Hill International
Annual Report 2009

Plain-text annual report

Concise Annual Report 2009 Contents Directors’ Report 2009 Overview Five Year Summary Group Profile Electronic Security and Entertainment Home, Hardware and Eco Building and Industrial Executive Management Group Information on Directors Remuneration report – audited Lead Auditor’s Independence Declaration Corporate Governance Statement Concise Financial Report Income Statement Balance Sheet Statement of Recognised Income and Expense Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report to the Members Shareholder Information 2 5 7 9 11 13 15 17 18 27 28 30 32 33 34 36 50 51 52 Hills Industries Limited Concise Annual Report 2009 Principal Registered Office 944-956 South Road Edwardstown SA 5039 Telephone: (08) 8301 3200 Facsimile: (08) 8297 4468 Email: info@hills.com.au ABN 35 007 573 417 Share Registry Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street Adelaide, SA 5000 Telephone (within Australia): 1300 556 161 Telephone (outside Australia): +61 3 9415 4000 Facsimile: (08) 8236 2305 Email: web.queries@computershare.com.au Internet address: www.computershare.com Shareholder enquires/change of address Shareholders wishing to enquire about their shareholdings, dividends or change their address should contact the Company’s share registry. Relationship of the Concise Annual Financial Report to the full Annual Financial Report The Concise Annual Financial Report is an extract from the full Annual Financial Report for the year ended 30 June 2009. The financial statements and specific disclosures included in the Concise Annual Financial Report have been derived from the full Annual Financial Report. The Concise Annual Financial Report cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of Hills Industries Limited and its subsidiaries (the Group) as the full Annual Financial Report. Further information can be obtained from the full Annual Financial Report. A copy of the Group’s 30 June 2009 full Annual Financial Report, including the independent audit report, is available to all shareholders and will be sent to shareholders without charge upon request or can be downloaded from www.hills.com.au. The 30 June 2009 full Annual Financial Report can be requested by telephone: Australia: (08) 8301 3200 Overseas: +61 8 8301 3200 Or via email at info@hills.com.au. The paper used to print this Concise Annual Report is made from wood grown in sustainable forests. Overview The Hills Industries Group achieved a profit after tax (excluding unusual and significant items) attributable to shareholders of $28.052 million (statutory profit of $9.506 million). This was a reduction of 41.6% compared to the previous year and was struck on record revenues of $1.211 billion. Overview 2009 While the growth in revenue to a record level was pleasing, the general slowdown in economic activity around the world, and in Australia and New Zealand in particular, saw the Group record its first reduced operating profit for many years. As a result of the reduced profitability, the Group undertook a number of restructuring initiatives, which resulted in the closure of some operations, a reduction in headcount, some improvements in our supply chain and changes to our product offering. While these initiatives were implemented across the Group, they were most prevalent in the Home, Hardware and Eco division, which produced an extremely poor result. Cash flows from operations were very strong during the period as improvements were made to the management of our working capital. The cash flow from operations was a record for the Group. Our gearing (measured as debt divided by equity) was below our stated target of 45%. Since the balance date, the company has undertaken some important initiatives to strengthen the balance sheet. On August 5 we completed a placement to institutional shareholders of around $40 million. At the same time we announced a Share Purchase Plan, which gave existing shareholders an entitlement to purchase additional shares at the placement price. The institutional raising introduces a number of new shareholders to the company’s register and in the directors’ view brings a better balance to the share register between private and institutional investors. The second initiative was the extending of the term of the majority of our debt facilities to November 2011. With the support of our shareholders and bankers Hills is well placed to capitalise on improving economic conditions and acquisition opportunities that may arise. Group Strategy Our strategy is to develop competitive businesses in three main industry segments, being Electronic Security and Entertainment, Building and Industrial Products and Home, Hardware and Eco Products. We are committed to diversification in order to mitigate the impact of short-term changes to individual markets and economies. We aim to be product innovators and market leaders. Our overall objective is to grow revenue and earnings through a combination of organic growth and acquisitions. We aim to produce superior returns on the funds invested in our businesses. We aim to be good corporate citizens in all aspects of our business dealings. We look to provide a safe working environment for all of our employees in which they can develop to their potential. Trading Conditions The impact of the global financial crisis and the resultant volatility in commodity prices and exchange rates saw generally subdued and difficult trading conditions in Australia and in particular in New Zealand. Steel prices rose quite sharply early in the year and then declined as economic activity decreased over the course of the year. The severe and rapid devaluation of the dollar in the first half of the year under review caused sharp increases in the cost of our imported product, which we were unable to pass on as effectively as we would have liked. As a result, our margins were reduced during the latter part of the year, which contributed to the lower operating profit. Unusual / Significant Items In the period under review we booked a number of non-trading losses as a result of restructuring initiatives referred to above, as well as the mark to market adjustment on our interest rate swaps and foreign exchange contracts. The bulk of these unusual items were non- cash, the largest two being the write off of the goodwill in our Alquip business and the mark to market adjustments. In addition, there were redundancy and closure costs as a result of the restructuring initiatives that we have undertaken. 22 Operating and Financial Review Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 The Directors present their Report together with the Financial Report of Hills Industries Limited (‘the Company’) and of the Group, being the Company and its controlled entities, for the financial year ended 30 June 2009 and the auditor’s report thereon. Vision and Values Hills is a diversified company operating mainly in Australia and New Zealand. We aim to be the market leader in the industries in which we operate, supplying innovative quality products to our customers and to achieve superior financial performance that provides strong shareholder value. To achieve this we value and promote: • A leadership style which encourages autonomy and initiative; • Commercial acumen with a focus on profitability and value; • A never-ending process of continuous improvement; • Being open, ethical and earning the trust of those we deal with; and • A culture of individual development, personal growth and safety. Dividends During the year we announced that our previous policy of paying 100% of our after tax profits to shareholders as dividends would be discontinued. The directors felt that in the environment of declining availability of capital this policy was not in the long-term interests of the company. Over the course of the year shareholders will receive a total 10 cents per share in fully franked dividends in respect of the year ended 30 June 2009. Earnings per share from ordinary operations for the same period were 14.6 cents. Shareholders We value the support of our shareholders in a year that saw some significant reductions in our share price. The continued support of our Dividend Reinvestment and Share Purchase Plans helps to bolster the company’s balance sheet. We also continue our practice of ensuring that employees who meet the relevant criteria participate in our Employee Share Scheme. We believe that widespread share ownership by our employees has many positive benefits for the employees, the company and our shareholders. While the growth in revenue to a record level was pleasing, the general slowdown in economic activity around the world, and in Australia and New Zealand in particular, saw the Group record its first reduced operating profit for many years. Likely Developments There continues to be much public comment and debate about the state of global markets. Economic forecasters continue to have a wide range of views about the timing and speed of an economic recovery in Australia and New Zealand. We expect trading conditions to remain subdued in the first half of the new financial year, however, we are forecasting improved trading conditions in the second half of the financial year. As a result of the cost reductions and restructuring initiatives previously referred to, we believe the company is well placed to improve profits when economic conditions return to more normal levels. The changes that we have made have been wide spread but have not undermined our commitment to customer service. Based on all of the above, we expect a modest improvement in operating profit for the financial year ending 30 June 2010. The Board of Directors: Ian Elliot Graham Lloyd Twartz Peter William Stancliffe Jennifer Helen Hill-Ling Geoffrey Guild Hill Roger Baden Flynn Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 3 Five Year Summary Total revenue Amount in $ millions $1014.0 $931.8 $811.0 Net profit after tax attributable to members (before unusual items) Amount in $ millions Earnings per share (before unusual items) Amount in cents $1184.7 $1210.8 $47.2 $48.0 $43.3 $35.5 27.6c 27.3c 25.9c 23.1c $28.0 14.6c 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 In thousands of AUD 2005 2006 2007 2008 2009 Total revenue Net profit after tax attributable to members Net profit after tax attributable to members (before unusual items) Net profit after tax and before minority interest Depreciation, impairment and amortisation Net borrowing costs (before unusual items) 811,046 35,510 35,510 41,720 20,585 3,308 931,799 43,261 43,261 48,210 17,566 5,880 1,013,999 1,184,737 1,210,802 47,173 46,807 9,506 47,173 52,042 18,988 9,105 48,036 52,360 21,784 14,374 28,052 15,655 23,107 12,531 Shareholders’ equity 292,528 309,952 331,726 408,219 402,535 Operating profit attributable to members —as a % of shareholders’ equity 15.7% 12.1% 14.0% 11.5% 2.4% Net profit after tax and before minority interest —as a % of total revenue 5.3% 5.1% 5.2% 4.4% 1.3% Earnings per share (cents) Earnings per share (before unusual items) (cents) Dividends per share (cents) Employees at year end Shareholders at year end 23.1 23.1 24.0 2,694 20,270 25.9 25.9 26.0 2,956 21,748 27.6 27.6 27.5 2,999 22,837 26.6 27.3 27.5 3,140 23,841 4.9 14.6 10.0 2,608 23,716 Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 5 Group Profile Electronic Security and Entertainment • Electronic security systems • Closed circuit television systems • Home and business automation and control systems • Satellite dishes • Consumer electronic equipment • Communications-related products and services • Domestic and commercial antennas • Professional audio equipment • Communications antennas • Subscription TV installation services • Master antenna television systems • Fibre optic transmission solutions • Fibre to the home / Fibre to the node Home, Hardware and Eco • Outdoor clothes dryers • Laundry trolleys • Ironing boards • Barrier doors • Garden sprayers • Wheelbarrows • Ladders • Rehabilitation and mobility products • Water storage solutions • Plumbing products Building and Industrial • Structural, precision and large steel tubing • Metal roofing, flooring and fencing • Carports and shed systems • Steel door frames • Cable and pipe support systems • Hot-dip galvanising Revenue Amount in $ millions Revenue Amount in $ millions Revenue Amount in $ millions $263.8 $277.2 $206.3 $343.3 $312.3 $227.5 $203.3 $191.3 $164.9 $168.9 $643.0 $663.4 $544.7 $498.2 $438.9 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 EBIT* Amount in $ millions EBIT* Amount in $ millions EBIT* Amount in $ millions $38.1 $13.8 $13.8 $34.0 $31.7 $12.3 $30.9 $9.6 $36.0 25.9c $35.4 $31.8 $31.0 22.6c $26.5 $26.8 $23.5 2005 2006 2007 2008 2009 2005 2006 2007 2008 ($3.1) 2009 2005 2006 2007 2008 2009 * EBIT – Earnings before interest and tax (before unusual / significant items). Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 7 88 Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 Electronic Security and Entertainment The Electronic Security and Entertainment segment comprises Hills Electronic Security, Hills Antenna & TV Systems, Hills Sound, Vision and Lighting, Access Television Services, Step Electronics, UHS and Opticomm. Revenue of $343 million was 9.9% higher than the previous year, while underlying EBIT of $30.9 million (statutory EBIT of $30.6 million) was 19.0% lower than 2008. Access Television Services Access Television Services (ATS) is the exclusive supplier of installation services to AUSTAR Entertainment, the leading provider of subscription TV in rural and regional Australia. The ongoing success of AUSTAR’s marketing campaigns and product offer saw steady volumes of work available to ATS. We continue to meet the KPIs set by AUSTAR. We were pleased during the year to successfully transition to be the supplier of installation services in far north Queensland. Opticomm Opticomm provides infrastructure and services to the Fibre to the Node and Fibre to the Home developments. The Government’s announcement of its proposed structure for the national broadband network was confirmation of the business model adopted by Opticomm. During the year we were pleased to sign a number of further contracts with major developers, which will deliver improved results over the next five to ten years in this rapidly growing market. Ultra High Speed We were delighted to acquire a 51% interest in Ultra High Speed Pty Limited (UHS) late in the year. UHS is best known for its development of market leading products in the electronics and wireless communication markets, particularly in security, telemetry and monitoring. UHS products, when combined with our security division products, provide a compelling solution to our customers. Hills Electronic Security This business unit markets an extensive range of electronic security products ranging from simple domestic alarms to complex integrated surveillance and access control systems. We represent a number of the world’s leading security companies, whose products we mix and match with our own products. The market is characterised by reasonably predictable level of day-to-day business, supplemented by larger project opportunities. The overall level of activity in the project market declined during the second half of the year and our margins were reduced as a result of the Australian dollar devaluation. We have ensured that we have maintained market share and have set about improving our margins in future. We secured the exclusive distribution of Panasonic CCTV products during the year, which complement our own EVO branded product range, which achieved market success during the year. The transition from a distributor of other people’s products to a developer of our own range of products continued when we acquired the rights to the Intellectual Property for our core range of control panels. A number of new product launches are planned, including the recently launched VoiceNav product. Hills Sound, Vision and Lighting Hills Sound, Vision and Lighting (SVL) comprises Audio Telex, Lighthouse Distribution and Crestron Control Solutions in Australia and New Zealand. We are the leading supplier to the professional audio market and through Crestron we distribute a range of advanced control automation systems for integration control of audio, video and data. The results for this business were also affected by subdued project demand, as well as a sharp fall off in demand for the company’s products in our important European and American markets. Late in the year we were pleased to see the launch of a number of new Crestron products, particularly focussing on lighting control and energy management. Our Australian Monitor brand still represents the best value for money products in the market and during the year we invested in the development of a new range of digital products to be released shortly. Hills Antenna & TV Systems This business unit provides a full range of reception and distribution equipment for subscription television, free to air television and the wireless voice and data markets as well as the DGTEC range of consumer electronics. Sales to the subscription TV market continued at steady levels, and this business unit produced excellent results as it entered the consumer electronics market with a range of digital set top boxes and personal video recorders under the DGTEC name. Furthermore, sales of digital antennas were most pleasing as the government’s intention to turn off the analogue free to air signal was announced. Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 9 Home, Hardware and Eco Consumer Products This business unit distributes a range of predominantly metal-based branded hardware products to consumer trade customers and government utilities. Our market leading brands include Hills, Bailey and Oldfields Ladders. The results from this part of the business were extremely poor during the year. As a result of this a complete review and restructure of the business unit was undertaken. A number of product categories were discontinued where it was established that these products could not meet our return on investment benchmarks. The closure of the Alquip business was a consequence of this process. This business unit now has a reduced and focussed product range, improved supply chain and logistics, improved customer service and improved quality and product benchmarks. We believe that this business can return to making a contribution to the Hills results effective immediately. Team Poly The Team Poly business is one of Australia’s largest manufacturers of rainwater tanks. For the first part of the year demand for rainwater tanks was quite low due to increased rainfall in eastern States and reductions in State rebate schemes in most States. Industry profitability was generally affected and several players in the market experienced financial difficulties and insolvency. In response to these market changes Team Poly undertook a restructuring of its cost base and method of operations. Team Poly has returned to profitability after a disappointing performance in the first half of the year, despite the industry remaining characterised by subdued demand and over capacity. The Home, Hardware and Eco segment comprises our branded Consumer Products operations in Australia and New Zealand, the Hills Healthcare rehabilitation and mobility business, LW Gemmell, Hills Solar and Team Poly. During the year revenue decreased by 10.6% to $203.3 million, and the division produced an underlying loss of $3.1 million (statutory loss of $16.0 million). Hills Healthcare This business unit comprises K•Care, Kerry Equipment and Air Comfort Seating Systems. The business unit manufactures a range of mobility, rehabilitation and aged care products for domestic and overseas markets. In the face of increasing competition from imports, sales and profits in this business held up quite well, although margins were difficult to maintain. We were pleased with the sales growth in our nursing bed offer, as well as our Air Comfort Seating Systems range of products. LW Gemmell and Woodroffe LW Gemmell is a specialist distributor of imported plumbing products. Although commercial building activity was lower towards the end of the year, LW Gemmell’s performance was in line with our expectations. After many years of poor performance from our traditional Woodroffe business we reached the view that we could not achieve our benchmark returns and late in the year the closure of this business was announced. LW Gemmell • A division of Hills Industries Limited Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 11 Building and Industrial The Building and Industrial segment comprises Orrcon, Korvest and Fielders. Revenues improved by 3.2% to $663.4 million, however underlying EBIT was $31.8 million (statutory EBIT of $30.9 million), a 10.4% reduction on the previous year. Korvest Korvest is a publicly listed company involved in the manufacture of cable and pipe support systems, guarding and walkway systems and galvanising. Hills holds 46% of the shares in Korvest. The results for this year for Korvest were very pleasing. Orrcon This business unit manufactures and distributes a comprehensive range of steel tube and pipe. Orrcon’s first six months was in line with our expectations, however, as a result of overstocking throughout the Australian steel industry and lower product demand from our plant at Unanderra, the second half performance was quite subdued. The difficulties associated with the Australian steel industry in recent times have been well publicised. The year saw volatile steel prices, characterised by sharply increasing prices in the first half and steadily decreasing prices over the balance of the year. We believe that the inventory reduction programme across the steel industry is now largely complete and so we expect improved results from Orrcon in the coming year. Fielders Fielders manufactures and distributes a range of rollformed metal building products (roof and gutter material, downpipes, steel flooring systems, carports, sheds and purlins) for commercial and domestic building markets throughout Australia. Fielders is a market leader in new and innovative products in a market that is generally not known for innovation. Our Centenary carport and verandah business continues to expand and the Angle Cut roofing system also continues to grow market share. Commercial building activity was quite subdued during the second half and continues to be so. Fielders continues to grow market share however the level of commercial building activity is currently low and is forecast to remain so. We are looking for improvements in our eastern states operations in the coming year. Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 13 13 Executive Management Group Andrew Muir BEc (Adel) MBA (Adel) General Manager Finance Age: 40 Joined the Company in July 2004 as General Manager Business Development responsible for the Mergers and Acquisitions activity for the Group. Andrew was appointed General Manager Finance in May 2008 and Company Secretary in July 2008. Daniel Edgecombe BComm (Adel) MBA (Adel) FCA General Manager Business Development Age: 36 Daniel joined the Group in April 2005 as CFO at Fielders before moving into a national sales operations role within the business. He commenced in his current role in January 2009. Daniel’s role involves strategy development and execution, particularly relating to our portfolio of businesses. Daniel has previous experience in the consumer electronics industry and as an external auditor/accountant. Keith Middleton BA (Flinders), Dip Corporate Management Chief Executive Officer, Fielders Age: 47 Keith joined Fielders Steel Roofing in 2004, appointed Chief Operating Officer in March 2005. Keith has previously held overall responsibility for all sales and manufacturing activities undertaken at Fielders and was appointed Chief Executive Officer in April 2009. Keith has extensive experience at the Senior Executive level within large customer orientated FMCG companies. Leon Andrewartha BEng MBA Age: 54 Appointed Managing Director Orrcon in May 2005. Previously Director, Manufacturing for Electrolux Australia and Executive General Manager Manufacturing for Email Major Appliances. Prior to these roles, Leon worked in the automotive industry for 11 years. Leon Andrewartha has over 35 years of experience working in a range of technical, commercial and engineering roles in product development, manufacturing and distribution industries in Australia. Ric Gros FAICD Group General Manager – Home, Hardware and Eco Age: 51 Joined the Company in June 2007 having previously been the Managing Director of Korvest Ltd for 2 years. A Fellow of the Australian Institute of Company Directors, Ric was born in Chile and educated in Australia, with extensive international commercial background in servicing industrial, mining and distribution related industries. Stephen Cope Group General Manager – Electronic Security and Entertainment Age: 51 Joined the Company in April 2007 as Group General Manager, Electronic Security and Entertainment and is responsible for all of the diverse electronics businesses in the Hills portfolio. Stephen Cope has over 30 years experience in the management of large technology and contracting companies in Australia and overseas and has held various executive management positions. He has extensive experience in technology development and commercialisation strategy. He is a graduate of the University of Melbourne MBS LIB and MDP Programs. Operating and Financial Review (continued) Hills Industries Limited and its Controlled Entities Directors’ Report for the year ended 30 June 2009 15 16 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Directors’ Report Information on Directors Jennifer Helen Hill-Ling LLB (Adel) Chairman, Non-Independent Non-Executive Director Age: 47 Ian Elliot FAICD Independent Non-Executive Director Age: 55 Experience and expertise Appointed Director in August 2003. Ian Elliot has spent 36 years in marketing. His speciality is brand building, with extensive involvement in a number of icon brands. Mr Elliot is a fellow of the AICD and graduate of the Harvard Business School Advanced Management Program. Other current directorships Director of Salmat Limited. Former directorships Former Chairman of Promentum Limited, Zenith Media Pty Ltd, Allied Brands Limited, Artist & Entertainment Group Limited and Cordiant Communications Group and former Chairman and CEO of George Patterson Advertising. Special responsibilities Chairman of the nomination committee. Member of the remuneration committee. Interests in shares and options at the date of this report 4,449 ordinary shares in Hills Industries Limited. Nil options over ordinary shares in Hills Industries Limited. Roger Baden Flynn BEng (Hons) MBA FIE (Aust) FAICD Independent Non-Executive Director (Lead Independent Director) Age: 59 Experience and expertise Appointed Director in November 1999. Roger Flynn has 40 years experience working in a range of technical and commercial roles in manufacturing and distribution industries in Australia and the United States, including 38 years of Board experience in ASX listed companies. Other current directorships Executive Chairman of Coventry Group Limited. Former directorships in last 3 years None. Special responsibilities Member of the audit and compliance committee. Interests in shares and options at the date of this report 31,740 ordinary shares in Hills Industries Limited. Nil options over ordinary shares in Hills Industries Limited. Experience and expertise Appointed Director in August 1985. Appointed Deputy Chairman in June 2004. Appointed Chairman 28 October 2005. Jennifer Hill Ling has extensive experience in corporate and commercial law, specialising in corporate and business structuring, mergers and acquisitions, joint ventures and related commercial transactions. She has practiced law for some 26 years. Other current directorships Hills Associates Limited, Argent Pty Ltd and Hills Industries NZ Limited. Former directorships Tower Trust Ltd. Special responsibilities Chairman of the Board. Member of the nomination committee. Chairman of the remuneration committee. Interests in shares and options at the date of this report 16,343,161 ordinary shares in Hills Industries Limited (including 1,174,550 shares owned by Hills Associates Limited and Poplar Pty Ltd (jointly held) and 13,313,300 shares owned by Hills Associates Limited of which JH Hill Ling is a Director). Nil options over ordinary shares in Hills Industries Limited. Graham Lloyd Twartz BA (Adel) DipAcc (Flinders) Group Managing Director Age: 52 Experience and expertise Appointed Director in July 1993. Appointed as Group Managing Director 1 July 2008. Graham Twartz is the Group Managing Director and is responsible for Group operations, including business strategy and acquisitions. He was formerly the Finance Director and Company Secretary and has over 24 years experience in his field. Mr Twartz held senior management positions in diversified companies before joining Hills in 1993. Other current directorships Director of Korvest Ltd and Fielders Australia Pty Ltd. Former directorships None. Special responsibilities Managing Director. Interests in shares and options at the date of this report 211,486 ordinary shares in Hills Industries Limited and 29,115 ordinary shares in Korvest Ltd. 160,000 options over ordinary shares in Hills Industries Limited. Geoffrey Guild Hill FCPA FAICD F.S.I BEc (Syd) MBA (NSW) Independent Non-Executive Director based in Hong Kong Age: 63 Experience and expertise Appointed Director in February 1999. Geoffrey Hill is a merchant banker, based in Hong Kong, with over 33 years experience in the securities industry. He has worked both in Europe and the United States and has managed merchant banks in Australia since 1989. Mr Hill specialises in mergers and acquisitions and corporate reconstructions and has been active in the Merchant Banking field since 1979. Other current directorships Chairman of Fielders Australia Pty Ltd, International Pacific Securities (Group) Limited and Metals Finance Limited. Director of Brickworks Investments Limited, Asian Property Investments Limited, Heritage Gold (NZ) Limited, Centrex Metals Limited and HSW Capital. Appointed as a Director of Fielders Australia Pty Ltd on 27 July 2008. Former directorships Former Director of Biron Corporation Limited, Undercoverwear Limited, Pacific Strategic Investments Limited, Huntley Investments Limited, Nine Network Limited and Bell Resources Limited. Special responsibilities Member of the audit and compliance committee. Member of the nomination committee. Member of the remuneration committee. Interests in shares and options at the date of this report 87,953 ordinary shares in Hills Industries Limited. Nil options over ordinary shares in Hills Industries Limited. Peter William Stancliffe BE (Civil) FAICD Independent Non-Executive Director Age: 61 Experience and expertise Appointed Director in August 2003. Peter Stancliffe has over 39 years experience in the management of large industrial companies both in Australia and overseas and has held various senior management positions, including Chief Executive Officer. He has extensive experience in strategy development and a detailed knowledge of modern company management practices. Mr Stancliffe is a graduate of the MIT Senior Management Program and the AICD Company Directors’ Course. Other current directorships Chairman of Korvest Limited. Non executive Director of Automotive Holdings Group Limited and Harris Scarfe Pty Ltd. Former directorships in last 3 years Former Chairman of View Resources Limited. Special responsibilities Chairman of the audit and compliance committee. Interests in shares and options at the date of this report 17,115 ordinary shares in Hills Industries Limited and 1,000 ordinary shares in Korvest Limited. Nil options over ordinary shares in Hills Industries Limited. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 17 Directors’ Report Company Secretary Mr Andrew Muir, B.Ec, MBA (Adelaide) was appointed to the position of Company Secretary in July 2008. Mr Muir is the Company’s General Manager of Finance and was formerly the General Manager of Business Development for 5 years. Mr Paul Blewett, LLB, was appointed to the position of Company Secretary in April 2008 and held this position until July 2008. Mr Blewett previously held the role of General Counsel and Company Secretary with another listed public company for several years and prior to that worked as Legal Counsel for other large corporations, and as a lawyer for a major commercial legal practice. Meetings of Directors The numbers of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 30 June 2009, and the numbers of meetings attended by each Director were: Director J Hill-Ling G Twartz* I Elliot^ R B Flynn G G Hill P W Stancliffe Board Meetings Audit Committee Meetings Nomination Committee Meetings Remuneration Committee Meetings A 17 17 12 16 17 16 B 17 17 17 17 17 17 A – – – 6 4 6 B – – – 6 6 6 A 1 – 1 – 1 – B 1 – 1 – 1 – A 2 – 2 – 2 – B 2 – 2 – 2 – A - Number of meetings attended B - Number of meetings held during the time the Director held office or was a member of the committee during the year * - An executive Director ^ - Granted a leave of absence as a consequence of serious illness Remuneration report – audited The remuneration report is set out under the following main headings: A Principles used to determine the nature and amount of remuneration B Details of remuneration C Service agreements D Share based compensation E Additional information The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. A Principles used to determine the nature and amount of remuneration The objective of the Group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with achievement of strategic objectives and the creation of value for shareholders, and conforms with market practice for delivery of reward. The Board ensures that executive reward satisfies the following key criteria for good reward governance practices: • competitiveness and reasonableness • acceptability to shareholders • performance linkage / alignment of executive compensation • transparency • capital management. In consultation with external remuneration consultants, the Group has structured an executive remuneration framework that is market competitive and complimentary to the reward strategy of the organisation. It ensures the framework is aligned with shareholders’ and program participants’ interests. Alignment to shareholders’ interests: • has economic profit as a core component of plan design • focuses on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant return on assets as well as focusing the executive on key non financial drivers of value • attracts and retains high calibre executives. Alignment to program participants’ interests: • rewards capability and experience • reflects competitive reward for contribution to growth in shareholder wealth • provides a clear structure for earning rewards • provides recognition for contribution. The Board has established a remuneration committee which provides advice on remuneration and incentive policies and practices and specific recommendations on remuneration packages and other terms of employment for executive Directors, other senior executives and non executive Directors. The Corporate Governance Statement provides further information on the role of this committee. Non-executive Directors Fees and payments to non executive Directors reflect the demands which are made on, and the responsibilities of, the Directors. Non executive Directors’ fees and payments are reviewed annually by the Board. The Board has also considered the advice of independent remuneration consultants to ensure non executive Directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of non executive Directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to the determination of her own remuneration. Directors’ fees The current base remuneration was last reviewed in August 2008 and is inclusive of committee fees, except that non-executive Directors who chair a committee receive additional yearly fees. Retirement allowances for Directors Superannuation contributions required under the Australian superannuation guarantee legislation are made and are deducted from the Directors’ overall fee entitlements. In addition, certain non executive Directors are entitled to receive benefits on retirement under a scheme that has been discontinued. Under the scheme, Directors are entitled to a maximum retirement benefit of twice their annual Directors’ fees (calculated as an average of their fees over the last three years) accumulated over a period of eight years of service. Since the scheme was discontinued, no new Directors have become entitled to any benefit and the benefit multiple for existing Directors (up to a maximum of two times fees) remains fixed. These benefits have been fully provided for in the financial statements. Executive pay The executive pay and reward framework has three components: • base pay and benefits, including superannuation • short term performance incentives, and • long term incentives through participation in the Hills Executive Share Option Plan. 18 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Directors’ Report Remuneration report – audited (continued) A Principles used to determine the nature and amount of remuneration (continued) Base pay Structured as a total employment cost package which may be delivered as a combination of cash and prescribed non financial benefits at the executives’ discretion. Executives are offered a competitive base pay that comprises the fixed component of pay and rewards. External remuneration consultants provide analysis and advice to ensure base pay is set to reflect the market for a comparable role. Base pay for executives is reviewed annually to ensure the executive’s pay is competitive with the market. An executive’s pay is also reviewed on promotion. Key management personnel who acquire shares through the exercise of options are provided with 20 year interest free loans by the Company in accordance with the rules of the Executive Share Option Plan approved by the Shareholders. These loans are of a non recourse nature. For accounting purposes these 20 year, non recourse loans are treated as part of options to purchase shares, until the loan is extinguished at which point the shares are recognised. A small number of shares are issued to executive Directors and specified executives as a result of the Employee Share Bonus Plan under which shares are issued to all employees with more than a nominated period of service. The Board considers that the above performance linked remuneration structure is generating the desired outcome. There are no guaranteed base pay increases included in any executives’ contracts. B Details of remuneration Amounts of remuneration Superannuation Retirement benefits comprise employer contributions to superannuation funds. Performance linked remuneration Performance linked compensation includes both short term and long term incentives, and is designed to reward key management personnel for meeting or exceeding their financial and personal objectives. The short term incentive (STI) is an ‘at risk’ bonus provided in the form of cash, while the long term incentive (LTI) is provided as options over ordinary shares of the Company under the rules of the Executive Share Option Plan. Key management personnel may receive bonuses based on the achievement of agreed outcomes relating to the performance of the Group (including operational results). Bonuses earned are measured on a number of factors, the most common of which is based on the achievement of the Earnings before interest and tax (EBIT) result of the relevant business, return on funds employed in the business, improvements in safety and increase in earnings per share for the Company. Shares issued to key management personnel are a result of the Employee Share Bonus Plan under which shares are issued to all employees with more than a nominated period of service. Options issued to key management personnel are a result of the Executive Share Option Plan. Non executive Directors do not receive any performance related remuneration. The remuneration structures take into account: • the overall level of remuneration for each key management personnel; and • the executive’s ability to control performance. The key management personnel are not currently entitled to contractual termination payments other than those generally applicable to all staff. Options are issued under the Executive Share Option Plan to executive Directors, in accordance with thresholds approved by shareholders at the AGM. The plan provides for 14 executives (21 executives in 2008) to receive options over ordinary shares for no consideration. The ability to exercise the options is conditional on the Company achieving certain performance outcomes. Non executive Directors do not receive any options. Details of the remuneration of the Directors, the key management personnel of the Group as defined in AASB 124 Related Party Disclosures and specified executives of Hills Industries Limited and the Hills Industries Limited Group are set out in the following tables. The key management personnel of Hills Industries Limited includes the Directors as per page 17 above and the following executive officers who have authority and responsibility for planning, directing and controlling the activities of the entity: • S Cope, Group General Manager, Electronic Security and Entertainment • G Daher, General Manager, Direct Alarm Supplies • R Gros, Group General Manager, Home, Hardware & Eco • R Meacham, General Manager, Pacific Communications • A Muir, General Manager, Finance • A Oliver, General Manager, Antenna and TV Systems The key management personnel of the Group are the Directors of Hills Industries Limited (see page 17 above), those executives listed above and those other executives that report directly to the Managing Director being: • L Andrewartha, Managing Director, Orrcon Operations Pty Ltd • J Easling, Managing Director, Fielders Australia Pty Ltd (until 22 April 2009) • A Kachellek, Managing Director, Korvest Ltd • K Middleton, CEO, Fielders Australia Pty Ltd (from 22 April 2009) In addition, the following persons must be disclosed under the Corporations Act 2001 as they are among the 5 highest remunerated Group and/or Company executives: • D Salvaterra, General Manager, EzyStrut, Korvest Ltd (until 11 February 2009) Changes since year end There have been no changes in key management personnel since year end. Payments to persons before taking office There were no payments to persons before taking office. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 19 Directors’ Report Remuneration report – audited (continued) B Details of remuneration (continued) Amounts of remuneration (continued) Key management personnel of the Group and other executives of the Company and the Group Short-term employee benefits Post-employment benefits Share-based payments (B) Cash salary and fees Cash bonus (A) 2009 $ $ Non Executive Directors J Hill-Ling I Elliot R Flynn G Hill* P Stancliffe* Sub-total non-executive Directors Executive Director 181,957 94,801 88,685 157,585 122,859 645,887 – – – – – – G Twartz 673,012 50,459 Other key management personnel (Group) L Andrewartha^ 330,000 52,661 S Cope^# J Easling G Daher R Gros# A Kachellek R Meecham# K Middleton^ A Muir# A Oliver^# 280,833 67,954 215,290 – 185,115 82,285 273,359 33,770 210,941 105,786 188,139 80,129 314,183 16,133 259,939 32,110 218,423 92,047 Total key management personnel compensation (Group) 3,795,121 613,334 Other Company and Group executives D Salvaterra^ 88,390 100,849 Non- monetary benefits $ Other $ Super- annuation benefits $ Termination benefits Options Shares Total $ $ $ $ – – – – – – – – – – – – – – – – – – – – – – – – – 16,433 8,532 7,982 7,982 11,057 51,986 9,535 66,483 – – – – – – – – – 34,439 31,448 19,421 24,066 27,642 27,996 24,201 29,728 26,342 8,301 27,942 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 198,390 103,333 96,667 165,567 133,916 697,873 14,276 998 814,763 11,729 8,884 – 2,583 8,884 5,374 4,600 1,678 4,600 10,312 998 998 998 998 998 429,827 390,117 235,709 295,047 340,653 – 350,097 998 998 998 998 298,067 362,720 323,989 358,023 17,836 391,694 – 72,920 9,980 4,900,885 – 24,288 154,074 – 500 368,101 (A) The short term incentive bonus is for performance during the respective financial year using the criteria set out in section A. Short term incentive cash bonuses awarded as remuneration to any Director of the Company and each of the five named Company executives and relevant Group executives are detailed in the remuneration tables above. (B) Share based payment remuneration comprises options in the Executive Share Option Plan and shares under the Employee Share Plan. The options granted during the year expire on 31 January 2012 and each option entitles the holder to purchase one ordinary share in the Company. The ability to exercise the options is conditional on the Group achieving certain performance hurdles. For all options granted prior to 2008, once the option is exercised, the holder was restricted from selling the shares for a period of three years. The fair value of options granted to executive Directors and senior executives included above is calculated at the grant date using the valuation methodology set out in Division 13A of the Income Tax Assessment Act, 1936. This method has been adopted, as other methods do not reflect the number of conditions that must be met under the plan, including those applying after the shares have been allocated. Further details of options granted during the year are set out below. ^ denotes one of the 5 highest paid executives of the Group, as required to be disclosed under the Corporations Act 2001. # denotes one of the 5 highest paid executives of the Company, as required to be disclosed under the Corporations Act 2001. * G Hill remuneration includes Board fees from Fielders Australia Pty Ltd and P Stancliffe remuneration includes Board fees from Korvest Limited. 20 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Directors’ Report Remuneration report – audited (continued) B Details of remuneration (continued) Amounts of remuneration (continued) Key management personnel of the Group and other executives of the Company and the Group Short-term employee benefits Post-employment benefits Share-based payments (B) Cash salary and fees Cash bonus (A) 2008 $ $ Non-executive Directors Non- monetary benefits $ Other $ Super- annuation benefits $ Options Shares Total $ $ $ J Hill-Ling I Elliot R Flynn G Hill P Stancliffe Sub-total non-executive Directors Executive Directors 150,994 78,937 78,937 78,937 88,589 476,394 – – – – – – D Simmons G Twartz 579,526 160,000 513,236 50,000 Other key management personnel (Group) L Andrewartha^ 320,000 34,884 A Oliver^# A Muir# J Easling R Meacham# D Walker S Cope^# R Gros^# 211,837 113,268 239,966 259,145 – – 148,048 112,597 191,686 48,148 190,000 120,000 190,117 120,000 D Salvaterra^ 140,002 146,504 Total key management personnel compensation 3,459,957 905,401 – – – – – – – – – – – – – – – – – – – – – – – – 13,589 7,104 7,104 7,104 7,973 42,874 – – – – – – – – – – – – 164,583 86,041 86,041 86,041 96,562 519,268 11,952 42,813 38,491 1,000 833,782 8,611 38,698 25,728 1,000 637,273 – 28,800 19,134 – 402,818 12,290 23,664 19,048 1,000 381,107 – – – – – – – 21,157 8,110 1,000 270,673 23,323 10,978 1,000 294,446 20,045 6,429 1,000 288,119 19,564 3,500 1,000 263,898 27,900 9,565 1,000 348,465 27,911 9,565 1,000 348,593 23,150 – 1,000 310,656 32,853 340,339 150,548 10,000 4,899,098 The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Fixed remuneration % At risk – STI % Value of options as proportion of remuneration % 2009 2008 2009 2008 2009 2008 Executive Directors of Hills Industries Limited D Simmons G Twartz – 94 81 92 Other key management personnel of Group L Andrewartha S Cope G Daher J Easling R Gros A Kachellek R Meacham K Middleton A Muir A Oliver 88 83 72 91 64 – 100 100 90 71 73 96 90 74 64 – 60 – 100 69 – 6 12 17 28 – 10 29 27 4 10 26 19 8 9 36 – – 36 – 40 – – 31 – 1.75 2.73 2.28 0.88 – 2.58 – 1.54 0.46 1.42 2.88 4.62 4.04 4.75 2.75 – 3.74 2.75 – 2.24 – 3.01 5.01 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 21 Directors’ Report Remuneration report – audited (continued) C Service agreements G Twartz, Managing Director • Term of agreement – on going, commencing 1 July 2008 • Base salary, inclusive of superannuation, for the year ended 30 June 2009 of $800,000, to be reviewed annually by the remuneration committee. • Payment of a termination benefit on termination by the Company in lieu of notice, other than for gross misconduct, equal to the three months base salary. Details of options over ordinary shares in the Company provided as remuneration to each Director of Hills Industries Limited and each of the key management personnel of the Company and the Group are set out below. When exercisable, each option is convertible into one ordinary share of Hills Industries Limited. Further information on the options is set out in section A above and in note 26 to the full annual financial report. No. of options granted during the year No. of options vested during the year 2009 2008 2009 2008 D Share based compensation Directors of Hills Industries Limited Options All options refer to options over ordinary shares of the Company, which are exercisable on a one for one basis under the Executive Share Option Plan. The terms and conditions of each grant of options affecting remuneration in the previous, this or future reporting periods are as follows: D Simmons – 100,000 – 240,000 G Twartz 100,000 60,000 60,000 40,000 Other key management personnel of the Group L Andrewartha 60,000 60,000 S Cope 60,000 60,000 G Daher 25,000 20,000 – – – – – – J Easling – 30,000 10,000 10,000 Date exercis- able and vested Grant date Value per option at grant date Expiry date Exercise price Per- formance achieved % vested R Gros 60,000 60,000 A Kachellek – – – – R Meacham 25,000 25,000 10,000 28/2/04 31/1/06 / 31/1/26 $3.66 $0.42 Yes 61% K Middleton 25,000 20,000 – – – – – – A Muir A Oliver 60,000 25,000 10,000 25,000 25,000 45,000 40,000 Shares provided on exercise of remuneration options During the reporting period, no shares were issued on the exercise of options previously granted as compensation to key management personnel. 31/1/09 28/2/05 31/1/07 / 31/1/27 $4.16 $0.48 Yes 31/1/10 28/2/06 31/1/08 / 31/1/28 $4.83 $0.56 31/1/11 28/2/07 31/1/09 / 31/1/29 $5.53 $0.64 31/1/12 28/2/08 31/1/11 31/1/31 $5.49 $0.19 4/2/09 31/1/12 31/1/32 $3.01 $0.00 No No n/a n/a 0% 0% 0% n/a n/a No options have been granted since the end of the financial year. The options were provided at no cost to the recipients. All options expire on the earlier of their expiry date or termination of the individual’s employment. The options are exercisable three years from grant date for the options issued from 2008 onwards, or two years from grant date for options issued prior to 2008. In addition to a continuing employment service condition, the ability to exercise options is conditional on the Group achieving certain performance hurdles. Details of the performance criteria are included in the long term incentives discussion in section A. For options granted in the current year, the earliest exercise date is 31 January 2012. No terms of equity settled share based payment transactions (including options and rights granted as compensation to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period. 22 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Directors’ Report Remuneration report – audited (continued) E Additional information Details of remuneration: cash bonuses and options Cash bonus Options Vested 2009 % Forfeited 2009 % Year granted Vested % Forfeited % Financial years in which options may vest Minimum total value of grant yet to vest $ Maximum total value of grant yet to vest $ Name G Twartz 18 82 L Andrewartha 45 55 86 14 75 25 – 100 28 72 S Cope G Daher J Easling R Gros J Easling 75 25 K Middleton A Muir A Oliver 100 – 75 25 79 21 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 100 – – 100 – – 100 – – 100 – – 100 100 – 100 – – 100 – – 100 – – 100 – – 100 – – 2009 2011 2012 2009 2011 2012 2009 2011 2012 2009 2011 2012 2009 2011 2012 2009 2011 2012 2009 2011 2012 2009 2011 2012 2009 2011 2012 2009 2011 2012 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,976 – – 1,976 – – 1,976 – – 559 – – – – – 1,976 – – 823 – – 659 – – 823 – – 823 – The minimum value of options yet to vest is nil as the performance criteria may not be met and consequently the option may not vest. The maximum value of options yet to vest has been determined as the amount of the grant date fair value of the options that is yet to be expensed. The % of options forfeited in the year represents the reduction from the maximum number of options available to vest due to the highest level performance criteria as well as options that have lapsed due to termination of employment. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 23 Directors’ Report Remuneration report – audited (continued) Principal activities E Additional information Share-based compensation: Options The movement during the reporting period, by value, of options over ordinary shares in the Company held by each key management person, and each of the five named Company executives and Group executives is detailed below. Value of options A Value at grant date $ B Value at exercise date $ C Value at lapse date $ G Twartz L Andrewartha S Cope G Daher J Easling R Gros A Kachellek R Meachem K MIddleton A Muir A Oliver – – – – – – – – – – – – – – – – – – – – – – 38,490 38,490 38,490 6,415 22,209 38.490 – 16,038 6,415 16,038 28,868 (A) The value at grant date calculated in accordance with AASB 2 Share based Payment of options granted during the year as part of remuneration. The value of options granted in the year is the fair value of the options calculated at grant date using the method described above. The total value of the options granted is included in the table above. This amount is allocated to remuneration over the vesting period. (B) The value at exercise date of options that were granted as part of remuneration and were exercised during the year is calculated as the market price of shares of the Company as at close of trading on the date the options were exercised after deducting the price paid to exercise the option. (C) The value at lapse date of options that were granted as part of remuneration and that lapsed during the year because a vesting condition was not satisfied. The value is determined at the time of lapsing, but assuming the condition was satisfied. The value of the options that lapsed/forfeited during the year represents the benefit forgone and is calculated at the date the option lapsed using the method described above assuming the performance criteria had been achieved. The options issued in February 2007 lapsed during the year. The principal activities of the Group during the course of the year are outlined within the Overview of the Group. Objectives The Group’s objectives are to: • provide a safe, challenging and rewarding workplace; • deliver superior returns to shareholders; • increase earnings per share; • represent quality, reliable and value for money products; and • improve the retention rate of our outstanding people resources. In order to meet theses objectives the following targets have been set for the 2010 financial year and beyond: • increase revenue, operating activities, profits, earnings per share and return on funds employed; • reduce operating costs; • achieve strategic objectives; • consider further strategic acquisitions; • continue to improve our safety performance; • continue to source cost effective supplies; and • further develop our employees. Dividends – Hills Industries Limited Dividends paid to members during the financial year were as follows: 2009 $’000 Final ordinary dividend for the year ended 30 June 2008 of 26,149 14.0 cents per fully paid share paid on 29 September 2008 Final dividend foregone for Share Investment Plan (3,993) Interim ordinary dividend for the year ended 30 June 2009 of 15,986 8.0 cents per fully paid share paid on 7 April 2009 Interim dividend forgone for Share Investment Plan Total Amount (2,279) 35,863 In addition to the above dividends, since the end of the financial year the Directors have recommended the payment of a final ordinary dividend of approximately $4,876,000 (2.0 cents per fully paid share) to be paid on 23 November 2009 out of retained profits at 30 June 2009. The financial effect of these dividends has not been brought to account in the financial statements for the year ended 30 June 2009 and will be recognised in subsequent financial periods. For more information regarding dividends please refer to note 9. Significant changes in the state of affairs There were no significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year On 5 August 2009 the Company announced an underwritten share placement to institutional and sophisticated investors and subsequently raised $39.3 million, issuing 28,113,259 shares at $1.40 per share. In addition, on 21 August 2009 the Company announced the details of a Share Purchase Plan (SPP), offering eligible shareholders the opportunity to apply for up to $5,000 of fully paid, ordinary shares at an issue price of $1.40 per share. The Company reserves the right to scale the offer back. The SPP will open on 28 August 2009 and close on 11 September 2009. In total the Company plans to raise a maximum of around $50 million. Since the end of the financial year the Company has extended the term of the majority of its debt facilities to November 2011. Apart from the above, there has not arisen in the interval between the end of the financial year and the date of this report any other item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. 24 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Directors’ Report Dividends – Hills Industries Limited (continued) Likely developments and expected results of operations For likely developments please refer to the Review of Operations section of the Directors’ report. Shares under option Unissued ordinary shares of Hills Industries Limited under option in accordance with accounting standards at the date of this report are as follows: Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual financial report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental regulation Greenhouse gas and energy data reporting requirements The Group is subject to the reporting requirements of the National Greenhouse and Energy Reporting Act 2007. The National Greenhouse and Energy Reporting Act 2007 requires the Group to report its annual greenhouse gas emissions and energy use. The first measurement period for this Act is dependent upon productivity levels and at this stage is likely to run from 1 July 2009 to 30 June 2010. The Group has implemented systems and processes for the collection and calculation of the data required and expects to be able to prepare and submit its initial report to the Greenhouse and Energy data Officer by 31 October 2010. Share options granted to Directors and the most highly remunerated officers Options over unissued ordinary shares of Hills Industries Limited granted during the financial year for no consideration to the Directors and the five most highly remunerated officers of the Company and the Group as part of their remuneration were as follows: Directors G Twartz, Group Managing Director Other Executives of Hills Industries Limited S Cope, Group General Manager - Electronic Security and Entertainment R Gros, Group General Manager - Home, Hardware & Eco R Meacham, General Manager, Pacific Communications A Muir, General Manager, Finance A Oliver, General Manager, Antenna and TV Systems Options granted 100,000 100,000 60,000 60,000 25,000 60,000 25,000 230,000 Other Executives of Hills Industries Limited L Andrewartha, Managing Director - Orrcon Operations Pty Ltd 60,000 J Easling, Managing Director - Fielders Australia Pty Ltd (until 22 April 2009) A Kachellek, Managing Director - Korvest Ltd K Middleton, CEO - Fielders Australia Pty Ltd D Salvaterra, General Manager - EzyStrut, Korvest Ltd (until 11 February 2009) – – 25,000 – 85,000 The options were granted under the Hills Industries Limited Executive Share Option Plan during the financial year and have an exercise price of $3.01 and an expiry date of 31 January 2032. Details of options granted to the Directors and the five most highly remunerated officers of the Company and the Group can be found in section D of the Remuneration Report on page 22. No options have been granted since the end of the financial year. Date Options Granted Expiry date Issue price of shares Number under option February 2001 January 2023 February 2002 January 2024 February 2003 January 2025 February 2004 January 2026 February 2005 January 2027 February 2006 January 2028 February 2007 January 2029 February 2008 January 2031 February 2009 January 2032 $2.50 $2.90 $3.23 $3.66 $4.16 $4.83 $5.53 $5.49 $3.01 55,000 58,000 90,000 145,000 215,000 – – 455,000 525,000 1,543,000 All options expire on the earlier of their expiry date or termination of the employee’s employment. In addition, the ability to exercise the options is conditional on the Group achieving certain performance hurdles. The performance hurdles comprise two components, relative total shareholder return and growth in earnings per share. Further details are included in the Remuneration Report. These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. Shares issued on the exercise of options During or since the end of the financial year, the Company has not issued ordinary shares as a result of the exercise of options. Insurance of officers Since the end of the previous financial year the Company has paid insurance premiums in respect of Directors’ and officers’ liability and legal expenses’ insurance contracts, for current and former Directors and officers, including senior executives of the Company and Directors, senior executives and secretaries of its controlled entities. The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Company. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities. The Directors have not included details of the nature of the liabilities covered or the amount of the premiums paid in respect of the Directors’ and officers’ liability and legal expenses’ insurance contracts as such disclosure is prohibited under the terms of the contracts. Indemnification of officers The Company has agreed to indemnify the Directors and officers of the Company against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as Directors of the Company and its controlled entities, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 25 Directors’ Report Dividends – Hills Industries Limited (continued) Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 27. 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. Amounts in the Directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. This report is made in accordance with a resolution of Directors. G Twartz Director J Hill-Ling Director Dated at Adelaide this 11th day of September 2009 Indemnification of officers (continued) The Company has also agreed to indemnify the current Directors of its controlled entities for all liabilities to another person (other than the Company or a related body corporate) that may arise from their position, except where the liability arises out of conduct involving a lack of good faith. The agreement stipulates that the Company will meet the full amount of any such liabilities, including costs and expenses. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. Details of the amounts paid or payable to the auditor of the Company, KPMG, and its related practices for audit and non audit services provided during the year are set out below. The Board of Directors has considered the position and, in accordance with advice received from the audit and compliance committee, is satisfied that the provision of the non audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non audit services have been reviewed by the audit and compliance committee to ensure they do not impact the impartiality and objectivity of the auditor • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year the following fees were paid or payable for services provided by the auditor of the Company, its related practices and non related audit firms: Audit services: KPMG Australia: audit and review of financial reports Overseas KPMG firms – audit and review of financial reports Non-KPMG firms – audit and review of financial reports Total remuneration for audit services Taxation services KPMG Australia: Tax compliance services Overseas KPMG firms – Tax compliance services Total remuneration for taxation services Other Advisory services KPMG Australia: Risk management consulting services Hedge accounting consulting services Total remuneration for other services Consolidated 2009 2008 400,000 377,000 36,458 41,004 – 436,458 3,030 421,034 157,048 134,020 30,430 187,478 26,582 160,602 39,195 15,000 54,195 – – – Total remuneration for non-audit services 241,673 160,602 26 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Lead Auditor’s Independence Declaration Lead Auditor’s independence Declaration under Section 307C of the Corporations Act 2001 To: the Directors of Hills Industries Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2009 there have been: (a) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG N Faulkner Partner Dated at Adelaide this 11th day of September 2009 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 27 Corporate Governance Statement Hills Industries Limited (the Company) and its controlled entities (the Group) and the Board are committed to achieving and demonstrating the highest standards of corporate governance. The Board continues to review the framework and practices to ensure they meet the interests of shareholders. A description of the Company’s main corporate governance practices is set out below. All these practices, unless otherwise stated, were in place for the entire year. They comply with the August 2007 ASX Principles of Good Corporate Governance and Best Practice Recommendations. Further details of the corporate governance practices of the Company are available in the Corporate Governance section of the Company website at www.hills.com.au. Principle 1: Lay solid foundations for management and oversight The Board is responsible to shareholders for the performance of the Company in both the short and the longer term and it seeks to balance sometimes competing objectives in the best interests of the Group as a whole. Its focus is to enhance the interests of shareholders and other key stakeholders and to ensure the Group is properly managed. The Board Charter, including a statement of the Board’s roles and responsibilities, is available on the Company’s website. The Board remains responsible for overseeing the performance of the management team on behalf of shareholders, but delegates responsibility for the day to day management of the Company to the Group Managing Director and senior executives. The Board has formally delegated a range of authorities to management and a statement of matters delegated to management is available on the Company’s website. As part of overseeing the performance of senior executives, the Board has established a process of annual performance review and goal planning, whereby each executive is evaluated against a range of criteria, including achievement of strategic and financial goals, safety performance and business excellence. All senior executives participated in this evaluation, which was conducted in accordance with the prescribed process, during the year ended 30 June 2009. Principle 2: Structure the Board to add value Board composition The Board is structured such that it comprises Directors from a variety of business and professional backgrounds who bring a range of commercial, operational, financial and legal skills and experience relevant to the Company. In addition, the Board seeks to ensure that, at any point in time, its membership represents an appropriate balance between Directors with experience and knowledge of the Group and Directors with an external perspective. Directors’ independence In assessing whether a Director is independent the Board considers whether there are any, or the extent of any business or other relationships, between the Director and the Company and whether such relationships could, or could reasonably be perceived to, materially interfere with the Director’s independent exercise of their judgement. In determining whether a relationship between a Director and the Company is considered to be material, the Board assesses a range of quantitative and qualitative matters including the proportion the transactions represent to both the Company and the Director and the value or strategic importance of the relationship to both the Company and the Director. Board members Details of the members of the Board, their experience, expertise, qualifications, term of office, relationships affecting their independence and their independent status are set out in the Directors’ Report under the heading ‘’Information on Directors’’. At the date of signing the Directors’ Report, there is one Executive Director and five Non Executive Directors, four of whom have no relationships adversely affecting independence and so are deemed independent under the principles set out above. Ms Jennifer Hill-Ling is not defined as an independent Director as she is, or in her capacity as an officer of or associated directly with, a substantial shareholder of the Company. Chairman and Managing Director The Chairman, Ms Jennifer Hill-Ling is not considered an independent Chairman. The Company considers this departure is appropriate however given: • The Hill-Ling family’s interest in the Company; and • Ms Hill-Ling’s considerable experience within the Company. The Board charter specifies that the role of Chairman and the role of Managing Director are separate roles to be undertaken by separate people. The role of Managing Director is undertaken by Mr Graham Twartz. Independent professional advice Directors and Board Committees have the right, in connection with their duties and responsibilities, to seek independent professional advice at the Company’s expense, subject to approval of cost by the Chairman. Performance assessment The Chairman undertakes a regular annual assessment of the performance of individual Directors, the Board as a whole and its Committees and meets privately with each Director to discuss this assessment. Descriptions of the process for performance assessment for the Board and senior executives are available on the Company website. A performance evaluation for the Board and its members and committees has taken place in the reporting period. This was conducted in accordance with the process described above. Nomination committee The Board has established a Nomination Committee. Membership of the Nomination Committee of the Company and details of meetings for the reporting period are set out in the Directors’ Report above. When a new Director is to be appointed the Committee reviews the range of skills, experience and expertise on the Board, identifies its needs and prepares a short list of candidates with appropriate skills and experience. The full Board then appoints the most suitable candidate who must stand for election at the next Annual General Meeting of the Company. The Committee’s nomination of existing Directors for reappointment is not automatic and is contingent on their past performance, contribution to the Company and the current and future needs of the Board and Company. The Board and the Committee are also aware of the advantages of Board renewal and succession planning. Details of the nomination, selection and appointment processes are available on the Company website. 28 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Corporate Governance Statement Principle 3: Promote ethical and responsible decision making The Company has a formal Code of Conduct which supports a foundation of honesty and integrity and adopts a Corporate Creed which requires that at all times all Company personnel act with the utmost integrity, objectivity and in compliance with the letter and the spirit of the law and Company policies. The Code encourages all staff and other stakeholders to report any breaches of the Code to the Chairman of the Board, who is required to investigate and report on all such matters. The Board has adopted a share dealing policy that specifically precludes Directors and Officers from buying or selling shares within 45 days prior to the announcement of the Annual or Half Year results, the day of and the day after the announcement and if in possession of price sensitive information not generally available to the public. Principle 7: Recognise and manage risk The Board, through the Audit Committee, is responsible for ensuring there are adequate policies in relation to risk management, compliance and internal control systems. The Board has required management to design and implement a risk management and internal control system to manage the Company’s material business risks and to report to it on whether those risks are being managed effectively. Management has reported to the Board as to the effectiveness of the Company’s management of its material business risks. In summary, the Company policies are designed to ensure strategic, operational, legal, reputation and financial risks are identified, assessed, effectively and efficiently managed and monitored to enable achievement of the Group’s business objectives. A copy of the Code and the trading policy are available on the Company’s website. The Company’s policies in relation to oversight and management of material business risks are disclosed on the Company website. Principle 4: Safeguard integrity in financial reporting Audit committee The Board has established an Audit and Compliance Committee which is responsible for reviewing the financial accounts and other financial information distributed externally, monitoring the adequacy of risk management and internal control systems and monitoring procedures in place to ensure compliance with statutory responsibilities. The Company has adopted an Audit and Compliance Committee Charter which is set out on the Company website. The names of the members of the Audit and Compliance Committee together with details of their qualifications and attendance at meetings are set out in the Directors’ Report. The Committee consists of three Directors, all of whom are non executive and independent. External auditors The Company and Audit Committee policy is to appoint external auditors who clearly demonstrate quality and independence. The performance of the external auditor is reviewed annually. It is KPMG policy to rotate audit engagement partners on listed companies at least every five years. The Board requires that adequate handover occurs in the year prior to rotation of an audit partner to ensure an efficient and effective audit under the new partner. Principles 5 and 6: Make timely and balanced disclosures and respect the rights of shareholders Continuous disclosure and shareholder communication The Company has written policies and procedures on information disclosure that focus on continuous disclosure of any information concerning the Company that a reasonable person would expect to have a material effect on the price of the Company’s securities. These policies and procedures also include the arrangements the Company has in place to promote communication with shareholders and encourage effective participation at general meetings. A summary of these policies and procedures is available on the Company’s website. The Managing Director and Company Secretary are responsible for compliance with the Company’s continuous disclosure policy. The Board has received assurance from the Managing Director and CFO that, in their opinion: • The Company’s financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and Group and are in accordance with relevant accounting standards. • The above statement is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board and that the Company’s risk management and internal compliance and control is operating efficiently and effectively in all material respects in relation to financial reporting risks. Principle 8: Remunerate fairly and responsibly The Board has established a Remuneration Committee which comprises three Non Executive Directors. Details of the names of the members of the Remuneration Committee and their attendance at Directors’ meetings are set out in the Directors’ Report. The Remuneration Report, within the Director’s Report, sets out the Company’s policies for remunerating Directors, Executive Directors and senior executives. Details of the existence and terms of any schemes of retirement benefits other than superannuation, for Non Executive Directors is set out in the Remuneration Report within the Directors’ Report. The following information is available on the Company’s website: • The Remuneration Committee charter; and • The Company’s security trading policy, which prohibits transactions in associated products which limit the risk of participating in unvested entitlements under any equity based remuneration scheme. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 29 Income Statement For the year ended 30 June 2009 In thousands of AUD Revenue from continuing operations Other income Expenses excluding net financing costs Results from operating activities Financial income Financial expenses Net finance expense Profit before income tax Income tax expense Profit for the year Profit is attributable to: Equity holders of Hills Industries Limited Minority interest Profit for the year Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the Company: Basic earnings per share Diluted earnings per share Dividends per share: Dividends paid on ordinary shares during the year ended 30 June Final and interim dividend for the year ended 30 June Note 4 5 10 10 9 9 Consolidated 2009 2008 1,210,802 2,983 1,213,785 (1,167,855) 45,930 767 (23,438) (22,671) 23,259 (7,604) 15,655 9,506 6,149 15,655 4.9¢ 4.9¢ 22.0¢ 10.0¢ 1,184,737 10,384 1,195,121 (1,112,247) 82,874 781 (15,155) (14.374) 68,500 (16,140) 52,360 46,807 5,553 52,360 26.6¢ 26.4¢ 27.5¢ 27.5¢ The above consolidated income statement should be read in conjunction with the accompanying notes. 30 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Discussion and Analysis of the Income Statement For the year ended 30 June 2009 The Group’s total revenue (excluding financial revenues) for 2009 increased by 2.2% to $1,210.8 million. Group underlying profit after tax (before unusual / significant items) attributable to shareholders decreased by 41.6% to $28.1 million (statutory profit of $15.7 million). Details of revenue and results by segment are set out in Note 3. A brief summary of the performance of Hills key operating divisions for the year ended 30 June 2009 is as follows: • Electronic Security and Entertainment revenue increased by 9.9% to $343.3 million. Underlying profit before interest and tax (EBIT) of $30.9 million (statutory profit of $30.6 million) was 19.0% lower than 2008. These results are attributable to: – Margins reduced due to cost increases associated with a rapid devaluation of the Australian dollar late in the first half of the financial year; – Slowdown in the volume of projects awarded due to the general reduction in capital expenditure undertaken by Australian businesses; – Export markets for the Hills Sound, Vision and Lighting Group were subdued due to economic conditions in the UK and Europe; and – The Antenna and TV Systems business performed very well during the year with the progressive switching off of analogue television signals across Australia resulting in increased demand for digital antennas and digital set top boxes and demand for subscription TV remaining buoyant. • Home, Hardware and Eco Products revenue decreased by 10.6% to $203.3 million while underlying EBIT decreased by 122.5% to a loss of $3.1 million (statutory loss of $16.0 million). These results are attributable to: – Results for our traditional Home and Hardware Products business were very poor during the period. As a result of this poor performance a complete review and restructure of this business unit was undertaken. A number of product categories were discontinued where it was felt that these products could not meet our return on investment benchmarks and supply chain and logistics, customer service, quality and product benchmarks were improved. The restructure included the closure of the Alquip business; – Team Poly results were adversely affected by changes to government subsidies and rainfall in Queensland and New South Wales resulting in a dramatic reduction in industry volumes and demand for rainwater tanks. In response to these market changes, Team Poly undertook a restructuring of its cost base and method of operations, resulting in the closure of the Toowoomba branch operation; – After many years of poor performance we reached the view that we could not achieve our benchmark returns in the Woodroffe business and the decision was taken to close this operation; – The LW Gemmell business performed in line with expectations during the year; and – The Hills Healthcare business unit performed reasonably well during the year, however the steel price increases and Australian dollar devaluation caused some margin compression during the period. • Building and Industrial Products revenue increased by 3.2% to $663.4 million while underlying EBIT decreased by 10.4% to $31.8 million (statutory profit of $30.9 million). These results are attributable to: – Results for the Orrcon steel tube and pipe business, after a very strong first half, were quite subdued. Steel prices, which had risen strongly in the first part of the financial year, declined steadily as world stockpiles increased and demand decreased. In the second half of the financial year the industry reacted to the falling level of demand by reducing inventory holdings, resulting in a reduction in the volume of product sold across the industry. In addition, volumes through the Unanderra Pipe and Tube Mill were reduced as there was less project work available; – The Fielders roll forming business performed strongly during the year. The Centenary Carport and Verandah business continues to expand and the Angle Cut roofing system continues to grow market share; and – The Korvest business, which comprises the market leading EzyStrut cable and pipe support business, Korvest Galvanisers and Indax, achieved increased sales and profits during the period. Unusual / Significant Items During the year the Group booked a number of non-trading items as a result of the restructuring initiatives referred to above as well as the mark to market adjustment for interest rate swaps and foreign exchange contracts. Further details of unusual / significant items are provided in Note 5 of the financial report. Earnings per share before unusual / significant items decreased from 27.3¢ to 14.6¢. Dividends per share decreased from 27.5¢ to 10.0¢. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 31 Balance Sheet As at 30 June 2009 In thousands of AUD Current Assets Cash and cash equivalents Trade and other receivables Inventories Total Current Assets Non-Current Assets Receivables Other financial assets Property, plant and equipment Deferred tax assets Intangible assets Derivative financial instruments Total Non-Current Assets Note Consolidated 2009 2008 6 67,978 197,480 196,569 462,027 – 2 227,494 25,828 114,326 333 368,983 21,549 244,761 180,341 446,651 17,285 2 226,424 16,403 114,162 – 374,276 Total Assets 830,010 820,927 Current Liabilities Trade and other payables Borrowings Current tax liabilities Provisions Derivative financial instruments Total Current Liabilities Non-Current Liabilities Borrowings Provisions Derivative financial instruments Total Non-Current Liabilities Total Liabilities Net Assets Equity Contributed equity Reserves Retained profits Capital and reserves attributable to equity holders of Hills Industries Limited Minority interest Total Equity 7 8(a) 8(b) 120,902 3,852 8,816 33,835 5,924 172,699 218,498 5,975 4,318 228,791 401,490 428,520 248,598 46,495 107,442 402,535 25,985 428,520 28¢ 28¢ 27¢ 28¢ 139,921 6,191 4,317 32,260 – 182,689 203,497 5,224 – 208,721 391,410 429,517 223,091 51,369 133,759 408,219 21,298 429,517 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 32 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Discussion and Analysis of the Balance Sheet As at 30 June 2009 During the year the Group’s net assets decreased by 0.2% to $428.5 million. The movement in intangibles related to acquisitions of $6.1 million, the impairment of goodwill associated with the Alquip business of $5.4 million and amortisation of patents and trademarks of $0.6 million. The increase in the Group’s total assets of $9.1 million to $830.0 million principally comprises: The increase in the Group’s total liabilities of $10.1 million to $401.5 million principally comprises: • An increase in cash of $46.4 million due to the implementation • An increase in loans and borrowings of $12.7 million due to an of a number of working capital initiatives in the second half of the financial year and the receipt of proceeds from the sale of the Edwardstown property; • A decrease in total receivables of $64.6 million of which $20.8 million related to the receipt of proceeds on the sale of the Edwardstown site. The remaining reduction resulted from a reduction in net trade receivables due to improved collections and declining sales volumes and a lack of project revenue in the later part of the year; • An increase in the value of inventories of $16.2 million due to general inflation particularly in relation to steel products; and • An increase in net deferred tax assets of $9.5 million due to the partial reversal of deferred tax liabilities associated with the revaluation of the Group’s land and buildings, increase in provisions for inventory and receivables, and accruals generally and the recognition of a deferred tax asset in relation to derivatives. increase in the Hills facility borrowings and borrowings in relation to the business acquired during the period; • A decrease in trade and other payables of $19.0 million due to lower volume of activity in the latter part of the year; • An increase in current tax liabilities of $3.9 million due to the timing of payments; and • An increase in derivative financial instruments of $10.2 million as a result of recording the mark to market adjustment on interest rate swaps and foreign exchange contracts at the end of the financial year. Issued capital increased by $25.5 million owing to shares issued under the Dividend Investment Plan and shares issued under the Share Purchase Plan. Reserves decreased by $4.8 million primarily due to the decrease in the asset revaluation reserve from the revaluation of land and buildings to fair value, net of the deferred tax recognised directly in equity. Statement of recognised income and expense For the year ended 30 June 2009 In thousands of AUD Note Consolidated Revaluation of land and buildings, net of tax Changes in the fair value of cash flow hedges, net of tax Exchange differences on translation of foreign operations Net income 8 8 8 Profit for the year Total recognised income and expense for the year Total recognised income and expense for the year is attributable to: Equity holders of Hills Industries Limited Minority interest 2009 (5,244) 230 110 (4,904) 15,655 10,751 4,602 6,149 10,751 2008 28,595 – (2,340) 26,255 52,360 78,615 71,968 6,647 78,615 The above consolidated statement of recognised income and expense should be read in conjunction with the accompanying notes. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 33 Statement of Cash Flows For the year ended 30 June 2009 In thousands of AUD Note Consolidated 2009 2008 Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) 1,374,725 (1,288,577) 1,236,662 (1,205,856) Cash generated from operations Interest received Interest paid Dividends received Income taxes paid Net cash inflow (outflow) from operating activities Cash flows from investing activities Payment for purchase of business operations, net of cash acquired Payments for acquisition of subsidiaries, net of cash acquired Payments for property, plant and equipment Loans to other entities Proceeds from sale of property, plant and equipment Proceeds from disposal of assets held for sale Rent received Net cash (outflow) inflow from investing activities Cash flows from financing activities Proceeds from the issue of shares Proceeds from borrowings Repayment of borrowings Dividends paid to the Company’s shareholders Dividends paid to minority interests in subsidiaries Net cash inflow (outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the financial year 12 12 7 9 6 86,148 763 (13,318) – (11,260) 62,333 (619) (3,980) (32,047) 272 903 20,850 842 (13,779) 25,238 36,707 (26,865) (35,863) (1,431) (2,214) 46,340 21,310 – 67,650 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 30,806 781 (15,143) 1 (22,459) (6,014) (7,097) (356) (35,366) (285) 840 3,500 836 (37,928) 44,860 40,101 (3,827) (40,611) (2,387) 38,136 (5,806) 26,923 193 21,310 34 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Discussion and Analysis of the Statement of Cash Flows For the year ended 30 June 2009 Cash flows provided by operating activities increased by $68.3 million to $62.3 million (2008: ($6.0 million)). This is primarily due to working capital reduction initiatives in the second half of the financial year, a reduction in interest paid due to lower debt levels and lower interest rates and a reduction in tax paid. The outflow of cash flows from investing activities decreased by $24.1 million to $13.8 million due to a combination of a reduction in payments for the acquisition of property, plant and equipment of $3.3 million, a reduction in the amount spent to acquire businesses and subsidiaries of $2.9 million and the receipt of the proceeds on sale of the Edwardstown site of $20.8 million (increase on 2008 of $17.3 million). Cash flows from financing activities reduced by $40.3 million due to a combination of a reduction in the proceeds received on share issues of $19.6 million, a net increase in the repayment of borrowings of $19.6 million, partially offset by a reduction in dividend payments of $5.7 million. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 35 Notes to the Financial Statements 1. Basis of preparation 3. Segment Information (a) Description of segments The Group comprises the following main business segments: Electronic Security and Entertainment Electronic security systems, closed circuit television systems, home and commercial automation and control systems, professional audio products, consumer electronic equipment, fibre optic transmission solutions, communications related products and services, domestic and commercial antennas, master antenna television systems, communications antennas, amplifiers, and subscription TV installation services. Home, Hardware and Eco Outdoor clothes driers, ladders, ironing boards, laundry trolleys, security doors, garden sprayers, wheelbarrows, rehabilitation and mobility products, water tanks and other rotationally moulded products, solar hot water products, stainless steel products and plumbing products. Building and Industrial Structural, precision and large steel tubing, galvanising, cable tray and pipe systems, steel doorframes, roll formed metal building products, carports and shed systems. Geographical segments In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. The Group’s business segments operate geographically as follows: Australia Manufacturing facilities and sales offices and customers in all states and territories. Overseas Manufacturing facilities and sales offices in New Zealand. The concise financial report has been prepared in accordance with the Corporations Act 2001 and Accounting Standard AASB 1039 Concise Financial Reports (AASB 1039). The financial statements and specific disclosures required by AASB 1039 have been derived from the Group’s full financial report for the financial year. Other information included in the concise financial report is consistent with the Group’s full financial report. The concise financial report does not, and cannot be expected to, provide as full an understanding of the financial performance, financial position and financing and investing activities of the Group as the full financial report. The financial report is prepared on the basis of historical costs except the following assets are stated at their fair values: financial instruments at fair value through profit or loss and land and buildings at fair value. A full description of the accounting policies adopted by the Group may be found in the Group’s full financial report. These accounting policies have been consistently applied by each entity in the Group to all periods presented. The presentation currency is Australian dollars. 2. Critical accounting estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amount recognised in the financial statements are described in the following notes: • Note 12 – business combinations • Note 14 of the Full Financial Report – measurement of the recoverable amounts of cash generating units containing goodwill • Note 26 of the Full Financial Report – measurement of share based payments • Note 19 of the Full Financial Report and note 11 – provisions and contingencies 36 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Notes to the Financial Statements 3. Segment Information (continued) (b) Primary reporting format – business segments 2009 In thousands of AUD Segment revenue Electronic Security and Entertainment Home, Hardware and Eco Building and Industrial Eliminations Consolidated Sales to external customers 343,279 203,313 Intersegment sales Total sales revenue – – 343,279 203,313 Unallocated / corporate revenue – – 663,368 3,475 666,843 – – 1,209,960 (3,475) (3,475) – – 1,209,960 842 Total segment revenue 343,279 203,313 666,843 (3,475) 1,210,802 30,572 (15,960) 30,920 Segment result Segment result Net finance expense Unallocated/corporate revenue less unallocated/corporate expenses Profit before income tax Income tax expense Profit for the year Segment assets and liabilities Segment assets 145,299 152,544 404,495 Unallocated/corporate assets Total assets Segment liabilities Unallocated/corporate liabilities Total liabilities Other segment information Acquisitions of property, plant and equipment, intangibles and other non current segment assets Unallocated/corporate assets Total aquisitions Depreciation and amortisation expense Unallocated/corporate expense Total depreciation and amortisation Impairment of goodwill 31,885 30,680 80,449 3,678 4,400 22,545 2,700 7,018 12,308 – 5,380 – – – – – – – 45,532 (22,671) 398 23,259 (7,604) 15,655 702,338 127,672 830,010 143,014 258,476 401,490 30,623 1,424 32,047 22,026 1,081 23,107 5,380 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 37 Notes to the Financial Statements 3. Segment information (continued) 2008 In thousands of AUD Segment revenue Electronic Security and Entertainment Home, Hardware and Eco Building and Industrial Eliminations Consolidated Sales to external customers 312,322 227,558 Intersegment sales Total sales revenue – – 312,322 227,558 Unallocated / corporate revenue – – 643,060 5,353 648,413 – – 1,182,940 (5,353) (5,353) – – 1,182,940 1,797 Total segment revenue 312,322 227,558 648,413 (5,353) 1,184,737 38,098 13,806 23,891 Segment result Segment result Net finance expense Unallocated/corporate revenue less unallocated/corporate expenses Profit before income tax Income tax expense Profit for the year Segment assets and liabilities Segment assets 127,940 157,189 401,814 Unallocated/corporate assets Total assets Segment liabilities 32,239 24,235 96,287 Unallocated/corporate liabilities Total liabilities Other segment information Acquisitions of property, plant and equipment, intangibles and other non current segment assets Unallocated/corporate assets Total aquisitions Depreciation and amortisation expense Unallocated/corporate expense Total depreciation and amortisation 3,908 7,965 19,148 2,897 6,574 10,952 – – – – – 75,795 (14,374) 7,079 68,500 (16,140) 52,360 686,943 133,984 820,927 152,761 238,649 391,410 31,021 4,170 35,191 20,423 1,361 21,784 38 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Notes to the Financial Statements 3. Segment information (continued) 2009 In thousands of AUD Segment result including unusual / significant items EBITDA (pre unusual / significant items) Depreciation & amortisation EBIT (pre unusual / significant items) Unusual / significant items – restructuring costs EBIT Net finance expenses (pre unusual / significant items) Unusual / significant items – financial expenses Net finance expense Profit before income tax Income tax expense Profit for the year 2008 In thousands of AUD Segment Result including unusual / significant items EBITDA (pre unusual / significant items) Depreciation & amortisation EBIT (pre unusual / significant items) Unusual / significant items EBIT Net finance expenses (pre unusual / significant items) Unusual / significant items – financial expenses Net finance expense Profit before income tax Income tax expense Profit for the year Electronic Security and Entertainment Home, Hardware and Eco Building and Industrial Corporate / Unallocated Consolidated 33,552 (2,700) 30,852 (280) 30,572 3,912 (7,018) (3,106) (12,854) (15,960) 44,142 (12,308) 31,834 (914) 30,920 1,479 (1,081) 398 – 398 (12,531) (10,140) (22,671) 83,085 (23,107) 59,978 (14,048) 45,930 (12,531) (10,140) (22,671) 23,259 (7,604) 15,655 Electronic Security and Entertainment Home, Hardware and Eco Building and Industrial Corporate / Unallocated Consolidated 40,995 (2,897) 38,098 – 20,380 (6,574) 13,806 – 38,098 13,806 46,492 (10,952) 35,540 (11,649) 23,891 1,690 (1,361) 329 6,750 7,079 109,557 (21,784) 87,773 (4,899) 82,874 (14,374) (14,374) – (14,374) – (14,374) 68,500 (16,140) 52,360 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 39 Notes to the Financial Statements 3. Segment information (continued) (c) Secondary reporting format – geographical segments In thousands of AUD Australia Overseas Segment revenues from sales to external customers Segment assets Acquisitions of property, plant and equipment, intangibles and other non current segment assets 2009 2008 2009 2008 2009 2008 1,168,373 1,127,552 695,776 665,359 30,367 30,828 41,587 55,388 6,562 21,584 256 1,424 193 4,170 Unallocated/corporate 842 1,797 127,672 133,984 4. Revenue In thousands of AUD From continuing operations Sales revenue Sale of goods Other revenue Services Rents and sub-lease rentals Dividends 1,210,802 1,184,737 830,010 820,927 32,047 35,191 Consolidated 2009 2008 1,140,920 1,130,531 69,040 53,369 842 – 836 1 69,882 54,206 1,210,802 1,184,737 5. Profit from Ordinary Activities Profit after tax for the year includes the following items that are unusual because of their nature, size or incidence: In thousands of AUD Financial expenses (a) Net fair value loss on interest rate swaps and forward exchange contracts Less: Applicable income tax benefit Losses & Gains (b) Restructuring costs Less: Applicable income tax benefit (c) Gain on sale of asset held for sale Less: Applicable income tax benefit (d) Impairment of inventory – Orrcon Less: Applicable income tax benefit Consolidated 2009 2008 (10,140) 3,042 (7,098) (14,048) 2,600 – – – – (11,448) – – – – – 6,750 174 (11,649) 3,495 (1,230) 40 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Notes to the Financial Statements 5. Profit from Ordinary Activities (continued) (a) Net fair value loss on interest rate swaps and forward exchange contracts The Group manages its financial risk relating to interest rates and currency through the use of fixed interest rate swaps and forward exchange contracts respectively. In previous financial years the net fair value gains relating to these contracts have not been brought to account on the basis of materiality. The Group does not trade in these instruments and does not speculate on movements in rates. In the current financial year the significant movements in the Australian dollar resulted in a non cash fair value loss before tax on forward exchange contracts of $5.822 million and the significant reduction in interest rates over the financial year resulted in a non cash fair value loss before tax on interest rate swaps of $4.318 million. (b) Restructuring costs Over the course of 2009, the Company has undertaken a detailed review of operations with particular emphasis on the Home, Hardware and Eco Products division. A number of restructuring initiatives were implemented during the year, including a reduction in headcount in all businesses, the closure of the Alquip business and satellite manufacturing operations of Team Poly in Toowoomba. Furthermore, a number of non performing product lines were rationalised and discontinued. The total after tax cost of these restructuring initiatives was $11.448 million, of which the cash cost was $2.564 million. Included in the non cash costs was the impairment of the goodwill associated with the Alquip business. This totalled $5.38 million. (c) Gain on sale of Asset held for sale During the previous financial year a contract was entered into for the sale of the land and building at the Hills manufacturing site in Edwardstown South Australia. The impact of the sale of this property was a decrease in assets held for sale of $15.946 million and an increase in profit after tax of $6.924 million. Tax payable on this gain was calculated after absorbing certain capital tax losses. (d) Impairment of Inventory – Orrcon As part of a review in the previous financial year of the large pipe and tube business of Orrcon it was determined that certain inventory on hand was impaired. A contract to supply water pipe to a major customer in Queensland was cancelled due to the quality of the pipe received from our overseas supplier. Directors considered it prudent to write down the value of the pipe to expected recoverable value. In addition, all other costs that are related to this contract have been expensed. All of these costs are included in the impairment charge. Since the impairment was recognised, a quantity of the pipe has been sold and the remaining pipe on hand as at 30 June 2009 has been valued at estimated realisable value. 6. Current assets – Cash and cash equivalents In thousands of AUD Cash at bank and in hand Deposits at call Consolidated 2009 2008 63,931 4,047 67,978 19,397 2,152 21,549 (a) Reconciliation to cash at the end of the year The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows: In thousands of AUD Balances as above Bank overdrafts (note 17 of the Full Financial Report) Balances per statement of cash flows Consolidated 2009 2008 67,978 21,549 (328) (239) 67,650 21,310 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 41 Notes to the Financial Statements 7. Contibuted equity (a) Share capital Ordinary shares fully paid (b) Movements in ordinary share capital Date Details 1 July 2007 Opening balance Issued under the Dividend Investment Plan Issued under the Share Investment Plan Issued under the Employee Share Bonus Plan Issued under the Executive Share Plan Issued under the Share Placement Plan Less: Transaction costs arising on share issue 30 June 2008 Balance 1 July 2008 Opening balance Issued under the Dividend Investment Plan Issued under the Share Investment Plan Issued under the Employee Share Bonus Plan Issued under the Executive Share Plan Issued under the Share Placement Plan Less: Transaction costs arising on share issue Company Company 2009 2008 Shares ’000 Shares ’000 2009 $’000 2008 $’000 204,601 185,789 248,598 223,091 Number of shares ‘000 172,827 2,447 1,548 192 67 8,708 – $‘000 178,031 11,336 – 200 74 33,515 (65) 185,789 223,091 185,789 223,091 4,648 3,006 554 320 10,284 – 9,342 – 270 1,022 14,912 (39) 30 June 2009 Balance 204,601 248,598 (c) Ordinary shares During the year the Company invited shareholders to participate in a Share Purchase Plan. Each shareholder was entitled to purchase up to $5,000 worth of shares. The price of the shares was at a 10% discount to the volume weighted average price of the Company’s ordinary shares for the 10 days up to the date prior to the closing date of 25 February 2009. The share issue price was $1.45 per share. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. (d) Dividend investment plan and share investment plan The Company issued ordinary shares under a Dividend Investment Plan and a Share Investment Plan during the year. Under the Dividend Investment Plan, participating shareholders elected to apply dividends in whole or in part to the purchase of ordinary shares at an issue price. Under the Share Investment Plan, participating shareholders elected to forgo dividends in whole or in part and to substitute shares issued out of the capital account. The issue price was at a 10% discount on the market price. Shares under the Dividend Investment Plan are recognised in equity at the value of the dividends applied to purchase those shares. The value of shares issued slightly exceeds the value of the dividends applied due to the rounding up of shares issued to the nearest whole share. Shares issued under the Share Investment Plan are recognised in equity at nil value as the dividends are forgone and substituted for shares issued for no consideration. (e) Employee share scheme The Company made two issues of ordinary shares under the Employee Share Bonus Plan during the year. All employees meeting the service criteria were eligible to participate in the issue. The shares are issued at market value. (f) Executive Shares and Options Information relating to the Executive Share Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year, is set out in note 27 of the Full Financial Report. (g) Capital risk management The Company’s and the Group’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. 42 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Notes to the Financial Statements 7. Contributed equity (continued) (g) Capital risk management (continued) The Group and the Company monitor capital on the basis of the gearing ratio in conjunction with its review of the Group and Company’s banking covenants. This ratio is calculated as net debt divided by total equity. Net debt is calculated as total borrowings as shown in the balance sheet less cash and cash equivalents. Total equity is equity as shown in the balance sheet (including minority interest). During 2009, the Group’s strategy, which was unchanged from 2008, was to maintain a target gearing ratio less than 45%. The gearing ratios at 30 June 2009 and 30 June 2008 were as follows: In thousands of AUD Total borrowings (notes 17 and 20 of the Full Financial Report) Less: cash and cash equivalents (note 6) Net debt Total equity Gearing ratio Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. 8. Reserves and retained profits In thousands of AUD (a) Reserves Asset revaluation reserve Hedging reserve – cash flow hedges Foreign currency translation reserve Asset realisation reserve Equity compensation reserve Movements Asset revaluation reserve Balance 1 July Revaluation – gross (note 12 of the full Financial Report) Deferred tax (note 13 of the full Financial Report) Transfers to / from reserves Balance 30 June Hedging reserve – cash flow hedges Balance 1 July Revaluation – gross (note 15 of the Full Financial Report) Deferred tax (note 13 of the full Financial Report) Balance 30 June Foreign currency translation reserve Balance 1 July Currency translation differences arising during the year Balance 30 June Asset realisation reserve Balance 1 July Balance 30 June Equity compensation reserve Balance 1 July Executive share option plan expense Balance 30 June Consolidated 2009 2008 222,350 209,449 (67,978) (21,310) 154,372 428,520 188,139 429,517 36.0% 43.8% Consolidated 2009 44,828 230 (1,971) 2,825 583 2008 50,112 – (2,081) 2,825 513 46,495 51,369 50,112 (7,407) 2,163 (40) 44,828 – 329 (99) 230 (2,081) 110 (1,971) 2,825 2,825 513 70 583 22,556 39,467 (11,966) 55 50,112 – – – – 259 (2,340) (2,081) 2,825 2,825 437 76 513 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 43 Notes to the Financial Statements 8. Reserves and retained profits (continued) (b) Retained profits Movements in retained profits were as follows: In thousands of AUD Opening retained earnings Net profit for the year Dividends Transfers to/from reserves Balance 30 June (c) Nature and purpose of reserves (i) Asset revaluation reserve Consolidated 2009 133,759 9,506 2008 127,618 46,807 (35,863) (40,611) 40 (55) 107,442 133,759 The asset revaluation reserve is used to record increments and decrements on the revaluation of non current assets, as described in note 1(p) of the Full Financial Report. The balance standing to the credit of the reserve may be used to satisfy the distribution of bonus shares to shareholders and is only available for the payment of cash dividends in limited circumstances as permitted by law. (ii) Hedging reserve – cash flow hedges The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in equity, as described in note 1(o) of the Full Financial Report. Amounts are recognised in profit and loss when the associated hedged transaction affects profit and loss. (iii) Foreign currency translation reserve Exchange differences arising on translation of the foreign operations are taken to the foreign currency translation reserve, as described in note 1(d) of the Full Financial Report. The reserve is recognised in profit and loss when the net investment is disposed of. (iv) Asset Realisation Reserve Where a revalued asset is sold, that portion of the asset revaluation reserve that relates to that asset is transferred to the asset realisation reserve upon settlement. (v) Equity Compensation Reserve The equity compensation reserve represents the value of shares held by an equity compensation plan that the Group is required to include in the consolidated financial statements. This reserve will be reversed against share capital when the underlying shares vest in the employee. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. 44 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Notes to the Financial Statements 9. Dividends In thousands of AUD (a) Ordinary shares Final dividend for the year ended 30 June 2008 of 14.0 cents (2007: 14.0 cents) per fully paid share paid on 29 September 2008 (2007: 24 September 2007) Fully franked based on tax paid @ 30% Final dividend foregone for Share Investment Plan Interim dividend for the year ended 30 June 2009 of 8.0 cents (2008: 13.5 cents) per fully paid share paid 7 April 2009 (2008: 31 March 2008) Fully franked based on tax paid @ 30% Final dividend foregone for Share Investment Plan Total dividends provided for or paid Company 2009 2008 26,149 (3,993) 22,156 15,986 (2,279) 13,707 35,863 24,201 (3,779) 20,422 23,579 (3,390) 20,189 40,611 (b) Dividends and share reinvestment plan The Dividend Investment Plan and Share Investment Plan will operate in respect of the proposed final dividend (refer (c) below). Under the Dividend Investment Plan, participating shareholders elect to apply dividends in whole or in part to the purchase of ordinary shares at an issue price. Under the Share Investment Plan, participating shareholders elect to forgo dividends in whole or in part and to substitute shares issued out of the capital account. A discount of 5.0% will apply under the rules of the plans. Last date for receipt of election notice for the dividend plans: 9 November 2009. c) Dividends not recognised at year end In thousands of AUD In addition to the above dividends, since year end the Directors have recommended the payment of a final dividend of 2.0 cents per fully paid ordinary share (2008: 14.0 cents) fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 23 November 2009 out of retained profits at 30 June 2009, but not recognised as a liability at year end, is (d) Franked dividends The franked portions of the final dividends recommended after 30 June 2009 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2010. In thousands of AUD Company 2009 2008 4,876 26,154 Company 2009 2008 Franking credits available for subsequent financial years based on a tax rate of 30% (2008: 30%) 19,505 29,091 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the Company if distributable profits of subsidiaries were paid as dividends. The impact on the franking account of the dividend recommended by the Directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $2,090,000 (2008: $11,209,000). Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 45 Notes to the Financial Statements 10. Earnings per share In cents (a) Basic earnings per share Profit from continuing operations attributable to the ordinary equity holders of the Company Profit from continuing operations before unusual / significant items attributable to the ordinary equity holders of the Company (b) Diluted earnings per share Profit from continuing operations attributable to the ordinary equity holders of the Company Profit from continuing operations before unusual / significant items attributable to the ordinary equity holders of the Company (c) Reconciliations of earnings used in calculating earnings per share In thousands of AUD Basic Earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating basic earnings per share from continuing operations Diluted Earnings per share Profit attributable to the ordinary equity holders of the Company used in calculating diluted earnings per share Basic Earnings per share before unusual / significant items Profit from continuing operations attributable to the ordinary equity holders of the Company used in calculating basic earnings per share Adjusted for unusual / significant items Fair value loss on derivatives Restructuring costs Gain on sale of asset held for sale Impairment of inventory – Orrcon Profit attributable to the ordinary equity holders of the Company before unusual / significant items used in calculating basic earnings per share (d) Weighted average number of shares used as the denominator In thousands of shares Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Effect of share options on issue Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share Consolidated 2009 2008 4.9 14.6 4.9 14.6 26.6 27.3 26.4 27.3 Consolidated 2009 2008 9,506 46,807 9,506 46,807 9,506 46,807 7,098 11,448 – – – – (6,924) 8,154 28,052 48,037 Consolidated 2009 2008 192,623 175,956 703 1,090 193,326 177,066 46 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Notes to the Financial Statements 11. Contingencies (a) Contingent liabilities The Company and Group had contingent liabilities at 30 June 2009 in respect of: Guarantees (a) Under the terms of a Deed of Cross Guarantee the Company and its wholly owned subsidiaries have guaranteed the debt in each other’s companies. Guarantees amount to $354,165,000 (2008: $349,297,000). No material deficiency in net tangible assets exists in these companies at reporting date with net tangible assets amounting to $257,504,000 (2008: $276,420,000). (b) Letters of credit established in favour of suppliers / creditors amounting to $331,000 (2008: $38,000). (c) Bank guarantees in favour of customers and suppliers amounting to $13,721,000 (2008: $18,493,000) for the Group and $7,949,000 (2008: $9,892,000) for the Company. 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. Claims Certain legal claims for unspecified damages have been made against 413 King William Street Pty Ltd (a company in which Hills Industries Limited has a 50% interest) and Hills Industries Limited in relation to a property development for the new Hills head office in Adelaide. Both 413 King William Street Pty Ltd and Hills Industries Limited have received separate legal advice that these claims can be defended. These claims will be vigorously defended and the Directors believe no provision is required. (b) Contingent assets There are no contingent assets where the probability of future receipts is not considered remote. 12. Business combinations Acquisition of subsidiaries (a) Summary of acquisition On 1 April 2009 the Company acquired 51% of the issued share capital of UHS Systems Pty Ltd (UHS). The acquired business contributed revenues of $3,857,000 and net profit after tax of $280,000 for the period from 1 April 2009 to 30 June 2009. Had the business been acquired at the beginning of the reporting period it would have contributed revenues of approximately $10,500,000 and net profit of approximately $1,500,000. Details of the fair value of the assets and liabilities acquired and goodwill are as follows: In thousands of AUD Purchase consideration Cash paid Fair value of shares issued Direct costs relating to the acquisition Total purchase consideration Fair value of net identifiable assets acquired (refer to (c) below) Goodwill (refer to (c) below and note 14 of the Full Financial Report) 5,100 – 107 5,207 (86) 5,293 The goodwill recognised on the acquisition is attributable mainly to the skills, technical talent and product portfolio of the acquired business and its workforce and to the synergies expected to be achieved from integrating UHS into the Hills Group’s existing Electronic Security and Entertainment business. (b) Cash flow information In thousands of AUD Outflow of cash to acquire business, net of cash acquired Cash consideration Less: Balances acquired Cash Outflow of cash 5,100 1,120 3,980 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 47 Notes to the Financial Statements 12. Business combination (continued) (b) Assets and liabilities acquired The assets and liabilities arising from the aquisition are as follows: In thousands of AUD Cash and cash equivalents Receivables Inventories Property, plant and equipment Net deferred tax asset Payables Borrowings Employee benefit liabilities, including superannuation Current tax liability Provisions R&D capitalised Net assets Add: Goodwill Net identifiable assets acquired 1,120 3,016 1,111 73 28 (1,789) (2,863) (221) (211) (550) 200 (86) 5,293 5,207 Acquisition of subsidiaries in the prior reporting period On 5 October 2007 the Company acquired 50% of the shares in Opticomm Co Pty Ltd (Opticomm), for consideration of $756,000. The Company controls Opticomm by virtue of conditions contained in the shareholders agreement. Opticomm operates in the provision of fibre infrastructure to deliver high-speed voice, data and video to homes and multi-residential developments. The acquired business contributed revenues of $1,851,000 and net loss of $80,000 for the period from 5 October 2007 to 30 June 2008. As Opticomm was not actively trading prior to acquisition, had the acquisition occurred on 1 July 2007, the profit for the year ended 30 June 2008 would have been the same. Details of the fair value of the assets and liabilities acquired and goodwill are as follows: The purchase consideration was $756,000 with cash consideration of $350,000, contingent consideration of $400,000 and acquisition costs of $6,000. Opticomm was not trading and as such there were no assets acquired as part of the acquisition. Accordingly, the entire acquisition price was attributable to goodwill. 48 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Notes to the Financial Statements 12. Business combination (continued) Acquisition of business operations Summary of acquisition There were no acquisitions of business operations in the current reporting period. During the current reporting period an amount of $619,000 was paid under a deferred payment arrangement for inventory in relation to the acquisition of the business of Impressive Steel. This business was acquired on 1 May 2007. Acquisition of business operations in the prior reporting period. On 1 March 2008 the Group acquired the business operations of L. W. Gemmell & Associates (Aust) Pty Ltd (Gemmell) for $5,938,000 in cash. Gemmell manufactures and distributes a range of specialised plumbing products including pressure reducing valves and backflow prevention devices. It is not practicable to estimate the effect on the income statement had the business been acquired at 1 July 2007 nor is it practicable to individually estimate the profit or loss since acquisition. Details of the fair value of the assets and liabilities acquired and goodwill are as follows: The purchase consideration was $5,938,000 and comprised cash consideration. The fair value of net identifiable assets acquired was $2,614,000 with goodwill of $3,324,000 Net assets acquired, at fair value comprised inventory $2,520,000, plant and equipment $212,000 and trade payables $118,000. Preacquisition carrying amounts were determined based on applicable AASBs immediately before the acquisition. The values of assets and liabilities recognised on acquisition are their estimated fair values. The goodwill recognised on the acquisition was attributable mainly to the skills and technical talent of the acquired business’s work force and the synergies expected to be achieved from integrating the company into the Group’s existing Home, Hardware and Eco business. 13 Events occurring after the reporting period On 5 August 2009 the Company announced an underwritten share placement to institutional and sophisticated investors and subsequently raised $39,358,000, issuing 28,113,259 shares at $1.40 per share. In addition, on 21 August 2009 the Company announced the details of a Share Purchase Plan (SPP), offering eligible shareholders the opportunity to apply for up to $5,000 of fully paid, ordinary shares at an issue price of $1.40 per share. The Company reserves the right to scale the offer back. The SPP will be open on 28 August 2009 and close on 11 September 2009. In total the Company plans to raise a maximum of around $50 million. Since the end of the financial year the Company has extended the term of the majority of its debt facilities to November 2011. Apart from the matter noted above, no other matter or circumstance has occurred subsequent to year end that has significantly affected, or may significantly affect, the operations of the Company or Group, the results of those operations or the state of affairs of the Company or Group in subsequent financial years. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 49 Director’s Declaration 1. In the opinion of the Directors of Hills Industries Limited (‘the Company’): (a) the concise financial statements and notes set out on pages 30 to 49, and the Remuneration report in the Directors’ Report of the Group, comprising Hills Industries Limited and the entities it controlled during the financial year ended 30 June 2009, set out on pages 18 to 24, are in accordance with the Corporations Act 2001, including: (i) have been derived from or is consistent with the full financial report for the financial year; and (ii) complies with Australian Accounting Standard AASB 1039 Concise Financial Reports. Signed in accordance with a resolution of the Directors: G Twartz Director Dated at Adelaide on this 11th day of September 2009. 50 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Independent Audit Report to the Members of Hills Industries Limited Report on the Remuneration Report The following paragraphs are copied from our Report on the remuneration report for the year ended 30 June 2009. We have audited the remuneration report included in pages 18 to 24 of the Directors’ report for the year ended 30 June 2009. The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of Hills Industries Limited for the year ended 30 June 2009, complies with section 300A of the Corporations Act 2001. KPMG N Faulkner Partner Dated at Adelaide on this 11th day of September 2009. Report on the concise financial report The accompanying concise financial report of the Group comprising Hills Industries Limited (the Company) and its controlled entities comprises the balance sheet as at 30 June 2009, the income statement, statement of recognised income and expenses and statement of cash flows for the year then ended and related notes 1 to 13 derived from the audited financial report of Hills Industries Limited for the year ended 30 June 2009 and the discussion and analysis. The concise financial report does not contain all the disclosures required by Australian Accounting Standards. Directors’ responsibility for the concise financial report The Directors of the Company are responsible for the preparation and presentation of the concise financial report in accordance with Australian Accounting Standard 1039 Concise Financial Reports and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation of the concise financial report; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on the concise financial report based on our audit procedures. We have conducted an independent audit in accordance with Australian Auditing Standards, of the financial report of Hills Industries Limited for the year ended 30 June 2009. Our audit report on the financial report was signed on 11 September 2009 and was not subject to any modification. The Australian 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 for the year is free of material misstatement. Our procedures in respect of the concise financial report include testing that the information in the concise financial report is derived from, and is consistent with, the financial report for the year, and examination on a test basis, of evidence supporting the amounts, discussion and analysis, and other disclosures which were not directly derived from the financial report for the year. These procedures have been undertaken to form an opinion whether, in all material respects, the concise financial report complies with Australian Accounting Standard AASB 1039 Concise Financial Reports and whether the discussion and analysis complies with the requirements laid down in Australian Accounting Standard AASB 1039 Concise Financial Reports. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion, the concise financial report, including the discussion and analysis, of Hills Industries Limited and its controlled entities for the year ended 30 June 2009 complies with Australian Accounting Standard AASB 1039 Concise Financial Reports. Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 51 Shareholder Information The shareholder information set out below was applicable as at 21 August 2009. A Distribution of equity security holders Analysis of numbers of equity security holders by size of holding: Holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Ordinary shares Shares Options 4,829 10,989 4,918 3,345 85 24,166 _ _ _ 12 6 18 There were 1,464 holders of less than a marketable parcel of ordinary shares. B Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted securities are listed below: Name Poplar Pty Limited Hills Associates Limited HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Jacaranda Pastoral Pty Limited National Nominees Limited RBC DEXIA Investor Services Australia Nominees Pty Limited (PIPOOLED A/C) Australian Foundation Investment Company Limited Argo Investments Limited Citicorp Nominees Pty Limited RBC DEXIA Investor Services Australia Nominees Pty Limited (PIIC A/C) Donald Cant Pty Limited Milton Corporation Limited Colleen Sims Nominees Pty Limited ANZ Nominees Limited Hills Associates Limited & Poplar Pty Limited Queensland Investment Corporation AMP Life Limited Choiseul Investments Limited Citicorp Nominees Pty Ltd (CFSIL CFS WS Small Comp A/C) C Substantial Shareholders Substantial holders in the Company are set out below: Name Poplar Pty Limited Hills Associates Limited 52 Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 Ordinary shares Number held 19,007,978 13,313,300 8,094,226 8,081,018 5,968,699 4,972,427 4,852,514 4,262,130 4,208,604 2,999,155 2,356,348 1,979,060 1,719,260 1,693,012 1,189,408 1,174,550 1,130,577 802,837 801,039 724,292 Percentage of issued shares 8.14 5.70 3.47 3.46 2.56 2.13 2.08 1.83 1.80 1.28 1.01 0.85 0.74 0.73 0.51 0.50 0.48 0.34 0.34 0.31 89,330,434 38.26 Number held 19,007,978 13,313,300 Percentage 8.14 5.70 Shareholder Information D Voting rights The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options No voting rights. E On market buy back There is no current on market buy back. F Direct payment to shareholder accounts Dividends may be paid directly to bank, building society or credit union accounts in Australia. Payments are electronically credited on the dividend date and confirmed by mailed payment advice. Shareholders who want their dividends paid this way should advise the Company’s share register in writing. G Securities Exchange The Company is listed on the Australian Securities Exchange. The Home exchange is Adelaide. H Other information Hills Industries Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. I Offices and Officers Company Secretary Mr Andrew Muir, B.Ec, MBA Principal Registered Office 944-956 South Road Edwardstown SA 5039 Telephone: (08) 8301 3200 Facsimile: (08) 8297 4468 Email: info@hills.com.au Locations of Share Registries Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street Adelaide, SA 5000 Telephone (within Australia): 1300 556 161 Telephone (outside Australia): +61 3 9415 4000 Facsimile: (08) 8236 2305 Email: web.queries@computershare.com.au Internet address: www.computershare.com Hills Industries Limited and its Controlled Entities Concise Annual Report for the year ended 30 June 2009 53 

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