last three years has not been a principal of a material professional adviser or a material consultant to (cid:131) the company or another group member or an employee materially associated with the service provided; is not a material supplier or customer of the company or another group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; (cid:131) has no material contractual relationship with the company or other group member other than as a Director of the company; Page 21 of 80 Corporate Governance Statement (cid:131) has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere (cid:131) with the Director’s ability to act in the best interests of the company; and is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the company. The Board has confirmed that based on this definition of independence, Mr Massey, General Cosgrove and Mr Barnes are independent Non-executive Directors. The Board determined that Mr Johnston meets the independence definition except with respect to his former role as a Director of RBS Morgans Limited. The Board does not consider that Mr Johnston’s current role with RBS Morgans materially interferes with his ability to act independently in the interests of the company. It is currently considered appropriate to have a number of Executive Directors on the Board as they have a strong awareness of management issues and a deep knowledge of the company. The company has reduced the number of Executive Directors and increased the number of Non-executive Directors over recent years. The Board considers it appropriate to transition over time to a majority of Non-executive Directors. The role of the Chairman and Chief Executive Officer are separate. The Chairman of the Board is Mr Massey who is an independent Non-executive Director. The Chief Executive Officer and Managing Director is Mr Buckley. Each Director, as part of his agreement with the company has the ability to seek independent advice at the company’s expense after consultation with the Chairman. The Nomination Committee is comprised by three Non-executive Directors, Mr Massey (Chairman), General Cosgrove, Mr Johnston and the Managing Director Mr Buckley. Details of the number of meetings of the Committee and members’ attendance can be found in the Directors’ Report. The Nomination Committee facilitates Board and individual Director performance reviews and evaluation on at least an annual basis using an external facilitator as necessary to ensure independent professional scrutiny and benchmarking against developing best practices. The results of the review are presented to the Chairman and to the Board. A performance evaluation in the financial year 2010 was undertaken in accordance with board procedure and involved an independent board consultant. The Board acknowledges that performance can always be enhanced and will continue to seek and consider ways of further enhancing performance both individually and collectively. The Nomination Committee assists the Board in determining the composition of the Board and its committees. When considering a candidate as a Director, consideration is given to the candidate’s ability to act in the best interests of shareholders as well as specific skills and expertise. Consideration is also given to the candidate’s capacity to understand the impacts of various laws and regulations on their role and on the company including company law, trade practices legislation, environmental law, occupational health and safety, equal opportunity and taxation. As the company has significant operations outside of Australia, consideration is also given to the candidate’s ability to understand the impacts of foreign jurisdiction legislation, foreign currency issues and the business environment in the countries in which the company operates. In addition, consideration is given to the candidate’s knowledge of the areas of the company’s operations, risk management concepts and how they apply to the company and also whether the candidate is up to date with issues of corporate governance. New Directors undergo an induction process in which they are given an extensive briefing on the company. This includes meetings with key executives, tours of the relevant premises, an induction package and presentations. A formal letter of appointment is provided. In order to achieve continuing improvement in Board performance, all Directors are encouraged to undergo continuing professional development. Specifically, Directors are provided with the resources and training to address skills gaps where they are identified. The Nomination Committee has responsibility for independently supervising the company’s Leadership Development Programme as part of its succession considerations. The roles and responsibilities of the Nomination Committee are summarised in the Investor Centre of the company’s website. Principle 3: Promote ethical and responsible decision making The Board has adopted a Code of Conduct for Directors, Senior Executives and staff. The Code of Conduct is regularly reviewed and updated as necessary to ensure it reflects the highest standards of behaviour, professionalism and practices necessary to maintain confidence in the company’s integrity. The code has six governing principles namely honesty and integrity, confidentiality of information, integrity of personal dealings, conflicts of interest, abiding by the law and gifts and entertainment. Page 22 of 80 Corporate Governance Statement The Board also promotes the maintenance of an open working environment in which all employees and contractors are able to report instances of unethical, improper, unlawful or undesirable conduct without fear of intimidation or reprisal. This is endorsed through the Whistleblowers Protection Policy. The Board has adopted a policy for trading in Cardno securities by Directors, Senior Executives and staff. The purpose of these codes is to guide Directors and Senior Executives in the performance of their activities and to define the circumstances in which both they and staff, and any associates, are permitted to deal in securities. This policy was reviewed and updated during the year to ensure best practice principles continue to be incorporated in the policy in line with the Listing Rules. These codes and policy have been designed with a view to ensuring the highest ethical and professional standards as well as compliance with legal obligations. Both codes and the policy are available for review in the Investor Centre of the company’s website. Principle 4: Safeguard integrity in financial reporting The Managing Director and Chief Financial Officer have provided the Board with a statement confirming that the company’s financial reports present a true and fair view of the company’s financial position and are in accordance with relevant accounting standards. The Audit, Risk & Compliance Committee consists of two Non-executive Directors, Mr Barnes and Mr Johnston, and one Executive Director, Dr Johnson. Mr Barnes, an independent Non-executive Director, is Chairman of the Audit, Risk & Compliance Committee. Mr Barnes is not the Chairman of the company. Mr Massey stepped down from his position on the Committee on 18 August 2009 so as to avoid any potential conflict of interest between his role as a member of the Committee and his role as Chairman of the Board. Details of the number of meetings of the Committee and members attendance can be found in the Directors’ Report. The guidelines provide for the Audit, Risk & Compliance Committee to consist of at least three members and consist only of Non-executive Directors. The Board considers that it is appropriate to have one Executive Director on the Audit, Risk & Compliance Committee to ensure there is appropriate insight when considering the company’s operations and risks. The Audit, Risk & Compliance Committee requires the rotation at least every five years of the external audit engagement partner. The selection of the external audit engagement partner is assessed against specific criteria established and agreed by the Audit, Risk & Compliance Committee. The role, objective and responsibilities of the Audit, Risk & Compliance Committee are able to be accessed in the Investor Centre of the company’s website. Principle 5: Make timely and balanced disclosure The company has adopted a Continuous Disclosure Policy which can be viewed in the Investor Centre of the company’s website. The purpose of this policy is to set out the procedures to be followed to enable accurate, timely, clear and adequate disclosure to the market and compliance with the ASX Listing Rules regarding disclosure. The Policy also operates to ensure that all employees are aware of their obligations for compliance within the continuous disclosure obligations. The Board regularly reviews its disclosure to ensure the market is kept informed of price sensitive or significant information in accordance with the Listing Rules. During the year the company approved a Confidential Information Policy which established standards of behaviour and processes regarding the manner in which the executives and employees handle confidential information relating to the company’s business. A copy of the policy has been distributed to all staff and is accessible on the company intranet. The Company Secretary has been nominated as the person responsible for communications with the Australian Securities Exchange (ASX). This role includes the responsibility for ensuring compliance with the continuous disclosure requirements in the ASX Listing Rules and overseeing and co-ordinating information disclosure to the ASX, analysts, brokers, shareholders, the media and the public. Further comments related to making timely and balanced disclosure are covered with consideration of the next Principle. Principle 6: Respect the rights of shareholders The Board recognises the important rights of shareholders and strives to communicate with shareholders regularly and clearly – both by electronic means and using more traditional communication methods. Shareholders are encouraged to attend and participate at general meetings. The company’s auditors attend the Annual General Meeting of the company and are available to answer shareholders’ questions. The Communications Policy adopted by the company includes: (cid:131) communicating effectively with shareholders through releases to the market via the ASX, the media, the company’s website, information mailed to shareholders and the general meetings of the company; (cid:131) all information disclosed to the ASX is posted on the company’s website when it is disclosed to the ASX. Presentation material used in public presentations and to brief analysts is released to the ASX and posted on the company’s website; Page 23 of 80 Corporate Governance Statement (cid:131) giving shareholders ready access to balanced and understandable information about the company and (cid:131) corporate proposals; and the external auditor attending the Annual General Meeting and being available to answer shareholder questions about the conduct of the audit and the preparation and content of the Auditor’s Report. A copy of the company’s Communications Policy is able to be reviewed in the Investor Centre of the company’s website. Principle 7: Recognise and manage risk The Board, together with management, has sought to identify, monitor and mitigate risk. Internal controls are monitored on a continuous basis and wherever possible, improved. The issue of risk management is formalised in the company’s Corporate Governance Policy and in the Audit, Risk & Compliance Committee Terms of Reference which are both kept under regular review. The review takes place at both committee level through the Board’s Audit, Risk & Compliance Committee which meets at least four times each year, and at board level. The Audit, Risk & Compliance Committee has established policies and procedures to identify and monitor business risks as well as adopting an internal compliance and control system to manage material business risk. The Operational Risk Management Committee, which is comprised of the Managing Director and Senior Executives who are representative of all aspects of the company’s business across the globe, regularly reports to the Audit, Risk & Compliance Committee. The Operational Risk Management Committee has responsibility for oversight and maintenance of the Enterprise Wide Risk Management System, the company’s Operational Risk Management Plan, which has been established in accordance with AS/NZ 4360:2004. The Operational Risk Management Committee also has responsibility for operational risks, quality control issues and operations processes. The Audit, Risk & Compliance Committee reports to the Board regularly on the implementation and management of the Enterprise Wide Risk Management System and identifies significant risks to the company and how they are being mitigated and managed by management via the Operational Risk Management Committee. This structure allows the company to assess risks ranging from low to very high and it is those risks that are identified as significant that are referred to in the Financial Report. The company also monitors the quality and accuracy of its services through a Quality Management System. The details of the Quality Management System are available to staff via the company’s intranet and client feedback is a feature of the system. The Managing Director and Chief Financial Officer attest to the Board the soundness of the risk management and internal control systems each year and that the system is operating effectively in all material aspects in relation to financial risks. The objective, roles and responsibilities of the Audit & Risk Compliance Committee and Operational Risk Management Committee and each committee’s terms of reference are able to be accessed in the Investor Centre of the company’s website. Principle 8: Remunerate fairly and responsibly The company has established a Remuneration Committee. The Remuneration Committee, which advises and reports to the Board, is chaired by the Chairman, Mr Massey and includes Mr Barnes and Mr Johnston, all Non-executive Directors. Details of the number of meetings of the committee and members’ attendance can be found in the Directors’ Report. The current remuneration of the Directors and the Senior Executives is published in the Directors’ Report. The Executive Director and Senior Executive Remuneration Policy is: Cardno Limited seeks to set fair and market competitive remuneration for its Executive Directors and Senior Executives to ensure high performance and long-term commitment while taking into consideration the best interest of shareholders. Executive Directors and Senior Executives’ remuneration consists of fixed salary, potential Performance Equity Plan participation, discretionary cash bonuses and other benefits including superannuation and salary sacrificing. In determining the salary of Executive Directors and Senior Executives, an assessment of performance is completed and a review of the market is conducted. The company takes into account the responsibilities of the individual’s position, the level of skill and experience as well as the company’s business. If the employment of an Executive Director or Senior Executive is terminated, the Executive Director or Senior Executive may be entitled to receive from the employer pay in lieu of notice and compensation for employee entitlements such as annual leave and long service leave up to the termination date and by reference to the Executive’s remuneration. Where the Executive Directors participate in equity-based incentive plans, the details are submitted to shareholders for approval. Page 24 of 80 Corporate Governance Statement The Remuneration Policy in regard to Non-executive Directors is: The Non-executive Directors of Cardno Limited are entitled to a fee that is determined by the Board on commencement of the role and reviewed on an annual basis thereafter. The fee includes compulsory superannuation contributions. Non-executive Directors do not participate in equity plans of the company and do not receive retirement benefits. The fee covers both Board and sub-committee responsibilities. The company’s Trading Policy specifically prohibits any Director, Senior Executive or employee from transacting in short selling, trading in products which limit the risk associated with the holding of unvested securities or profiting from trading in securities which decrease in market value. A copy of this policy can be accessed in the Investor Centre of the company’s website. The role, objectives and responsibilities of the Remuneration Committee is able to be accessed in the Investor Centre of the company’s website. Page 25 of 80 Consolidated Statement of Financial Performance Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Revenue Employee expenses Consumables and materials used Sub-consultant and contractor costs Depreciation and amortisation expenses Financing costs Other expenses Profit/(loss) before income tax Income tax (expense) / benefit Net profit/(loss) for the year Profit attributable to: Owners of the Company Note 2 3 3 4 2010 $’000 477,238 (211,888) (135,520) (53,470) (8,525) (3,166) (21,090) 43,579 (5,982) 37,597 2009 $’000 515,842 (231,464) (145,272) (61,848) (11,003) (4,637) (19,526) 42,092 (7,939) 34,153 37,597 37,597 34,153 34,153 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 30 30 43.86 43.61 43.82 43.82 The statement of financial performance should be read in conjunction with notes 1 to 38 which form part of the financial statements. Page 26 of 80 Consolidated Statement of Comprehensive Income Cardno Limited and its Controlled Entities for the year ended 30 June 2010 Profit for the period Other comprehensive income Exchange differences on translation of foreign operations 2010 $’000 2009 $’000 37,597 34,153 (4,214) (258) Other comprehensive income for the period, net of tax (4,214) (258) Total comprehensive income for the period 33,383 33,895 Total comprehensive income attributable to: Owners of the Company 33,383 33,383 33,895 33,895 The statement of comprehensive income should be read in conjunction with notes 1 to 38 which form part of the financial statements. Page 27 of 80 Consolidated Statement of Financial Position Cardno Limited and its Controlled Entities as at 30 June 2010 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other current assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Trade and other receivables Other financial assets Property, plant and equipment Deferred tax assets Intangible assets Other non-current assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Current tax liabilities Short term provisions Other current liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing loans and borrowings Deferred tax liabilities Long term provisions Other non-current liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained earnings TOTAL EQUITY Note 2010 $’000 2009 $’000 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 13 21 22 23 56,282 103,275 71,496 6,211 237,264 1,504 836 29,208 3,551 339,099 89 374,287 65,808 92,072 56,419 4,794 219,093 1,650 553 27,014 2,110 222,091 213 253,631 611,551 472,724 82,462 49,250 1,528 15,501 29,250 58,779 8,976 4,115 13,206 38,033 177,991 123,109 125,990 442 6,527 629 133,588 76,076 1,058 5,629 931 83,694 311,579 206,803 299,972 265,921 252,080 (8,507) 56,399 299,972 227,457 (4,293) 42,757 265,921 The statement of financial position should be read in conjunction with notes 1 to 38 which form part of the financial statements. Page 28 of 80 Consolidated Statement of Changes in Equity Cardno Limited and its Controlled Entities for the year ended 30 June 2010 BALANCE AT 1 JULY 2008 Profit for the period Exchange differences on translation of foreign operations Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued Notes converted to shares Dividends paid or provided BALANCE AT 30 JUNE 2009 Profit for the period Exchange differences on translation of foreign operations Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued Notes converted to shares Dividends paid or provided BALANCE AT 30 JUNE 2010 23 23 5 23 5 Note Share Capital Ordinary $’000 192,063 Retained Earnings $’000 30,038 34,153 Foreign Translation Reserve $’000 Total $’000 (4,035) 218,066 - 34,153 - (258) (258) 34,153 (258) 33,895 - - (21,434) (21,434) 42,757 37,597 - - - - 32,741 2,653 (21,434) 13,960 (4,293) 265,921 - 37,597 - (4,214) (4,214) 37,597 (4,214) 33,383 - - - 32,741 2,653 - 35,394 227,457 - - - 24,623 - - 24,623 252,080 - - (23,955) (23,955) 56,399 - - - - (8,507) 24,623 - (23,955) 668 299,972 The statement of changes in equity should be read in conjunction with notes 1 to 38 which form part of the financial statements. Page 29 of 80 Consolidated Statement of Cash Flows Cardno Limited and its Controlled Entities for the year ended 30 June 2010 CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Interest received Finance costs Cash paid to suppliers and employees Income tax paid Note 2010 $’000 2009 $’000 508,714 1,474 (2,968) (451,683) (8,792) 550,769 1,492 (4,768) (494,189) (14,715) NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 25(a) 46,745 38,589 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of subsidiaries, net of cash acquired Payment of direct costs of acquisition Proceeds from sale of property, plant & equipment Payments for property, plant & equipment 25(d) (129,486) - 691 (3,126) (42,023) (620) 1,588 (9,716) NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES (131,921) (50,771) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Share issue transaction costs Proceeds from borrowings Repayment of borrowings Finance lease payments Dividends paid NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS HELD 20,704 (56) 101,086 (19,427) (2,589) (22,301) 77,417 28,587 - - 14,350 - (19,374) 23,563 (7,759) 11,381 CASH AND CASH EQUIVALENTS AT 1 JULY 65,808 52,624 Effects of exchange rate changes on cash and cash equivalents at the end of year (1,767) 1,803 CASH AND CASH EQUIVALENTS AT 30 JUNE 25(b) 56,282 65,808 The statement of cash flow should be read in conjunction with notes 1 to 38 which form part of the financial statements. Page 30 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES Cardno Limited (the “Company”) is a company incorporated and domiciled in Australia. The consolidated financial report of the Company for the year ended 30 June 2010 encompasses the Company and its subsidiaries (together referred to as the “Group”). The financial report was authorised for issue by the Board of Directors on 16 August 2010. (a) Statement of compliance The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASBs including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB), Urgent Issues Group Interpretations (“UIG”) and the Corporations Act 2001. The financial report of the consolidated entity also complies with International Financial Reporting Standards and interpretations adopted by the International Accounting Standards Board. (b) Basis of Preparation The financial report has been prepared on an accrual and historical cost basis. The consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. The following new standards, amendments to standards and new interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 30 June 2010, but have not been applied in preparing this financial report. (cid:131) AASB 9 Financial Instruments includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the project to replace AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 will become mandatory for the Group’s 30 June 2014 financial statements. Retrospective application is generally required, although there are exceptions, particularly if the entity adopts the standard for the year ended 30 June 2012 or earlier. The Group has not yet determined the potential effect of the standard. (cid:131) AASB 2009-5 Further amendments to Australian Accounting Standards arising from the Annual Improvements Process affect various AASBs resulting in minor changes for presentation, disclosure, recognition and measurement purposes. The amendments, which become mandatory for the Group’s 30 June 2011 financial statements, are not expected to have significant impact on the financial statements. (cid:131) AASB 2009-8 Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions resolves diversity in practice regarding the attribution of cash-settled share-based payments between different entities within a group. As a result of the amendments Australian Interpretation (AI) 8 Scope of AASB 2 and AI 11 AASB 2 – Group and Treasury Share Transactions will be withdrawn from the application date. The amendments, which become mandatory for the Group’s 30 June 2011 financial statements, are not expected to have a significant impact on the financial statements. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 (updated by CO 05/641 effective 28 July 2005 and CO 06/51 effective 31 January 2006) and in accordance with that Class Order, amounts in the financial report and Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. (c) Basis of Consolidation Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Company. A list of the controlled entities is contained in Note 38 to the financial statements. All controlled entities have a June financial year-end. Page 31 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (c) Basis of Consolidation continued Transactions eliminated on consolidation Intra-group balances, unrealised gains and losses and inter-entity balances resulting from transactions with or between controlled entities are eliminated in full on consolidation. (d) 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. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the consolidated balance sheet. Cash flows from operating activities are included in the cash flow statements on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (e) Foreign Currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the translation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognised in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. The revenue and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income in the foreign currency translation reserve (FCTR). When a foreign operation is disposed of, in part or in full, the relevant amount in the FCTR is transferred to profit or loss. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and are presented within equity in the FCTR. Hedge of net investment in foreign operation Foreign currency differences arising on the translation of a financial liability designated as a hedge of a net investment in a foreign operation are recognised in other comprehensive income to the extent that the hedge is effective, and are presented within equity in the FCTR. To the extent that the hedge is ineffective, such differences are recognised in profit or loss. When the hedged part of a net investment is disposed of, the relevant amount in the FCTR is transferred to profit or loss as part of the profit or loss on disposal. (f) Revenue Recognition Revenue is recognised at fair value of the consideration received net of the amount of goods and services tax (GST) payable to the taxation authority. Page 32 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (f) Revenue Recognition continued Sale of goods Revenue from the sale of goods is recognised (net of rebates, discounts and other allowances) upon the delivery of goods to the customer. Consulting revenue Revenue from consulting services which are provided on a time and material basis is recognised at the contractual hourly rates as labour hours are delivered and direct expenses are incurred. For long term contracts, revenue and expenses are recognised in accordance with the percentage of completion method. Where a loss is expected to arise from a contract, the loss is recognised immediately as an expense. The percentage of completion is determined by costs to date versus estimated total project costs. Interest revenue Interest revenue is recognised as it accrues, taking into account the effective yield on the financial asset. Dividends Revenue from dividends is recognised by the consolidated entity when dividends are received. (g) Leases Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. The corresponding rental obligations, net of finance charges, are included in current and non-current interest-bearing loans and borrowings. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Other leases are operating leases and are not recognised in the Group’s statement of financial position. Payments made under operating leases which are subject to fixed annual increments are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense and are spread over the lease term. (h) Net Financing Costs Interest income is recognised in the profit and loss as it accrues, using the effective interest method. Borrowing costs are calculated using the effective interest method and include interest, amortisation of discounts or premiums relating to borrowings and amortisation of ancillary costs incurred in connection with arrangement of borrowings and foreign exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Borrowing costs are expensed as incurred unless they relate to qualifying assets. Qualifying assets are assets which take a substantial period of time to get ready for their intended use or sale. Where funds are borrowed specifically for the acquisition, construction or production of a qualifying asset, the amount of borrowing costs capitalised is the amount incurred in relation to that borrowing, net of any interest earned on those borrowings. Where funds are borrowed generally, borrowing costs are capitalised using a weighted average capitalisation rate. (i) Income Tax 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. 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. Page 33 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (i) Income Tax continued Deferred tax is recognised using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting or taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. 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. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probably that future taxable profits will be available against which the temporary difference can be utilised. 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 Company and its wholly-owned Australian resident entities are part of a tax-consolidated group. As a consequence, all members of the tax-consolidated group are taxed as a single entity from the date of forming the tax consolidated Group. The head entity within the tax-consolidated Group is Cardno Limited. Nature of tax funding arrangements and tax sharing arrangements The head entity, in conjunction with other members of the tax-consolidated Group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated Group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability/(asset) assumed by the head entity and any tax-loss deferred tax asset assumed by the head entity. (j) Segment Reporting As of 1 July 2009 the Group determines and presents operating segments based on the information that internally is provided to the Managing Director and Chief Financial Officer, who have been identified as the Group’s chief operating decision makers. This change in accounting policy is due to the adoption of AASB 8 Operating Segments. Previously operating segments were determined and presented in accordance with AASB 114 Segment Reporting. The new accounting policy in respect of segment operating disclosures is presented as follows: (cid:131) Comparative segment information has been re-presented in conformity with the transitional requirements of AASB 8. Since the change in accounting policy only impacts presentation and disclosure aspects, there is no impact on earnings per share. (cid:131) An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. (cid:131) Segment results that are reported to the chief operating decision-makers include items directly attributed to the segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise of mainly head office expenses, financing costs, and income tax expense. (cid:131) Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. Page 34 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (k) Non-current Assets Held for Sale and Discontinued Operations Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale. Immediately before classification as held for sale, the measurement of the assets (and all assets and liabilities in a disposal group) is brought up-to-date in accordance with applicable accounting standards. Then, on initial classification as held for sale, non-current assets and disposal groups are recognised at the lower of carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale are included in profit or loss, even when there is a revaluation. The same applies to gains and losses on subsequent re-measurement. A discontinued operation is a component of the consolidated entity’s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale, or is a subsidiary acquired exclusively with a view to resale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative period. (l) Trade and Other Receivables Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. Interest income is recognised as it accrues. The recoverability of trade receivables is reviewed on an ongoing basis. An estimate for impairment of doubtful debts is made when there is objective evidence collection of the full nominal amount is no longer probable. Bad debts are written off as incurred. (m) Inventories Work in progress is stated at the aggregate of contract costs incurred to date plus recognised profits less recognised losses and progress billings. If there are contracts where progress billings exceed the aggregate costs incurred plus profits less losses, the net amounts are presented as unearned revenue under other liabilities. Contract costs include all costs directly related to specific contracts, costs that are specifically chargeable to the customer under the terms of the contract and an allocation of overhead expenses incurred in connection with the consolidated entity’s activities in general. (n) Property, Plant and Equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes 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 costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Cost also may include transfers from other comprehensive income of any gain or loss on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. 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 items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in the income statement. Subsequent costs Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the reporting period in which they are incurred. Page 35 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (n) Property, Plant and Equipment continued Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. 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 and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: • • • • • buildings laboratory equipment, instruments and amenities equipment and motor vehicles leasehold improvements office furniture and equipment 40 years 4-7 years 4-7 years 4-5 years 3-11 years Depreciation methods, useful lives and residual values are reviewed at each reporting date. (o) Intangible Assets Business Combinations and Goodwill The Group has adopted revised AASB 3 Business Combinations (2008) and amended AASB 127 Consolidated and Separate Financial Statements (2008) for business combinations occurring in the financial year starting 1 July 2009. All business combinations occurring on or after 1 July 2009 are accounted for by applying the acquisition method. The change in accounting policy is applied prospectively and had no material impact on earnings per share. For every business combination, the Group identifies the acquirer, which is the combining entity that obtains control of the other combining entities or businesses. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The acquisition date is the date on which control is transferred to the acquirer. Judgement is applied in determining the acquisition date and determining whether control is transferred from one party to another. The Group measures goodwill as the fair value of the consideration transferred including the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. Consideration transferred includes the fair values of the assets transferred, liabilities incurred by the Group to the previous owners of the acquiree, and equity interests issued by the Group. Consideration transferred also includes the fair value of any contingent consideration and share-based payment awards of the acquiree that are replaced mandatorily in the business combination. Transaction costs that the Group incurs in connection with a business combination, such as finder’s fees, legal fees, due diligence fees, and other professional and consulting fees, are expensed as incurred. Works contracts and software intangibles Works contracts and software intangibles are acquired by the consolidated entity and are stated at cost less accumulated amortisation and impairment losses. Amortisation is calculated based on the timing of projected cash flows of the contracts over their estimated useful lives, which currently vary from 1 to 7 years. Patents and Licenses Patents and licenses acquired by the consolidated entity are considered to have indefinite useful lives and are stated at cost less any impairment losses. Patents and licences are not amortised but tested for impairment annually. Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Page 36 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (p) Amortisation Amortisation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value. Amortisation is charged to the profit and loss on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Goodwill and intangible assets with an indefinite life are not amortised but are systematically tested for impairment at each annual balance sheet date. Works contracts which are assigned a value are amortised over the life of the contract from the date they are available for use. Amortisation methods, useful lives and residual values are reviewed at each reporting date. (q) Impairment The carrying amount of the consolidated entity’s assets, other than inventories (see paragraph (m)), and deferred tax assets (see paragraph (i)), are reviewed at each statutory reporting date to determine whether there is any indication of impairment. If any such indication exists, an impairment test is performed. The consolidated entity performs impairment testing of goodwill and intangibles with indefinite useful lives annually. An impairment loss is recognised whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit and loss unless the asset has previously been revalued, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised through the profit and loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Calculation of recoverable amount The recoverable amount of the consolidated entity’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Reversals of impairment An impairment loss in respect of receivables carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of goodwill is not reversed. In respect of other assets, 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. (r) Trade and Other Payables Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the consolidated entity. Trade accounts payable are normally settled within 60 days. Trade and other payables are stated at cost. Page 37 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (s) Interest Bearing Borrowings Interest bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the profit and loss over the period of the borrowings on an effective interest rate basis. (t) Employee Benefits Wages, salaries and annual leave Liabilities for employee benefits for wages, salaries and annual leave expected to be settled within 12 months of the period end represent present obligations resulting from employees’ services provided to reporting date, calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at reporting date including related on-costs. Long-term service benefits The provisions for employee entitlements to long service leave and other deferred employee benefits represent the present value of the estimated future cash outflows to be made by the employer resulting from employees’ services provided up to the balance date and include related on-costs. In determining the liability for long service leave, consideration has been given to future increases in wage and salary rates, and the consolidated entity’s experience with staff departures. Liabilities for employee entitlements which are not expected to be settled within 12 months are discounted using the rates attached to national government securities at balance date, which most closely match the terms of maturity of the related liabilities. Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value. Share-based payment transactions The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do not meet the related service and non-market performance conditions at the vesting date. (u) Provisions A provision is recognised in the balance sheet when the consolidated entity has a present legal, equitable or constructive obligation as a result of a past event, and it is probable that a future sacrifice of economic benefits will be required to settle the obligation, the timing or amount of which is uncertain. If the effect is material, provisions are determined by discounting the expected future cash flows at the pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Dividends A provision for dividends payable is recognised in the reporting period in which the dividends are declared. (v) Cash and Cash Equivalents Cash and cash equivalents comprise cash on hand and investments in money market instruments. Bank overdrafts are shown within Interest-bearing loans and borrowings in current liabilities on the balance sheets. (w) Earnings per Share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, for the effects of all dilutive potential ordinary shares, which comprise share options and rights granted to employees. Page 38 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (x) Presentation of Financial Statements The Group applies revised AASB 101 Presentation of Financial Statements, which became effective as of 1 January 2009. As a result, the Group presents in the consolidated statement of changes in equity all owner changes in equity, whereas all non-owner changes in equity are presented in the consolidated statement of comprehensive income. Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share. (y) Critical Accounting Estimates and Judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. • • • Estimating impairment of goodwill – refer to notes 1(q) and 14. Revenue recognition in relation to long term contracts including estimating stage of completion and total contract costs – refer notes 1(f) and 2. Accounting for business combinations including estimating fair values of identifiable assets acquired and liabilities assumed – refer notes 1(o) and 34. Page 39 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 2. REVENUE Fees from services Fees from sale of goods Fees from recoverable expenses Dividends received Interest received Royalties Rental income Other Revenue 3. EXPENSES, LOSSES AND (GAINS) Depreciation Motor vehicles Plant & equipment Total Depreciation Amortisation of non-current assets Works contracts Software intangibles Motor vehicles under lease Plant & equipment under lease Total Amortisation Total Depreciation & Amortisation Bad and doubtful debts Financing costs Interest and finance charges Amortisation of borrowing costs Total financing costs Rental expense relating to operating leases Minimum lease payments Net loss on disposal of property, plant and equipment Foreign exchange (gains) / losses 4. INCOME TAX EXPENSE (a) The components of tax expense comprises: Current tax expense Current year Adjustments for prior years Deferred tax expense Origination and reversal of temporary differences Change in New Zealand tax rate Total income tax expense/(benefit) Page 40 of 80 2010 $’000 2009 $’000 366,760 8,227 98,765 6 1,429 126 889 1,036 477,238 689 5,923 6,612 216 205 1,290 202 1,913 8,525 2,211 2,896 270 3,166 402,030 8,643 101,911 - 1,472 147 - 1,639 515,842 1,472 6,019 7,491 770 303 1,119 1,320 3,512 11,003 3,263 4,409 228 4,637 19,027 19,303 (58) 396 432 (4,144) 7,856 (514) 7,342 (1,351) (9) 5,982 13,438 (3,747) 9,691 (1,752) - 7,939 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 4. INCOME TAX EXPENSE CONTINUED (b) Numerical reconciliation between tax expense and pre-tax profit Profit before tax Income tax using the Australian corporation tax rate of 30% (2009: 30%) Increase (decrease) in income tax expense due to: Non-deductible expenses Adjustment for branch office taxation Allowances for R&D expenditure Tax exempt revenue Benefit arising from amendment to Australian tax legislation Sundry items Effect of tax rates in foreign jurisdictions Under / (over) provided in prior years Income tax expense 5. DIVIDENDS PAID OR PROVIDED FOR ON ORDINARY SHARES (a) Dividends proposed subsequent to year end not recognised as a liability 100% franked dividend at 30% (2009: 30%) (Refer Note 29) (b) Dividends paid during the year (28 cents per share) 100% franked dividend at 30% (2009: 30%) (c) Franking credit balance The amount of franking credits available for the subsequent financial year are: 2010 $’000 2009 $’000 43,579 42,092 13,074 12,628 338 326 (5,329) (162) (1,335) (407) (9) 6,496 (514) 5,982 218 623 (1,855) (840) - (879) - 9,895 (1,956) 7,939 15,840 11,798 23,955 21,434 - - franking account balance as at the end of the financial year at 30% 7,021 9,384 franking credits that will arise from the payment of income tax payable as at the end of the financial year 3,186 10,207 2,273 11,657 The impact on the franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduce it by $6,788,546 (2009: $5,056,335) 6. CASH AND CASH EQUIVALENTS Cash at bank and on hand Restricted cash (project advances) Bank short term deposits 7. TRADE & OTHER RECEIVABLES (CURRENT) Trade debtors Provision for doubtful debts Sundry debtors Forward exchange contract 8. INVENTORIES (CURRENT) Work in progress Page 41 of 80 34,438 - 21,844 56,282 109,366 (8,986) 100,380 2,895 - 103,275 34,796 5,005 26,007 65,808 93,283 (5,403) 87,880 3,976 216 92,072 71,496 56,419 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 9. OTHER CURRENT ASSETS Prepayments Project advances Security deposits 10. TRADE & OTHER RECEIVABLES (NON-CURRENT) Sundry debtors 11. OTHER FINANCIAL ASSETS (NON-CURRENT) Investments in non-related entities 12. PROPERTY, PLANT & EQUIPMENT Laboratory equipment, instruments & amenities – at cost Less accumulated depreciation Equipment & motor vehicles – at cost Less accumulated depreciation Office furniture & equipment – at cost Less accumulated depreciation Leasehold improvements – at cost Less accumulated depreciation Office furniture & equipment under lease Less accumulated amortisation Motor vehicles – under hire purchase Less accumulated depreciation Motor vehicles & field lab equipment – under lease Less accumulated amortisation Leasehold improvements – under lease Less accumulated amortisation Property Less accumulated depreciation 2010 $’000 2009 $’000 4,825 176 1,210 6,211 4,069 109 616 4,794 1,504 1,650 836 553 12,714 (8,261) 4,453 8,992 (6,328) 2,664 52,782 (40,291) 12,491 9,612 (3,616) 5,996 15 (15) - 1,197 (497) 700 5,253 (2,516) 2,737 533 (378) 155 75 (63) 12 9,834 (6,065) 3,769 6,741 (4,449) 2,292 39,397 (29,363) 10,034 6,904 (1,443) 5,461 2,091 (988) 1,103 1,193 (395) 798 5,014 (1,931) 3,083 1,200 (889) 311 233 (70) 163 Total Property, Plant & Equipment 29,208 27,014 Page 42 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 12. PROPERTY, PLANT & EQUIPMENT CONTINUED (a) Movements in carrying amounts Movements in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year. Laboratory equipment, instruments & amenities – at cost Carrying amount at the beginning of the year Additions Increase through merger acquisition Disposals Depreciation expense Transfer between classes Foreign exchange Carrying amount at the end of the year Equipment & motor vehicles – at cost Carrying amount at the beginning of the year Additions Increase through merger acquisition Disposals Depreciation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Office furniture & equipment – at cost Carrying amount at the beginning of the year Additions Increase through merger acquisitions Disposals Depreciation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Leasehold improvements – at cost Carrying amount at the beginning of the year Additions Increase through merger acquisitions Disposals Depreciation expense Foreign exchange Transfer between classes Carrying amount at end of the year Office furniture & equipment – under lease Carrying amount at the beginning of the year Additions Disposals Amortisation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Motor vehicles – under hire purchase Carrying amount at the beginning of the year Additions Depreciation expense Transfer between classes Carrying amount at the end of the year Page 43 of 80 2010 $’000 2009 $’000 3,769 919 1,098 (78) (1,163) (12) (80) 4,453 2,292 182 1,104 (308) (689) (47) 130 2,664 10,034 1,761 4,204 (175) (4,041) (188) 896 12,491 5,461 263 957 (12) (716) (72) 115 5,996 1,103 - - (92) - (1,011) - 798 - (135) 37 700 2,821 689 1,375 (390) (1,087) 436 (75) 3,769 3,144 357 941 (840) (1,472) 446 (284) 2,292 9,165 4,794 588 (267) (4,389) 349 (206) 10,034 2,181 3,726 301 (508) (543) 264 40 5,461 1,474 174 (15) (1,050) 130 390 1,103 39 679 (37) 117 798 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 12. PROPERTY, PLANT & EQUIPMENT CONTINUED (a) Movements in carrying amounts continued Motor vehicles & field lab equipment – under lease Carrying amount at the beginning of the year Additions Amortisation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Leasehold improvements – under lease Carrying amount at the beginning of the year Increase through merger acquisitions Additions Disposals Amortisation expense Transfer between classes Carrying amount at the end of the year Property – at fair value Carrying amount at the beginning of the year Additions Disposals Foreign exchange Carrying amount at the end of the year Total Property, Plant & Equipment Carrying amount at the beginning of the year Additions Increase through merger acquisitions Disposals Depreciation & amortisation expense Transfer between classes Foreign exchange Carrying amount at the end of the year 13. DEFERRED TAX ASSETS & LIABILITIES Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Accruals Provisions Carried forward tax losses Lease timing Property, plant and equipment Change in tax rate (NZ) Discretionary reserve Capitalised software Other Total deferred tax assets Set-off of deferred tax liabilities Net deferred tax assets Page 44 of 80 2010 $’000 2009 $’000 3,083 925 (1,156) (12) (103) 2,737 311 - 15 (7) (112) (52) 155 163 - (151) - 12 27,014 4,065 7,363 (731) (8,104) - (399) 29,208 2,193 10,034 482 404 88 9 342 340 10 13,902 (10,351) 3,551 2,184 1,977 (1,082) 33 (29) 3,083 1,007 19 19 - (270) (464) 311 11 150 - 2 163 22,026 12,565 3,224 (2,020) (9,930) - 1,149 27,014 1,719 8,176 932 326 393 - - - 446 11,992 (9,882) 2,110 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 13. DEFERRED TAX ASSETS & LIABILITIES CONTINUED Liabilities Unrealised foreign exchange gains Work in progress Prepayments Property, plant and equipment Cash to accrual adjustment Intangible items Retentions Goodwill on acquisition Other Total deferred tax liabilities Set-off of deferred tax assets Net deferred tax liabilities 2010 $’000 2009 $’000 741 7,544 440 227 - 300 68 1,473 - 10,793 (10,351) 442 1,026 7,122 403 2 1,447 823 - - 117 10,940 (9,882) 1,058 NET DEFERRED TAX ASSETS (LIABILITIES) 3,109 1,052 30 June 2010 Movement in temporary differences during the year: Accruals Provisions Capitalised Software Carried forward tax losses Lease Timing Property, plant & equipment Cash to accruals adjustment Unrealised foreign exchange gains Work in progress Prepayments Goodwill on Acquisition (USA) Retainage Intangible Items Sundry Items 1 July 2009 Recognised in profit or loss Recognised directly in equity Acquired in business combination 30 June 2010 $’000 $’000 $’000 $’000 $’000 1,719 8,176 - 932 326 391 (1,447) (1,026) (7,122) (403) - - (823) 329 1,052 616 877 340 (450) (64) (249) 1,447 285 (422) 28 (1,472) (68) 523 (32) 1,359 - - - - - - - - - - - - - - - - 979 - - - (281) - - - - - - - - 698 2,335 10,032 340 482 262 (139) - (741) (7,544) (375) (1,472) (68) (300) 297 3,109 Page 45 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 13. DEFERRED TAX ASSETS & LIABILITIES CONTINUED 30 June 2009 Movement in temporary differences during the year: Amortised Expenses Accruals Provisions Carried forward tax losses Lease timing Deferred Rent Property, plant & equipment Cash to Accruals Adjustment Unrealised foreign exchange gains Work in progress Prepayments Intangible Items Other 1 July 2008 Recognised in profit or loss Recognised directly in equity Acquired in business combination 30 June 2009 $’000 $’000 $’000 $’000 $’000 51 1,310 6,140 177 164 131 (150) (2,133) 408 (6,280) (106) (300) 285 (303) (51) 409 1,775 755 162 (131) 541 686 (1,434) (837) (297) 130 44 1,752 - - - - - - - - - - - - - - - - 261 - - - - - - (5) - (653) - (397) - 1,719 8,176 932 326 - 391 (1,447) (1,026) (7,122) (403) (823) 329 1,052 Page 46 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 14. INTANGIBLE ASSETS Goodwill at cost Works contracts Accumulated amortisation Patents and licenses Software intangibles Accumulated amortisation 2010 $’000 2009 $’000 335,671 218,035 2,840 (2,518) 322 2,110 1,550 (554) 996 2,900 (2,336) 564 2,110 1,795 (413) 1,382 339,099 222,091 Reconciliation of movement in carrying amounts from beginning of year to end of year: Consolidated Year ended 30 June 2009 Balance at the beginning of year Additions: - acquisition through business combinations - current year - prior year Amortisation charges Effect of foreign exchange Closing value at 30 June 2009 Year ended 30 June 2010 Balance at the beginning of year Additions: - acquisition through business combinations - current year - prior year Amortisation charges Effect of foreign exchange Closing value at 30 June 2010 Goodwill is allocated to the following cash-generating units: Americas and Software Emerging Markets Region South East Australia & N.Z North & Western Australia Geotechnical Division Goodwill $’000 Works Contracts $’000 Patents and Trademarks $’000 Software Intangibles $’000 161,346 36 2,115 1,678 47,236 (36) - 9,489 218,035 1,039 - (770) 259 564 - (5) - - 2,110 - - (303) 7 1,382 218,035 564 2,110 1,382 124,502 (24) - (6,842) 335,671 - - (216) (26) 322 - - - - 2,110 - - (205) (181) 996 2010 $’000 2009 $’000 194,619 34,201 47,377 22,473 37,001 335,671 99,016 34,512 25,033 22,473 37,001 218,035 For the purposes of impairment testing, goodwill is allocated to the Group’s management divisions which represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. Page 47 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 14. INTANGIBLE ASSETS CONTINUED The recoverable amount of each cash-generating unit above is determined based on value-in-use calculations. Value-in-use is calculated based on the present value of cash flow projections over a 5 year period including a terminal value at the end of year five. The cash flows are discounted using a pre-tax discount rate of 11.7% (2009: 12.8%) based on an estimate of the Group’s weighted average cost of capital. This is a blended rate based on Cardno’s debt to equity profile. Sensitivity analysis at higher rates shows no impairment. The value-in-use calculations are based on budget forecasts for each cash generating unit for the 2010 year and longer term year-on-year growth rates as assessed by operational management of the businesses. The growth rate is calculated as the average growth rate over the forecast period based upon 2010 baseline performance. These forecasts are based on underlying economic conditions and historical growth of project revenue. Costs are calculated taking into account historical gross margins as well as estimated cost inflation over the period. The following assumptions were used in the value-in-use calculations: Americas and Software Emerging Markets Region South East Australia & N.Z North & Western Australia Geotechnical Division Growth Rate 4.7% 2.2% 3.6% 6.6% 9.3% 15. OTHER NON-CURRENT ASSETS Borrowing costs 16. TRADE & OTHER PAYABLES (CURRENT) Trade payables & accruals Forward exchange contract Vendor liability 17. INTEREST-BEARING LOANS & BORROWINGS (CURRENT) Lease liabilities Hire purchase liabilities Bank Loans (i) Details of the terms and conditions of loans and borrowings are set out in Note 20 18. SHORT-TERM PROVISIONS Employee benefits Training benefits 19. OTHER CURRENT LIABILITIES Unearned revenue Deferred Rent 20. INTEREST-BEARING LOANS & BORROWINGS (NON-CURRENT) Lease liabilities Hire purchase liabilities Bank Loans Pre-Tax Discount Rate 11.7% 11.7% 11.7% 11.7% 11.7% 2010 $’000 2009 $’000 89 213 63,988 - 18,474 82,462 1,539 506 47,205 49,250 15,457 44 15,501 29,194 56 29,250 3,291 124 122,575 125,990 48,633 236 9,910 58,779 1,928 418 6,630 8,976 13,128 78 13,206 38,033 - 38,033 3,482 340 72,254 76,076 Page 48 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 20. INTEREST-BEARING LOANS & BORROWINGS (NON-CURRENT) Bank Loans As at 30 June 2010 the Group has bank loans totalling $169,779,591 (2009: $78,884,102), with an effective interest rate of 2.72% (2009: 3.01%). The facility limits are multi-currency comprising an on-demand working capital / guarantee facility of AUD19.0 million and term acquisition financing facilities of USD129.1 million and GBP8.55m repayable in July 2012. Pricing of the working capital facility is BBSY plus a margin ranging from 2.25% to 3.00% depending on the Maximum Financial Leverage Ratio, while current interest rates on term facilities range from 2.60% pa. to 3.07% pa. The undrawn portion of facilities at 30 June 2010 was AUD17.4 million (2009: AUD10.0 million). Facilities are secured by an unlimited interlocking guarantee and indemnity. The portion of the bank loans disclosed as a current liability represents amounts due to be repaid within one year. There were no bank overdrafts in existence at 30 June 2010 (2009: Nil). 21. LONG-TERM PROVISIONS Employee entitlements 22. OTHER NON-CURRENT LIABILITIES Deferred rent Other 2010 $’000 2009 $’000 6,527 5,629 394 235 629 420 511 931 23. ISSUED CAPITAL OF CARDNO LIMITED Balance at the beginning of the period - Shares issued during the period: - Dividend reinvestment scheme - Shares issued for cash - Employee Tax Exempt Share Acquisition Plan - Employee share based payments - Conversion of Convertible Notes 30 June 2010 30 June 2009 No. of shares $’000 No. of shares $’000 84,272,249 227,457 73,509,653 192,063 392,854 5,410,426 434,932 - - 1,646 20,663 1,764 550 - 558,162 8,658,018 485,287 - 1,061,129 2,036 28,612 1,541 552 2,653 Balance at the end of the year 90,510,461 252,080 84,272,249 227,457 The Company does not have authorised capital or par value in respect of its issued shares. All shares are ordinary shares and have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of members. The Company issued shares subsequent to year end – refer to note 29. Page 49 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 23. ISSUED CAPITAL OF CARDNO LIMITED CONTINUED Performance Equity Plan (PEP) The PEP is designed to reward strong performance by individuals within the Cardno Group of companies. Options and Rights are issued under the PEP (made in accordance with thresholds set in the plan approved at the 2009 AGM) which provides certain employees (as determined by the Managing Director and Remuneration Committee) with the opportunity to acquire shares in the Company, or rights to acquire shares in the Company. Movements in options throughout the year were as follows: Grant Date Exercise Date Expiry Date 25 October 2007 25 October 2007 5 December 2007 5 December 2007 5 December 2008 2 December 2009 19 October 2009 19 October 2010 29 November 2009 29 November 2010 29 November 2011 2 December 2012 25 October 2009 25 October 2010 5 December 2009 5 December 2010 5 December 2011 2 December 2013 Exercise Price $ Number of Options at Beginning of Year Fair Value at Grant Date $ 7.57 0.68 230,000 7.57 0.92 330,000 7.71 0.70 1,272,500 7.71 0.95 1,719,000 3.35 0.41 2,421,000 Options Granted Options Lapsed Options Vested Not Exercised Number of Options as at 30 June 2010 - - - - - - - 230,000 - - 330,000 103,000 1,169,500 - 180,500 163,000 - - - 1,538,500 2,258,000 2,244,900 4.43 0.77 - 2,244,900 - Weighted average exercise price Weighted average remaining contract life Total expense recognised $454,311 (2009: $552,687) 5.93 4.43 6.12 7.69 5.00 670 days The options outstanding at 30 June 2010 have an exercise price in the range of $3.35 to $7.71. These options do not entitle the holder to participate in any share issue of the Company. The options issued prior to FY2010 are subject to a performance hurdle and will not vest unless there has been at least a 5% improvement per year (compounded) in the earnings per share of the Company over the vesting periods. The options issued during FY2010 are subject to a performance hurdle and to vest the Company must achieve earnings per share (EPS) growth in accordance with the following scale: EPS Growth Over 3 Years <12.5% (<4% pa) 12.5% (4% pa) >12.5% (4% pa) & <26% (8% pa) 26% (8% pa) >26% (8% pa) & <40% (12% pa) ≥40% (12% pa) % of Performance Options in Tranche to Vest 0% 30% Pro rata 70% Pro rata 100% The fair values of options granted during the year has been calculated using the Black-Scholes model, taking into account price volatility, risk free interest rates and the dividend yield. The model inputs for the fair value of options granted during the year ended 30 June 2010 include share price at grant date of $4.07 (2009: $3.26), expected price volatility of the companies shares of 42% (2009: 33%), expected dividend yield of 8.00% (2009: 8.28%) and risk free interest rate of 4.61% (2009: 6.73%). Page 50 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 23. ISSUED CAPITAL OF CARDNO LIMITED CONTINUED Movements in rights throughout the year were as follows: Grant Date Exercise Date Expiry Date Performance Hurdle Fair Value at Grant Date $ Number of Rights at Beginning of Year Rights Granted Rights Lapsed Rights Vested Not Exercised Number of Rights as at 30 June 2010 22 October 2009 22 October 2012 22 October 2013 2 December 2009 2 December 2012 2 December 2013 Total expense recognised $95,899 (2009: NIL) EPS Growth TSR EPS Growth TSR 3.96 3.19 3.20 2.30 - - - - 67,500 67,500 112,000 112,000 - - - - - - - - 67,500 67,500 112,000 112,000 The fair values of rights granted during the year with a total shareholder return performance hurdle, have been calculated using a Monte-Carlo simulation valuation model taking into account price volatility, risk free interest rates and comparator company shareholder return performance. The fair value of rights with the EPS growth hurdle was calculated using a Black-Scholes model taking into account price volatility, risk free interest rates and the dividend yield. The model inputs for the fair value of rights granted during the year ended 30 June 2010 include share price of $5.03 (22 October 2009) and $4.07 (2 December 2009) at grant date, expected price volatility of 42%, expected dividend spread of 8.00% and risk free interest rate of 5.25% (22 October 2009) and 4.61% (2 December 2009). The rights are subject to performance hurdles being 50% of the Rights, may vest, on a sliding scale, dependent on relative total shareholder return performance and 50% of the Rights, may vest, on a sliding scale, dependent on earnings per share growth. The EPS performance hurdle tranche of the rights vest on a sliding scale depending on EPS growth averaged over 3 years. Employee Share Acquisition Plans (“ESAP”) Shares are issued under the ESAP (made in accordance with thresholds set out in plans approved by shareholders at the 2009 AGM). It provides employees with the opportunity to acquire shares in the Company for no consideration as a bonus component of their remuneration. Employees with 12 months service or greater who have worked an average of 100 hours or more per month are entitled to $1,000 of shares each year and employees with 6 to 12 months service are entitled to $500 of shares each year. Employees who work part time, who have greater than 12 months service and who have worked more than 600 hours per year are also entitled to $500 of shares each year. Shares issued under ESAP rank equally with other fully paid ordinary shares from the date of issue. Shares are issued in the name of the participating employee and are subject to a restriction period. The shares are restricted under the plan until the earlier of three years from the date of acquisition or the date they cease to be an employee. Once the restriction period is lifted the shares can be traded as fully paid ordinary shares. The ESAP has no conditions that could result in the recipient forfeiting ownership of shares. 24. RESERVES Foreign Currency Translation The foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign Group entities where their functional currency is different to the presentation currency of the reporting entity as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary. Page 51 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 25. NOTES TO THE CASH FLOW STATEMENTS (a) Reconciliation of Net Cash from Operating Activities to Net profit/(loss) for the year Net profit/(loss) for the year Adjust for non-cash items Depreciation Amortisation Dividend received Gain/(loss) on sale of property, plant & equipment Net exchange differences Share based remuneration Adjust for changes in assets and liabilities (increase) / decrease in assets: Inventories Deferred tax assets Trade receivables Provision for doubtful debts Other receivables Prepayments Other assets Increase / (decrease) in liabilities: Trade payables Income tax payable Employee provisions Unearned revenue Other liabilities Deferred tax liabilities (b) Reconciliation of cash For the purposes of the cash flow statements, cash includes cash on hand, restricted cash and bank deposits at call net of bank overdrafts. Cash at the end of the year as shown in the cash flow statements is reconciled to related items in the accounts as follows: Cash and cash equivalents (Note 6) Restricted cash (project advances) can only be drawn in relation to specific projects for which it has been provided. (c) Non-cash financing and investing activities During the financial year, the consolidated entity acquired property, plant and equipment with an aggregate fair value of $939,867 (2009: $2,848,899) by means of finance leases. These acquisitions are not reflected in the cash flow statements. (d) Acquisition of entities Details of the acquisitions are as follows: Purchase consideration Cash consideration Vendor liability Accrued costs relating to acquisition Direct costs relating to acquisition Consideration 2010 $’000 2009 $’000 37,597 34,153 6,612 1,913 - 33 1,037 2,321 (1,258) (691) 13,366 1,322 1,642 1,197 (871) (5,375) (1,222) (101) (9,630) (250) (897) 7,492 3,511 - 432 (2,528) 2,094 (4,714) (3,027) 1,856 1,540 65 (181) (44) (4,133) (5,654) (2,591) 7,894 519 1,905 46,745 38,589 56,282 65,808 132,670 18,474 - - 151,144 43,973 9,027 91 620 53,711 Page 52 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 25. NOTES TO THE CASH FLOW STATEMENTS CONTINUED Assets and liabilities held at acquisition date: Cash Receivables Deferred tax assets Property, plant & equipment Intangibles* Inventories Creditors and borrowings Deferred tax liabilities Provisions Goodwill on acquisition* Consideration Net cash outflow on acquisition Cash consideration Less balance acquired 2010 $’000 2009 $’000 3,184 29,282 750 7,363 - 13,819 (24,756) (281) (2,719) 26,642 124,502 151,144 132,670 (3,184) 129,486 1,950 15,217 233 3,224 1,039 3,795 (10,721) (8,262) 6,475 47,236 53,711 43,973 (1,950) 42,023 * As disclosed in note 34, the acquisitions of ENTRIX and ERI were completed on 10 June 2010. Accordingly, the accounting for these acquisitions has been completed on a provisional basis. Further analysis will be performed to determine the existence and fair value of any identifiable intangible assets acquired as part of the acquisition. 26. CAPITAL AND LEASING COMMITMENTS Finance leases and hire purchase Commitments in relation to finance leases are payable as follows: - Within one year - Later than one year but not later than 5 years - Later than 5 years - Minimum lease payments Less: Future finance charges Recognised as a liability Present value of minimum lease and hire purchase payment Commitments in relation to finance leases are payable as follows: - Within one year - Later than one year but not later than 5 years - Later than 5 years Recognised as a liability Finance leases are taken out over motor vehicle, leasehold improvements and plant and equipment, with terms varying between 3 and 5 years. Representing lease and hire purchase liabilities: Current (note 17) Non-current (note 20) 2010 $’000 2009 $’000 2,531 3,922 - 6,453 (993) 5,460 2,045 3,415 - 5,460 2,975 4,481 - 7,456 (1,288) 6,168 2,346 3,822 - 6,168 2,045 3,415 5,460 2,346 3,822 6,168 Page 53 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 26. CAPITAL AND LEASING COMMITMENTS CONTINUED Operating Leases - Within one year - Later than one year but not later than 5 years - Later than 5 years Commitments not recognised in the financial statements The Group leases office premises under operating leases, with terms varying from 3 to 10 years. The majority of leases provide for an option of renewal at the end of the lease term. Premise leases are subject to annual review for changes in the CPI index and contain restrictions on sub-leasing. The Group also leases various plant & equipment under terms between 2 and 5 years as well as software licenses with a term of 3 years subject to annual review based on the number of licences exercised. 27. EMPLOYEE BENEFITS & COMPENSATION COMMITMENT The aggregate employee benefit liability is comprised of: Accrued wages, salaries and on-costs (included in payables) Provisions (current) (note 18) Provisions (non-current) (note 21) Number of employees Number of full time equivalent employees at 30 June Defined contribution superannuation expense for the year ended 30 June 2010 was $9,752,309 (2009: $10,295,787) 2010 $’000 2009 $’000 25,970 52,032 28,021 106,023 20,347 42,163 20,683 83,193 15,063 15,501 6,527 37,091 13,693 13,206 5,629 32,528 3,657 3,008 28. CONTINGENT LIABILITIES As at the date of this report, there is no current litigation or pending or threatened litigation which would not be covered by professional indemnity insurance or has not already been provided for in the financial statements of the Company, or which is likely to have a material effect on the financial performance of the consolidated entity. The consolidated entity had contingent liabilities at 30 June 2010 in respect of: Bank guarantees 2010 $’000 2009 $’000 7,287 9,891 The Group has bank guarantees with financial institutions. A multiple guarantee facility is available to the Group totalling $19 million (2009: $19 million). These facilities are secured by an unlimited interlocking guarantee and indemnity. 29. SUBSEQUENT EVENTS On 11 August 2010 Cardno completed a $49 million capital rising via a 1:6 fully underwritten renounceable rights issue. The number of ordinary shares issued under the rights issue was 15,089,139. The capital raised will be used to reduce debt used for the June 2010 acquisition of ENTRIX and ERI and for working capital. On 16 August 2010, the Directors of Cardno Limited declared a final dividend of 15.0 cents per share for the 2010 financial year. The fully franked dividend will be paid on 15 October 2010 to shareholders registered on 17 September 2010 and will total $15,839,940. The dividend has not been provided for in the 30 June 2010 financial statements. Page 54 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 30. EARNINGS PER SHARE Basic earnings per share The calculation of basic earnings per share at 30 June 2010 was based on the profit attributable to ordinary shareholders of $37,597,311 (2009: $34,153,794) and a weighted average number of ordinary shares outstanding during the financial year ended 30 June 2010 of 85,716,101 (2009: 77,932,437), calculated as follows: 2010 2009 Profit attributable to ordinary shareholders 37,597,311 34,153,794 Weighted average number of ordinary shares Issued ordinary shares at 1 July Effect of shares issued for cash consideration Effect of shares issued in respect of employee share scheme Effect of shares issued from conversion of convertible notes 84,272,249 1,308,010 135,842 - 73,509,653 3,201,881 168,496 1,052,407 Weighted average number of ordinary shares at 30 June 85,716,101 77,932,437 Options and rights are considered to be potential ordinary shares and are therefore excluded from the weighted average number of ordinary shares used in the calculation of basic earnings per share. Where dilutive, potential ordinary shares are included in the calculation of diluted earnings per share. Diluted earnings per share Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Profit attributable to ordinary shareholders (diluted) Profit attributable to ordinary shareholders After-tax effect of interest on convertible notes Profit attributable to ordinary shareholders (diluted) Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares at 30 June Effect of convertible notes Effect of share options and rights on issue Weighted average number of ordinary shares (diluted) at 30 June 37,597,311 - 37,597,311 34,153,794 - 34,153,794 85,716,101 - 493,905 86,210,006 77,932,437 9,069 1,066 77,942,572 4,113,400 options issued during the 2008 and 2010 financial years and still on issue as at 30 June 2010 have not been included in the calculation of diluted earnings per share because they are not dilutive for the year ended 30 June 2010. These options could potentially dilute basic earnings per share in the future. Subsequent Event – Impact of Rights Issue On 11 August 2010 Cardno completed a $49 million capital rising via a 1:6 fully underwritten renounceable rights issue. The number of ordinary shares issued under the rights issue was 15,089,139. The current and prior year basic and diluted earnings per share have not been adjusted by the bonus element associated with the rights issue (factor of 1.02) as it is not material. Page 55 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 31. AUDITOR’S REMUNERATION Audit services Auditors of the Company KPMG Australia: - Audit and review of financial reports Overseas KPMG firms: - Audit and review of financial reports Other auditors - Audit and review of financial reports Other services Auditors of the Company KPMG Australia: - Other assurance services - Taxation services Overseas KPMG firms: - Taxation services Other auditors - Other assurance services - Taxation services 32. KEY MANAGEMENT PERSONNEL DISCLOSURES Key management personnel compensation included in employee benefits are as follows: Short-term employee benefits Other long-term benefits Post-employment benefits Termination benefits Equity compensation benefits 2010 $ 2009 $ 220,000 272,000 492,000 - - - 127,117 619,117 667,176 667,176 - - 2,350 2,350 54,535 131,262 188,147 - - - - 21,548 127,590 149,138 2010 $’000 2009 $’000 4,175 198 405 131 606 5,515 3,996 198 611 - 94 4,899 Apart from the details disclosed in this note, no Director has entered into a material contract with the Company or the consolidated entity since the end of the previous financial year and there were no material contracts involving Directors’ interests existing at year-end. Page 56 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 32. KEY MANAGEMENT PERSONNEL DISCLOSURES CONTINUED Options and rights over equity instruments granted as compensation The movement during the reporting period in the number of options over ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: 2010 OPTIONS Directors A D Buckley J I Forbes T C Johnson G G Tamblyn Executives R J K Collins-Woolcock P W Gardiner M J Renshaw Kylie Sprott S V Coote * C W N Tapp * Held at 1 July 2009 Granted as compensation Lapsed Vested (not exercised) Held at 30 June 2010 Vested and exercisable at 30 June 2010 250,000 120,000 90,000 60,000 135,000 170,000 135,000 - 170,000 110,000 - - - - - - - - - - - - - - - - - - 170,000 - 100,000 50,000 40,000 20,000 30,000 45,000 30,000 - - 25,000 150,000 70,000 50,000 40,000 105,000 125,000 105,000 - - 85,000 - - - - - - - - - - * ceased to be employed during the financial year ended 30 June 2010 No options held by key management personnel had vested and were exercisable as at 30 June 2010. 2009 OPTIONS Directors A D Buckley J I Forbes T C Johnson G G Tamblyn Executives R J K Collins-Woolcock S V Coote P W Gardiner M J Renshaw C W N Tapp Held at 1 July 2008 Granted as compensation Vested (not exercised) Held at 30 June 2009 Vested and exercisable at 30 June 2009 310,000 150,000 120,000 75,000 100,000 140,000 140,000 100,000 60,000 - - - - 60,000 70,000 70,000 60,000 50,000 60,000 30,000 30,000 15,000 25,000 40,000 40,000 25,000 - 250,000 120,000 90,000 60,000 135,000 170,000 170,000 135,000 110,000 - - - - - - - - - The movement during the reporting period in the number of rights over ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: 2010 RIGHTS Directors A D Buckley J I Forbes T C Johnson G G Tamblyn Executives R J K Collins-Woolcock P W Gardiner M J Renshaw Kylie Sprott Held at 1 July 2009 Granted as compensation Vested Held at 30 June 2010 Vested and exercisable at 30 June 2010 - - - - - - - - 60,000 30,000 25,000 20,000 30,000 30,000 30,000 8,000 - - - - - - - - 60,000 30,000 25,000 20,000 30,000 30,000 30,000 8,000 - - - - - - - - The fair value of options and rights are provided in the Remuneration Report section of the Directors’ Report and in note 23. Page 57 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 32. KEY MANAGEMENT PERSONNEL DISCLOSURES CONTINUED Movements in shares The movement during the reporting period in the number of ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: 2010 Non–Executive Directors John Massey Anthony Barnes Peter Cosgrove Ian Johnston Executive Directors Graham Tamblyn Andrew Buckley Jeffrey Forbes Trevor Johnson Executives Roger Collins-Woolcock Paul Gardiner Michael Renshaw Kylie Sprott 2009 Non–Executive Directors John Massey Anthony Barnes Peter Cosgrove Ian Johnston Executive Directors Graham Tamblyn Andrew Buckley Jeffrey Forbes Trevor Johnson Executives Roger Collins-Woolcock Steven Coote* Paul Gardiner Michael Renshaw Charles Tapp* Held at 1 July 2009 Purchases Received as Compensation Sales Held at 30 June 2010 Held at 1 July 2008 Purchases Received as Compensation Sales 44,382 3,348 - 207,390 1,426,330 2,359,037 19,947 1,967,399 653,652 800,141 153,213 - 5,618 118 - - 521 - 1,358 - - - 10,359 3,580 - - - - - - - - 245 245 245 - 30,687 - - 200,000 1,407,000 2,322,952 3,377 1,963,704 791,090 556,546 796,132 149,284 161 13,695 3,348 - 7,390 19,330 36,085 16,570 3,695 - - 3,695 3,615 - - - - - - - - - 314 314 314 314 314 - - - - 210,000 - - - - - - - - - - - - - - - 137,752 - - - - 50,000 3,466 - 207,390 1,216,851 2,359,037 21,305 1,967,399 653,897 800,386 163,817 3,580 Held at 30 June 2009 44,382 3,348 - 207,390 1,426,330 2,359,037 19,947 1,967,399 653,652 556,860 800,141 153,213 475 * ceased to be employed during the financial year ended 30 June 2010. Other key management personnel transactions with the Company or its controlled entities A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. One of these entities transacted with the Company or its subsidiaries in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-Director related entities on an arm’s length basis. Page 58 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 32. KEY MANAGEMENT PERSONNEL DISCLOSURES CONTINUED The aggregate amounts recognised during the year relating to key management personnel and their related parties were as follows: (i) Mr A D Buckley was a Director of CBD Professional Services Pty Ltd (until 17 December 2009). The aggregate amount the consolidated entity billed for services performed by Mr Buckley was $20,688 (2009: $25,220). The consolidated entity also used Carter Newell Lawyers (associated with CBD Professional Services Pty Ltd) for legal advice throughout the year and the aggregate amount of fees expensed was $651 (2009: $5,136). 33. FINANCIAL RISK MANAGEMENT The main risks arising from the Group’s financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate and foreign exchange risks and ageing analysis for credit risk. The Board through the Audit, Risk & Compliance Committee reviews and agrees policies for managing these risks and ensures strategies are implemented in the business. A Quality Management System and an Operational Risk Committee supports consistent risk mitigation practices and procedures in order to maintain a consistent level of quality across the Group which includes the minimisation of risk. The policies for managing each of the Group’s risks are summarised below and remain unchanged from the prior year. The Group holds the following financial instruments: Financial assets Cash and cash equivalents Trade and other receivables Investments in non-related entities Financial liabilities Trade and other payables Interest-bearing loans and borrowings Credit risk 2010 $’000 2009 $’000 56,282 104,779 836 161,897 65,808 93,722 553 160,083 82,462 175,240 257,702 58,779 85,052 143,831 Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised above. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on customers in accordance with the policy. The Group does not require collateral in respect of financial assets. Investments are allowed only in liquid securities and only with counterparties that have a credit rating equal to or better than an approved rating. There are no significant concentrations of credit risk within the Group. The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Australia & New Zealand Americas Asia Pacific Europe & Africa 2010 $’000 39,549 41,763 10,587 8,481 100,380 2009 $’000 35,459 29,055 12,920 10,446 87,880 Page 59 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 33. FINANCIAL RISK MANAGEMENT CONTINUED Credit risk continued The ageing of the Group’s trade receivables at the reporting date was: Not past due (current) Past due 0-30 days (30 day ageing) Past due 31-60 days (60 day ageing) Past due more than 60 days (+90 day ageing) 2010 2009 Gross $’000 Impairment $’000 Gross $’000 Impairment $’000 58,705 23,912 6,303 20,446 109,366 - - - 8,986 8,986 42,122 17,341 9,024 24,796 93,283 - - - 5,403 5,403 Based on historic default rates, the Group believes that no impairment allowance is necessary in respect of receivables not past due or past due by up to 60 days. For those receivables outstanding more than 60 days each debtor has been individually analysed and a provision for impairment established as necessary. The movement in the provision for impairment in respect of trade receivables of the Group during the year was as follows: Balance at 1 July Impairment loss recognised Receivables written off Merger acquisition Foreign exchange Balance at 30 June Liquidity risk 2010 $’000 2009 $’000 5,403 2,699 (1,242) 2,218 (92) 8,986 3,112 2,951 (1,602) 751 191 5,403 Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, the Group aims to maintain flexibility in funding by keeping sufficient committed credit lines available to meet the Group’s requirements. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: Consolidated 30 June 2010 Non-derivative financial liabilities Trade and other payables Finance leases & hire purchase Bank loans Derivative financial liabilities Forward exchange contract Carrying amount Contractual cash flows $’000 Less than 1 year 1 – 5 years Over 5 years 82,462 5,460 169,780 82,462 6,453 170,120 82,462 2,531 47,819 - 3,922 122,301* - 257,702 - 259,035 - 132,812 - 126,223 - - - - - * Bank loans are a term facility repayable in July 2012. On 11 August 2010 Cardno completed a $49 million capital rising via a 1:6 fully underwritten renounceable rights issue. The number of ordinary shares issued under the rights issue was 15,089,139. The capital raised will be used to reduce debt used for the June 2010 acquisition of ENTRIX and ERI and for working capital. Page 60 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 33. FINANCIAL RISK MANAGEMENT CONTINUED Liquidity risk continued Consolidated 30 June 2009 Non-derivative financial liabilities Trade and other payables Finance leases & hire purchase Bank loans Derivative financial liabilities Forward exchange contract Market risk (a) Foreign exchange risk Carrying amount Contractual cash flows $’000 Less than 1 year 1 – 5 years Over 5 years 58,543 6,168 78,884 58,543 7,456 79,067 58,543 2,975 6,919 - 4,481 72,148 236 143,831 236 145,302 236 68,673 - 76,629 - - - - - Foreign exchange risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the functional currency of the respective Group entities. The Group operates internationally and is exposed to foreign exchange risk arising from the currency exposure to the Australian dollar. The Group borrows funds in foreign currencies to hedge its net investments in foreign operations. The Group has loans totalling $148.3 million (2009: $54.7 million) denominated in US dollars (USD) and $14.0 million (2009: $17.5 million) denominated in sterling (GBP) which have been designated as hedges of the Group’s net investments in subsidiaries with functional currencies in those currencies. As at 30 June 2010, a 10% strengthening of the Australian dollar against the USD and GBP would have increased equity by $13.5 million (2009 $5.0 million) and $1.3 million (2009: $1.6 million) respectively. A 10% weakening of the Australian dollar against the USD and GBP would have decreased equity by $16.5 million (2009 $6.1 million) and $1.6 million (2009: $1.9 million) respectively. There would be no impact on profit and loss as the loans are designated as net investment hedges. Other than interest bearing liabilities, there are no other significant foreign currency exposures in relation to financial instruments at year end. (b) Interest rate risk The Group manages its exposure to interest rate fluctuation by continuously monitoring its debt to ensure any significant movement would not have a material impact on the performance of the Group. The Group does not engage in any significant transactions which are of a speculative nature. At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was: Consolidated Variable rate instruments Cash assets Bank loans Fixed rate instruments Finance leases & hire purchase Bank loans 30 June 2010 30 June 2009 Effective Interest Rate Balance $’000 Effective Interest Rate Balance $’000 3.10% 2.72% 7.93% 8.00% 56,282 (169,769) (113,487) (5,460) (11) (5,471) 2.48% 3.00% 8.49% 6.56% 65,808 (78,728) (12,920) (6,168) (156) (6,324) Page 61 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 33. FINANCIAL RISK MANAGEMENT CONTINUED Market risk continued Group sensitivity At 30 June 2010, if interest rates had changed by -/+ 50 basis points from the year-end rates with all other variables held constant, post-tax profit for the year would have been $397,000 higher/lower (2009: $45,000 higher/lower), mainly as a result of lower/higher interest expense on variable bank loans partially offset by higher/lower interest income from cash and cash equivalents. There have been no changes in the underlying assumptions from the previous year. Fair values The carrying values of financial assets and liabilities approximate their fair values due to their relatively short term nature. Capital risk management The Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Board of Directors monitors the return on capital, which the Group defines as net operating income divided by total shareholders’ equity. The Board of Directors also monitors the level of dividends to ordinary shareholders. 34. BUSINESS COMBINATIONS Year ended 30 June 2010 (a) During the year the Group acquired 100% of the net assets of ITC Group with an effective date of 1 January 2010 and Australian Underground Services Pty Ltd (AUS) with an effective date of 1 April 2010. ITC is an Australian based services consulting engineering firm with offices in five Australian States and Territories with around 100 staff. AUS is an Australian based utility detection and mapping services firm with around 30 staff based in Victoria. The acquired businesses contributed revenues of $9,840,744 and net profit after tax (NPAT) of $1,457,039 to the Group for the year. If the acquisitions had occurred on 1 July 2009 revenue and NPAT for the Group would have been $489,280,901 and $38,696,379 respectively. Details of acquisitions Purchase Consideration Cash Vendor liability (including contingent consideration) Total purchase consideration Fair value of net identifiable assets acquired Goodwill $’000 24,993 2,775 27,768 5,929 21,839 At the time of purchase the vendors of ITC Group subscribed for shares in Cardno Limited to the value of $5,801,549 and the vendors of Australian Underground Services Pty Ltd (AUS) subscribed for shares in Cardno Limited to the value of $1,498,038. The fair value of the ordinary shares issued was based on the 10 day volume weighted average price (VWAP) for AUS of Cardno Limited shares and the 30 day VWAP for ITC Group of Cardno Limited shares. The fair value price was $4.16 for the purchase of shares by vendors of ITC Group issued 11 February 2010 and $3.99 for the purchase of shares by vendors of Australian Underground Services Pty Ltd issued 14 May 2010. Page 62 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 34. BUSINESS COMBINATIONS CONTINUED Contingent consideration Cardno Limited has agreed to pay an amount of $1,775,170 to the selling shareholders of ITC Group as additional consideration relating to the collection of accounts receivable as at 1 January 2010. This has been included in purchase consideration based on estimates of the amount that will be payable to the acquiree. Cardno Limited has agreed to pay the selling shareholders of Australian Underground Services Pty Ltd additional consideration of $1,000,000 if the acquiree’s normalised EBIT over the period 1 January 2010 to 31 December 2010 is $1,700,000. This amount has been included in the purchase consideration based on estimates of the acquiree’s financial performance over the earn-out period. The goodwill is attributable to the skills and technical talent of the employee’s of the ITC Group and Australian Underground Services, the synergies expected to be achieved from integrating the Company into the Group’s existing operations. The Group incurred acquisition related costs of $137,506 relating to external legal fees and due diligence costs. These legal fees and due diligence costs have been included in administrative expenses in the Group’s consolidated statement of comprehensive income. The assets and liabilities arising from the acquisitions are as follows: Cash Receivables Deferred tax assets Property, plant and equipment Creditors & borrowings Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration Less: Balances acquired Cash Outflow of cash Acquirees’ carrying amount $’000 Fair Value $’000 1,439 5,512 261 1,795 (1,963) (1,115) 5,929 1,439 5,512 261 1,795 (1,963) (1,115) 5,929 24,993 1,439 23,554 Page 63 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 34. BUSINESS COMBINATIONS CONTINUED (b) On 10 June 2010, the Group acquired 100% of ENTRIX, a US based consultancy specialising in water resources management, environmental risk management, facility permitting and compliance, and natural resource economics. The effective date of acquisition was 1 June 2010. For the period 1 June 2010 – 30 June 2010, the acquired business contributed revenue of $16,845,375 and net profit after tax of $3,005,122. If the acquisition had occurred on 1 July 2009 revenue and NPAT for the Group would have been $584,149,348 and $41,702,922.respectively. Details of acquisitions Purchase Consideration Cash Vendor liability Total purchase consideration Fair value of net identifiable assets acquired* Goodwill* $’000 81,067 4,294 85,361 17,088 68,273 * The acquisition of ENTRIX was completed on 10 June 2010. Accordingly, the accounting for this acquisition has been completed on a provisional basis. Further analysis will be performed to determine the existence and fair value of any identifiable intangible assets acquired as part of the acquisition. At the time of purchase the vendors of ENTRIX subscribed for shares in Cardno Limited to the value of $4,428,168. The fair value of the ordinary shares issue was based on the 10 day VWAP of Cardno Limited shares. The fair value price was $3.71 for the purchase of shares by vendors of ENTRIX issued 10 June 2010. The goodwill is attributable to the skills and technical talent of the employee’s of ENTRIX, the synergies expected to be achieved from integrating the Company into the Group’s existing operations. The Group incurred acquisition related costs of $752,730 relating to external legal fees and due diligence costs. These legal fees and due diligence costs have been included in administrative expenses in the Group’s consolidated statement of comprehensive income. The assets and liabilities arising from the acquisitions are as follows: Cash Receivables Inventories Deferred tax assets Property, plant and equipment Creditors & borrowings Deferred tax liabilities Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration Cash balance acquired Outflow of cash Acquirees’ carrying amount $’000 Fair Value $’000 1,071 20,079 11,832 718 4,138 (19,254) (239) (1,257) 17,088 1,071 20,079 11,832 718 4,138 (19,254) (239) (1,257) 17,088 81,067 1,071 79,996 Page 64 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 34. BUSINESS COMBINATIONS CONTINUED (c) On 10 June 2010 the Group acquired 100% of Environmental Resolutions, Inc, an environmental soil and groundwater remediation firm primarily focussed on the petro-chemical market in the US. The effective date was 1 June 2010. For the period 1 January 2010 – 30 June 2010, the acquired business contributed revenues of $1,456,831 and net profit after tax of $425,548. If the acquisition had occurred on 1 July 2009 revenue and NPAT for the Group would have been $517,633,465 and $42,052,758 respectively. Details of acquisitions Purchase Consideration Cash Vendor liability (including contingent consideration) Total purchase consideration Fair value of net identifiable assets acquired* Goodwill* $’000 26,610 11,404 38,014 3,624 34,390 * The acquisition of ERI was completed on 10 June 2010. Accordingly, the accounting for this acquisition has been completed on a provisional basis. Further analysis will be performed to determine the existence and fair value of any identifiable intangible assets acquired as part of the acquisition. At the time of purchase the vendors of Environmental Resolutions Inc. subscribed for shares in Cardno Limited to the value of $6,784,390. The fair value of the ordinary shares issued based on the 10 day VWAP of Cardno Limited shares. The fair value price was $3.71 for the purchase of shares by vendors of Environmental Resolutions Inc issued 10 June 2010. Contingent consideration Cardno Limited has agreed to pay the selling shareholders of Environmental Resolutions, Inc additional consideration of USD8,089,000 if the acquiree’s normalised EBITDA over the period 1 June 2010 to 31 May 2011 exceeds USD6,371,000. This amount has been included in the purchase consideration based on estimates of the acquiree’s financial performance over the earn-out period. The goodwill is attributable to the skills and technical talent of the employee’s of Environmental Resolutions Inc, the synergies expected to be achieved from integrating the Company into the Group’s existing operations. Page 65 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 34. BUSINESS COMBINATIONS CONTINUED The Group incurred acquisition related costs of $546,593 relating to external legal fees and due diligence costs. These legal fees and due diligence costs have been included in administrative expenses in the Group’s consolidated statement of comprehensive income. The assets and liabilities arising from the acquisitions are as follows: Cash Receivables Inventories Deferred tax assets Property, plant and equipment Creditors & borrowings Deferred tax liabilities Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration Cash balance acquired Outflow of cash Year ended 30 June 2009 Acquirees’ carrying amount $’000 Fair Value $’000 674 3,693 1,985 - 1,431 (3,541) (42) (576) 3,624 674 3,693 1,985 - 1,431 (3,540) (42) (576) 3,624 26,610 674 25,936 (a) The Group acquired the issued share capital of The Ecology Lab Pty Ltd and Spectrum Survey & Mapping Pty Ltd with an effective acquisition date of 1 July 2008. The acquired businesses contributed revenues of $8,876,918 and net profit after tax of $981,663 to the Group for the year. The Ecology Lab is a Sydney based consultant specialising in marine and freshwater ecology while Spectrum Survey & Mapping is a specialist survey firm based in Perth and Kalgoorlie. Details of acquisitions Purchase Consideration Cash Direct costs relating to the acquisitions Total purchase consideration Fair value of net identifiable assets acquired Goodwill $’000 7,400 122 7,522 2,987 4,535 Page 66 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 34. BUSINESS COMBINATIONS CONTINUED The assets and liabilities arising from the acquisitions are as follows: Cash Receivables Inventories Deferred tax assets Property, plant and equipment Creditors & borrowings Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration Less: Balances acquired Cash Outflow of cash Acquirees’ carrying amount $’000 Fair Value $’000 1,527 1,995 17 233 1,581 (1,288) (1,078) 2,987 1,527 1,995 17 233 1,581 (1,288) (1,078) 2,987 7,400 1,527 5,873 (b) The Group also acquired the issued share capital of TBE Group Inc, a US based infrastructure services firm with offices across 19 US states as well as China, the UK and Canada, with an effective acquisition date of 15 September 2008 and contributed revenues of $75,381,574 and net profit after tax (NPAT) of $6,260,221 to the Group. If the acquisition had occurred on 1 July 2008 revenue and NPAT for the Group would have been $606,730,344 and $41,856,788 respectively. Details of acquisition Purchase Consideration Cash Vendor liability – earn-out agreement Direct costs relating to the acquisitions Total purchase consideration Fair value of net identifiable assets acquired Goodwill The assets and liabilities arising from the acquisition are as follows: $’000 36,573 9,027 589 46,189 3,488 42,701 Cash Receivables Inventories Property, plant and equipment Intangibles Provisions Creditors & borrowings Net identifiable assets acquired Outflow of cash to acquire subsidiary, net of cash acquired Cash consideration Less: Balances acquired Cash Outflow of cash Acquirees’ carrying amount $’000 Fair Value $’000 423 13,222 3,778 1,643 - (7,184) (9,433) 2,449 423 13,222 3,778 1,643 1,039 (7,184) (9,433) 3,488 36,573 423 36,150 Page 67 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 35. SEGMENT INFORMATION The Group has three reportable segments managed separately by location and service provided. Internal management reports on the performance of these reportable segments, are reviewed monthly by the Managing Director, Chief Financial Officer and Group Operations Manager. The following summary describes the operations in each of the Group’s reportable segments: - - - Professional Services Australia and New Zealand – provides consulting engineering, planning, surveying, landscape architecture, environmental services and geotechnical services in that region. Professional Services Americas and Software – provides consulting engineering, planning, surveying, landscape architecture and environmental services in the Americas and software sales globally. International Development Assistance – manages aid projects on behalf of unilateral and multilateral government agencies and private clients. Comparative segment information has been represented in conformity with the requirement of AASB 8 Operating Segments. 2010 Segment revenue Fees from services and sale of goods Fees from recoverable expenses Inter-segment revenue External sales Other income Total segment revenue Segment result before financing costs Professional Services Australia & NZ Professional Services Americas & Software International Development Assistance Total $’000 208,353 10,146 - 218,499 1,586 220,085 71,875 42,655 - 114,530 186 114,716 96,349 376,577 45,964 (1,590) 140,723 285 141,008 98,765 (1,590) 473,752 2,057 475,809 34,285 11,065 4,009 49,359 Segment assets 217,452 283,807 97,961 599,220 Segment liabilities 91,260 37,040 48,148 176,448 Other Acquisitions of non- current segment assets Depreciation and amortisation of segment assets 26,980 69,576 237 96,793 6,032 1,872 621 8,525 Page 68 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 35. SEGMENT INFORMATION CONTINUED 2009 Segment revenue Fees from services and sale of goods Fees from recoverable expenses Inter-segment revenue External sales Other income Total segment revenue Segment result before financing costs Professional Services Australia & NZ Professional Services Americas& Software International Development Assistance Total $’000 224,962 11,788 - 236,750 1,028 237,778 70,309 38,265 - 108,574 234 108,808 118,595 413,866 51,858 (3,193) 167,260 524 167,784 101,911 (3,193) 512,584 1,786 514,370 29,886 6,873 7,004 43,763 Segment assets 202,767 140,119 109,022 451,908 Segment liabilities 82,903 12,530 52,599 148,032 Other Acquisitions of non- current segment assets Depreciation and amortisation of segment assets 62,242 1,783 268 64,293 7,308 2,833 862 11,003 Reconciliations of reportable segment revenues, profit or loss, assets and liabilities 2006 $’000 2005 $’000 2010 $’000 2009 $’000 Revenues Total revenue for reportable segments Elimination of inter-segment revenue Interest revenue Other income Consolidated revenue Profit or loss Reportable segment result before net financing costs Interest Revenue Finance costs Other corporate (costs)/gains Profit before tax Income tax expense Profit after tax Assets Total assets for reportable segments Unallocated assets Consolidated total assets Liabilities Total liabilities for reportable segments Other liabilities Other unallocated amounts Consolidated total liabilities Page 69 of 80 475,342 (1,590) 1,429 2,057 477,238 49,359 1,429 (3,166) (4,043) 43,579 (5,982) 37,597 599,220 12,331 611,551 176,448 22,727 112,404 311,579 515,777 (3,193) 1,472 1,786 515,842 43,763 1,472 (4,637) 1,494 42,092 (7,939) 34,153 451,908 20,816 472,724 148,032 23,315 35,456 206,803 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 35. SEGMENT INFORMATION CONTINUED Geographical information In presenting information on a geographical basis segment revenue from external customers and segment assets are attributed based on geographic locations of business unit. Australia & NZ Americas Asia Pacific UK & Africa Other segments Revenues 2010 Total Non-Current Assets Revenues 2009 Total Non-Current Assets 286,652 141,301 15,042 32,814 - 475,809 129,277 214,182 545 25,807 4,476 374,287 278,630 162,985 22,234 50,521 - 514,370 123,391 97,045 670 29,649 2,876 253,631 36. PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 30 June 2010 the parent Company of the Group was Cardno Limited. 2 5 Company 2010 $’000 2009 $’000 Results of the parent entity Profit for the year Other comprehensive income Total comprehensive income for the year Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Revaluation reserve Retained earnings Total equity Parent entity contingencies Bank guarantees 29,692 - 29,692 29,882 - 29,882 208,711 327,402 53,833 53,907 252,080 - 21,415 273,495 196,095 293,675 49,725 50,541 227,457 - 15,677 243,134 2,151 4,700 A multiple guarantee facility is available to the Group totalling $19 million (2009: $29 million). The facility is secured by an unlimited interlocking guarantee and indemnity. Parent entity guarantees in respect of debts of its subsidiaries The parent entity has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of its subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed, are disclosed below in note 37. Page 70 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 37. DEED OF CROSS GUARANTEE Pursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors’ reports. It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full for any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: - Cardno Holdings Pty Ltd - Cardno (QLD) Pty Ltd - Cardno Staff Pty Ltd - Cardno Bowler Pty Ltd - Cardno Emerging Markets (Australia) Pty Ltd - Cardno (NSW/ACT) Pty Ltd A consolidated statement of comprehensive income and consolidated statement of financial position, comprising the Company and controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, for the year ended 30 June 2010 is set out as follows: Statement of comprehensive income and retained earnings Revenue Employee expenses Consumables and materials used Sub-consultant and contractor costs Depreciation and amortisation expenses Finance costs Other expenses Profit before income tax Income tax expense Net profit for the year Other comprehensive income for the year Total comprehensive income for the year Retained earnings at the beginning of the year Transfers to and from reserves Dividends recognised during the year Retained earnings at the end of the year Attributable to: Owners of the Company 6 0 2005 $’000 2010 $’000 2009 $’000 234,201 211,795 (119,870) (41,514) (39,305) (38) (2,384) 4,572 35,662 (380) 35,282 (475) 34,807 19,181 475 (23,955) 30,508 (117,502) (34,899) (37,355) (92) (3,392) 13,253 31,808 (2,328) 29,480 (711) 28,769 11,134 711 (21,433) 19,181 30,508 19,181 Page 71 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 37. DEED OF CROSS GUARANTEE CONTINUED Statement of financial position 6 0 2005 $’000 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other current assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Trade and other receivables Other financial assets Property, plant and equipment Deferred tax assets Intangible assets Other non-current assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Current tax liabilities Short term provisions Other current liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Deferred tax liabilities Long term provisions Other non-current liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained earnings TOTAL EQUITY 2010 $’000 22,337 408,965 18,542 735 450,579 - 174,948 73 5,816 35,663 89 216,589 667,168 197,076 162,300 3,174 9,120 4,187 375,857 - - 3,807 6,234 - 10,041 385,898 281,270 252,080 (1,319) 30,508 281,270 2009 $’000 28,093 265,366 14,210 387 308,056 - 134,482 98 5,562 35,663 213 176,018 484,074 139,268 72,148 4,989 9,183 3,623 229,211 - - 3,515 5,559 - 9,074 238,285 245,789 227,458 (849) 19,180 245,789 Page 72 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 38. CONTROLLED ENTITIES Name Cardno Holdings Pty Ltd Cardno (Qld) Pty Ltd Cardno Staff Pty Ltd Cardno Staff No. 2 Pty Ltd Cardno Operations Pty Ltd Cardno Investments Pty Ltd Cardno International Pty Ltd Advanced Water & Wastewater Technologies Pty Ltd Cardno (WA) Pty Ltd Cardno CCS Pty Ltd Cardno Lawson Treloar Pty Ltd Cardno MBK PNG Ltd Cardno (NSW/ACT) Pty Ltd Cardno BLH Pty Limited Cardno Willing Pty Ltd Cardno Victoria Pty Ltd Cardno Alexander Browne Pty Ltd Cardno (Vic) Pty Ltd Cardno Young Pty Ltd Cardno Emerging Markets (Australia) Pty Ltd Cardno Eppell Olsen Pty Ltd Cardno UK Limited Cardno Emerging Markets (UK) Limited Cardno Emerging Markets (East Africa) Limited Barton Enterprises Pty Ltd Cardno Forbes Rigby Pty Ltd Cardno Gilbert Rose Pty Ltd Cardno Saraceni Pty Ltd Cardno Low & Hooke No. 1 Unit Trust Cardno Low & Hooke No. 2 Unit Trust Cardno Low & Hooke Pty Ltd Cardno Low & Hooke Management Services Pty Ltd Bresfine Pty Ltd Cardno NZ Limited Cardno USA, Inc. Cardno Emerging Markets (USA), Ltd Emerging Markets Group (EMG) Ltd Emerging Markets Group (Consulting) Limited Emerging Markets Group (EMG) s.a. Cardno WRG, Inc. Cardno TCB Limited Cardno Willing (NSW) Pty Ltd Cardno (NT) Pty Ltd Cardno (PNG) Ltd XP Software Pty Ltd XP Software Inc. Hydrotech Research Pty Ltd Cardno Ullman & Nolan Pty Ltd Cardinal Surveys Pty Ltd Ullman & Nolan Pty Ltd Cardno Ullman & Nolan Geotechnic (NT) Pty Ltd TCB Limited Middleton Williams & Co Limited Micro Drainage Limited Cardno Bowler Pty Ltd Bowler Geotechnical Pty Ltd Bowler Geotechnical Cairns Pty Ltd Bowler Geotechnical Sydney West Pty Ltd Country of Incorporation Equity Holding Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Papua New Guinea Australia Australia Australia Australia Australia Australia Australia Australia Australia United Kingdom United Kingdom Kenya Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand United States of America United States of America United Kingdom United Kingdom Belgium United States of America New Zealand Australia Australia Papua New Guinea Australia United States of America Australia Australia Australia Australia Australia New Zealand New Zealand United Kingdom Australia Australia Australia Australia 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% Page 73 of 80 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2010 38. CONTROLLED ENTITIES CONTINUED Name Country of Incorporation Equity Holding Bowler Geotechnical Gold Coast Pty Ltd J&D Civil Testing Pty Ltd Sandhorse Pty Ltd Kurtway Pty Ltd Bowler Geotechnical (SC) Pty Ltd Dumley Pty Ltd Russhan Pty Ltd L.A. & S.R. Thorne Pty Ltd Cardno Spectrum Survey Pty Ltd Cardno Ecology Lab Pty Ltd TBE Group, Inc TBE Holdings, Inc TBE International Group, Inc Cardno TBE (Michigan), Inc TBE (UK) Ltd TBE Group (Canada), ULC TBE H&J Subsurface Utility – Engineering (Beijing) Limited TBE H&J Subsurface Utility – Engineering (Hong Kong) Limited Cardno ITC Pty Ltd Cardno ITC (ACT) Pty Ltd Cardno ITC (QLD) Pty Ltd Cardno ITC (VIC) Pty Ltd Cardno ITC (WA) Pty Ltd Cardno Australian Underground Services Pty Ltd Environmental Resolutions, Inc ENTRIX Holding Company ENTRIX Inc ENTRIX of North Carolina Inc ENTRIX Americas, SA ENTRIX Canada Limited ENTRIX Venezuela, CA ENTRIX Bolivia, Limitada Congo Carta de Costa Rica, SA ENTRIX, Inc SAC Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United States of America United States of America United States of America United States of America United Kingdom Canada China China Australia Australia Australia Australia Australia Australia United States of America United States of America United States of America United States of America Ecuador Canada Venezuela Bolivia Costa Rica Peru 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% Page 74 of 80 Directors’ Declaration Cardno Limited and its Controlled Entities for the year ended 30 June 2010 1. In the opinion of the Directors of Cardno Limited (the Company): (a) the consolidated financial statements and notes set out on pages 21 to 69 and the Remuneration report in the Directors’ report, set out on pages 9 to 19, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2010 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the Company and the Group entities identified in Note 38 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those Group entities pursuant to ASIC Class Order 98/1418. 3. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and Chief Financial Officer for the financial year ended 30 June 2010. 4. The Directors draw attention to Note 1(a) to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Dated at Brisbane on the 16th day of August 2010. Signed in accordance with a resolution of the Directors. JOHN C MASSEY Chairman Page 75 of 80 Additional Shareholder Information Distribution of Ordinary Shareholders The number of shareholders, by size of holding, as at 26 August 2010 were: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – and over Total Ordinary Shares Number of Holders 4,172 3,627 1,362 1,209 126 10,496 Number of Shares 1,812,045 9,450,162 9,653,831 27,907,503 56,776,059 105,599,600 As at 26 August 2010 there were 717 shareholders who held less than a marketable parcel of 123 shares. Twenty Largest Ordinary Shareholders The names of the twenty largest holders as at 24 August 2009 were: RBC Dexia Investor Services Australia Nominees Pty Limited < PIPOOLED A/C> J P Morgan Nominees Australia Limited ANZ Nominees Limited Andrew Buckley National Nominees Limited Pat Beyer Trevor Johnson HSBC Custody Nominees (Australia) Limited Merrill Lynch (Australia) Nominees Pty Limited Cogent Nominees Pty Limited Malcolm David Pound Steve M Zigan Graham Tamblyn Joseph E O’Connell R A Young Investments Pty Ltd Paul Gardiner Anne Felicity Phillips Citicorp Nominees Pty Limited Roger Collins-Woolcock KMS Properties Pty Ltd Total Substantial Shareholders Listed Ordinary Shares Number Held Percentage 5,707,877 3,541,647 3,212,378 2,450,261 2,129,644 2,128,796 2,050,001 2,028,353 1,881,745 1,830,536 1,101,741 1,046,402 1,009,516 1,005,526 938,239 850,774 767,358 670,491 633,938 629,811 5.41% 3.35% 3.04% 2.32% 2.02% 2.02% 1.94% 1.92% 1.78% 1.73% 1.04% 0.99% 0.96% 0.95% 0.89% 0.81% 0.73% 0.63% 0.60% 0.60% 35,615,034 33.73% The names of substantial shareholders who have notified the company in accordance with section 671B of the Corporations Act 2001 are: Perpetual Limited and subsidiaries Number of Shares Held Percentage 6,847,194 6.48% Page 78 of 80 Additional Shareholder Information Voting Rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Escrowed Shares There are currently 4,793,974 ordinary shares held in escrow. This is approximately 4.54% of the company’s issued share capital. The details are as follows:- (cid:131) (cid:131) (cid:131) (cid:131) In accordance with the Share Sale Deeds between Cardno Limited and the shareholders of ITC Group Pty Ltd and its associated entities completed on 18 February 2010, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 18 August 2011. This agreement affects 1,391,298 shares, being approximately 1.32% of the company’s issued share capital. In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of Australian Underground Services Pty Ltd completed on 18 May 2010, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 18 November 2011. This agreement affects 377,861 shares, being approximately 0.36% of the company’s issued share capital. In accordance with the Agreement and Plan of Merger between Cardno Limited and the stockholders of ENTRIX Holding Company completed on 11 June 2010, ordinary shares issued as part of the purchase price are escrowed for periods of 18 months to 11 December 2011. This agreement affects 1,194,588 shares, being approximately 1.13% of the company’s issued share capital. In accordance with the Stock Purchase Agreement between Cardno Limited and the stockholders of Environmental Resolutions, Inc completed on 11 June 2010, ordinary shares issued as part of the purchase price are escrowed for periods of 18 months to 11 December 2011. This agreement affects 1,830,227 shares, being approximately 1.73% of the company’s issued share capital. Options As at 26 August 2010 the details of Performance Options on issue are as follows: Number of Option Holders Number of Options on Issue 469 6,371,400 Voting Rights of Options The ordinary shares issued on exercise of the options will rank equally with all other ordinary shares. Rights As at 26 August 2010 the details of Performance Rights on issue are as follows: Number of Option Holders Number of Options on Issue 18 359,000 Voting Rights of Rights The ordinary shares issued on exercise of the rights will rank equally with all other ordinary shares. Page 79 of 80 Lawyers McCullough Robertson Lawyers Level 11, Central Plaza Two 66 Eagle Street BRISBANE QLD 4000 Ph: +61 7 3233 8888 Fax: +61 7 3229 9949 Website: www.mccullough.com.au Kirkland & Ellis LLP 300 North LaSalle Chicago, Illinois 60654 USA Ph: +1 312 862 2000 Fax: +1 312 862 2200 Website: www.kirkland.com Bankers HSBC Bank Australia Limited 300 Queen Street BRISBANE QLD 4000 Ph: +61 7 3835 7820 Fax: +61 7 3835 7830 Website: www.hsbc.com.au Corporate Directory Board of Directors Chairman John Massey Deputy Chairman Graham Tamblyn Managing Director Andrew Buckley Directors Anthony Barnes Peter Cosgrove Jeffrey Forbes Trevor Johnson Ian Johnston Chief Financial Officer & Company Secretary Jeffrey Forbes Joint Company Secretary Michael Pearson Registered Office Cardno Limited ABN 70 108 112 303 Level 11, Green Square North Tower 515 St Paul’s Terrace FORTITUDE VALLEY QLD 4006 Ph: +61 7 3369 9822 Fax: +61 7 3369 9722 Website: www.cardno.com Share Registry Computershare Investor Services Pty Limited Level 19 307 Queen Street BRISBANE QLD 4000 Ph: 1300 552 270 (within Australia) +61 3 9415 4000 (outside Australia) Website: www.computershare com.au Auditors KPMG Level 16, Riparian Plaza 71 Eagle Street BRISBANE QLD 4000 Ph: +61 7 3233 3111 Fax: +61 7 3233 3100 Website: www.kpmg.com.au Page 80 of 80

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