Cardno Limited
Annual Report 2012

Plain-text annual report

cardno financial report Table of Contents Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Directors’ Report ................................................................................................................... 2 Corporate Governance Statement............................................................................................ 25 Consolidated Statement of Financial Performance ...................................................................... 32 Consolidated Statement of Comprehensive Income .................................................................... 33 Consolidated Statement of Financial Position ............................................................................ 34 Consolidated Statement of Changes in Equity ........................................................................... 35 Consolidated Statement of Cash Flows .................................................................................... 36 Notes to the Financial Statements ........................................................................................... 37 Directors’ Declaration ............................................................................................................ 80 Independent Auditor’s Report ................................................................................................. 81 Additional Shareholder Information .......................................................................................... 83 Corporate Directory ............................................................................................................... 86 Page 1 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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 2012. 1. Directors The Directors of the Company in office during or since the year ended 30 June 2012 are set out below: John Massey (Chairman - Non-Executive) Andrew Buckley (Managing Director - Executive) Anthony Barnes (Non-Executive) Peter Cosgrove (Non-Executive) Jeffrey Forbes (Executive and Company Secretary) Trevor Johnson (Executive) Ian Johnston (Non-Executive) John Marlay (Non-Executive) (appointed 1 November 2011) Tonianne Dwyer (Non-Executive) (appointed 25 June 2012) Details of the qualifications, experience and responsibilities of the Directors are on pages 3 to 5. 2. Company Secretary Jeffrey Forbes BCom, MAICD, MAusIMM was appointed to the position of Company Secretary on 10 July 2006. Michael Pearson LLB, BA, ACIS was appointed to the position of Joint Company Secretary on 24 September 2009. Page 2 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Director Experience John C Massey BCom, CPA, FAICD(Life), FAIM Non-Executive Chairman Age 66 is Chairman of Special Responsibilities As well as being Chairman of the Company, the Board and John Nominations Committee, and a member of the Remuneration Committee (Chairman of the Committee until 14 February 2012). Andrew D Buckley BE(Hons), FIEAust, FAICD Managing Director Age 55 Special Responsibilities Andrew is a member of the Nominations Committee Anthony H (Tony) Barnes BCom Non-Executive Director Age 62 Special Responsibilities Tony is Chairman of the Board’s Audit, Risk & Compliance Committee and a member of the Remuneration Committee. Peter J Cosgrove AC, MC ndc (Ind), jssc, psc (US), Dip Mil Stud, FAICD Non-Executive Director Age 65 Special Responsibilities Peter Committee is a member of the Nominations John Massey has been Chairman of Cardno Limited since July 2004 and a Non-Executive Director since March 2004. He has extensive commercial and leadership experience as a Chairman, Director and Chief Executive spanning many different industries. John is also Chairman of Sunstate Cement Limited and UQ Holdings, and a Director of Stockyard Beef Group. His previous appointments include such diverse companies as Brisbane Airport, Dairy Australia, Macmahon, Grainco, Thomas Cook and QDL Pharmaceuticals. In 2006, John was made a Life Fellow of the Australian institute of Company Directors for eminence in the field of directorship and was also subsequently awarded the 2010 Gold Medal which recognises the Outstanding Company Director in Queensland for achievements in corporate life and to the community. Andrew was appointed Managing Director of the Cardno Group in 1997. He has over thirty years’ experience in the management of design and implementation of engineering infrastructure, environment and development assistance projects. Andrew has worked in the design and construction of mining, engineering and infrastructure projects in Australia, Africa, USA and Asia. He has held senior management roles in the engineering, construction and development assistance sectors for over 20 years. Under Andrew’s leadership the Cardno Group has grown from an annual turnover of approximately $14 million in FY1997 to $960 million in FY2012 and from less than 200 people to over 7,000. 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. He also held the position of Chief Executive Officer of Zinifex Limited for a period. He 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. Tony 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 Inc and the Parent – Infant Research Institute. Retired General Peter Cosgrove joined Cardno as a Non- Executive Director in March 2007, bringing with him a wealth of experience and credentials. Peter is a director of Qantas Airways Limited, Qantas Superannuation Limited, and Australian Rugby Union Limited. He is Chancellor of the Australian Catholic University and holds a number of prestigious memberships and appointments including being a member of the Trustee Board of the Commonwealth Superannuation Corporation. 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 3 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Director Experience Jeffrey I Forbes BCom, MAICD, MAusIMM Chief Financial Officer, Company Secretary, Executive Director Age 59 Trevor C Johnson BE, MEngSc, PhD, FIEAust, CPEng, RPEQ, MAICD Executive Director Age 55 Special Responsibilities Trevor was a member of the Board’s Audit, Risk & Compliance Committee and retired on 25 June 2012. Ian J Johnston DipCM, GradDip App Fin & Inv, ASIA, ACSA, ACIS, FAICD Non-Executive Director Age 63 Special Responsibilities Ian is a member of the Board's Audit, Risk & Compliance Committee, the Remuneration Committee and the Nominations Committee. John Marlay, B.Sc., FAICD Non-Executive Director Age 63 Special Responsibilities John is Chairman of the Board’s Remuneration Committee and a member of the Nominations Committee. Jeff joined Cardno in July 2006 as Chief Financial Officer, Company Secretary and Executive Director, Finance. Jeff has more than 33 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 has worked for a number of major companies including Rio Tinto, BHP and CSR. Trevor has been a director of the Cardno Group since 1996, and an employee of the company for more than 25 years. He is a member of the Senior Executive team which assists the Managing Director in running the company. In his executive role as Director Corporate, Trevor is responsible for a number of acquisition, co-ordination and communication activities within Cardno. Trevor has more than 30 years’ experience as a civil engineer, with special expertise in the fields of hydraulics, water quality and environmental analysis. He remains significantly involved in the company’s operational activity, and frequently commissioned as a technical expert witness on engineering matters. is 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 an Executive Director and Head of Corporate Finance and in 2003 became Chairman of Corporate Finance and a member of the Advisory Board. He is also a Director of Data #3 Limited and RBSM Foundation Limited. He is also a member of the National Trust of Queensland Brisbane City Hall Conservation Appeal Committee. Ian’s previous Board appointments include The Rock Building Society Limited and Northern Energy Corporation Ltd. John Marlay joined Cardno as a Non-Executive Director in November 2011. He is also a Non-Executive Director of Incitec Pivot Limited (since 2006), Boral Limited (since 2009), Alesco Corporation Limited (since 2011) and the Independent Chairman of Tomago Aluminum Company (since 2010). From 2002 to 2008 John held the position of Chief Executive Officer and Managing Director of Alumina Limited. John held various senior management roles with Pioneer International Limited and Hanson PLC from 1995 to 2002. Prior to that John also held executive management positions with James Hardie Ltd and Esso Australia Ltd. Page 4 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Director Tonianne Dwyer BJuris (Hons), LLB (Hons), GAICD Non-Executive Director Age 49 Special Responsibilities Tonianne was appointed a member of the Board’s Audit, Risk & Compliance Committee on 1 July 2012. 3. Principal Activities Experience Tonianne Dwyer became a Non-Executive Director of Cardno Limited in June 2012. She is also a Non-Executive Director of DEXUS Property Group and of DEXUS Wholesale Property Fund. Tonianne’s executive career has included roles as Executive Director and Head of Funds Management at Quintain Estates and Development (2003-2010), Director, Investment Banking at Societe Generale/SG Cowen/Hambros Bank in London (1987- 2003). 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 $74.2 million for the year ended 30 June 2012, a 26% increase over the 2011 financial year. Basic earnings per share was 61.73 cents, a 9.7% increase on the prior year of 56.29 cents. EBITDA rose 28% to $128.7 million compared to the 2011 financial year of $100.2 million. The record profit for the year ended 30 June 2012 is the eighth consecutive year of annual profits and earnings per share growth since listing on the ASX in 2004. Revenue was $965.8 million, a 16% increase on the 2011 financial year despite the impact of the stronger Australian dollar. Cardno had strong operating cash flow of $72.6 million in the 2012 financial year. Cardno’s balance sheet remains strong with a debt to equity ratio of 36.2% and cash of $107.9 million at 30 June 2012. The record profit for the year ended 30 June 2012 reflects Cardno’s focus on high growth markets and strategic acquisitions. A number of major factors contributed to this result. These included improved conditions in Australia led by resources and energy, continuing strong performance from the US business despite variable economic conditions, and ongoing contributions from acquisitions. During the financial year Cardno made five acquisitions:  Cardno Lane Piper, a 40 person environmental and geotechnical engineering firm based in Melbourne, Victoria in September 2011;  Cardno Geotech Solutions, a 22 person geotechnical engineering and construction material testing firm based in Newcastle, New South Wales in October 2011;  Cardno TEC, a 330 person consulting firm with specialist expertise in environmental management, asset management and marine infrastructure management headquartered in Charlottesville, Virginia, USA in October 2011;  Cardno HRP, a 62 person town planning consultancy, environmental planning and landscape architecture group based in Brisbane, Queensland in November 2011; and  Cardno ATC, a major 1,600 person consulting services firm providing environmental services, building sciences, geotechnical, construction material testing and other consultancy services headquartered in Lafayette, Louisiana, USA in March 2012. Page 5 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 In the second half of the 2012 financial year Cardno successfully completed a $112.0 million capital raising from a fully underwritten placement of $45.0 million and a 1:9 fully underwritten renounceable rights issue of $67.0 million. The proceeds from the placement and rights issue were used to fund, in part, the acquisition of Cardno ATC and to maintain Cardno’s balance sheet strength and flexibility for future growth. The Board has declared a final dividend of 18 cents per share (70% franked) to be paid on 12 October 2012 to all shareholders registered on 14 September 2012. With the interim dividend of 18.0 cents per share (70% franked) in April 2012, this will result in a full year dividend of 36 cents per share (70% franked), which is also a record for Cardno. Cardno continues to perform strongly across its markets and geographical locations and remains well positioned for further expansion through organic growth and strategic acquisitions. 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 2011 ordinary - Interim 2012 ordinary Declared after end of year - Final 2012 ordinary Dealt with in the financial report as: - Dividends paid or provided - Noted as a subsequent event (Note 28) Cents per share Total amount $’000 Franked Date of payment 17.0 18.0 18.0 18,665 24,823 70% 70% 14 October 2011 4 April 2012 24,931 70% 12 October 2012 43,488 24,931 68,419 6. Events Subsequent to the Reporting Date On 2 July 2012, Cardno acquired 100% of Marshall Miller & Associates, Inc and EM-Assist Inc for up to US$31.0 million and US$14.3 million respectively. Each of the acquisitions has a percentage of the purchase price subject to the attainment of performance targets. Marshall Miller & Associates, Inc is a 180-person mining, energy and environmental consulting firm headquartered in Virginia, USA while EM-Assist Inc is a 150-person environmental services and compliance management firm headquartered in California, USA. The acquisitions were funded by a combination of cash (from available cash reserves and debt facilities) and shares issued. On 13 August 2012, the Directors of Cardno Limited declared a final dividend of 18 cents per share (70% franked) for the 2012 financial year. The dividend will be paid on 12 October 2012 to shareholders registered on 14 September 2012 and will total $24,931,153. The dividend has not been provided for in the 30 June 2012 financial statements. 7. Likely Developments Cardno will continue to manage its global business in physical and social infrastructure and pursue its policy of growing both organically and by acquisition during the next financial year. 8. Significant Changes in the State of Affairs Other than as disclosed elsewhere in this Director’s Report, there have been no significant changes in the state of affairs since 30 June 2011. Page 6 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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 or 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. 10. Directors’ Meetings Attendance at Board meetings and Board Committee meetings for the year ended 30 June 2012 is set out below: No. of Meetings Held A H Barnes A D Buckley P J Cosgrove T Dwyer* J I Forbes T C Johnson** I J Johnston J Marlay*** J C Massey Board of Directors A 13 14 13 1 14 13 14 9 14 B 14 14 14 1 14 14 14 9 14 Audit, Risk & Compliance Committee B A 4   -  4 4   4   -  4 4   Remuneration Committee Nominations Committee A 7      7 7 7 B 7      7 7 7 A  6 6    6 2 6 B  6 6    6 2 6  not a member of this committee 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. * Tonianne Dwyer was appointed to the Board on 25 June 2012 and the Audit, Risk and Compliance Committee from 1 July 2012. ** Trevor Johnson resigned from the Audit, Risk and Compliance Committee on 25 June 2012. *** John Marlay was appointed to the Board, Remuneration and Nominations Committees on 1 November 2011. 11. Remuneration Report - Audited The Board has designed Cardno’s remuneration strategy to ensure its Managing Director and key management personnel are strongly aligned to achieving Cardno’s business strategies and delivering value to shareholders. Cardno’s vision is to be a world leader in the provision of professional services to improve the physical and social environment. This vision will be achieved through focussing on our people, clients, growth, quality, safety and performance. To achieve this vision we have designed the following remuneration strategy. Remuneration Strategy The Cardno group's remuneration strategy is designed to attract, retain and motivate appropriately qualified and experienced key management personnel in the engineering and professional consulting services sector. The ability of Cardno to deliver long term shareholder value relies significantly upon the capability of these key management personnel to drive business performance and client service satisfaction. Page 7 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 including remuneration, Cardno's remuneration strategy is provided through a framework which includes a mix of fixed and variable incentives (Total Remuneration), designed to maximise the financial performance and growth of the Company over time. In general, the remuneration approach includes a reasonable percentage of potential annual remuneration for key management personnel to be delivered as at risk variable remuneration. The Board has determined that this remuneration method is likely to contribute significantly to improved key management personnel performance and better financial outcomes achieved in Cardno's operations. long-term performance-based short-term and Fixed Annual Remuneration for key management personnel is generally targeted at median levels compared to similar roles in the Cardno comparator group. Exceptional performance by any individual key management person, as a result of achieving both superior financial results and specified business performance targets, which are demonstrably beyond expectations (i.e. exceeding at-target performance outcomes) can result in Total Remuneration for that key management person towards the 75th percentile compared to similar roles in the Cardno comparator group. Cardno's business operations are international in their geographic reach, with employees located and operating in Australia and approximately 85 countries including New Zealand, the USA, and in countries in Europe, South America, Africa, Asia Pacific region and the Middle East. Cardno's remuneration framework is designed to reward our staff competitively in each country, and to promote their focus on growth in the business and for the retention of talented and motivated staff. The Cardno Board retains discretion in approving the Managing Director’s and the key management personnel’s short term incentive (STI) payment and for the awarding of any Performance Rights as a long term incentive (LTI) award under the Performance Equity Plan (PEP). The Board is mindful of proposed Federal Government legislative changes in remuneration practices for publicly-listed companies (including potential remuneration clawback provisions), and intends to review Cardno's executive remuneration policy and practices when the final legislative requirements are published. Underlying Principles of Cardno’s Remuneration Strategy a) Components of Remuneration Fixed Annual Remuneration (FAR) remunerates key management personnel in line with market benchmarks and performance taking into account responsibilities of the individual’s position, level of skill and experience and demonstrated performance in support of Cardno values. Short Term Incentives (STI) rewards the achievement or exceeding of both financial and non-financial group, divisional, and personal objectives. The STI also provides alignment with shareholder rewards through improved short term earnings growth and business development. Long Term Incentives (LTI) reward key management personnel for Cardno performance over a 3 year period. The LTI provides a retention element through an exposure to Cardno equities and an alignment with shareholder rewards through increasing total shareholder return (TSR). b) Market Positioning Cardno targets the FAR for key management personnel to align with the median against similar roles in a group of comparator companies. A range around the median provides flexibility to recognise capability and contribution, value to the organisation, individual performance and the tenure of individuals. Key management personnel Total Remuneration, including FAR, STI and LTI is also targeted to be consistent with the median against similar roles in comparator companies. The Total Remuneration potential for the achievement of stretch performance against specific STI targets for individual key management personnel has the capacity to reach the 75th percentile compared to similar roles in the market for comparator companies. Page 8 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 c) Benchmarking remuneration The primary source for remuneration benchmarking is a group of Australian listed companies in the Industrial Sector in the range of half to double Cardno’s market capitalisation. For the Managing Director and key management personnel, remuneration levels for comparable roles in appropriate international jurisdictions are also taken into account. d) Remuneration Committee The Committee is responsible for reviewing and advising the Board on remuneration policies and practices. The Committee also reviews and advises the Board on the design and implementation of share rights and option schemes, incentive performance packages, superannuation entitlements, retirement and termination entitlements and fringe benefits policies. The remuneration of Directors, Managing Director, key management personnel, managers and staff is reviewed by the Remuneration Committee which then provides recommendations to the Board. Board decisions on the remuneration of the Managing Director and key management personnel are made in the absence of the Executive Directors as appropriate. The Committee obtains independent advice on the appropriateness of remuneration based on trends in comparative companies both locally and internationally. In 2012 the Committee engaged Ernst & Young to provide remuneration recommendations regarding the provision of market remuneration benchmarking reports for the Managing Director, other key management personnel and Non-Executive Directors. Ernst & Young has provided its recommendations to the Remuneration Committee. The Committee is satisfied the advice received from Ernst & Young regarding the above services, is free from undue influence from the key management personnel to whom the advice relates, as the relevant criteria, as established by the Board have been satisfied. The criteria used by the Board are that the key management personnel to whom the advice relates were not involved in the selection and appointment of, or contract negotiation with, Ernst & Young as remuneration advisors. All documentation and communication (including confirmation by Ernst & Young that the remuneration recommendations were free from undue influence from the key management personnel to whom the advice relates) were provided directly to the Remuneration Committee. Additionally, the Board has put in place policies managing Ernst & Young’s access to key management personnel on remuneration-related matters, including parameters for communication and the types of communication that can take place between Ernst & Young and key management personnel, to further ensure the recommendations are free from undue influence. The remuneration recommendations were provided to the Remuneration Committee as an input into decision making only. The Committee considered the recommendations, along with other factors, in making its remuneration decisions. In 2012 the total fees paid to Ernst & Young for the remuneration recommendations were $58,400. Other remuneration related service fees and expenses relating to a review of the PEP were $16,500. The members of the Committee during the year were: John Marlay (Committee Chairman since February 2012), John Massey (retired as Committee Chairman from February 2012), Ian Johnston and Tony Barnes, all independent Non-Executive Directors. The Committee met 7 times during the year and committee members’ attendance record is disclosed in the table of directors’ meetings on page 8. Page 9 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Key Management Personnel Remuneration Structure Cardno’s key management personnel executive remuneration is structured as a mix of FAR and variable remuneration through at risk STI and LTI components. The mix of these components varies for different management levels but with a higher weighting to at risk remuneration as a percentage of Total Remuneration than other comparator group companies. This is seen as an important driver of Cardno’s financial performance and long term growth in support of shareholders’ interests. Fixed remuneration is designed to provide a base salary whilst STI and LTI programs only reward key management personnel when selected business performance conditions, and financial and management outcomes are satisfied or exceeded. Participation in both STI and LTI schemes for the Managing Director and key management personnel are subject to continuing employment and the discretion of the Board. a) Fixed Annual Remuneration (FAR) FAR consists of a base salary including superannuation. Cardno benchmarks key management personnel FAR at the median compared to similar roles in market comparator companies. The comparator companies are those in the ASX 300 with half to double Cardno’s average market capitalisation and with a similar organisational size operating within a similar industry group. Key management personnel have the flexibility to receive their FAR as cash, superannuation, and fringe benefits such as motor vehicles. Remuneration levels are reviewed annually by the Remuneration Committee and recommendations made to the Board through a process that considers the individual, segment and overall performance of Cardno as well as the individual’s level of skill, contribution and experience. The Committee also considers input and recommendations from the Managing Director on the remuneration and performance of each of the key management personnel. In addition Ernst & Young provided comparator analyses and independent advice to assist the Committee’s assessment that key management personnel remuneration remains competitive in the market place. b) Short-Term Incentive (STI) STI is an at risk annual incentive payment provided in the form of cash. The STI is potentially available to key management personnel and other senior staff who have significant influence over the annual financial outcomes of the business and who are able to meet key divisional and personal objectives. STI is assessed over the duration of Cardno's financial year, and consists of cash payments to key management personnel, with 50% of any award being deferred and paid 12 months after achievement. At least 60% of the potential incentive payment for at target performance for key management personnel is assessed on key performance indicators (KPIs) based on financial measures for the Cardno group overall and for the key management personnel’s divisional financial performance (where relevant). The remaining incentive component is assessed on relevant KPIs based on specific non-financial parameters including safety, business growth, client relationships and working capital reduction. The principal financial performance objectives are based on results compared to budgeted financial outcomes. The non-financial objectives vary and are specific to position, responsibility and areas assessed by the Managing Director to be integral to each area of accountability. Key management personnel can earn between 20% and 50% of their FAR (depending on position) for achieving at-target performance outcomes. In addition, key management personnel can achieve additional STI up to 10% of their FAR, for out-performance results through achievement of exceptional financial results and attainment of selected critical personal performance targets. This payment is based on the Managing Director’s and the Remuneration Committee’s assessment and judgment of performance, measured against the key management person’s out-performance against specific goals. Page 10 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 The Board considers that the STI is an appropriate incentive designed to place a component of key management personnel remuneration at risk against meeting or exceeding both financial and non-financial targets. Each year the Remuneration Committee reviews the proposed KPIs for the Managing Director and key management personnel, which are submitted to the Board for approval. At the end of the financial year, the Remuneration Committee assesses the actual performance of Cardno and with input by the Managing Director the relevant division and the individual’s performance against the KPIs set for the year. The Committee makes recommendations to the Board which approves the STI to be paid to the Managing Director, key management personnel and senior managers. This method of assessment and review provides the Committee with an objective assessment of individual performance. The contracts for the Managing Director and Chief Financial Officer include payment of assessed STI without any deferral. c) Long-Term Incentive (LTI) The purpose of the LTI is to promote the alignment of the Managing Director and key management personnel decision making with the interests of shareholders, including the achievement of performance conditions which are likely to underpin sustainable long term business growth for Cardno. The delivery of LTI is made under the PEP. Vesting of LTI is assessed against Cardno's 3 year historical financial results, based on both the compound annual growth in Cardno's earnings per share (EPS) (up to 50% potential) and the relative TSR achieved by Cardno compared with an ASX-listed comparator group (up to 50% potential). The LTI award for key management personnel under the PEP is paid in Performance Rights, which may vest after 3 years from the date of issue, dependent on continuing employment and the achievement of performance outcomes over that period. This incentive is designed to ensure that any achievement by key management personnel is as a result of both stretching growth in Cardno's EPS, as well as aligning key management personnel rewards with shareholder returns. The Board exercises its discretion annually in inviting key management personnel to participate in the 3 year PEP. The LTI Plan has also included payment for other senior staff using Performance Options and Performance Rights. In FY2013 it has been determined to discontinue the grant of Performance Options as an LTI. The Board considers the issue of Performance Rights with vesting based on the achievements of specific EPS and TSR outcomes, aligns the performance of key management personnel and other senior staff with the interests of shareholders. Equity Plans Cardno has two equity plans for staff as follows: a) Performance Equity Plan (PEP) The PEP incorporates the LTI and is designed to reward strong performance by staff within Cardno. Both Performance Options and Performance Rights to acquire ordinary shares in the Company were approved by shareholders in accordance with the PEP at the 2009 AGM. This approval followed an independent review of the executive LTI plan by Godfrey Remuneration who provided some remuneration advice to the Company at the time. Proposed amendments were adopted by the Board to ensure the interests and objectives of the shareholders, the Managing Directors, key management personnel and staff were aligned. The Plan rules prohibit participants entering into any transaction designed to remove the at risk aspect of an instrument before it vests. Page 11 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012  Performance Options The grant of Performance Options is discretionary and is generally limited to managers and staff who have been high performers throughout the year. The plan operates by granting a Performance Option to managers and staff to purchase a prescribed number of shares at a pre-determined time in the future. During the 2012 financial year, Performance Options with a grant date fair value of $3,103,110 were issued with a vesting period of three years from the grant date. Each Performance Option is convertible to one ordinary share. The exercise price of the Performance 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 Performance Option. All Performance Options expire on the earlier of their expiry date or termination of the manager or staff member’s employment. The Performance Options may be exercised at any time during a 12 month period commencing three years after the date the Performance Options are issued. There are no voting or dividend rights attached to the Performance Options. Voting rights and dividends will be attached to the unissued ordinary shares when the Performance Options have been exercised. Movements in Performance Options during the Year: Grant Date Vesting Date Expiry Date 5 December 2008 2 December 2009 29 November 2011 5 December 2011 2 December 2012 2 December 2013 25 November 2010 25 November 2013 25 November 2014 1 November 2011 1 November 2014 1 November 2015 Weighted average exercise price Weighted average remaining contract life Exercise Price $ Fair Value at Grant Date $ Number of Performance Options at Beginning of Year 3.35 0.41 2,001,000 4.43 0.77 2,038,700 4.84 0.77 3,274,500 Performance Options Granted Performance Options Lapsed Performance Options Exercised Number of Performance Options as at 30 June 2012 - - - 82,750 1,918,250 - - - - - - - 2,038,700 3,274,500 3,831,000 4.92 951 days 5.26 0.81 - 3,831,000 4.32 5.26 3.35 3.35 Total expense recognised $1,410,871 (2011: $1,681,706) The Performance Options outstanding at 30 June 2012 have not vested, are not exercisable at 30 June 2012 and have an exercise price in the range of $4.43 to $5.26. The Performance Options issued prior to FY2010 are subject to a performance hurdle and will not vest unless there has been at least a compounded 5% improvement per year in the EPS of the Company over the vesting periods. The Performance Options issued during and since FY2010 are subject to a performance hurdle and to vest the Company must achieve 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% Page 12 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 The fair values of Performance 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. For FY2013 it has been decided to change the provision of LTI under the PEP to all eligible staff to Performance Rights only and to discontinue the grant of Performance Options for this Plan. The Board considers the issue of Performance Rights based on the achievement of specific EPS and TSR targets better aligns the performance of key management personnel and those selected staff who participate in the PEP with the interests and objectives of shareholders.  Performance Rights The issue of Performance Rights is discretionary and for FY2012 and prior periods, was limited to the Managing Director, key management personnel and other senior managers. The Board approves the specific key management personnel and senior managers who are invited to participate in the allocation of Performance Rights on an annual basis. For FY2013, it is proposed that all eligible staff will be entitled to receive Performance Rights. The plan operates by granting a Performance Right to the Managing Director, key management personnel and senior managers to acquire an ordinary share at nil consideration at a predetermined time in the future. During the 2012 financial year 627,500 Performance Rights with a grant date fair value of $3,007,138 were issued with a vesting period of three years from the grant dates of 20 October 2011 and 1 November 2011. Each Performance Right is convertible to one ordinary share. All Performance Rights expire on the earlier of their expiry date or termination of employment unless the Board determines otherwise. The Performance Rights may be exercised at any time during a one-year period commencing three years after the date the Performance Rights are issued provided the performance hurdles have been met. There are no voting or dividend rights attached to the Performance Rights. Voting rights and dividends will attach to the ordinary shares issued when the Performance Rights have vested and been exercised. Movements in Performance Rights during the Year: Grant Date Vesting Date Expiry Date Performance Hurdle Fair Value at Grant Date $ Number of Performance Rights at Beginning of Year Performance Rights Granted Performance Rights Lapsed Performance Rights Vested Not Exercised Number of Performance Rights as at 30 June 2012 22 October 2009 22 October 2012 22 October 2013 2 December 2009 2 December 2012 2 December 2013 21 October 2010 21 October 2013 21 October 2014 25 November 2010 25 November 2013 25 November 2014 EPS Growth 3.96 TSR 3.19 EPS Growth 3.20 TSR 2.30 EPS Growth 3.78 TSR 2.71 EPS Growth 3.94 TSR 2.96 20 October 20 October 20 October EPS Growth 4.21 2011 2014 2015 1 November 2011 1 November 2014 1 November 2015 TSR 2.81 EPS Growth 4.38 TSR 2.97 Total expense recognised $1,280,672 (2011: $609,182) 67,500 67,500 112,000 112,000 76,250 76,250 188,750 188,750 - - - - - - - - - - - - 72,500 72,500 241,250 241,250 - - - - - - - - - - - - - - - - - - - - - - - - 67,500 67,500 112,000 112,000 76,250 76,250 188,750 188,750 72,500 72,500 241,250 241,250 Page 13 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 The fair values of Performance Rights granted during the year with a TSR 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 Performance Rights with an EPS performance hurdle taking into account risk free interest rates and the dividend yield. The Performance Rights outstanding at 30 June 2012 have not vested, are not exercisable at 30 June 2012 and have no exercise price. The Performance Rights are subject to performance hurdles of TSR (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 Performance Rights to Vest (Tranche 1 50%) EPS Growth Over 3 Years % of Performance Rights to Vest (Tranche 2 50%) 0% 50% Pro rata 100% <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% Cardno’s TSR is ranked against the TSR performance of a comparator group defined as the smallest companies in the S&P/ASX 300 excluding companies in the resources and financial sectors dated at 1 July 2009. b) Employee Share Acquisition Plan (ESAP) Shares are issued to all qualifying staff under the ESAP (excluding Cardno Limited Directors), in accordance with thresholds approved by Cardno shareholders at the 2009 AGM. It provides staff with the opportunity to acquire shares in the Company for no consideration as a bonus component of their remuneration. Staff with 12 months service or more, who have worked an average of 100 hours or more per month are entitled to $1,000 of shares each year and staff with 6 to 12 months service are entitled to $500 of shares each year. Staff 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. Subject to the Board’s discretion and depending on the overall performance of Cardno, shares are issued in the name of the participating staff member 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 at which the individual ceases to be a member of staff. 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 2012 are detailed in the table below: Grant Date Issue Price Restriction Lifted FY2012 Restricted at 30 June 2012 Restriction Period Ends 9 March 2010 25 February 2011 31 January 2012 $4.07 $6.05 $5.78 145,249 74,004 25,959 289,683 9 March 2013 314,932 25 February 2014 487,552 31 January 2015 Page 14 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Shares issued during the reporting period are valued at the volume weighted average market price over the 5 trading days prior to the date of the issue to staff, which approximates the fair value. Employment Agreements a) Managing Director Remuneration Structure Mr Andrew Buckley’s employment contract has no fixed term and provides both fixed and incentive based remuneration which includes STI and LTI. The basis of Mr Buckley’s fixed and variable remuneration is benchmarked against market comparator group companies that are within half to double of Cardno’s average market capitalisation and also against companies of similar organisational size operating within a similar industry group. Mr Buckley’s FAR was $750,000 for FY12. STIs are assessed against two separate performance measures. The first measure is an agreed target level profitability for Cardno. For FY12 an STI cash bonus of between 50% and 100% of up to $700,000 was payable for achievement of between 95% and 105% of the agreed target level Group NPAT pro-rata between the qualification levels. The second STI measure is a qualitative assessment of Mr Buckley’s performance against specific criteria including financial growth, leadership, succession planning and critical relationships and takes into account the prevailing operating and economic conditions. A maximum of $200,000 was payable under this measure for FY12. The Board has discretion based on the recommendation of the Remuneration Committee, to award up to an additional $200,000 for exceptional performance in the achievement of Group NPAT outcomes, business growth, his personal leadership and relative performance compared to other Chief Executive Officers in comparable companies. LTI entitlements are awarded at the discretion of the Board on the recommendation of the Remuneration Committee based on the overall performance and growth of Cardno, EPS growth and relative TSR performance as well as other qualitative and quantitative measures of Cardno’s longer term performance. Mr Buckley’s LTI entitlement includes the issue of Performance Rights pursuant to Cardno’s Performance Equity Plan approved by shareholders at the 2009 AGM. The quantum of 80,000 Performance Rights was approved by shareholders at the 2011 AGM. Details of termination benefits payable by way of cash or Performance Rights to Mr Buckley are outlined in the following table: Benefits Payable Mode of retirement from office Notice period Unpaid / accrued FAR Accrued but untaken annual leave Long service leave 12 months 12 months Yes Yes Yes Yes Yes Yes Unpaid /Accrued STI Yes, at Board’s discretion Yes, at Board’s discretion Severance payment Unvested Performance No No Rights At Board’s discretion At Board’s discretion Notice by Mr Buckley Termination by the Company (except for misconduct) Termination by the Company for misconduct Nil Nil Yes Yes No No No Page 15 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 b) Key Management Personnel Employment Agreements Each agreement varies according to the individual key management person but typically includes: a) b) c) Termination provisions relating to notice periods and payments similar to those outlined for the Managing Director above, except that notice periods are up to six months and reduced where termination is for performance reasons. Performance and confidentiality obligations on the part of both the employer and employee, Employee covenants that during the term of employment and for at least six months after termination the employee will not solicit any existing client or employee of the Company. Non-Executive Directors Non-Executive Directors remuneration is reviewed annually by the Board. The review takes account of recommendations of the Remuneration Committee and external benchmarking of comparable companies. In considering the level of remuneration for Non-Executive Directors, the Remuneration Committee uses independent external advice, industry survey data and other information about the level of fees and benefits being paid to Non-Executive Directors within comparator companies. The Board took independent advice in 2012 from Ernst & Young regarding Non-Executive Directors’ remuneration. 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. Cardno targets to set Non-Executive Director fees at approximately the median of Non-Executive Director fees in the comparator group. The aggregate fee pool for all of the Non-Executive Directors was approved by shareholders at the 2011 AGM with a maximum aggregate of $900,000 including superannuation. The reasons for requesting an increase at that time were as follows: a) b) c) d) e) f) The previous limit of $600,000 was approved by shareholders on 25 October 2007. At the time of the 2011 AGM the Board consisted of three Executive Directors and four Non- Executive Directors. It had been decided to continue transitioning the Board’s composition to a greater membership of Non-Executive Directors who will be compensated under the aggregate fee pool increase. The recommendation was based on an independent external review of competitive board remuneration practices for similar companies. The Board was of the view that the proposed increase to Non-Executive Directors aggregate remuneration was commensurate with market remuneration paid to Non-Executive Directors at equivalent ASX listed companies in terms of growth and market capitalisation, and was necessary to retain and attract appropriately qualified Non-Executive Directors to the Company. The increase reflected the more onerous corporate governance environment and the commensurate increase in time and responsibility of Non-Executive Directors for Board activities. The Company did not intend to allocate the full amount immediately. The proposed increase was to allow for growth over time in both the remuneration and the number of Non-Executive Directors. Page 16 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 The FY12 Non-Executive Director fee structure, last increased in July 2010, is outlined below:   Chairman of the Board: $200,000 (covering all responsibilities as Chairman of the Board and member of any Board Committee). Other Non-Executive Directors: $100,000 (covers all responsibilities as a member of the Board, including other Committee memberships and other duties including representing the Company externally). As a consequence of Cardno’s growth, the benchmarking of Non-Executive Directors fees compared with companies in the market comparator group, the increasing time commitment and demands on Directors and the need to plan for Non-Executive Director succession, the Board determined to restructure the manner in which Non–Executive Directors are remunerated for the financial year 2013. The new fee structure for Non-Executive Directors from 1 July 2012 includes payment of a base Board fee and Committee fees as follows:     Chairman of the Board: $250,000 (covering all responsibilities as Chairman of the Board and Chairman and/or member of any Board Committee) Other Non-Executive Directors: $100,000 (covering responsibilities as a member of the Board and other duties including representing the Company externally) Committee Chairman: $20,000, and Committee member: $10,000 (covering all responsibilities as either chairman or member respectively of the Audit, Risk & Compliance Committee and of the Remuneration Committee). No fees are payable to either the Chairman or a member of the Nominations Committee It is not proposed to seek an increase to the aggregate fee pool for Non-Executive Directors at the 2012 AGM. The remuneration of the Directors and key management personnel are set out in the following tables. Page 17 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Director and Key Management Personnel Remuneration Details of the nature and amount of each major element of remuneration of each Director of the Company and other Key Management Personnel of the consolidated entity are: Short Term Post Employment Long Term Share Based Payments Salary and Fees STI * $ $ Non- Monetary Benefits $ Total $ Super- annuation Benefits $ Other Long Term Benefits*** $ Termina- tion Benefits $ Shares Performance Rights** $ $ Director Non-Executive John Massey Anthony Barnes Peter Cosgrove Ian Johnston John Marlay Tonianne Dwyer Executive Andrew Buckley Jeffrey Forbes Trevor Johnson Former Graham Tamblyn (resigned 21/10/2010) 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 183,486 183,486 50,636 49,464 91,743 91,743 91,743 91,743 53,517 - 1,923 - 700,480 641,137 377,697 341,193 353,585 341,919 - 100,083 - - - - - - - - - - - - - - - - - - - - - - - - 183,486 183,486 50,636 49,464 91,743 91,743 91,743 91,743 53,517 - 1,923 - 1,060,000 810,000 120,400 105,000 69,200 50,000 4,000 1,764,480 4,000 1,455,137 502,097 4,000 450,193 4,000 426,785 4,000 395,919 4,000 16,514 16,514 49,364 50,536 8,257 8,257 8,257 8,257 4,816 - 173 - 50,448 103,725 38,303 53,807 44,278 43,006 - - - - - - - - - - - - - 329,981 - 91,066 - 92,099 - 20,000 - 4,000 - 124,083 - 14,033 - 79,076 Total $ 200,000 200,000 100,000 100,000 100,000 100,000 100,000 100,000 58,333 - 2,096 - - - - - - - - - - - - - 252,616 89,488 122,136 44,252 100,693 35,321 2,067,544 1,978,331 662,536 639,318 571,756 566,345 - 27,372 - 244,564 475,445 3,862,265 196,433 3,928,558 Proportion of Remuneration Performance Related Value of Performance Rights as a Proportion of Remuneration - - - - - - - - - - - - 63.5% 62.1% 36.6% 37.6% 29.7% 31.3% - 51.7% 44.7% 45.1% - - - - - - - - - - - - 12.2% 4.5% 18.4% 6.9% 17.6% 6.2% - 11.2% 12.3% 5.0% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Total Compensation – 2012 Total Compensation – 2011 1,904,810 1,249,600 1,840,768 985,000 12,000 3,166,410 220,410 - 16,000 2,840,768 298,135 592,222 * STIs which have been accrued at 30/06/2012 and to be paid in 2nd quarter FY2013. ** 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. *** Amounts earned under the Transitional Long Term Incentive plan (TLTI) no longer applicable in FY2012 and replaced by the LTI plan. Page 18 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Director and Key Management Personnel Remuneration continued Short-Term Post Employment Long Term Share Based Payments Executives Salary STI* Paul Gardiner Jean–Francois Floury Executives Roger Collins-Woolcock 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 Ross Thompson (effective 1/7/11) Michael Renshaw Kylie Sprott $ 424,463 363,699 376,438 111,688 401,802 367,761 493,598 418,213 279,479 244,754 280,997 220,183 Total compensation – 2012 2,256,777 $ 88,862 85,000 93,233 25,000 107,750 60,000 184,500 120,000 70,200 65,000 79,650 65,000 624,195 Total compensation – 2011 1,726,298 420,000 Non- Monetary Benefits Total Super- annuation Benefits $ $ $ Other Long Term Benefits $ Shares Termina- tion Benefits $ $ Performance Options & Performance Rights** $ 4,000 4,000 - - 4,000 4,000 - - - - - - 8,000 8,000 517,325 452,699 469,671 136,688 513,552 431,761 678,098 538,213 349,679 309,754 360,647 285,183 23,700 36,531 25,000 10,052 22,080 33,009 19,939 - 19,874 22,608 20,366 22,179 2,888,972 2,154,298 130,959 124,379 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,000 1,000 1,000 - 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 6,000 5,000 117,856 45,508 28,929 - 118,447 48,244 126,121 45,508 63,879 14,946 52,591 10,599 507,823 3,533,755 164,805 2,448,482 Total $ 659,881 535,738 524,600 146,740 655,079 514,014 825,158 584,721 434,433 348,308 434,604 318,961 Proportion of Remuneration Performance Related Value of Performance Options & Performance Rights as a Proportion of Remuneration 31.3% 24.4% 23.3% 17.0% 34.5% 21.1% 37.6% 28.3% 30.9% 23.0% 30.4% 23.7% 32.0% 23.9% 17.9% 8.5% 5.5% 0.0% 18.1% 9.4% 15.3% 7.8% 14.7% 4.3% 12.1% 3.3% 14.4% 6.7% * STIs 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. Additional Information Name Andrew Buckley Jeffrey Forbes Trevor Johnson Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson STI Vested% Forfeited % 96% 86% 87.0% 59% 78% 72% 90% 78% 89% 4% 14% 13% 41% 22% 28% 10% 22% 11% Page 19 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Consequences of Performance on Shareholder Wealth Cardno’s financial performance and resultant benefits for shareholder return are demonstrated in the following table. The Remuneration Committee has taken these results into consideration when making recommendations to the Board for the Managing Director and other key management personnel 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 ($ per share) Basic Earnings Per Share Growth Return on Capital Employed 2012 2011 2010 2009 2008 $74,168 $43,488 $2.18 9.7% 20.5% $58,802 $33,975 $1.49 28.3% 24.9% $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% Over the past four years, Cardno’s profit after income tax has grown at an average rate per annum of 28% and revenue from $399 million (2008) to $966 million (2012). During the same period average key management personnel total remuneration has grown by approximately 17% per annum. Performance Rights for the Managing Director and Key Management Personnel Details of vesting profiles of Performance Rights granted as remuneration to the Executive Directors and key management personnel of Cardno and still outstanding at 30 June 2012, including Performance Rights granted during the financial year are as follows: Key Management Personnel Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Senior Executives Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson Outstanding Performance Rights Grant Date Vesting Date % Vested in Year % Forfeited in Year 80,000 70,000 60,000 35,000 35,000 30,000 30,000 27,500 25,000 40,000 35,000 30,000 35,000 40,000 35,000 30,000 50,000 35,000 30,000 30,000 25,000 8,000 30,000 25,000 20-Oct-11 21-Oct-10 22-Oct-09 20-Oct-11 21-Oct-10 22-Oct-09 20-Oct-11 21-Oct-10 22-Oct-09 1-Nov-11 25-Nov-10 2-Dec-09 1-Nov-11 1-Nov-11 25-Nov-10 2-Dec-09 1-Nov-11 25-Nov-10 2-Dec-09 1-Nov-11 25-Nov-10 2-Dec-09 1-Nov-11 25-Nov-10 20-Oct-14 21-Oct-13 22-Oct-12 20-Oct-14 21-Oct-13 22-Oct-12 20-Oct-14 21-Oct-13 22-Oct-12 1-Nov-14 25-Nov-13 2-Dec-12 1-Nov-14 1-Nov-14 25-Nov-13 2-Dec-12 1-Nov-14 25-Nov-13 2-Dec-12 1-Nov-14 25-Nov-13 2-Dec-12 1-Nov-14 25-Nov-13 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% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-Executive Directors do not participate in any of the Company’s incentive plans. Page 20 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 No Performance Rights granted during the financial year have vested. No Performance Rights have been granted since the end of the financial year and up to the date of this report. No Performance Rights were exercised during the financial year. Details of the performance criteria are included on page 14. During the reporting period, the following shares were issued on the exercise of Performance Options previously granted as compensation: Key Management Personnel Number of shares Amount paid $/share Roger Collins-Woolcock Paul Gardiner Michael Renshaw 60,000 70,000 60,000 $3.35 $3.35 $3.35 The movement during the reporting period, by value, of Performance Rights and Performance Options over ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Executive Directors and Key Management Personnel Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Key Management Personnel Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson Granted in year $ (a) Exercised in year $ (b) (Performance Rights) (Performance Options) Vested in year $ (not exercised) 372,000 162,750 139,500 193,400 169,225 193,400 241,750 145,050 145,050 - - - 117,600 - 137,200 117,600 - - - - - - - - - - - (a) The value of Performance Rights granted in the year is the fair value of the Performance Rights calculated at grant date using the Monte-Carlo & Black-Scholes pricing models. The total value of the Performance Rights is allocated to remuneration over the vesting period (i.e. in years 20 October 2011 – 20 October 2014 and 1 November 2011 – 1 November 2014). (b) The value of Performance Options exercised during the year is calculated as the market price of the shares of the Company as at closing of trading on the date the Performance Options were exercised after deducting the price to exercise the option. 12. Directors’ and Executives’ Interests As at the date of this report, the interests of the Directors in the shares of Cardno Limited were: Cardno Limited Ordinary Shares Shares held in Escrow Performance Options Performance Rights Anthony Barnes Andrew Buckley Peter Cosgrove Tonianne Dwyer Jeffrey Forbes Trevor Johnson Ian Johnston John Massey John Marlay 5,084 2,520,261 979 - 31,237 1,600,001 268,839 64,816 3,500 - - - - - - - - - - - - - - - - - - - 210,000 - - 100,000 82,500 - - - Page 21 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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 2011 Purchases Received as Compensation Sales Held at 30 June 2012 Non–Executive Directors Anthony Barnes Peter Cosgrove Tonianne Dwyer Ian Johnston John Marlay John Massey Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Senior Executives Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson 4,307 - - 241,955 - 58,334 2,450,261 26,466 2,050,001 704,103 - 850,939 191,286 5,165 430 777 979 - 26,884 3,500 6,482 70,000 4,771 50,000 214,922 - 120,346 60,000 887 10,834 - - - - - - - - - 173 86 173 173 173 173 - - - - - - - - (500,000) (170,000) - - - - - 5,084 979 - 268,839 3,500 64,816 2,520,261 31,237 1,600,001 749,198 86 971,458 251,459 6,225 11,437 13. Unissued shares under Performance Options and Performance Rights At the date of this report unissued ordinary shares of the Company under Performance Options are: Exercise Date Expiry date Exercise price 2 December 2012 2 December 2013 25 November 2013 25 November 2014 1 November 2014 1 November 2015 $4.43 $4.84 $5.26 Number of Performance Options 2,038,700 3,274,500 3,831,000 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 Performance Rights 22 October 2012 22 October 2013 2 December 2012 2 December 2013 21 October 2013 21 October 2014 25 November 2013 25 November 2014 20 October 2014 20 October 2015 1 November 2014 1 November 2015 Nil Nil Nil Nil Nil Nil 135,000 224,000 152,500 377,500 145,000 482,500 These Performance Options and Performance 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 auditor and in accordance with written advice provided by resolution of the Audit, Risk and Compliance Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible Page 22 of 86 Directors’ Report Cardno Limited and its Controlled Entities for the year ended 30 June 2012 with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: All non-audit services were subject to the corporate governance procedures adopted by the Board and have been reviewed by the Audit, Risk and Compliance Committee to ensure they do not impact the integrity and objectivity of the auditor; and The 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, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for Cardno, acting as an advocate for Cardno or jointly sharing risks and rewards. Details of the amounts paid to the auditor and its related practices for audit and non-audit services provided during the year are set out in note 30. 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 24 and forms part of the Directors’ report for the year ended 30 June 2012. 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 13 August 2012 Page 23 of 86 ABCD Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: the directors of Cardno Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2012 there have been: • no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and • no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Robert S Jones Partner Brisbane 13 August 2012 Page 24 of 86 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Corporate Governance Statement Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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 Cardno 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 Cardno’s current practice against these Principles and Recommendations and notes that Cardno’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 the Managing Director and the senior management team has been formalised. The most significant responsibilities of the Board are:  providing strategic guidance to Cardno 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; reviewing the operational and financial performance of Cardno’s activities; reporting to shareholders and the market; ensuring compliance with prudential regulations and standards; ensuring adequate risk management processes are in place; reviewing internal controls and internal and external audit reports;       monitoring and influencing the culture and reputation of Cardno;  monitoring Board composition, Director selection and Board process and performance; approving key executive appointments and ensuring executive succession planning;  reviewing the performance and remuneration of the Managing Director and senior management;  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.  The Board has delegated to the Managing Director, together with his senior management team the responsibility for implementation of Cardno’s strategic direction, business plans and day-to-day management of its operations. The performance of the Managing Director and senior management team is evaluated by the Board through formal performance reviews undertaken on an annual basis. The individual performance of the Managing Director and each member of the senior management team is reviewed against goals set in the previous year and new objectives are established for the following financial year. 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 as Cardno develops. The Board’s responsibilities and functions are also contained in Cardno’s Corporate Governance Policy which can be accessed in the Investor Centre on the Cardno website. Principle 2: Structure the Board to add value The Board has been established so that it has appropriate 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. Page 25 of 86 Corporate Governance Statement Cardno Limited and its Controlled Entities for the year ended 30 June 2012 The Board currently comprises six Non-Executive Directors including the Chairman, and three Executive Directors. In June this year Mr Massey announced he would retire as Chairman of the Board effective 14 August 2012. Mr John Marlay will take over as Chairman at that time. Mr Massey has advised that he will not seek re-election as a Director at the 2012 Annual General Meeting. The Board has adopted the following criteria to determine the independence of a Director as someone who must be a Non-Executive Director and:  is not a substantial shareholder of Cardno or an officer of, or otherwise associated directly with, a substantial shareholder of Cardno;  within the last three years has not been employed in an executive capacity by Cardno or another group member, or been a Director after ceasing to hold any such employment;  within the last three years has not been a principal of a material professional adviser or a material consultant to Cardno or another group member or an employee materially associated with the service provided; is not a material supplier or customer of Cardno or another group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer;   has no material contractual relationship with Cardno or other group member other than as a Director of the company;  has not served on the Board for a period which could, or could reasonably be perceived to,  materially interfere with the Director’s ability to act in the best interests of Cardno; 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 Cardno. The Board has confirmed that based on this definition of independence, Mr Massey, Mr Marlay, Mr Johnston, General Cosgrove, Ms Dwyer and Mr Barnes are independent Non-Executive Directors. The Board noted Mr Johnston’s former role as a Director of RBS Morgans, which ended some years ago, and determined that Mr Johnston now meets the Board’s definition of independence. The Board considers that Mr Johnston’s current non-financial involvement with RBS Morgans does not interfere with his ability to act independently in the interests of Cardno. The Board currently considers 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 Cardno. Cardno has reduced the number of Executive Directors and increased the number of Non-Executive Directors over recent years to the point where it now has a majority of Non-Executive Directors. The role of the Chairman and Chief Executive Officer are separate. The Chairman of the Board is Mr Marlay who is an independent Non-Executive Director. The Chief Executive Officer and Managing Director is Mr Buckley. Each Director, as part of their agreement with Cardno, has the ability to seek independent advice at Cardno’s expense after consultation with the Chairman. The Nominations Committee comprises three Non-Executive Directors, Mr Marlay (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 Nominations 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. 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. Page 26 of 86 Corporate Governance Statement Cardno Limited and its Controlled Entities for the year ended 30 June 2012 The Nominations 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 Cardno including company law, trade practices legislation, environmental law, occupational health and safety, equal opportunity and taxation. As Cardno 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 Cardno operates. In addition, consideration is given to the candidate’s knowledge of the areas of Cardno’s operations, risk management concepts and how they apply to Cardno 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 Cardno. This includes meetings with key executives, tours of the relevant businesses, 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 Nominations Committee has responsibility for independently supervising Cardno’s Leadership Development Programme as part of its succession considerations. The Committee also proposes the development of policies relevant to Cardno’s human resources, including the Diversity Policy. The roles and responsibilities of the Nominations Committee are set out in its Terms of Reference which are displayed on the Investor Centre of Cardno’s website. Principle 3: Promote ethical and responsible decision making The Board has adopted a Code of Conduct for Directors, senior managers 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 sets the standard of behaviour required in areas such as performance and conduct, health and safety, use of property, compliance with laws and professional standards, confidentiality of information and conflicts of interest. 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 and the Whistleblower hotline which is managed by an independent operator and accessible to all Cardno staff 24 hours a day, 7 days a week. The Audit, Risk & Compliance Committee receives notifications and reports of disclosures made under the policy. After due investigation, the Committee determines an appropriate response and whether corrective action is required to be taken. The Board has adopted a policy for trading in Cardno securities by Directors, senior managers and staff. The purpose of this policy is to guide Directors and senior managers 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 updated during 2012 and the updated version was disclosed on the ASX in April 2012 in accordance with the ASX Listing Rules. The updated policy addresses each of the ASX requirements including provisions relating to the prohibition of trading by directors and senior executives in Cardno’s securities during defined blackout periods. The 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 the code and the policy are available for review in the Investor Centre of the Cardno website. Page 27 of 86 Corporate Governance Statement Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Diversity Policy The Board has adopted a Diversity Policy which is accessible on the Cardno website. Cardno respects and values the competitive advantage of diversity and recognises the benefits of its integration throughout Cardno through the improvement of corporate performance and increasing shareholder value. Specifically, diversity is reinforced through both strategic and operational means, and by management nurturing and developing the collective relevant skills. As at 30 June 2012, women comprised 31% of Cardno’s workforce globally. The proportion of women in senior executive positions such as General Manager, Division Manager, Business Unit Manager and/or Vice President was 11%. The proportion of women on the Cardno Board was 11%. Cardno has established objectives with the aim of recognising and increasing diversity within the organisation and the continued promotion of our people to senior and executive management roles, regardless of gender, age or race. As part of the implementation of the policy, measurable objectives have been developed to create ongoing visibility and focus on diversity. As a rapidly growing organisation, Cardno’s first objective is to ensure that it has accurate analytics regarding diversity. This will in turn help to refine the areas of focus and effort. During 2011/12, Cardno implemented a flexible work policy in the Australia/New Zealand region aimed at promoting flexibility in work arrangements for all employees. In addition, Cardno University was launched globally and will provide opportunities to create exciting and rewarding career paths for Cardno staff. In 2012/2013 Cardno aims to:  undertake a comprehensive review of the analytics of diversity within the organisation to determine priority actions and programs. This will take place on both a region and global perspective and will include data regarding job roles and salary levels. identify and communicate emerging themes with regard to diversity relevant for Cardno’s business and consequently establish further priorities and actions. increase the percentage of women at all levels in the company, including on the Board, in senior management and in professional roles.    develop a “Women in Cardno” network to champion gender equality globally.  implement a review of our recruitment practices with the aim of increasing our applicant diversity, including indigenous people in the Australia and New Zealand region. Principle 4: Safeguard integrity in financial reporting The Chief Executive Officer and Managing Director and Chief Financial Officer have provided the Board with a statement confirming that Cardno’s financial reports present a true and fair view of its financial position and are in accordance with relevant accounting standards. During the year the Audit, Risk & Compliance Committee consisted of two Non-Executive Directors, Mr Barnes and Mr Johnston, and one Executive Director, Dr Johnson. In June 2012 Dr Johnson retired from the Committee and was replaced by Ms Dwyer, an independent Non-Executive Director. Mr Barnes, an independent Non-Executive Director, is Chairman of the Audit, Risk & Compliance Committee. Mr Barnes is not the Chairman of the company. 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 set out in its Terms of Reference which can be viewed in the Investor Centre of the company’s website. Page 28 of 86 Corporate Governance Statement Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Principle 5: Make timely and balanced disclosure Cardno 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 the policy to ensure it reflects best practice standards regarding disclosure and by following the policy ensures the market is kept informed of price sensitive or significant information in accordance with the Listing Rules. The policy was reviewed during the last financial year. Cardno maintains a Confidential Information Policy which establishes standards of behaviour and processes regarding the manner in which the executives and employees handle confidential information relating to Cardno’s business. A copy of the policy has been distributed to all staff and is accessible on the Cardno 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. 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. Cardno’s auditors attend the Annual General Meeting of the company and are available to answer shareholders’ questions. The Board has adopted a Communications Policy that provides for:  communicating effectively with shareholders through releases to the market via the ASX, the media, Cardno’s website, information mailed to shareholders and the general meetings of Cardno;  posting all information disclosed to the ASX on the Cardno 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 Cardno’s website;  giving shareholders ready access to balanced and understandable information about Cardno and corporate proposals; and  having the external auditor attend 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 Cardno’s Communications Policy is able to be reviewed in the Investor Centre of the Cardno website. Principle 7: Recognise and manage risk The Board, together with the Managing Director and senior 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 Cardno’s Corporate Governance Policy and in the Audit, Risk & Compliance Committee Charter which are both kept under regular review 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 approved policies and Page 29 of 86 Corporate Governance Statement Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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 represent all aspects of Cardno’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 Cardno and how they are being mitigated and managed by management via the Operational Risk Management Committee. This structure allows Cardno 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. Cardno 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 Cardno’s website. Details of the number of meetings of the Audit, Risk & Compliance Committee and members’ attendance can be found in the Directors’ Report. Principle 8: Remunerate fairly and responsibly Cardno has established a Remuneration Committee. The Remuneration Committee, which advises and reports to the Board, is chaired by Mr Johnston and includes Mr Marlay and Mr Barnes, all Non-Executive Directors. In January 2012 Mr Massey, while remaining as a member, retired as Chairman of the Committee and was replaced by Mr Marlay. In August 2012 when Mr Marlay became Chairman of Cardno, he stepped down as Chairman of the Committee but remains a member of the Committee. 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 Board has consciously designed Cardno’s remuneration strategy to ensure its Managing Director and senior management team are strongly aligned to achieving Cardno’s business strategies and deliver shareholder value. Cardno’s vision is to be a world leader in the provision of professional services to improve the physical and social environment. This vision will be achieved through focussing on our people, clients, growth, quality, safety and performance. The Cardno group’s remuneration strategy is designed to attract, retain and motivate appropriately qualified and experienced senior managers in the engineering and professional consulting services sector. The ability of Cardno to deliver long term shareholder value relies significantly upon the capability of these senior managers to drive business performance and client service satisfaction. Page 30 of 86 Corporate Governance Statement Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Cardno’s remuneration strategy is provided through a framework which includes a mix of fixed and variable remuneration, including short-term and long-term performance-based incentives (Total Remuneration), designed to maximise the financial performance and growth of Cardno over time. In general, the remuneration approach includes a reasonable percentage of potential annual remuneration for senior managers to be delivered as a risk variable remuneration. The Board has determined that this remuneration method is likely to contribute significantly to improved senior manager performance and better financial outcomes achieved in Cardno’s operations. Where the Executive Directors participate in equity-based incentive plans, the details are submitted to shareholders for approval. The Non-Executive Directors of Cardno Limited are entitled to fees that are determined by the Board on commencement of the role and reviewed on an annual basis taking into account competitive market practices for companies with a similar size and complexity to Cardno. Fees include compulsory superannuation contributions. Non-Executive Directors do not participate in equity plans of Cardno and do not receive retirement benefits. Fees are paid for Non-Executive Directors membership of the Board and for the Chairmen and members of the Audit, Risk and Compliance Committee and the Remuneration Committee, with the exception of the Chairman of the Company who is paid an all-inclusive annual fee inclusive of Committee fees. The company’s Trading Policy specifically prohibits any Director, senior managers 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 Cardno website. The role, objectives and responsibilities of the Remuneration Committee is set out in its Terms of Reference which can be viewed in the Investor Centre of the Cardno website. Page 31 of 86 Consolidated Statement of Financial Performance Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Revenue Employee expenses Consumables and materials used Sub-consultant and contractor costs Depreciation and amortisation expenses Financing costs Other expenses Profit before income tax Income tax expense Profit for the year Profit attributable to: Owners of the Company Note 2 2012 $’000 965,820 2011 $’000 831,201 (425,594) (200,950) (171,305) (16,111) (7,500) (39,318) (321,233) (158,212) (216,345) (11,356) (4,501) (35,251) 105,042 (30,874) 74,168 84,303 (25,501) 58,802 3 3 4 74,168 74,168 58,802 58,802 Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 29 29 61.73 59.81 56.29 55.35 The statement of financial performance should be read in conjunction with notes 1 to 37 which form part of the financial statements. Page 32 of 86 Consolidated Statement of Comprehensive Income Cardno Limited and its Controlled Entities for the year ended 30 June 2012 Profit for the year Other comprehensive income Exchange differences on translation of foreign operations 2012 $’000 2011 $’000 74,168 58,802 11,445 (26,908) Other comprehensive income for the year, net of tax 11,445 (26,908) Total comprehensive income for the year 85,613 31,894 Total comprehensive income attributable to: Owners of the Company 85,613 85,613 31,894 31,894 The statement of comprehensive income should be read in conjunction with notes 1 to 37 which form part of the financial statements. Page 33 of 86 Consolidated Statement of Financial Position Cardno Limited and its Controlled Entities as at 30 June 2012 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 TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Loans and borrowings Current tax liabilities Short term provisions Other current liabilities TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES 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 2012 $’000 2011 $’000 6 7 8 9 10 11 12 13 14 15 16 17 18 19 13 20 21 22 107,856 175,471 108,032 4,047 395,406 570 783 43,497 11,731 506,762 563,343 84,047 118,205 80,107 4,957 287,316 535 669 31,937 5,446 355,709 394,296 958,749 681,612 122,990 2,073 12,644 33,546 31,301 151,222 1,859 5,514 19,561 32,934 202,554 211,090 196,769 493 9,146 902 207,310 104,535 140 8,023 628 113,326 409,864 324,416 548,885 357,196 460,947 (23,970) 111,908 548,885 311,383 (35,415) 81,228 357,196 The statement of financial position should be read in conjunction with notes 1 to 37 which form part of the financial statements. Page 34 of 86 Consolidated Statement of Changes in Equity Cardno Limited and its Controlled Entities for the year ended 30 June 2012 BALANCE AT 1 JULY 2010 Profit for the year Exchange differences on translation of foreign operations Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued Employee share based payments Dividends paid or provided BALANCE AT 30 JUNE 2011 Profit for the year Exchange differences on translation of foreign operations Total comprehensive income for the year Transactions with owners in their capacity as owners: Shares issued Employee share based payments Dividends paid or provided BALANCE AT 30 JUNE 2012 22 22 5 22 22 5 Note Share Capital Ordinary $’000 252,080 - - - 57,038 2,265 - 59,303 311,383 - - - Retained Earnings $’000 56,399 58,802 - 58,802 - - (33,973) (33,973) 81,228 74,168 - 74,168 Foreign Translation Reserve $’000 (8,507) Total $’000 299,972 - 58,802 (26,908) (26,908) (26,908) 31,894 - - - - (35,415) 57,038 2,265 (33,973) 25,330 357,196 - 74,168 11,445 11,445 11,445 85,613 146,872 2,692 - 149,564 460,947 - - (43,488) (43,488) 111,908 - - - - (23,970) 146,872 2,692 (43,488) 106,076 548,885 The statement of changes in equity should be read in conjunction with notes 1 to 37 which form part of the financial statements. Page 35 of 86 Consolidated Statement of Cash Flows Cardno Limited and its Controlled Entities for the year ended 30 June 2012 CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Interest received Finance costs paid Cash paid to suppliers and employees Income tax paid NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of subsidiaries, net of cash acquired Acquisition of subsidiaries, deferred consideration paid Proceeds from sale of property, plant & equipment Payments for property, plant & equipment NET CASH USED IN INVESTING ACTIVITIES 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 Note 2012 $’000 2011 $’000 24(a) 24(d) 991,723 1,874 (7,755) (884,264) (28,949) 858,262 1,949 (5,338) (757,529) (23,816) 72,629 73,528 (148,960) (65,941) (10,503) (1,832) 835 (15,897) 588 (9,063) (229,963) (20,810) 144,984 (3,774) 240,581 (159,199) (2,347) (40,794) 54,694 (2,054) 10,294 (50,210) (2,474) (31,942) NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 179,451 (21,692) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS HELD 22,117 31,026 CASH AND CASH EQUIVALENTS AT 1 JULY 84,047 56,282 Effects of exchange rate changes on cash and cash equivalents at the end of year 1,692 (3,261) CASH AND CASH EQUIVALENTS AT 30 JUNE 24(b) 107,856 84,047 The statement of cash flow should be read in conjunction with notes 1 to 37 which form part of the financial statements. Page 36 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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 2012 encompasses the Company and its subsidiaries (together referred to as “Cardno” or the “Group”). Cardno is a for-profit entity and operates as a provider of professional services in physical and social infrastructure. The financial report was authorised for issue by the Board of Directors on 13 August 2012. (a) Statement of compliance The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The financial report of the consolidated entity also complies with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). (b) Basis of Preparation The financial report has been prepared on a historical cost basis except for derivative financial instruments which are measured at fair value. The consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 July 2012, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of Cardno, except for AASB 9 Financial Instruments, which becomes mandatory for Cardno’s 2016 consolidated financial statements and could change the classification and measurement of financial assets. Cardno does not plan to adopt this standard early and the extent of the impact has not been determined. The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. Certain comparative amounts in the financial report have been reclassified to conform with the current year’s presentation. (c) Basis of Consolidation Subsidiaries Subsidiaries are entities controlled by Cardno. 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 Cardno. A list of the significant subsidiaries is contained in Note 37 to the financial statements. All controlled entities have a June financial year-end. Transactions eliminated on consolidation Intra-group balances and transactions, unrealised gains and losses and inter-entity balances resulting from transactions with or between controlled entities are eliminated in full on consolidation. Page 37 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (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 tax authority 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 tax authority are classified as operating cash flows. (e) Foreign Currency (i) 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, (see (ii) below) 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. (ii) 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. (iii) 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. 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. Page 38 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (f) Revenue Recognition continued 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. Dividends Revenue from dividends is recognised by the consolidated entity when dividends are received. (g) Leases Leases in terms of which Cardno 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 Cardno’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 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. 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. Page 39 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (i) Income Tax continued 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 probable 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 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 mainly comprise head office expenses, financing costs, and income tax expense. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. (k) 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 receivables is made when there is objective evidence collection of the full nominal amount is no longer probable. Bad debts are written off as incurred. (l) 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 Cardno’s activities in general. The recoverability of work in progress is reviewed on an ongoing basis. Amounts assessed as not recoverable from future billings are written off when identified. Page 40 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (m) 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, 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 profit or loss. 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 Cardno 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 profit or loss during the reporting period in which they are incurred. Depreciation Depreciation is calculated on 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 Cardno 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 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. (n) Intangible Assets Business Combinations and Goodwill Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to Cardno. 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, Cardno takes into consideration potential voting rights that currently are exercisable. Cardno measures goodwill at the acquisition date as: the fair value of the consideration transferred; plus Page 41 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (n) Intangible Assets continued Business Combinations and Goodwill continued the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, the gain is recognised immediately in profit or loss. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment loss. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that Cardno incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. When share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards) and relate to past services, then all or a portion of the amount of the acquirer’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared with the market- based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service. Works contracts, software intangibles and customer relationships Works contracts, software intangibles and customer relationships are acquired by Cardno 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 Cardno 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. (o) 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 systematic 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 each year at the same time. 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. (p) Impairment The carrying amount of Cardno’s assets, other than inventories (see paragraph (l)), and deferred tax assets (see paragraph (i)), are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, an impairment test is performed. Cardno performs impairment testing of goodwill and intangibles with indefinite useful lives annually. Page 42 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (p) Impairment continued 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 Cardno’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. (q) 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 Cardno. Trade accounts payable are normally settled within 60 days. Trade and other payables are stated at cost. (r) 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. (s) 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 Cardno expects to pay as at reporting date including related on-costs. Page 43 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (s) Employee Benefits continued 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 meet the related service and non-market performance conditions at the vesting date. (t) Provisions A provision is recognised in the balance sheet when Cardno 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. (u) Cash and Cash Equivalents Cash and cash equivalents comprise cash on hand and investments in money market instruments. Bank overdrafts are shown with interest-bearing loans and borrowings in current liabilities on the statement of financial position. (v) Earnings per Share Cardno 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 Performance Options and Performance Rights granted to employees and rights issues to existing shareholders, in the event of capitalisation. The bonus element in a rights issue to existing shareholders increases the number of ordinary shares outstanding without a corresponding change in resources. In this case, the number of ordinary shares outstanding before the event is adjusted for the proportionate change in the number of ordinary shares outstanding as if the event had Page 44 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED (v) Earnings per Share continued occurred at the beginning of the earliest period presented. If the changes occur after the reporting period but before the financial statements are authorised for issue, the per share calculations for those and any prior period financial statements presented shall be based on the new number of shares. The fact that per share calculations reflect such changes in the number of shares shall be disclosed. In addition, basic and diluted earnings per share of all periods presented shall be adjusted for the effects of errors and adjustments resulting from changes in accounting policies, accounted for retrospectively. (w) 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. Cardno 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(p) 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(n) and 33. Page 45 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 2. REVENUE Fees from services Fees from sale of goods Fees from recoverable expenses Interest received Royalties Rental income Other Revenue 3. EXPENSES, LOSSES AND (GAINS) Depreciation Motor vehicles Other property, plant & equipment Total Depreciation Amortisation of intangibles Works contracts Software intangibles Customer relationships 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 2012 $’000 2011 $’000 701,174 8,223 250,552 1,874 210 636 3,151 562,566 7,532 257,567 1,948 189 616 783 965,820 831,201 3,336 8,675 12,011 3,511 131 458 4,100 2,510 7,381 9,891 1,146 156 163 1,465 16,111 11,356 3,791 3,713 6,071 1,429 7,500 3,673 828 4,501 27,292 21,969 Net loss/(gain) on disposal of property, plant and equipment 364 2 Foreign exchange (gains) / losses (2,348) (668) 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 Adjustments for prior years Total income tax expense/(benefit) 31,218 4,128 35,346 1,078 (5,550) (4,472) 30,874 27,674 (623) 27,051 (1,550) - (1,550) 25,501 Page 46 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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% (2011: 30%) Increase (decrease) in income tax expense due to: Non-deductible expenses Adjustment for branch office taxation Allowances for R&D expenditure Benefit arising from amendment to Australian tax legislation Sundry items 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 70% franked dividend at 30% (2011: 70% at 30%) (Refer Note 28) (b) Dividends paid during the year (Final 2011: 17 cents per share, 70% franked at 30%. Interim 2012: 18 cents per share, 70% franked at 30%) (2011: all dividends 70% franked at 30%) (c) Franking credit balance The amount of franking credits available for the subsequent financial year are: - - franking account balance as at the end of the financial year at 30% franking credits that will arise from the payment of income tax payable as at the end of the financial year 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 $7,479,346 (2011: $5,598,782) 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 8. INVENTORIES (CURRENT) Work in progress Page 47 of 86 2012 $’000 2011 $’000 105,042 31,513 84,303 25,291 1,737 3,999 (1,609) (1,975) (1,369) 32,296 (1,422) 30,874 1,212 3,361 (3,353) - (385) 26,126 (625) 25,501 24,931 18,663 43,488 33,973 6,932 10,256 10,932 7,925 17,864 18,181 83,742 2,373 21,741 107,856 57,016 4,652 22,379 84,047 181,147 (12,233) 119,415 (6,376) 168,914 113,039 6,557 5,166 175,471 118,205 108,032 80,107 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 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 Less accumulated depreciation Motor vehicles Less accumulated depreciation & amortisation Office furniture & equipment Less accumulated depreciation & amortisation Leasehold improvements Less accumulated depreciation & amortisation Land and buildings Less accumulated depreciation 2012 $’000 2011 $’000 2,035 92 1,920 4,047 3,040 172 1,745 4,957 570 535 783 669 25,044 (16,459) 8,585 24,567 (14,104) 10,463 13,694 (8,554) 5,140 18,830 (11,360) 7,470 56,104 (38,417) 40,147 (27,501) 17,687 12,646 10,523 (5,112) 5,411 2,195 (844) 1,351 9,899 (4,497) 5,402 1,974 (695) 1,279 Total Property Plant & Equipment 43,497 31,937 Page 48 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 12. PROPERTY, PLANT & EQUIPMENT CONTINUED 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 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 Motor vehicles Carrying amount at the beginning of the year Additions Increase through merger acquisition Disposals Depreciation and amortisation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Office furniture & equipment Carrying amount at the beginning of the year Additions Increase through merger acquisitions Disposals Depreciation and amortisation expense Foreign exchange Transfer between classes Carrying amount at the end of the year Leasehold improvements Carrying amount at the beginning of the year Additions Increase through merger acquisitions Disposals Depreciation and amortisation expense Foreign exchange Transfer between classes Carrying amount at end of the year Property Carrying amount at the beginning of the year Additions Increase through merger acquisition Depreciation expense Transfer between classes Foreign exchange Carrying amount at the end of the year Carrying amount at the end of the year Page 49 of 86 2012 $’000 2011 $’000 5,140 3,044 1,963 (100) (1,925) 300 163 8,585 7,470 5,726 1,052 (374) (3,336) 97 (172) 10,463 12,646 8,333 2,154 (301) (5,628) 312 171 17,687 5,402 1,332 292 (424) (1,024) 95 (262) 5,411 1,279 126 - (98) (37) 81 1,351 4,453 1,914 685 (64) (1,422) (226) (200) 5,140 6,101 3,629 747 (270) (2,510) (135) (92) 7,470 12,491 5,053 1,067 (220) (4,863) (955) 73 12,646 6,151 446 (17) (37) (1,044) (342) 245 5,402 12 13 1,372 (52) - (66) 1,279 43,497 31,937 2012 $’000 2011 $’000 20,282 13,087 3,637 - 2,818 39,824 (28,093) 11,731 19,568 2,673 4,972 1,373 28,586 (28,093) 7,906 10,645 502 2,133 1,309 22,495 (17,049) 5,446 10,140 1,067 4,946 1,036 17,189 (17,049) 493 140 11,238 5,306 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 13. DEFERRED TAX ASSETS & LIABILITIES Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Accruals Provisions Work in progress Unearned revenue Other Total deferred tax assets Set-off of deferred tax liabilities Net deferred tax assets Liabilities Work in progress Property, plant and equipment Goodwill on acquisition Other Total deferred tax liabilities Set-off of deferred tax assets Net deferred tax liabilities NET DEFERRED TAX ASSETS (LIABILITIES) 30 June 2012 Movement in temporary differences during the year: Accruals Provisions Unearned revenue Sundry items Property, plant & equipment Work in progress Goodwill on acquisition (USA) 1 July 2011 $’000 7,004 10,643 2,133 1,110 (207) (10,139) (5,238) 5,306 Recognised in profit or loss $’000 Adjustments to prior years $’000 Acquired in business combination $’000 30 June 2012 $’000 8,783 (1,526) (2,133) (1,641) (1,741) (3,053) 233 (1,078) 3,056 431 - 1,826 (407) 1,115 (471) 5,550 603 2,311 - 1,977 (725) (2,739) 33 1,460 19,446 11,859 - 3,272 (3,080) (14,816) (5,443) 11,238 30 June 2011 Movement in temporary differences during the year: Accruals Provisions Unearned revenue Sundry items Property, plant & equipment Work in progress Goodwill on acquisition (USA) 1 July 2010 $’000 Recognised in profit or loss $’000 Adjustments to prior years $’000 Acquired in business combination $’000 30 June 2011 $’000 2,335 10,032 - (103) (139) (7,544) (1,472) 3,109 4,357 55 2,133 1,213 (68) (2,374) (3,766) 1,550 - - - - - - - - 312 556 - - - (221) - 647 7,004 10,643 2,133 1,110 (207) (10,139) (5,238) 5,306 Page 50 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 14. INTANGIBLE ASSETS Goodwill at cost Accumulated impairment losses Works contracts Accumulated amortisation Patents and trademarks Software intangibles Accumulated amortisation Customer relationships Accumulated amortisation Total Intangibles Reconciliation of movement in carrying amounts from beginning of year to end of year: Consolidated 2011 Balance at the beginning of year Additions: - acquisition through business combinations - current year - reclassification of intangibles* - prior year Amortisation charges Effect of foreign exchange 2012 $’000 2011 $’000 499,277 - 499,277 352,133 - 352,133 9,505 (7,043) 2,462 3,622 (3,415) 207 2,110 2,110 1,355 (765) 590 2,953 (630) 2,323 1,319 (616) 703 710 (154) 556 506,762 355,709 Goodwill Works Contracts Patents and Trademarks Software Intangibles $’000 $’000 $’000 $’000 Customer Relation- ships $’000 335,671 322 2,110 996 - 57,743 (1,800) 255 - (39,736) - 1,053 - (1,146) (22) - - - - - - - - (156) (137) 703 - - 747 - (163) (28) 556 Closing value at 30 June 2011 352,133 207 2,110 2012 Balance at the beginning of year Additions: - acquisition through business combinations - current year - reclassification of intangibles* - prior year Amortisation charges Effect of foreign exchange Closing value at 30 June 2012 352,133 207 2,110 703 556 132,200 (1,297) 1,500 - 14,741 499,277 4,946 815 - (3,511) 5 2,462 - - - - - 2,110 - - - (131) 18 590 1,715 482 - (458) 28 2,323 * Amounts were reclassified from goodwill to identifiable intangible assets following completion of the purchase price accounting for acquisitions which occurred in the prior year. Page 51 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 14. INTANGIBLE ASSETS CONTINUED Goodwill is allocated to the following cash-generating units: Americas and Software Emerging Markets Region South East Australia & NZ North & Western Australia Geotechnical Division Electrical Engineering Division 2012 $’000 2011 $’000 291,192 33,514 52,423 34,675 48,321 39,152 499,277 162,002 33,285 47,103 22,473 47,210 40,060 352,133 For the purposes of impairment testing, goodwill is allocated to Cardno’s management divisions which represent the lowest level within Cardno at which the goodwill is monitored for internal management purposes. 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 ranging from 13.2% to 15.2% (2011: 10.5% - 14.6%) (adjusted for risks specific to the cash generating unit) based on an estimate of Cardno’s weighted average cost of capital. The value-in-use calculations are based on budget forecasts for each cash generating unit for the 2013 year and longer term year-on-year growth rates which are based on underlying economic conditions and cash generating unit sector specific forecasts. Revenue, gross margin and costs have been estimated using growth assumptions ranging from 1% to 5%. Sensitivity analysis performed indicates any reasonable possible change in any of the key assumptions would not result in impairment. 15. TRADE & OTHER PAYABLES (CURRENT) Trade payables & accruals Vendor liability 16. 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 19 17. SHORT-TERM PROVISIONS Employee benefits Legal provision Movements in legal provision: Balance at 1 July 2011 Increase through merger acquisition Provision made during the year Provision used during the year Provision reversed during the year Effect of foreign exchange Balance at 30 June 2012 2012 $’000 2011 $’000 105,997 16,993 122,990 82,567 68,655 151,222 1,771 199 103 2,073 1,609 239 11 1,859 25,904 7,642 33,546 17,199 2,362 19,561 2,362 5,254 700 (571) (500) 397 7,642 Cardno makes provision for legal claims not covered by Cardno’s professional indemnity policy and as at 30 June an estimate of the potential impact of these claims has been provided for. As a result of the acquisition of ATC Inc Cardno assumed a contingent liability of $5.3 million in respect of various legal claims. Page 52 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 18. OTHER CURRENT LIABILITIES Unearned revenue Deferred rent 19. LOANS & BORROWINGS (NON-CURRENT) Lease liabilities Hire purchase liabilities Bank Loans 2012 $’000 2011 $’000 31,301 - 31,301 32,923 11 32,934 3,895 260 192,614 3,128 2 101,405 196,769 104,535 Bank Loans As at 30 June 2012 Cardno has bank loans totalling $194,012,464 (2011: $101,416,141), with an effective interest rate of 2.20% (2011: 2.48%). During the 2012 financial year, Cardno restructured its debt with a multiple currency facility, with four major financial institutions. The new facility diversifies Cardno’s bank arrangements and extends the term of the debt by incorporating 3 year ($94.1 million) and 5 year ($99.9 million) facilities. The facility limits comprise a multi- currency working capital facility of AUD55.0 million (2011: AUD35.0 million) and term acquisition financing facilities of USD195.0 million (2011: USD129.1 million) and GBP8.55 million (2011: GBP8.55 million). The weighted average interest rate for term facilities ranges from 2.08% to 2.63% (2011: 2.56% to 2.91%). Funding available to Cardno from undrawn facilities is AUD69.1million at 30 June 2012 (2011: AUD66.6 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 2012 (2011: Nil). 20. LONG-TERM PROVISIONS Employee benefits 21. OTHER NON-CURRENT LIABILITIES Deferred rent Other 2012 $’000 2011 $’000 9,146 8,023 281 621 902 297 331 628 22. ISSUED CAPITAL OF CARDNO LIMITED Balance at the beginning of the period Shares issued during the period: - Dividend reinvestment scheme - Shares issued for cash (net of transaction costs) - Employee Tax Exempt Share Acquisition Plan - Employee share based payments - Exercise of Performance Options 30 June 2012 30 June 2011 No. of shares $’000 No. of shares $’000 107,405,725 311,383 90,510,461 252,080 468,704 27,853,171 513,511 - 1,918,250 2,694 134,794 2,968 2,692 6,416 399,663 16,106,665 388,936 - - 2,033 52,654 2,351 2,265 - Balance at the end of the year 138,159,361 460,947 107,405,725 311,383 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. Page 53 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 22. 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. Performance Options and Performance 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 Board) with the opportunity to acquire shares in the Company, or rights to acquire shares in the Company. Movements in Performance Options throughout the year were as follows: Grant Date Vesting Date Expiry Date 5 December 2008 2 December 2009 29 November 2011 5 December 2011 2 December 2012 2 December 2013 25 November 2010 25 November 2013 25 November 2014 1 November 2011 1 November 2014 1 November 2015 Weighted average exercise price Weighted average remaining contract life Exercise Price $ Fair Value at Grant Date $ Number of Performance Options at Beginning of Year 3.35 0.41 2,001,000 4.43 0.77 2,038,700 4.84 0.77 3,274,500 Performance Options Granted Performance Options Lapsed Performance Options Exercised Number of Performance Options as at 30 June 2012 - - - 82,750 1,918,250 - - - - - - - 2,038,700 3,274,500 3,831,000 4.92 951 days 5.26 0.81 - 3,831,000 4.32 5.26 3.35 3.35 Total expense recognised $1,410,871 (2011: $1,681,706) The Performance Options outstanding at 30 June 2012 have an exercise price in the range of $4.43 to $5.26. These Performance Options do not entitle the holder to participate in any share issue of the Company. The Performance Options issued prior to FY2010 are subject to a performance hurdle and will not vest unless there has been at least a 5% compounded improvement per year in the earnings per share of the Company over the vesting periods. The Performance Options issued during and since 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 value of Performance Options granted during the year have 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 Performance Options granted during the year ended 30 June 2012 include share price at grant date of $5.29 (2011: $4.86), expected price volatility of the Company’s shares of 31% (2011: 30%), expected dividend yield of 6.30% (2011: 7.00%) and risk free interest rate of 3.19% (2011: 4.90%). Page 54 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 22. ISSUED CAPITAL OF CARDNO LIMITED CONTINUED Movements in Performance Rights throughout the year were as follows: Grant Date Vesting Date Expiry Date Performance Hurdle Fair Value at Grant Date $ Number of Performance Rights at Beginning of Year Performance Rights Granted Performance Rights Lapsed Performance Rights Vested Not Exercised Number of Performance Rights as at 30 June 2012 22 October 2009 22 October 2012 22 October 2013 2 December 2009 2 December 2012 2 December 2013 21 October 2010 21 October 2013 21 October 2014 25 November 2010 25 November 2013 25 November 2014 EPS Growth 3.96 TSR 3.19 EPS Growth 3.20 TSR 2.30 EPS Growth 3.78 TSR 2.71 EPS Growth 3.94 TSR 2.96 20 October 20 October 20 October EPS Growth 4.21 2011 2014 2015 1 November 2011 1 November 2014 1 November 2015 TSR 2.81 EPS Growth 4.38 TSR 2.97 Total expense recognised $1,280,672 (2011: $609,182) 67,500 67,500 112,000 112,000 76,250 76,250 188,750 188,750 - - - - - - - - - - - - 72,500 72,500 241,250 241,250 - - - - - - - - - - - - - - - - - - - - - - - - 67,500 67,500 112,000 112,000 76,250 76,250 188,750 188,750 72,500 72,500 241,250 241,250 The fair values of Performance Rights granted during the year with a total shareholder return (TSR) 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 Performance Rights with the EPS growth hurdle was calculated using a Black-Scholes model taking into account risk free interest rates and the dividend yield. The model inputs for the fair value of Performance Rights granted during the year ended 30 June 2012 include share price of $5.09 for Performance Rights granted on 20 October 2011 (FY11: $4.67, 21 October 2010) and $5.29 for Performance Rights granted on 1 November 2011 (FY11: $4.86, 25 November 2010), expected price volatility of 32% and 31% respectively (FY11: 32% and 30%), expected dividend yield of 6.3% (FY11: 7.00%) and risk free interest rate of 3.84% and 3.19% (FY11: 4.90%). The Performance Rights are subject to performance hurdles measured over three financial years. 50% of the Performance Rights may vest, on a sliding scale, dependent on relative total shareholder return performance and 50% of the Performance Rights may vest, on a sliding scale, dependent on earnings per share growth 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 Performance Rights to Vest (Tranche 1 50%) EPS Growth Over 3 Years % of Performance Rights to Vest (Tranche 2 50%) 0% 50% Pro rata 100% <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% Page 55 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 22. ISSUED CAPITAL OF CARDNO LIMITED CONTINUED 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. 23. RESERVES Foreign Currency Translation Reserve 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. 24. NOTES TO THE CASH FLOW STATEMENTS (a) Reconciliation of Net Cash from Operating Activities to Net profit for the year Net profit for the year Adjust for non-cash items Depreciation and amortisation 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 Page 56 of 86 2012 $’000 2011 $’000 74,168 58,802 16,111 364 4,702 5,660 11,354 2 (12,648) 4,630 (14,419) (4,122) (11,553) 1,669 (430) 696 (2,511) (5,379) 6,397 4,155 (1,850) (680) (350) 72,629 (7,574) (604) 227 (3,822) (1,166) 2,002 (1,209) 16,711 2,813 1,402 3,174 (42) (524) 73,528 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 24. NOTES TO THE CASH FLOW STATEMENTS CONTINUED (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 $2,666,780 (2011: $1,992,336) by means of finance leases. These acquisitions are not reflected in the cash flow statement. (d) Acquisition of entities Details of the acquisitions are as follows: Purchase consideration Cash consideration paid Vendor liability Consideration 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 paid Less cash acquired 2012 $’000 2011 $’000 107,856 84,047 156,231 15,218 171,449 7,269 46,754 2,163 5,462 6,623 13,506 (29,881) (703) (11,944) 39,249 132,197 171,446 21,940 55,304 77,244 11,437 9,598 1,291 4,109 - 1,037 (4,230) (222) (3,520) 19,500 57,744 77,244 156,231 (7,271) 148,960 21,940 (11,437) 10,503 * As disclosed in note 33, the acquisition of ATC Inc was completed on 29 February 2012. Accordingly, the accounting for this acquisition has been completed on a provisional basis. Further analysis will be performed to determine and true up the fair value of identifiable assets acquired and liabilities assumed as part of the acquisition. Page 57 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 25. CAPITAL AND LEASING COMMITMENTS (a) 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 16) Non-current (note 19) (b) 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 Cardno 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. Cardno 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. 26. EMPLOYEE BENEFITS The aggregate employee benefit liability is comprised of: Accrued wages, salaries and on-costs (included in payables) Provisions (current) (note 17) Provisions (non-current) (note 20) Number of employees Number of employees at 30 June Defined contribution superannuation expense Page 58 of 86 2012 $’000 2011 $’000 2,537 5,003 - 7,540 (1,415) 6,125 1,970 4,155 - 6,125 1,970 4,155 6,125 33,352 73,420 16,804 123,576 2,351 3,749 - 6,100 (1,122) 4,978 1,848 3,130 - 4,978 1,848 3,130 4,978 23,720 47,740 23,557 95,017 20,456 25,904 9,146 55,506 No. 7,208 16,025 17,199 8,023 41,247 No. 4,342 $ $ 15,760,497 11,994,190 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 27. 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 Cardno, or which is likely to have a material effect on the financial performance of Cardno. Cardno had contingent liabilities at 30 June 2012 in respect of: Bank guarantees 2012 $’000 2011 $’000 12,381 9,391 Cardno has bank guarantees with financial institutions. A multiple guarantee facility is available to Cardno totalling AUD$19 million and USD$5 million (2011: AUD$19 million). These facilities are secured by an unlimited interlocking guarantee and indemnity. 28. SUBSEQUENT EVENTS On 2 July 2012, Cardno acquired 100% of Marshall Miller & Associates, Inc and EM-Assist Inc for up to US$31.0 million and US$14.3 million respectively. Each of the acquisitions has a percentage of the purchase price subject to the attainment of performance targets. Marshall Miller & Associates, Inc is a 180-person mining, energy and environmental consulting firm headquartered in Virginia, USA while EM-Assist Inc is a 150-person environmental services and compliance management firm headquartered in California, USA. The acquisitions were funded by a mix of cash (from available cash reserves and debt facilities) and shares issued. On 13 August 2012, the Directors of Cardno Limited declared a final dividend of 18 cents per share (70% franked) for the 2012 financial year. The dividend will be paid on 12 October 2012 to shareholders registered on 14 September 2012 and will total $24,931,153. The dividend has not been provided for in the 30 June 2012 financial statements. 2012 $ 2011 $ 29. EARNINGS PER SHARE Basic earnings per share The calculation of basic earnings per share at 30 June 2012 was based on the profit attributable to ordinary shareholders of $74,168,212 (2011: $58,802,020) and a weighted average number of ordinary shares outstanding during the financial year ended 30 June 2012 of 120,147,400 (2011: 104,463,652), calculated as follows: Profit attributable to ordinary shareholders 74,168,212 58,802,020 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 No. 107,405,725 12,546,653 195.022 No. 90,510,461 13,824,398 128,793 Weighted average number of ordinary shares at 30 June 120,147,400 104,463,652 Performance Options and Performance 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. Page 59 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 29. EARNINGS PER SHARE CONTINUED Profit attributable to ordinary shareholders (diluted) Profit attributable to ordinary shareholders 2012 $ 2011 $ 74,168,212 58,802,020 Profit attributable to ordinary shareholders (diluted) 74,168,212 58,802,020 Weighted average number of ordinary shares (diluted) Weighted average number of ordinary shares at 30 June Effect of Performance Options and Performance Rights on issue No. No. 120,147,400 104,463,652 1,771,232 3,854,796 Weighted average number of ordinary shares (diluted) at 30 June 124,002,196 106,234,884 9,144,200 Performance Options issued during the 2010 to 2012 financial years and still on issue as at 30 June 2012 have been included in the calculation of diluted earnings per share because they are dilutive for the year ended 30 June 2012. 30. AUDITOR’S REMUNERATION Audit services Auditors of the Company KPMG Australia: - Audit and review of financial reports Other regulatory requirements - Overseas KPMG firms: - Audit and review of financial reports Other services Auditors of the Company KPMG Australia: - Other assurance services Overseas KPMG firms: - Other services 2012 $ 2011 $ 404,000 4,500 305,500 - 451,105 859,605 350,063 655,563 21,000 9,700 30,700 - - - 31. KEY MANAGEMENT PERSONNEL DISCLOSURES Key management personnel compensation included in employee benefits are as follows: Short-term employee benefits Long-term benefits Post-employment benefits Termination benefits Equity compensation benefits 2012 $’000 2011 $’000 6,055 - 351 - 989 7,395 4,996 592 423 - 366 6,377 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 60 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 31. KEY MANAGEMENT PERSONNEL DISCLOSURES CONTINUED Performance Options and Performance Rights over equity instruments granted as compensation The movement during the reporting period in the number of Performance Options over ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: 2012 PERFORMANCE OPTIONS Held at 1 July 2011 Granted as compensation Lapsed Vested & Exercised Held at 30 June 2012 Vested and exercisable at 30 June 2012 Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Senior Executives Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson - - - 60,000 - 70,000 60,000 - - - - - - - - - - - - - - - - - - - - - - - (60,000) - (70,000) (60,000) - - - - - - - - - - - - - - - - - - - - No Performance Options held by key management personnel had vested and were exercisable as at 30 June 2012. 2011 PERFORMANCE OPTIONS Held at 1 July 2010 Granted as compensation Lapsed Vested & expired (not exercised) Held at 30 June 2011 Vested and exercisable at 30 June 2011 Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Graham Tamblyn* Senior Executives Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson 150,000 70,000 50,000 40,000 105,000 - 125,000 105,000 - - *Retired from board of directors 21 October 2010 - - - - - - - - - - - - - - - - - - - - (150,000) (70,000) (50,000) (40,000) (45,000) - (55,000) (45,000) - - - - - - 60,000 - 70,000 60,000 - - - - - - - - - - - - The movement during the reporting period in the number of Performance Rights over ordinary shares in Cardno Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: 2012 PERFORMANCE RIGHTS Held at 1 July 2011 Granted as compensation Vested Held at 30 June 2012 Vested and exercisable at 30 June 2012 Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Senior Executives Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson 130,000 65,000 52,500 65,000 - 65,000 65,000 33,000 25,000 80,000 35,000 30,000 40,000 35,000 40,000 50,000 30,000 30,000 - - - - - - - - - 210,000 100,000 82,500 105,000 35,000 105,000 115,000 63,000 55,000 - - - - - - - - - Page 61 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 31. KEY MANAGEMENT PERSONNEL DISCLOSURES CONTINUED 2011 PERFORMANCE RIGHTS Held at 1 July 2010 Granted as compensation Vested Held at 30 June 2011 Vested and exercisable at 30 June 2011 Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Graham Tamblyn* Senior Executives Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson 60,000 30,000 25,000 20,000 30,000 - 30,000 30,000 8,000 - 70,000 35,000 27,500 20,000 35,000 - 35,000 35,000 25,000 25,000 *Retired from board of directors 21 October 2010 - - - - - - - - - - 130,000 65,000 52,500 40,000 65,000 - 65,000 65,000 33,000 25,000 - - - - - - - - - - The fair value of Performance Options and Performance Rights are provided in the Remuneration Report section of the Directors’ Report and in note 22. 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 director and key management person, including their related parties, is as follows: Held at 1 July 2011 Purchases Received as Compensation Sales Held at 30 June 2012 - - - - - - - - - 173 86 173 173 173 173 - - - - - - - - (500,000) (170,000) - - - - - 5,084 979 - 268,839 3,500 64,816 2,520,261 31,237 1,600,001 749,198 86 971,458 251,459 6,225 11,437 2012 Non–Executive Directors Anthony Barnes Peter Cosgrove Tonianne Dwyer* Ian Johnston John Marlay** John Massey Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson 4,307 - - 241,955 - 58,334 2,450,261 26,466 2,050,001 777 979 - 26,884 3,500 6,482 70,000 4,771 50,000 Senior Executives Roger Collins-Woolcock Jean-Francois Floury Paul Gardiner Michael Renshaw Kylie Sprott Ross Thompson * Tonianne Dwyer was appointed as a director on 25 June 2012 ** John Marlay was appointed as a director on 1 November 2011 704,103 - 850,939 191,286 5,165 430 214,922 - 120,346 60,000 887 10,834 Page 62 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 31. KEY MANAGEMENT PERSONNEL DISCLOSURES CONTINUED Held at 1 July 2010 Purchases Received as Compensation Sales Held at 30 June 2011 2011 Non–Executive Directors Anthony Barnes Peter Cosgrove Ian Johnston John Massey Executive Directors Andrew Buckley Jeffrey Forbes Trevor Johnson Graham Tamblyn* 3,466 - 207,390 50,000 2,359,037 21,305 1,967,399 1,216,851 Senior Executives 653,897 Roger Collins-Woolcock 800,386 Paul Gardiner 163,817 Michael Renshaw 3,580 Kylie Sprott Ross Thompson 348 *Retired from board of directors 21 October 2010 841 - 34,565 8,334 91,224 5,161 82,602 31,360 50,041 50,388 27,304 1,420 82 - - - - - - - - 165 165 165 165 - - - - - - - - (238,695) - - - - - 4,307 - 241,955 58,334 2,450,261 26,466 2,050,001 1,009,516 704,103 850,939 191,286 5,165 430 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. None of these entities transacted with the Company or its subsidiaries in the reporting period. 32. FINANCIAL RISK MANAGEMENT The main risks arising from Cardno’s financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. Cardno 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 Cardno which includes the minimisation of risk. The policies for managing each of Cardno’s risks are summarised below and remain unchanged from the prior year. Cardno 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 2012 $’000 2011 $’000 107,856 176,041 783 284,680 84,047 118,740 669 203,456 130,632 198,842 329,474 153,584 106,394 259,978 Page 63 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 32. FINANCIAL RISK MANAGEMENT CONTINUED Credit risk Credit risk is the risk of financial loss to Cardno if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Cardno’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. Cardno 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 a rating approved by the Audit, Risk & Compliance Committee. There are no material concentrations of credit risk. 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 The ageing of Cardno’s trade receivables at the reporting date was: 2012 $’000 62,830 87,853 13,020 5,211 168,914 2011 $’000 54,524 44,680 8,240 5,595 113,039 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 2012 2011 Gross $’000 Impairment $’000 Gross $’000 Impairment $’000 96,743 41,904 13,973 28,527 181,147 - - - 12,233 12,233 58,428 31,056 7,895 22,036 119,415 - - - 6,376 6,376 Cardno establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined on historical data of payment statistics for similar financial assets. Based on historic default rates, Cardno believes that no impairment allowance is necessary in respect of receivables less than 60 days. Page 64 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 32. FINANCIAL RISK MANAGEMENT CONTINUED The movement in the provision for impairment in respect of trade receivables of Cardno during the year was as follows: Balance at 1 July Impairment loss recognised Receivables written off Increase through entities acquired Effect of foreign exchange Balance at 30 June Liquidity risk 2012 $’000 2011 $’000 6,376 3,757 (2,551) 4,427 224 12,233 8,986 3,713 (6,622) 1,212 (913) 6,376 Liquidity risk is the risk that Cardno 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, Cardno aims to maintain flexibility in funding by keeping sufficient committed credit lines available to meet Cardno’s requirements. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: 30 June 2012 Non-derivative financial liabilities Trade and other payables Finance leases & hire purchase Bank loans* Carrying amount $’000 Contractual cash flows $’000 Less than 1 year $’000 1 – 5 years $’000 Over 5 years $’000 130,632 6,125 192,717 130,632 7,540 193,084 130,632 2,537 470 - 5,003 192,614 329,474 331,256 133,629 197,617 * Bank loans are term facilities maturing on various dates between December 2014 and December 2016 30 June 2011 Non-derivative financial liabilities Trade and other payables Finance leases & hire purchase Bank loans Market risk (a) Foreign exchange risk Carrying amount $’000 Contractual cash flows $’000 Less than 1 year $’000 1 – 5 years $’000 Over 5 years $’000 153,584 4,978 101,416 153,584 6,100 101,635 153,584 2,351 238 - 3,749 101,397 259,978 261,319 156,173 105,146 - - - - - - - - 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. Cardno operates internationally and is exposed to foreign exchange risk arising from the currency exposure to the Australian dollar. Cardno does not engage in any transactions which are of a speculative nature. Page 65 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 32. FINANCIAL RISK MANAGEMENT CONTINUED Market risk continued Cardno borrows funds in foreign currencies to hedge its net investments in foreign operations. Cardno has loans totalling $184.2 million (USD) and $9.8 million (2011: $11.0 million) denominated in pounds sterling (GBP) which have been designated as hedges of Cardno’s net investments in subsidiaries with functional currencies in those currencies. (2011: $91.3 million) denominated in US dollars As at 30 June 2012, a 10% strengthening of the Australian dollar against the USD and GBP would have increased equity by $16.7 million (2011: $8.3 million) and $0.9 million (2011: $1.0 million) respectively. A 10% weakening of the Australian dollar against the USD and GBP would have decreased equity by $20.5 million (2011: $10.1 million) and $1.1 million (2011: $1.2 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 Cardno 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 Cardno. Cardno does not engage in any transactions which are of a speculative nature. At the reporting date the interest rate profile of Cardno’s interest-bearing financial instruments was: Variable rate instruments Cash assets Bank loans Fixed rate instruments Finance leases & hire purchase Bank loans Group sensitivity 30 June 2012 30 June 2011 Effective Interest Rate 1.72% 2.20% 7.61% 2.77% Balance $’000 107,856 (192,614) (84,758) Effective Interest Rate 2.43% 2.48% (6,125) (103) (6,228) 7.89% 8.00% Balance $’000 84,047 (101,408) (17,361) (4,978) (8) (4,986) At 30 June 2012, if interest rates had changed by -/+ 50 basis points from the year-end rates with all other variables held constant, profit after tax for the year would have been $297,000 higher/lower (2011: $64,000 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 Cardno’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, Cardno may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Page 66 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 32. FINANCIAL RISK MANAGEMENT CONTINUED Market risk continued The Board of Directors monitors the return on capital, which Cardno defines as net operating income divided by total shareholders’ equity. The Board of Directors also monitors the level of dividends to ordinary shareholders. 33. BUSINESS COMBINATIONS Year ended 30 June 2012 (a) ATC Associates Inc In February 2012, Cardno acquired ATC Associates Inc, a major 1,600 person consulting services firm providing environmental, building sciences, geotechnical and construction material testing and other consultancy services headquartered in Lafayette, Louisiana, USA. The effective date of acquisition was 1 March 2012. For the period 1 March 2012 - 30 June 2012, the acquired business contributed revenues of $65,645,626 and net profit after tax of $2,342,895. If the acquisition had occurred on 1 July 2011 revenue and net profit after tax for Cardno would have been $1,094,806,210 and $77,205,611 respectively. Details of acquisition Purchase Consideration Cash Vendor liability Total purchase consideration Fair value of net identifiable assets acquired* Goodwill $’000 90,864 4,646 95,510 22,366 73,144 The acquisition of ATC was completed on 29 February 2012. Accordingly, the accounting for this acquisition has been completed on a provisional basis. Further analysis will be performed to determine and true up the fair value of identifiable assets acquired and liabilities assumed as part of the acquisition. At the time of purchase the vendors of ATC subscribed for shares in Cardno Limited to the value of $572,992. The fair value of the ordinary shares issued was based on the 10 day volume weighted average price (VWAP). The fair value price was $5.68 for the purchase of shares by vendors of ATC issued 29 February 2012. The purchase consideration for ATC includes a deferred settlement of USD$5,000,000 which is payable 18 months after completion. The goodwill recognised is attributable to the skills and technical talent of the employees of ATC and the synergies expected to be achieved from integrating the business into Cardno's existing operations. The goodwill is not expected to be deductible for tax purposes. The assets and liabilities arising from the acquisition are as follows: Cash Receivables Property, plant and equipment Inventories Deferred tax assets Intangible assets Creditors & borrowings Deferred tax liabilities Provisions Net identifiable assets acquired Fair Value $’000 106 31,402 3,133 13,087 994 2,078 (18,660) (690) (9,084) 22,366 Page 67 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 33. BUSINESS COMBINATIONS CONTINUED Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration paid Cash balance acquired Outflow of cash (b) TEC, Inc 90,864 106 90,758 In October 2011 Cardno acquired TEC, Inc a 330-person consulting firm with specialist expertise in environmental management, asset management and marine infrastructure management especially related to port infrastructure and defence facilities. Headquartered in Charlottesville, Virginia, USA, TEC has 15 mainland U.S. offices and 5 off-shore offices including Hawaii, Guam, Germany, Belgium and Italy. The effective date of the acquisition was 1 October 2011, and the acquired business contributed revenues of $45,850,310 and net profit after tax of $2,806,043 to Cardno for the year. If the acquisition had occurred on 1 July 2011 revenue and net profit after tax for Cardno would have been $978,311,684 and $74,988,073 respectively. Details of acquisition Purchase Consideration Cash Vendor liability and contingent consideration Total purchase consideration Fair value of net identifiable assets acquired Goodwill $’000 45,716 9,199 54,915 13,300 41,615 At the time of purchase the vendors of TEC subscribed for shares in Cardno Limited to the value of $6,425,389. The fair value of the ordinary shares issued was based on the 10 day volume weighted average price (VWAP). The fair value price was $4.83 for the purchase of shares by vendors of TEC issued 13 February 2012. The purchase consideration for TEC includes deferred settlement of US$563,636 which is payable 24 months after completion. Cardno Limited has agreed to pay the selling shareholders of TEC additional consideration of USD$8,330,000 if the acquiree’s normalised EBITDA over the period 2 October 2011 to 28 September 2012 is USD$7,200,000 or more. This amount has been included in the purchase consideration based on estimates of the acquiree’s financial performance over the earn-out period. Where the normalised EBITDA is between USD$6,000,000 and USD$7,200,000 the payment will be pro-rated. The goodwill recognised is attributable to the skills and technical talent of the employees of TEC and the synergies expected to be achieved from integrating the business into Cardno’s existing operations. The goodwill is expected to be deductible for tax purposes. The assets and liabilities arising from the acquisition are as follows: Cash Receivables Property, plant and equipment Deferred tax assets Intangible assets Creditors & borrowings Provisions Net identifiable assets acquired Fair Value $’000 4,185 11,170 649 1,164 4,544 (7,811) (601) 13,300 Page 68 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 33. BUSINESS COMBINATIONS CONTINUED Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration paid Cash balance acquired Outflow of cash 45,716 4,185 41,531 (c) Lane Piper Pty Ltd, Geotech Solutions Pty Ltd and Humphrey Reynolds Perkins Group During the year ended 30 June 2012 Cardno acquired Lane Piper Pty Ltd with an effective date of 1 September 2011, Geotech Solutions Pty Ltd with an effective date of 1 October 2011, and Humphrey Reynolds Perkins (HRP) Group with an effective date 1 November 2011. Lane Piper is an environmental and geotechnical engineering firm with around 40 staff and is based in Melbourne. Geotech Solutions is a geotechnical engineering, and construction material testing firm based in Newcastle with around 22 staff. HRP is a town planning consultancy, environmental planning and landscape architecture group based in Brisbane and has around 62 staff. The acquired business contributed revenues of $16,722,466 and net profit after tax of $2,370,625 to Cardno for the year. If the acquisitions had occurred on 1 July 2011 revenue and net profit after tax for Cardno would have been $972,010,107 and $74,735,027 respectively. Details of acquisitions Purchase Consideration Cash Vendor liability and contingent consideration Total purchase consideration Fair value of net identifiable assets acquired Goodwill $’000 19,651 1,373 21,024 3,586 17,438 At the time of purchase the vendors of Lane Piper subscribed for shares in Cardno Limited to the value of $1,074,304, the vendors of Geotech Solutions subscribed for shares in Cardno Limited to the value of $281,698 and the vendors of HRP subscribed for shares in Cardno Limited to the value of $3,312,499. The fair value of the ordinary shares issued was based on the 10 day volume weighted average price (VWAP). The fair value price was $5.15 for the purchase of shares by vendors of Lane Piper issued 19 September 2011, $4.69 for the purchase of shares by vendors of Geotech Solutions issued 21 October 2011 and $5.34 for the purchase of shares by vendors of HRP issued 25 November 2011. Cardno Limited has agreed to pay the selling shareholders of Lane Piper additional consideration of $1,000,000 if the acquiree’s normalised EBIT over the period 1 September 2011 to 31 August 2012 is $1,100,000 or more. This amount has been included in the purchase consideration based on estimates of the acquiree’s financial performance over the earn-out period. Where the normalised EBIT is between $850,000 and $1,100,000 the payment will be pro-rated. Cardno Limited has agreed to pay the selling shareholders of Geotech Solutions additional consideration of $373,215 if the acquiree’s normalised EBIT over the period 1 October 2011 to 30 September 2012 is $500,000 or more. This amount has been included in the purchase consideration based on estimates of the acquiree’s financial performance over the earn-out period. Where the normalised EBIT is between $375,596 and $500,000 the payment will be pro-rated. The goodwill recognised is attributable to the skills and technical talent of the employees of Lane Piper, Geotech Solutions and HRP and the synergies expected to be achieved from integrating the business into Cardno’s existing operations. The goodwill will not be deductible for tax purposes. Page 69 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 33. BUSINESS COMBINATIONS CONTINUED The assets and liabilities arising from the acquisitions are as follows: Cash Receivables Property, plant and equipment Inventories Creditors & borrowings Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration paid Cash balance acquired Outflow of cash Year ended 30 June 2011 (a) JF New & Associates Fair Value $’000 2,980 3,657 1,680 320 (3,944) (1,107) 3,586 19,651 2,980 16,671 In December 2010, Cardno acquired JF New & Associates (JFNEW), an environmental consulting firm specialising in natural resources management, environmental permitting, habitat restoration, mitigation banking, native plant materials and cultural resources consulting. The effective date was 31 December 2010. For the period 1 January 2011 - 30 June 2011, the acquired business contributed revenues of $7,919,751 and net profit after tax of $596,691. If the acquisition had occurred on 1 July 2010 revenue and NPAT for Cardno would have been $842,869,782 and $59,874,331 respectively. Details of acquisition Purchase Consideration Cash Vendor liability and contingent consideration Total purchase consideration Fair value of net identifiable assets acquired Goodwill $’000 9,655 2,528 12,183 4,708 7,475 At the time of purchase the vendors of JFNEW subscribed for shares in Cardno Ltd to the value of $2,409,835. The fair value of the ordinary shares issued was based on the 10 day VWAP of Cardno Ltd shares. The fair value price was $5.43 for the purchase of shares by vendors of JF New issued 7 January 2011. Cardno Limited agreed to pay the selling shareholders of JFNEW, additional consideration of USD$2,000,000 if the acquiree’s normalised EBITDA over the period 1 January 2011 to 31 December 2012 was USD$2,400,000. This has now been achieved and was paid during the year ended 30 June 2012. The hold back consideration was due and payable 18 months after completion. This amount was paid on 2 July 2012 in accordance with the Share Sale Agreement. The goodwill is attributable to the skills and technical talent of the employees of JFNEW and the synergies expected to be achieved from integrating the Company into Cardno’s existing operations. Page 70 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 33. BUSINESS COMBINATIONS CONTINUED The assets and liabilities arising from the acquisition are as follows: Cash Receivables Property, plant and equipment Inventories Creditors & borrowings Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration paid Cash balance acquired Outflow of cash (b) Roadtest Services Pty Ltd Fair Value $’000 606 1,997 2,467 339 (568) (133) 4,708 9,655 606 9,049 In June 2011, Cardno acquired Roadtest Services Pty Ltd, an Australian based construction materials testing and geotechnical engineering firm with around 60 staff based in Central Queensland. The effective date of acquisition was 1 April 2011. For the period 1 April 2011 - 30 June 2011, the acquired business contributed revenues of $2,428,405 and net profit after tax of $975,569. If the acquisition had occurred on 1 July 2010 revenue and NPAT for Cardno would have been $839,067,516 and $61,106,731 respectively. Details of acquisition Purchase Consideration Cash Vendor liability and contingent consideration Total purchase consideration Fair value of net identifiable assets acquired Goodwill $’000 12,285 - 12,285 965 11,320 At the time of purchase the vendors of Roadtest Services Pty Ltd subscribed for shares in Cardno Ltd to the value of $3,071,322. The fair value of the ordinary shares issued was based on the 5 day VWAP of Cardno Ltd shares in the 5 days prior to the date of issuance of the shares. The fair value price was $5.66 for the purchase of shares by vendors of Roadtest issued 15 June 2011. The goodwill is attributable to the skills and technical talent of the employees of Roadtest Services and the synergies expected to be achieved from integrating the company into Cardno’s existing operations. Page 71 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 33. BUSINESS COMBINATIONS CONTINUED The assets and liabilities arising from the acquisition are as follows: Cash Receivables Property, plant and equipment Creditors & borrowings Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration paid Cash balance acquired Outflow of cash Fair Value $’000 631 478 502 (139) (507) 965 12,285 631 11,654 During the current year, the accounting for this acquisition was finalised and as such amounts that had previously been determined provisionally have been revised and reflected in the tables above. (c) BEC Engineering Pty Ltd In June 2011 Cardno acquired BEC Engineering Pty Ltd, an Australian based electrical engineering services firm with around 100 staff. The effective date of acquisition was 1 June 2011. For the period 1 June to 30 June 2011, the acquired business contributed revenues of $3,783,473 and net profit after tax of $599,795. If the acquisition had occurred on 1 July 2010 revenue and NPAT for Cardno would have been $863,137,384 and $63,959,562 respectively. Details of acquisition Purchase Consideration Cash Vendor liability and contingent consideration Total purchase consideration Fair value of net identifiable assets acquired Goodwill $’000 51,310 1,000 52,310 13,159 39,151 Under the purchase agreement, the vendors of BEC subscribed for shares in Cardno Ltd to the value of $11,250,015. The fair value of the ordinary shares issued was based on the 5 day VWAP of Cardno Ltd shares in the 5 days prior to the date of issuance of the shares. The fair value price was $5.52 for the purchase of shares by vendors of BEC issued 6 July 2011. Cardno Limited has agreed to pay the selling shareholders of BEC Group additional consideration of $1,000,000 if the acquiree’s normalised EBIT over the period 1 July 2011 to 30 June 2012 is $9,000,000 or more. As at 30 June 2012, the earn-out had been achieved but not paid. The goodwill is attributable to the skills and technical talent of the employees of the BEC Group and the synergies expected to be achieved from integrating the company into Cardno’s existing operations. Page 72 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 33. BUSINESS COMBINATIONS CONTINUED The assets and liabilities arising from the acquisition are as follows: Cash Receivables Deferred tax assets Property, plant and equipment Inventories Intangible assets Creditors and borrowings Deferred tax liabilities Provisions Net identifiable assets acquired Outflow of cash to acquire subsidiaries, net of cash acquired Cash consideration paid* Cash balance acquired Outflow of cash Fair Value $’000 8,853 6,532 1,290 1,140 699 1,297 (3,717) (610) (2,325) 13,159 51,310 8,853 42,457 The cash component of the purchase consideration was paid on 6 July 2011. As at 30 June 2011, the amount payable of $51,310,000 had been recognised as a vendor liability and included in note 15. During the current year, the accounting for this acquisition was finalised and as such amounts that had previously been determined provisionally have been revised and reflected in the tables above. 34. SEGMENT INFORMATION Cardno 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 Cardno’s reportable segments: - - - Professional Services Australia and New Zealand – provides consulting engineering, planning, surveying, landscape architecture, environmental services, electrical engineering 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. Page 73 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 34. SEGMENT INFORMATION CONTINUED 2012 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 $’000 Professional Services Americas & Software $’000 International Development Assistance Total $’000 $’000 321,809 316,879 73,320 712,008 41,497 136,256 72,799 250,552 - (150) (2,461) (2,611) 363,306 2,235 365,541 452,985 861 453,846 143,658 901 144,559 959,949 3,997 963,946 55,920 49,224 5,371 110,515 Segment assets 338,937 475,932 99,734 914,603 Segment liabilities 71,583 72,914 36,347 180,844 Other Acquisitions of non- current assets Depreciation and amortisation of assets 2011 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 27,933 134,222 204 162,359 8,211 7,465 435 16,111 Professional Services Australia & NZ $’000 Professional Services Americas & Software $’000 International Development Assistance Total $’000 $’000 229,607 257,303 84,282 571,192 26,022 184,701 46,844 257,567 - (133) (960) (1,093) 255,629 758 256,387 441,871 447 442,318 130,166 382 130,548 827,666 1,587 829,253 34,021 51,806 4,175 90,002 Segment assets 285,907 272,162 90,876 648,945 Segment liabilities 128,778 19,404 48,059 196,241 Other Acquisitions of non- current assets Depreciation and amortisation of assets 58,852 13,643 542 73,037 6,325 4,512 519 11,356 Page 74 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 34. SEGMENT INFORMATION CONTINUED Reconciliations of reportable segment revenues, profit or loss, assets and liabilities 2006 $’000 2005 $’000 2012 $’000 2011 $’000 Revenues Total revenue for reportable segments Interest revenue 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 Other assets Unallocated assets Consolidated total assets Liabilities Total liabilities for reportable segments Bank loans unallocated Other unallocated liabilities Consolidated total liabilities Geographical information 963,946 1,874 829,253 1,948 965,820 831,201 110,515 1,874 (7,500) 153 105,042 (30,874) 90,002 1,948 (4,501) (3,146) 84,303 (25,501) 74,168 58,802 914,603 31,386 12,760 648,945 - 32,667 958,749 681,612 180,844 194,012 35,008 196,241 102,344 25,831 409,864 324,416 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 2012 2011 Revenues $’000 421,173 491,614 26,129 25,030 - 963,946 Total Non-Current Assets $’000 230,846 301,258 285 18,440 12,514 563,343 Revenues $’000 306,471 480,874 15,334 26,574 - 829,253 Total Non-Current Assets $’000 151,534 214,160 687 21,785 6,130 394,296 Page 75 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 35. PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 30 June 2012 the parent Company of Cardno was Cardno Limited. 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 Company 2 5 2012 $’000 2011 $’000 88,244 - 88,244 42,696 - 42,696 397,454 621,852 86,013 86,013 291,975 449,661 108,086 108,141 460,948 - 74,891 311,383 - 30,137 535,839 341,520 2,290 2,214 A multiple guarantee facility is available to Cardno totalling $19 million (2011: $19 million). The facility is secured by an unlimited interlocking guarantee and indemnity. The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. 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 36. Page 76 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 36. 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 2011 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 2012 $’000 2011 $’000 395,664 287,971 (168,194) (82,989) (36,868) (31) (6,836) 4,078 104,824 (9,702) 95,122 2,011 97,133 37,625 (2,011) (43,488) (143,792) (50,712) (41,983) (50) (3,883) 725 48,276 (7,184) 41,092 (2,639) 38,453 30,508 2,639 (33,975) 89,259 37,625 89,259 37,625 Page 77 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 36. DEED OF CROSS GUARANTEE CONTINUED Statement of financial position 6 0 2005 $’000 2012 $’000 2011 $’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 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 26,190 534,496 28,804 772 24,422 294,771 18,569 879 590,262 338,641 - 348,738 152 7,549 41,849 881 - 269,304 517 6,571 40,738 370 399,169 317,500 989,431 656,141 197,096 13,061 13,071 9,361 172,485 6,681 10,935 6,776 232,589 196,877 194,012 6,231 8,304 34 102,344 4,497 7,333 31 208,581 114,205 441,170 311,082 548,261 345,059 460,949 (1,947) 89,259 311,384 (3,950) 37,625 548,261 345,059 Page 78 of 86 Notes to the Consolidated Financial Statements Cardno Limited and its Controlled Entities for the year ended 30 June 2012 37. CONTROLLED ENTITIES Cardno’s significant subsidiaries are listed below. Name Country of Incorporation Equity Holding Cardno Holdings Pty Ltd Cardno (Qld) Pty Ltd Cardno Staff Pty Ltd Cardno Staff No. 2 Pty Ltd Cardno Operations Pty Ltd Cardno International Pty Ltd Cardno (WA) Pty Ltd Cardno CCS Pty Ltd Cardno Lawson Treloar Pty Ltd Cardno (NSW/ACT) Pty Ltd Cardno Willing Pty Ltd Cardno Victoria Pty Ltd Cardno Emerging Markets (Australia) Pty Ltd Cardno UK Limited Cardno Emerging Markets (UK) Limited Cardno Emerging Markets (East Africa) Limited Cardno NZ Limited Cardno Holdings New Zealand Limited Cardno USA, Inc. Cardno Emerging Markets (USA), Ltd Emerging Markets Group (EMG) s.a. Cardno WRG, Inc. Cardno TCB Limited Cardno (NT) Pty Ltd Cardno (PNG) Ltd XP Software Pty Ltd XP Software Inc. Micro Drainage Limited Cardno Bowler Pty Ltd TBE Group, Inc TBE Holdings, Inc Cardno ITC Pty Ltd Cardno Australian Underground Services Pty Ltd Environmental Resolutions, Inc ENTRIX Holding Company ENTRIX Inc ENTRIX Americas, SA Cardno JF New, Inc Cardno Roadtest Pty Ltd Cardno BEC Pty Ltd Cardno BEC (Qld) Pty Ltd Cardno (Colombia) S.A.S. Cardno Humphrey Reynolds Perkins Pty Ltd Cardno Humphrey Reynolds Perkins Jewell Pty Ltd Cardno Humphrey Reynolds Perkins Gold Coast Pty Ltd Cardno Humphrey Reynolds Perkins Sunshine Coast Pty Ltd Cardno Chenoweth Environmental Planning & Landscape Architecture Pty Ltd Cardno Lane Piper Pty Ltd Moriedale Holdings Pty Ltd Geotech Solutions Pty Limited TEC, Inc ATC & Associates Inc Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United Kingdom United Kingdom Kenya New Zealand New Zealand United States of America United States of America Belgium United States of America New Zealand Australia Papua New Guinea Australia United States of America United Kingdom Australia United States of America United States of America Australia Australia United States of America United States of America United States of America Ecuador United States of America Australia Australia Australia Colombia Australia Australia Australia Australia Australia Australia Australia Australia United States of America United States of America 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 79 of 86 Directors’ Declaration Cardno Limited and its Controlled Entities for the year ended 30 June 2012 1. In the opinion of the Directors of Cardno Limited (the Company): (a) the consolidated financial statements and notes set out on pages 32 to 79 and the Remuneration Report in section 11 of the Directors’ Report, set out on pages 7 to 21, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of Cardno’s financial position as at 30 June 2012 and of its performance for the financial year ended on that date; and (i) complying with Australian Accounting Standards Interpretations) and the Corporations Regulations 2001; and (including the Australian Accounting (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 Cardno entities identified in Note 37 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 2012. 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 13th day of August 2012. Signed in accordance with a resolution of the Directors. JOHN C MASSEY Chairman Page 80 of 86 ABCD Independent auditor’s report to the members of Cardno Limited Report on the financial report We have audited the accompanying financial report of Cardno Limited (the Company), which comprises the consolidated statement of financial position as at 30 June 2012, and consolidated statement of financial performance, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, notes 1 to 37, comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 1(a), the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Page 81 of 86 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. ABCD Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: a) the financial report of the Group is 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 2012 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1(a). Report on the remuneration report We have audited the Remuneration Report included on pages 7 to 21 of the Directors’ Report for the year ended 30 June 2012. The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the Remuneration Report of Cardno Limited for the year ended 30 June 2012, complies with Section 300A of the Corporations Act 2001. KPMG Robert S Jones Partner Brisbane 13 August 2012 Page 82 of 86 Additional Shareholder Information Distribution of Ordinary Shareholders The number of shareholders, by size of holding, as at 31 August 2012 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 5,918 4,122 1,168 1,164 124 12,496 Number of Shares 2,195,579 10,155,987 8,375,457 28,516,165 89,334,856 138,578,044 As at 31 August 2012 there were 660 shareholders who held less than a marketable parcel of 68 shares. Twenty Largest Ordinary Shareholders The names of the twenty largest holders as at 31 August 2012 were: J P Morgan Nominees Australia Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited BNP Paribas Noms Pty Ltd Andrew Buckley Geoffrey Allen Bailey & Wendy Ann Bailey Pat Beyer Trevor Johnson Citicorp Nominees Pty Limited Equity Trustees Limited Steve M Zigan Malcolm David Pound Paul Gardiner Merrill Lynch (Australia) Nominees Pty Limited Graham Tamblyn Joseph E O’Connell Citicorp Nominees Pty Limited Anne Felicity Phillips R A Young Investments Pty Ltd Total Substantial Shareholders Listed Ordinary Shares Number Held 16,113,737 14,892,036 9,252,561 5,630,298 3,187,102 2,420,261 1,875,508 1,617,179 1,600,174 1,397,745 1,140,000 1,006,015 998,284 971,458 905,975 852,338 791,648 788,967 780,000 770,000 66,991,286 Percentage 11.63% 10.75% 6.68% 4.06% 2.30% 1.75% 1.35% 1.17% 1.15% 1.01% 0.82% 0.73% 0.72% 0.70% 0.65% 0.62% 0.57% 0.57% 0.56% 0.56% 48.35% There are currently no shareholders who have notified the company as being substantial shareholders in accordance with section 671B of the Corporations Act 2001. Voting Rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Page 83 of 86 Additional Shareholder Information Escrowed Shares There are currently 5,086,654 ordinary shares held in escrow. This is approximately 3.02% of the company’s issued share capital. The details are as follows:-            In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of Roadtest completed on 15 June 2011, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 15 December 2012. This agreement affects 542,189 shares, being approximately 0.39% of the company’s issued share capital. In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of BEC Engineering Pty Ltd completed on 6 July 2011, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 6 January 2013. This agreement affects 1,820,495 shares, being approximately 1.31% of the company’s issued share capital. In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of Lane & Piper Pty Ltd completed on 19 September 2011, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 19 March 2013. This agreement affects 208,792 shares, being approximately 0.15% of the company’s issued share capital. In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of Geotech Solutions Pty Ltd completed on 21 October 2011, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 21 April 2013. This agreement affects 60,107 shares, being approximately 0.04% of the company’s issued share capital. In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of Humphreys Reynolds Perkins Group completed on 25 November 2011, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 25 May 2013. This agreement affects 620,338 shares, being approximately 0.45% of the company’s issued share capital. In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of Locom Australia Pty Ltd completed on 19 January 2012, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 19 July 2013. This agreement affects 1,907 shares, being approximately 0.001% of the company’s issued share capital. In accordance with the Stock Purchase Agreement between Cardno Limited and the shareholders of TEC Inc completed on 13 February 2012, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 17 April 2013. This agreement affects 1,330,044 shares, being approximately 0.96% of the company’s issued share capital. In accordance with the Agreement and Plan of Merger between Cardno Limited and the shareholders of ATC Group Holdings Inc completed on 29 February 2012, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 29 August 2013. This agreement affects 100,884 shares, being approximately 0.07% of the company’s issued share capital. In accordance with the Stock Purchase Agreement between Cardno Limited and the shareholders of EM-Assist Inc completed on 4 July 2012, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 3 January 2014. This agreement affects 48,665 shares, being approximately 0.04% of the company’s issued share capital. In accordance with the Stock Purchase Agreement between Cardno Limited and the shareholders of Marshall Miller & Associates Inc completed on 4 July 2012, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 3 January 2014. This agreement affects 281,595 shares, being approximately 0.20% of the company’s issued share capital. In accordance with the Share Sale Agreement between Cardno Limited and the shareholders of Better Technical Options completed on 27 August 2012, ordinary shares issued as part of the purchase price are escrowed for a period of 18 months to 27 February 2014. This agreement affects 71,638 shares, being approximately 0.05% of the company’s issued share capital. Page 84 of 86 Additional Shareholder Information Options As at 31 August 2012 the details of Performance Options on issue are as follows: Number of Option Holders Number of Options on Issue 548 9,144,200 Voting Rights of Options The ordinary shares issued on exercise of the options will rank equally with all other ordinary shares. Rights As at 31 August 2012 the details of Performance Rights on issue are as follows: Number of Rights Holders Number of Rights on Issue 26 1,516,500 Voting Rights of Rights The ordinary shares issued on exercise of the rights will rank equally with all other ordinary shares Page 85 of 86 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 Marlay Managing Director Andrew Buckley Directors Anthony Barnes Peter Cosgrove Tonianne Dwyer Jeffrey Forbes Trevor Johnson Ian Johnston John Massey 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 117 Victoria Street WEST END QLD 4101 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 86 of 86 Registered office Cardno Limited ABN 70 108 112 303 Level 11, North Tower Green Square 515 St Paul’s Terrace Fortitude Valley QLD 4006 Australia Phone + 617 3369 9822 Fax + 617 3369 9722 cardno@cardno.com www.cardno.com 

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